These complex proceedings arose out of a partnership between the third plaintiff, Ms Wei, and the first defendant, Ms Lei. I have now made final orders disposing of all of the substantive claims for relief in the proceedings. In this judgment I deal with questions of costs.
I delivered my first judgment in the proceedings on 29 September last year, following a trial in August: Shun Sheng Pty Ltd v Lei [2023] NSWSC 1176 ("J1"). The judgment dealt with most, but not all, of the substantive claims for relief. Two claims were reserved.
There followed several further interlocutory hearings which resulted in a further three judgments dealing with interlocutory issues. In the course of that process, I made some further substantive orders on 15 December last year.
Following a further hearing, I delivered a judgment on the reserved claims in late August this year: Shun Sheng Pty Ltd v Lei (No 5) [2024] NSWSC 1109 ("J5"). The orders made in that judgment disposed of the last of the substantive prayers for relief.
This judgment assumes familiarity with my judgments of September last year and August this year. Abbreviations used in those judgments are also used in this judgment.
As already mentioned, the proceedings were complex, involving multiple parties and multiple claims. The disputes and claims for determination at trial may be summarised as follows:
Partnership termination claim: It was common ground that the business the subject of the proceedings had originally belonged to Ms Wei and Ms Lei, as individuals, in partnership, using, at various times, different companies as nominees for the partnership. In October 2021, Ms Wei changed the locks at the partnership premises and definitively excluded Ms Lei (there was a dispute about the extent to which Ms Lei had been participating in the partnership over the preceding two years). It was common ground that, if not terminated earlier, the partnership ended at that point.
It was also common ground that in the ordinary course, upon termination, Ms Wei and Ms Lei would each have been entitled to receive a half share of the net proceeds of realising the partnership assets, including the goodwill of its business, and that each of them would be obliged, as part of the winding up process, to account for any partnership monies or other partnership assets appropriated by them (it was alleged by Ms Wei that Ms Lei had appropriated takings of the partnership, and Ms Lei claimed that Ms Wei had herself appropriated funds).
But Ms Wei contended that these prima facie entitlements had been displaced by a contrary agreement between the parties. The alleged agreement had three main features. First, the dissolution allegedly took effect on 30 June 2019. Second, Ms Lei allegedly agreed to leave the partnership business to Ms Wei and to surrender any entitlement to an account from Ms Wei or a half share of the other partnership assets. Third, however, Ms Lei allegedly agreed that she would remain liable to account for the partnership monies she had allegedly appropriated, and would pay Ms Wei a sum, later allegedly agreed at $1.1 million, on account of that liability.
Ms Lei, in her cross-claim, contended to the contrary and sought an order for winding up as at October 2021 with accounts from both parties in accordance with their prima facie entitlements. She also sought to have an independent accountant, Mr Alan Hayes, appointed as receiver for the purpose of winding up the partnership, including the conduct of any necessary accounting proceedings in favour of the partnership. For her part, Ms Wei took the position that, even if her termination claim was unsuccessful, no receiver should be appointed, and the parties should conduct the winding up themselves.
Guarantee claim: Ms Wei alleged that Mr Kitsos, Ms Lei's husband, had guaranteed Ms Lei's obligations under the termination agreement. Ms Wei thus sought judgment against Mr Kitsos for $1.1 million, together with any additional amount that should be found liable on account, against Mr Kitsos as well as Ms Lei.
Rent claim: The partnership business operated from commercial premises owned by another company belonging to Ms Wei, Sunshine Island. Sunshine Island alleged that potential arears of rent were outstanding under the tenancy agreement with the partners. Sunshine Island sought judgment against Ms Lei for the allegedly outstanding amount. No claim was made against Ms Wei, but later, by points of cross-claim, Ms Lei sought contribution from her to the extent that the rent claim succeeded.
