Tytane Pty Ltd v Lyons

1. The respondent's interlocutory application filed on 23 November 2017 be dismissed.
2. The respondent pay the applicant's costs of the interlocutory application.
3. The respondent's costs of the proceeding be otherwise paid by the applicant on a party-party basis. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

DAVIES J: 1 On 5 September 2017, the applicant ("Tytane") filed a notice of discontinuance of this proceeding and by r 26.12(7) of the Federal Court Rules 2011 (Cth) ("the Rules") a party who files a notice of discontinuance is liable to pay the costs of the other party to the discontinued proceeding. Tytane does not dispute that it is liable to pay the costs of the respondent to the proceeding ("Mr Lyons") on a party-party basis, but in issue is whether those costs should be paid on an indemnity basis. Mr Lyons submitted that he should have his costs paid on an indemnity basis as from 6 April 2017 and that such costs should be paid jointly and severally by Tytane and a non-party, Ronald Dennis ("Mr Dennis"), a director of Tytane. Tytane submitted that Mr Lyons should have his costs paid on a party-party basis up to 5 September 2017, being the date when Tytane filed the notice of discontinuance, but thereafter its costs should be paid by Mr Lyons. Tytane also argued that it was not appropriate to make a costs order against Mr Dennis. 2 The sequence of events giving rise to Mr Lyons' application for indemnity costs is as follows. 3 On 23 March 2017, Tytane filed an originating application seeking an order pursuant to r 7.23 of the Rules for preliminary discovery against Mr Lyons, a former director of Tytane. 4 By letter dated 6 April 2017 Mr Lyons' solicitors, Judd Commercial Lawyers, advised Tytane's solicitors, Skinner & Associates, that they were instructed to provide the various documents listed in that letter to Tytane in satisfaction of the application for preliminary discovery. The letter advised that Mr Lyons had, in addition, approximately 10 boxes at his residence containing books and records of Tytane which, although not requested, Tytane could collect. The letter also enclosed a proposed minute of order dismissing the proceeding with no order as to costs and advised that if those minutes of order were not accepted and the application was pressed, the letter would be relied on in respect to costs ("the 6 April 2017 offer"). 5 On 26 April 2017, Judd Commercial Lawyers wrote to Skinner & Associates, stating "we assume that your client has now collected the documents and that this proceeding will be dismissed with no order as to costs as we previously advised". By return email Skinner & Associates advised that the boxes had been collected but Tytane had not had enough time to go through them. The letter requested that the matter be adjourned for three weeks and the question of costs reserved. 6 In a phone call between the solicitors on 11 May 2017, Skinner & Associates advised that they required an affidavit from Mr Lyons verifying that the documents handed over were all the documents that Mr Lyons had in his possession, power or control. A formal request was made by letter dated 11 May 2017. 7 The affidavit was not forthcoming and further correspondence passed between the solicitors for the parties concerning the discovery and the request by Tytane's solicitors for the affidavit from Mr Lyons. 8 On 21 August 2017, Judd Commercial Lawyers sent a letter of offer in the following terms ("the 21 August 2017 Offer"): Our client has instructed us to make the following offer to resolve the proceeding and to save the costs of the preparation of additional evidence, submissions and the preparation and attendance for a final hearing of your client's application: 1. The proceeding be dismissed; 2. Your client is to pay our client's costs fixed in the amount of $15,000. We advise that the costs our client has incurred to the present time exceed the figure above and our client is compromising his entitlement to costs in the event he is successful in defending the application brought by your client. This offer is made in accordance with the principles set out in Calderbank v Calderbank [1976] FAM 93 and Messiter v Hutchinson (1987) NSWLR 525. Consequently, if our client achieves a verdict at the hearing of this proceeding in his favour, he will seek to rely upon this offer in support of an application for your clients to pay our client's costs on an indemnity basis from the date of this offer. This offer will remain open for acceptance until 1 September 2017 after which it will expire. 9 Tytane's solicitors responded by letter dated 30 August 2017 advising that Tytane wished to withdraw the originating application. The letter also stated: We note that your client is seeking costs to be fixed in the sum of $15,000.00. That seems excessive to us. We would be pleased if you could provide us with a breakup of how you arrived at the sum of $15,000.00 noting if this matter was to be taxed before the Taxing Registrar then the Federal Court Scale of Costs applies and not a time based method, which you may have applied. 