Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL

1. The Defendants are to pay 90% of Termite's costs of and incidental to the proceedings, including reserved costs, to be taxed in default of agreement. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

WHITE J: 1 On 15 March 2019, the Court delivered its reasons for finding that the plaintiff (Termite) was entitled to judgment against each of the six defendants in the sum of $7 million: Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2) [2019] FCA 354 (the Principal Judgment). After hearing submissions from the parties with respect to interest, on 22 March 2019 the Court entered judgment in favour of Termite against each defendant in the sum of $9,525,619.18 and reserved the issue of costs for further submissions. 2 Termite seeks an order that the defendants pay its costs of the proceedings, including any reserved costs, on a party-party basis. The defendants submit that they should be ordered to pay only a proportion of Termite's costs so as to reflect the fact that Termite failed on an issue in the trial, namely, proof of the particular breach of duty which it alleged and, accordingly, its entitlement to the damages which it claimed. They submitted that the proportion of costs to be allowed should be no more than 80%. 3 These reasons should be read in conjunction with the reasons in the Principal Judgment. For that reason, I will not repeat now many of the circumstances to which counsel referred in their submissions concerning the question of costs. 4 Termite succeeded in establishing that each of the defendants had breached the duties he owed to it as one of its Directors, whether de jure or de facto, and in some instances, as its officers. 5 In the trial, Termite claimed losses on three alternate bases: (a) $78,487,539.37, being the amount of the deficiency in its liquidation; (b) $64,634,444.37, if it was found that the Outback-Termite Loan was not subordinated; and (c) $46,053,095.08, being the aggregate of the distributions which the defendants had caused it to pay to the Joint Venturers. 6 Each of those claims failed because the Court found that Termite had not proved that the action which the defendants, discharging the duties imposed on them by ss 180 and 181 of the Corporations Act 2001 (Cth), would have taken, in its circumstances, to have avoided those losses. The Court found, alternatively, that Termite did not establish that the losses on any one of those three formulations had been caused by the breaches of duty it alleged. Instead, the Court found that Termite had proved only that, had the defendants discharged their duties, they would have caused it to have maintained a Cash Reserve of at least $10 million rather than the $3 million which they did. 7 The defendants submit that Termite's failure to prove an entitlement to the claimed losses should be reflected in the costs order. 8 Both parties referred to the Court's discretion with respect to costs conferred by s 43 of the Federal Court of Australia Act 1976 (Cth) and to several of the authorities concerning the award of costs when an applicant succeeds on only part of its claim or on only some issues. Termite noted that, ordinarily, costs follow the event, so that the successful party receives its costs in the absence of special circumstances making some other order appropriate: Hughes v Western Australia Cricket Association (Inc) [1986] FCA 511, [1986] ATPR 40-748 at 48, 136; Ruddock v Vadarlis (No 2) [2001] FCA 1865, (2001) 115 FCR 229 at [11]; Queensland North Australia Pty Ltd v Takeovers Panel (No 2) [2015] FCAFC 128, (2015) 236 FCR 370 at [9]. 9 Termite also referred to Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) [2015] HCA 53; (2015) 327 ALR 192 in which the High Court said, in relation to the costs of the appeal to that Court: [6] In any event, the preferable approach in this case is the one usually taken, that costs should follow the outcome of the appeal. This is not a case where it may be said that the event of success is contestable, by reference to how separate issues have been determined. There are no special circumstances to warrant a departure from the general rule, and good reasons not to encourage applications regarding costs on an issue-by-issue basis, involving apportionments based on degrees of difficulty of issues, time taken to argue them and the like. The fact that Firebird retains its registration is immaterial to the overall outcome of this appeal. (Citation omitted) 10 Counsel for Termite submitted that a similar approach should be applied presently. It is to be noted that in Firebird, the High Court was then speaking of the position with respect to appeals to that Court. 11 The authorities establish, however, that in determining whether to apply the ordinary rule at the trial level, the Court may have regard to the extent of an applicant's success on the various causes of action it pursued and the extent of its success on the various factual and legal issues which were in contest. At the same time, the mere fact that an applicant has not succeeded on some aspect of its claim does not indicate necessarily that a proportionate costs order is appropriate. The reasonableness or otherwise of the applicant's pursuit of the claim or issue on which it failed is a very relevant matter. The Court has also indicated that other factors are relevant, including the extent to which the evidence and submissions concerning the issues upon which the applicant failed overlapped with those on which it succeeded, the extent to which the applicant's case involved distinct and severable issues, and the complexity of the case in general: Australian Competition and Consumer Commission v The Construction Forestry Mining and Energy Union (No 4) [2018] FCA 684 at [107]; Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 5) [2015] FCA 1310 at [15]; Playgro Pty Ltd v Playgro Art & Craft Manufactory Ltd (No 2) [2016] FCA 478 at [33]. 