Business appropriation claim: Also in October 2021, occupation of the premises and the staff and equipment of the business were transferred, on the instructions of Ms Wei, to Shun Sheng, a company three-quarters owned by her. Ms Lei, as cross claimant, brought a claim against Ms Wei and Shun Sheng for them to account to the partnership for the assets so transferred, or their value, including the goodwill of the business, alleging that Ms Wei had effectively appropriated the business to Shun Sheng and that this had been a breach of her fiduciary duties.
Initially, another claim, the defamation and injurious falsehood claim, had been propounded in the proceedings. This was a claim by Shun Sheng, as the operator of the business, against Ms Lei. Shun Sheng alleged that Ms Lei had made false claims about the business, and, in particular, the health of its sex workers, resulting in loss of custom and damage to the business' reputation. This claim was settled before trial and withdrawn, on the basis that the parties would bear their own costs.
In my September 2023 judgment, I concluded that (J1 [293]):
1. Ms Wei's contention that the partnership was terminated in June 2019 failed, with the result that the date of termination was 18 October 2021;
2. Ms Wei's contention that she was not required to account for partnership income or assets appropriated by her failed, with a result that both Ms Lei and Ms Wei were obliged to account;
3. Ms Wei's claim for judgment for $1.1 million on account of Ms Lei's liability to account also failed;
4. so too did the claims against Mr Kitsos as alleged guarantor of Ms Lei's liabilities;
5. Mr Hayes should be appointed as receiver and manager of the partnership assets; and
6. the rent and business appropriation claims should be reserved for future determination.
The orders I made to give effect to these conclusions included: a declaration that the partnership was dissolved on 18 October 2021; and orders that the partnership be wound up and that Mr Hayes be appointed as Receiver and manager of the partnership assets; and orders reserving the rent claim and the business appropriation claim for further consideration and otherwise dismissing the claims against Ms Lei and Mr Kitsos.
The orders made on 15 December 2023 included consequential orders requiring Ms Wei and Ms Lei both to account to the partnership. They also included orders for accounts to the partnership from: Shuang (the third of the partnership nominee companies); Sunshine Island (for monies diverted to it from the partnership's eftpos machines) and Mr Kitsos (for payments of partnership takings made to him from March 2019 onwards by arrangement with Ms Wei).
The further conclusions I reached in my August 2024 judgment, and orders made as a result, were:
1. the rent claim failed and was dismissed; and
2. the business appropriation claim succeeded, with Ms Wei and Shun Sheng being ordered to account to the partnership account for the value of the partnership assets, including goodwill, appropriated in October 2021.
[2]
Costs
Initially, counsel for Ms Wei appeared to suggest that no costs order should be made at this stage of the proceedings. Instead, all questions of costs should be dealt with only after the accounting proceedings were finished.
Although an order for an account may not, at least in some circumstances, be final for the purposes of appeal, it is still final in the sense that, once made, its terms cannot be altered. Subsequent accounting proceedings are, to that extent, distinct proceedings which may, and often do, give rise to different costs considerations.
I did not in the end understand counsel to press his suggestion. In any event, in the present case I considered that there was every reason, once all the final orders (in the sense just discussed) had been made, to proceed with determining the costs of those proceedings. It was of course necessary to word the orders to make it clear that the costs in the accounting proceedings, and other consequential steps taken by the Receiver which may have overlapped with the completion of the principal proceedings, would not be covered by the orders made.
It was common ground that the order concerning the parties' costs of the defamation and injurious falsehood claim was to be interpreted as applying only to the additional costs referable to that claim (cf Medway Oil & Storage Co Ltd v Continental Contractors Ltd [1929] AC 88 at 95, 98). All of the costs referable to the claims which went to hearing, and the general costs of the proceedings, remain to be disposed of.
The questions debated in the argument on costs, which took place on 25 November, were:
1. the incidence of costs as between the various parties to the proceedings;
2. making the costs assessable and payable forthwith; and
3. an application by counsel for Ms Lei that costs be awarded in her favour on an indemnity basis, having regard to Ms Wei's failure to accept what were characterised by counsel as offers of compromise.