10 Mr Lyons' solicitors responded by letter dated 5 September 2017 stating as follows: We refer to your letter of 30 August 2017. Presently our client's legal costs, including counsel's fees, exceed the $15,000 previously offered. Counsel's fees alone are circa $6,800. We appreciate that costs in the Federal Court are subject to taxation. If our client is successful in this matter, we are instructed to seek a lump sum costs order payable on an indemnity basis. In addition, it is well known that your client is insolvent, indeed we understand that Mr Dennis in fact is paying the legal fees of your client. In those circumstances we are instructed to seek that the lump sum cost order be made on a joint and several basis against Tytane and Mr Dennis. Our offer of 21 August 2017 was not accepted by your client and has expired. By not accepting our client's generous offer, you have caused further cost and expense to be incurred. Our client is willing to resolve the proceeding on the following basis: 1. The proceeding be dismissed; 2. Your client and Mr Ronald Dennis to pay our client's costs in the amount of $17,000. We are instructed to rely upon this letter on the question of costs fixed, should it become necessary. The above offer remains open until 4:00pm on 12 September 2017 at which time it will expire. 11 In their letter of 19 September 2017 ("the 19 September 2017 Offer"), Tytane's solicitors noted that there had been no response to their request for a break-up of the sum of $15,000 and, after referring to the obligation on parties under s 37M of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act") to resolve disputes as quickly, inexpensively and efficiently as possible, stated: Accordingly, it is reasonable for us to make the request for the breakup of your costs so we can adequately advise our client as to the reasonableness of those costs having regard to the fact that the scale of costs applies (and not a time based costing system that you may have applied). Further, in your letter of the 5th September 2017, we note you say that your client's offer is "generous". Again, without having a breakup of your costs we are unable to form a view as to whether it is generous or not. Please provide the appropriate breakup of the costs (including Counsel's fee slips) so that we may give this matter proper consideration and then advice to our client. 12 In a separate letter dated the same day, Tytane's solicitors advised that a notice of discontinuance had been filed and offered the sum of $10,000 in full and final satisfaction of Mr Lyons' claim for costs. There was no response to that letter. 13 On 15 September 2017, Mr Lyons' solicitors responded that he would proceed with the foreshadowed application for an indemnity costs order and a non-party costs order unless they agreed to orders paying Mr Lyons' costs fixed in the amount of $17,000 by 19 September 2017. On 23 November 2017, an interlocutory application was filed on behalf of Mr Lyons seeking those orders and listed for hearing on 8 December 2017. 14 In the meantime, it transpired that the notice of discontinuance did not comply with r 26.12(2) of the Rules as the notice was filed without the leave of the Court or Mr Lyons' consent. In written submissions filed on behalf of Mr Lyons, it was stated that Mr Lyons only moved on the interlocutory application if leave to discontinue was sought by Tytane, otherwise Mr Lyons sought to have Tytane's application for preliminary discovery listed for hearing. At the hearing on 8 December 2017, Tytane sought and was granted leave to file the notice of discontinuance nunc pro tunc. 15 Mr Lyons interlocutory application should be dismissed for the following reasons, 16 It does not automatically follow that the non-acceptance of a Calderbank letter of offer will lead to an order for the payment of costs on an indemnity basis: Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No. 2) [2000] FCA 602 at [22] per Goldberg J. As Goldberg J explained, if the purpose of a Calderbank letter is to offer to bring litigation to an end it should be couched in such terms as enable the offeree to make a carefully considered comparison between the offer made and the ultimate relief it is seeking in all its aspects. It is necessary to look at the genuineness of the offer, whether it was realistic, the point of time at which it was made and whether, in all the circumstances, it was such a reasonable offer as required the offeree to give careful consideration to it. If, in all the circumstances, it was unreasonable for the offeree to reject the offer there are strong grounds for the Court ordering indemnity costs: Donnelly v Edelsten (1994) 121 ALR 333. 17 I accept Tytane's submission that neither the 21 August 2017 nor the 19 September 2017 offers were expressed in terms which enabled Tytane to make a sensible and informed assessment of those offers. The 21 August 2017 offer merely asserted, without providing a basis for the assertion, that Mr Lyons' costs at that time exceeded $15,000. The "explanation" subsequently provided on 5 September 2017 - after the expiry of the offer and in the context of a new offer increasing the amount of costs sought - was neither responsive to Tytane's reasonable request for a break-up as to how the sum of $15,000 was arrived at, nor assisted in clarifying the basis upon which the sum of $15,000 was arrived at in order to enable Tytane to assess the reasonableness of the offer. I therefore reject Mr Lyons' claim for indemnity costs based on these letters of offer. 