12 In the present case, Termite emphasised that it had succeeded in obtaining an award of damages for a substantial sum; that the defendants did not suggest that its conduct in the litigation had been unreasonable; that there was a degree of evidentiary overlap between the matters to be proved in establishing liability and causation, on the one hand, and the quantum of the damages it had claimed, on the other; and, finally, that the amount of time spent at trial on quantum issues was only a small fraction of the time spent on the liability and causation issues. As to the last of these matters, I note that Termite estimated that about 6.5% of the time at trial had been spent on quantum issues, whereas the defendants suggested that approximately 7.5% of the evidence and submissions at trial had concerned the quantification of the creditors' claims. 13 I accept that there was some overlap between the matters bearing on the proof of the extent of the risk of which the defendants had to take account in the discharge of their duties and the matters bearing on the proof of the damages said to result from the alleged breaches of those duties. However, in my view, it cannot reasonably be supposed that the whole of the evidence led by Termite with respect to damages was necessary in order for Termite to establish the risk of detriment which it suffered by reason of a breach of duties or the extent of that risk. 14 I take into account that the time spent at trial is not the only matter relevant to whether there should be some apportionment or the amount of the apportionment. 15 I am satisfied that, had Termite confined its claim to that on which it ultimately succeeded, or even to the third of the alternate formulations to which I referred earlier, the costs of the parties in preparing for the trial and at trial would have been less. Much of the evidence which Termite led concerning the quantification of the deficiency in the liquidation and Termite's liability to its creditors would not have been necessary. That is to say, I am satisfied that that evidence would not have been necessary as part of the proof of Termite's liability case. In particular, I consider that the evidence of Mr Lewis, one of Termite's joint and several liquidators, is likely to have been much reduced and that Termite would probably not have needed to have led evidence from Messrs Thorn, Fiteni and Thwaites. Nor is it likely to have needed to have commissioned the three expert reports from Mr Holmes, the forensic accountant, or to have led evidence from him. Likewise, the defendants would not have needed to have commissioned the report from Mr Morris, the forensic accountant, on all of the issues upon which he was asked to express an opinion. 16 Another indication that the quantum issues were, to an extent, severable from the liability issues is the division of tasks between counsel at trial, which was adopted on both sides. It was senior counsel who undertook the conduct of the respective cases concerning the liability and causation issues, whereas junior counsel attended to the examination and cross-examination of the quantum witnesses, and junior counsel made the closing submissions concerning the issue of quantum. 17 Another indication is seen in the closing submissions of the parties. Both parties provided extensive written submissions at the trial, and it is apparent that approximately 15% of each concerned quantum issues. 18 A final matter which I take into account is the stark disparity between the amount which Termite claimed, at its highest some $78.4 million, and the amount it recovered before interest of $7 million. 19 Having regard to all these matters, I consider that this is a case which does warrant Termite being deprived of part of its costs. It is appropriate to give effect to that by ordering that Termite recover a percentage of its costs so that there be a single costs order. An order of costs in this form should facilitate the quantification of Termite's costs. The Court should attempt to avoid, so far as possible, creating a situation in which the quantification of costs will be complex, protracted and, by itself, costly: Hockey v Fairfax Media Publications Pty Ltd (No 2) [2015] FCA 750; (2015) 237 FCR 127 at [120]. 20 The amount of reduction is to be determined as a matter of impression and evaluation rather than by arithmetical precision: Chen v Chan [2009] VSCA 233 at [10]. It ought to take into account Termite's own failure on some issues and the fact that the defendants had to incur their costs with respect to those issues. 21 Having regard to all of these matters, I consider that Termite should be entitled to recover 90% of its costs of the proceedings, including reserved costs. 22 The order of the Court is that the defendants are to pay 90% of Termite's costs of and incidental to the proceedings, including reserved costs, to be taxed in default of agreement. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.