Following the argument, I delivered an oral summary of my conclusions. The parties then agreed orders, which were made on the following day, to reflect those conclusions. I now set out my formal reasons for judgment, which are based on, but extend beyond, the oral summary I delivered on 25 November.
[3]
Incidence of costs
In dealing with the incidence of costs, I adopt the approach that I adopted in Akierman Holdings Pty Ltd v Akerman (No 3); In the matter of Akierman Holdings Pty Ltd (No 2) [2021] NSWSC 869. Neither party has expressly invited me to follow that particular approach, but I do not think it is likely to result in any different outcome from the approaches taken by the parties in submissions, and I find it helpful in framing my thinking.
The approach involves a two-stage analysis. The first is to identify the claims in the proceedings and to apply the rule that costs follow the event on a claim-by-claim basis. That is distinct from an issue-by-issue basis, as I explained in Akierman at [60]-[86]. The second stage is to determine which claim the general costs of the proceedings should follow. If there is one predominant claim, or there are a number of claims on which one party has succeeded, which together are predominant, then usually the general costs will follow the outcome of those claims.
Dealing with the first stage, I apply the rule that costs follow the event, distributively, to each of the four claims I have identified.
The partnership termination claim was a claim between Ms Wei personally and Ms Lei personally. The claim concerned their partnership rights and obligations. Ms Wei's allegations all failed, and Ms Lei succeeded on all issues.
Counsel for Ms Wei accepted that costs would be awarded against Ms Wei on the claim, but argued that there should be some discount. He submitted that the claim had not been a "total failure", in that an account against Ms Lei was ultimately ordered.
I do not, however, consider that that had any significance in terms of the "event". The making of such an order was never in dispute; it was a necessary part of the orders sought by Ms Lei in her cross-claim. Accordingly, Ms Wei should pay Ms Lei's costs of the claim in full.
Again, the guarantee claim by Ms Wei against Mr Kitsos was unsuccessful. Again, as counsel or Ms Wei pointed out, an account was ultimately ordered against Mr Kitsos. But the account awarded against him concerned payments made to him which were not the subject of any claim by Ms Wei: see J1 [222]. Nor was there any opposition from Mr Kitsos to that accounting order. As a matter of substance, the guarantee claim failed, and Ms Wei should pay Mr Kitsos' costs of it.
It is common ground that the rent claim of Sunshine Island against Ms Lei failed, and that Sunshine Island should pay Ms Lei's costs of that claim. It is also common ground that those costs should include the costs of proceedings on Ms Lei's points of cross-claim against Ms Wei.
The business appropriation claim was a claim by Ms Lei against Shun Sheng and Ms Wei. The claim was disputed and I found that both cross-defendants were liable to account. The claim succeeded. On the face of it, Shun Sheng and Ms Wei should pay the costs of it. But again, counsel for Ms Wei sought a qualification.
Counsel pointed out that in December last year, injunctions were obtained against Shun Sheng and Ms Wei which restricted the disposal of Sun Sheng's assets and required that information be provided to the Receiver concerning the takings of the business. Those injunctions were characterised by counsel as having been made in aid of proprietary relief then sought under the business appropriation claim. The orders sought would have imposed a constructive trust over the business assets appropriated to Shun Sheng, including the benefit of a new lease granted to Shun Sheng by Sunshine Island (see J1 [14], [30]). But that relief was not, in the end, pressed (see J5 [87]-[88]). Counsel submitted that the expenses of complying with the injunctions should be set off against the costs liability under the claim.
Where a party is subjected to an interlocutory injunction which is not sustained at the final hearing, the usual course is for that party to have the injunction discharged and to apply to recover any costs of compliance pursuant to the undertaking as to damages which will have been given when the injunction was obtained. But in the present case, the position was a bit procedurally complicated.