18 I also reject Mr Lyons' application for indemnity costs based on the offer made in the 6 April 2017 offer. The ordinary rule is that the costs of a successful party will be paid by an unsuccessful party on a party-party basis. The Court will not usually make an order for costs on an indemnity basis unless there is some special or unusual feature in the case which justifies a departure from the ordinary practice: Colgate-Palmolive Company v Cussons Pty Ltd [1993] FCA 801 at [16], [20]-[24]. In Hamod v New South Wales [2002] FCAFC 97 at [20], Gray J (with whom the other members of the Court agreed) said: Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs. In the present case it cannot be said, having regard to the course of correspondence passing between the solicitors for the parties following the initial offer, that Tytane acted unreasonably or imprudently in not resolving the proceeding at that earlier time. The question of whether Tytane was acting unreasonably in pursuing further inquiries about the sufficiency of the discovery made is not to be determined with the benefit of hindsight, and the fact that Tytane ultimately discontinued the proceeding does not justify an order for indemnity costs. 19 The application for non-party costs against Mr Dennis is likewise rejected. That application was put on the basis that there is a question about whether Tytane has the financial resources to meet a costs order against it and Mr Lyons should not be left to seek recovery from a company that may be impecunious in the circumstances where: (a) on the same day that Tytane received the documents from Mr Lyons, Mr Dennis moved a motion that the board of the company ratify and confirm the decision to bring proceedings against My Lyons for preliminary discovery; (b) Mr Dennis was instrumental in causing Tytane to continue the proceedings and chose to disregard the 6 April 2017 offer, the 21 August 2017 offer, and the 19 September 2017 offer. 20 The Court has a discretionary power under s 43(1) of the Federal Court Act to award costs against a non-party. In Selig v Wealthsure Pty Ltd (2015) 225 CLR 661 at [43] Gageler J said in respect of the equivalent power of the High Court: In Knight v FP Special Assets Ltd [1992] HCA 28 at [34], this Court held that its discretionary power to make orders against non-parties extends to the circumstance "where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party ... has an interest in the subject of the litigation". There is, however, no rule that where a non-party falls into this category an order for costs will necessarily follow. Rather, as Mason CJ and Deane J said, "an order for costs should be made against the non-party if the interests of justice require that it be made". 21 In the present case, the fact that Mr Dennis moved the resolution passed by Tytane on 6 April 2017 does not by itself justify a non-party costs order. I have already concluded that it cannot be said that Tytane was acting unreasonably or imprudently in not resolving the proceeding by accepting the 6 April 2017 offer at that time. I have also concluded that neither the 21 August 2017 offer nor the 19 September 2017 offer were expressed in terms which enabled Tytane to make a sensible or informed assessment of those offers. Those matters equally weigh against making a non-party costs order against Mr Dennis. Furthermore, the fact of the resolution does not of itself suggest any bad faith or improper purpose on Mr Dennis's part in having the company commence and continue the preliminary discovery application against Mr Lyons. 22 I am not satisfied, in any event, on the state of the evidence that the company would not be able to meet a costs order against it. The only evidence relied upon by Mr Lyons in support of his contention was a balance sheet for the company as at June 2015 which showed negative net equity of $222,101.86. Apart from the fact that the balance sheet is not indicative of the company's current financial position, I note, however, that the profit and loss statement for financial year ending 30 June 2015 showed a net profit for that year of $27,345.24. Moreover, a credit report for the company, which is more recent and is dated 22 May 2017 scored the company's risk level as moderate with a 2.55% chance of failure within the next 12 months. The evidence thus falls short of establishing that Tytane currently lacks the financial resources to meet a costs order against it. 23 Accordingly, the interlocutory application should be dismissed and the respondent ordered to pay the applicant's costs of that application. The respondent's costs of the proceeding should otherwise be paid by the applicant on a party-party basis. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.