Counsel for Ms Wei initially suggested that the injunction had automatically been discharged when I delivered judgment without granting the proprietary relief sought. But in the end, he accepted that the question of discharge should not be determined in the absence of the Receiver, who was effectively the party in whose favour the injunction had been given. It was agreed that the question would have to be determined at some later point when the Receiver could be represented.
Despite this complication, it remains the case that Shun Sheng (and Ms Wei, if she has incurred expenses or other losses in her personal capacity) may move to have the injunction discharged (or its discharge confirmed) and to seek an order for the costs of the injunction application (if not already dealt with). If successful in discharging the injunction they may then also apply for compensation for any costs or other losses incurred as a result of complying with it.
In my view, however, none of this has anything to do with the award of costs on the substantive business appropriation claim. At most, Ms Lei has not obtained proprietary relief which she earlier claimed. That does not affect the "event" for relevant purposes. Shun Sheng and Ms Wei should pay the costs of the claim.
I move to the second stage of analysis, which is the allocation of the general costs of the proceedings between the different claims. In my view, the partnership termination dispute was the principal component of the proceedings. Ms Lei's success in defeating that claim, and obtaining the contrary relief she sought, amply justify the costs she incurred in the proceedings. The general costs of the proceedings as between Ms Wei and Ms Lei should follow the outcome of that dispute and should be paid by Ms Wei.
The guarantee, rent and business appropriation claims were subordinate components of the proceedings. The unsuccessful parties on those claims will therefore pay only the costs of those claims to the extent that they increased the overall costs of the proceedings.
The upshot is that:
1. Ms Wei will pay the costs of Mr Kitsos solely attributable to her claims against him;
2. Sunshine Island will pay the costs of Ms Lei solely attributable to its claim against her (including the costs of proceedings on the points of cross-claim);
3. Ms Wei and Shun Sheng will pay the costs of Ms Lei solely attributable to her cross-claim against them; and
4. Ms Wei will otherwise pay Ms Lei's costs of the proceedings.
[4]
When costs to be payable
Counsel for Ms Wei submitted that, if the costs so ordered were to be assessable and payable at this point in the proceedings, there had to be an order to that effect under Uniform Civil Procedure Rules 2005 r 42.7. He did not however oppose the making of such an order. Accordingly, for more abundant caution I will make such an order.
[5]
Application for indemnity costs
Counsel for Ms Lei relied for the indemnity costs application on two letters sent on her behalf by her solicitors in the course of proceedings.
The first letter was sent in August 2022, nine months after the proceedings had begun. The letter enclosed a proposed deed appointing "an independent forensic accountant to take accounts". The proposed deed specified the task for the accountant as being to undertake "a forensic examination of the equity and other contributions made by [Ms Lei] and [Ms Wei] to the Assets in which those parties have joint and individual interests and whether and to what extent, the resources of the Partnership have been utilised by [Ms Lei] and/or [Ms Wei] to further [their respective] individual interest[s] that do not form part of the Partnership."
Ms Wei's solicitors replied a few days later. They relevantly stated:
Whilst our client [sic] recognizes there may be a need to appoint an expert in these proceedings, they are of the view that it is premature to do so at this stage, given that your clients have yet to file their amended defence (which was due on 15 July 2022), and exchange of evidence has not occurred.
The second letter was sent in March 2023, five months before the trial. In this letter, Ms Lei's solicitors referred to alleged issues with the evidence of the cash inflows and outflows from the business and, on this basis, restated their "continued view" that a forensic accountant should be appointed to conduct an account.
I think there are a number of difficulties with the application for indemnity costs on the basis of the August 2022 letter. The first is that the proposed deed did not define with particularity who was to account to whom and for what. This is a significant matter because the proceedings have resulted in a complex set of accounting processes involving numerous different parties. In the form in which it was presented, there was no definition of the scope of the task for the accountant and, as a result, it is far from clear whether, if the parties had negotiated a final version of the deed of agreement, it would have included all of the accounts which were ultimately found to be necessary.
In that regard, I add that one of the accounts ordered was against Shuang Pty Limited (see J1 [288], [296]), which was not joined until the very end of the proceedings, and therefore would not have been a party to the proceedings at the time the proposal came forward.
A related point is that the deed did not provide for the particular orders which were to be made to dispose of the proceedings. The offer appears very much to have been presented on an interlocutory basis. Although it was stated that the accountant's conclusions (on issues which were not of course defined) would be final and binding, there was nothing which explained how those conclusions would then be reflected in orders to dispose of the proceedings, including not least, orders as to costs.
The third point is broader still. The deed was in draft form and could not have been accepted so as to produce a binding contract: cf Shazbot Pty Ltd v Warner Capital Pty Ltd (No 6) [2024] NSWSC 81 at [110]-[126]. At best, the proposal was an invitation to negotiate the terms of a deed, the substantive elements of which remained for discussion and perhaps even for discovery by the parties.
The final difficulty is that the covering letter did not even follow the Calderbank practice of indicating that the letter contained an offer which was without prejudice except as to costs. I think that in the present case, this is a defect of substance not merely one of form.
The court is only justified in acting on an informal settlement offer if satisfied that the offeree was acting unreasonably in failing to accept it. If the offeree is not made aware that a failure to accept the offer may have adverse costs consequences, the court could rarely be satisfied of that. In the present case, a reader of the letter could well have concluded that this was merely an interlocutory proposal, which did not require instructions to be obtained from the client about whether the proceedings should be pursued. That is exactly the way in which it seems to have been understood and responded to by the solicitors for Ms Wei in these proceedings.
For these reasons, the August 2022 letter was not a Calderbank letter and failure to accept the proposal set out in it cannot be seen as unreasonable. The same reasoning applies a fortiori to the March 2023 letter. That letter contained even less by way of identifying what the proposal actually was.
Counsel for Ms Lei reminded me that in determining an application for indemnity costs, the court can, and in counsel's submission should, take account of all relevant factors. I understood counsel to be submitting that I could award indemnity costs even if I were not satisfied, as I am not, that either of the offers was an offer which complied with the requirements of Calderbank v Calderbank [1975] 3 ALL ER 333.
It may be accepted that the Court's jurisdiction to award indemnity costs is not limited by any rigid rules. But in a case such as the present, there must be some reason for the Court to depart from the usual basis of assessment of costs in the interests of justice. Where the interests of justice are said to require such a departure because of unreasonable behaviour by the defendant, that behaviour must be demonstrated affirmatively.
To the extent that there is any residual discretion to exercise, then, in my opinion the failure by the defendants' lawyers to avail themselves of the mechanism in the Rules for making formal offers of compromise is significant. Had they done so, they would have had to confront questions about the form of the orders their clients would obtain if successful, and pitch the terms of the offer accordingly. Ms Wei's legal representatives would then have been forced to consider those questions from their clients' point of view. On the evidence before me, neither side's lawyers reached, or had to reach, that point. In such circumstances, it hardly seems a proper case to depart from the usual basis of assessment.
[6]
Orders
The orders the Court made on 25 November were:
1. Order that the third plaintiff (Ms Wei) pay the second defendant's (Mr Kitsos') costs solely referable to her claims against him.
2. Order that the second plaintiff (Sunshine Island Pty Limited) pay the first defendant's (Ms Lei's) costs solely referable to its claim against her (including the costs of her points of cross-claim).
3. Order that the first and second cross-defendants (Shun Sheng Pty Limited and Ms Wei) pay the first cross-claimant's (Ms Lei's) costs solely referable to her cross-claim against them.
4. Order that the third plaintiff (Ms Wei) otherwise pay the first defendant's costs of the proceedings up to the making of final orders on the parties' substantive claims for relief (which shall not include the costs of accounting proceedings consequent upon the orders made by the Court on 15 December 2023 and 29 August 2024).
5. Order, to the extent necessary, that the costs in orders (1)-(4) be assessable and payable forthwith.
[7]
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Decision last updated: 16 December 2024