ACN 074 971 109 v National Mutual Life Association of Australasia Ltd
[2013] VSC 137
•26 March 2013
| IN THE SUPREME COURT OF VICTORIA |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
S CI 2026 of 2002
| ACN 074 971 109 (as trustee for the Argot Unit Trust) | First Plaintiff |
| and | |
| PEGELA PTY LIMITED (ACN 002 256 751) | Second Plaintiff |
| v | |
| THE NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LIMITED (ACN 004 020 437) | Defendant |
AND BETWEEN
S CI 7779 of 2009
| ACN 074 971 109 (as trustee for the Argot Unit Trust) | Plaintiff |
| v | |
| THE NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LIMITED (ACN 004 020 437) | Defendant |
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JUDGE: | WOOD AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 8 March 2013 | |
DATE OF JUDGMENT: | 26 March 2013 | |
CASE MAY BE CITED AS: | ACN 074 971 109 (as trustee for the Argo Unit Trust) & Anor v National Mutual Life Association of Australasia Limited | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 137 | |
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GROSS COSTS APPLICATION - Rule 63.07(2)(c) Supreme Court (General Civil Procedure) Rules 2005
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs in both cases | Mr. P. Crutchfield SC with Mr. B McLachlan | Gilbert + Tobin |
| For the Defendant in both cases | Mr. M. Wyles SC with Mr. M. Settle | King & Wood Mallesons |
HIS HONOUR:
On 4 May 2012 Croft J made orders in each proceeding that the plaintiff/s pay the defendant’s costs in both cases on an indemnity basis. The decision is under appeal but there is no stay in place. For convenience they will be referred to as the “2002” proceeding or the “2009” proceeding or when referring to both - “the proceedings”. On 13 August 2012 the defendant filed summonses in the proceedings seeking that instead of taxed costs, the defendant be entitled to a gross sum to be assessed pursuant to Rule 63.07(2)(c) of the Supreme Court (General Civil Procedure) Rules 2005 (“the Rules”).
On 28 November 2012 an order was made on the Court’s own motion referring the summonses to an Associate Judge pursuant to Order 77.05 of the Rules for determination. Rule 63.07 states as follows :
63.07Taxed or other costs provision
(1)Subject to this Order, where by or under these Rules or any order of the Court costs are to be paid to a party, that party shall be entitled to taxed costs.
(2)Where the Court orders that costs be paid to a party, the Court may then or thereafter order that as to the whole or any part of the costs specified in the order, instead of taxed costs, that party shall be entitled to –
(a)a portion specified in the order of taxed costs;
(b)taxed costs from or up to a stage of the proceeding specified in the order;
(c)a gross sum specified in the order instead of taxed costs;
(d)a sum in respect of costs to be determined in such manner as the Court directs.
The defendant relies on one affidavit of Fiona Kathleen Hanlon (1 August 2012) and two affidavits of Elizabeth Mary Harris - an expert costs lawyer (9 August 2012 and 19 November 2012), together with written submissions.
The plaintiffs rely on an affidavit by Ariel Weingart - an expert cost lawyer (2 November 2012) together with written submissions. The second plaintiff in the 2002 proceeding also relies on an affidavit of Garrick Michael Hawkins (28 November 2012).
The following lengthy extract appears in the defendant’s undated written submission filed on 21 November 2012 under the heading “Object of the Rule”:
“7. In Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3)[1] Croft J stated:
[1][2012] VSC 399 at [84].
“84 The clear object of rule 63.07 of the Rules is, in my view, similar to the object of the corresponding Federal Court rule, as discussed by Sackville J in Seven Network Limited v News Limited, as follows:[2]
[2][2007] FCA 1062 at [25]
“(i)The purpose of the subrule is to avoid the expense, delay and aggravation involved in protracted litigation arising out of taxation: Beach Petroleum v Johnson (No 2), at 120, per von Doussa J, applying Leary v Leary [1987] 1 All ER 261; Harrison v Schipp [200] NSWCA 213; (2002) 54 NSWLR 738, at 742 [21] per Giles JA.
(ii)An order that costs be assessed as a gross sum does not envisage that any process similar to that involved in taxation should take place. On the contrary, the Court applies a much broader brush than would be used on a taxation of costs pursuant to O 62: Beach Petroleum v Johnson (No 2), at 120, 124, per Doussa J; Harrison v Schipp, at 743 [22], per Giles JA.
(iii)The Court should be confident that the approach taken to the estimate of costs is logical, fair and reasonable. The Court should be astute to avoid both overestimating the recoverable costs and underestimating the appropriate amount, for example by applying an arbitrary discount to the amounts claimed: Beach Petroleum v Johnson (No 2), at 123, per von Doussa J.
(iv)Although the power to assess a gross sum for costs involves the exercise of a discretion, it is necessary to bear in mind fundamental principles applicable to an assessment of costs on a party and party basis. These include the principles contained in O 62 r 19 (embodying the ‘necessary or proper’ test) and those stated in Stanley v Phillips [1966] HCA 24; ) (1966) 115 CLR 470, at 478, per Barwick CJ (on a party and party taxation the emphasis is upon obtaining adequate representation to enable justice to be done, not upon the propriety of steps taken to ensure maximum success in the cause): Auspine Ltd v Australian Newsprint Mills Ltd [199] FCA 673; (1999) 93 FCR 1, at 4-5 [12]-[15], per O’Loughlin J; Charlick Trading Pty Ltd v Australian National Railways Commission [2001] FCA 629, at [6]-[8], per Mansfield J.
(v)Although the methodology permitted by O 62 r 4(2)(c) initially involves a broader approach than on a normal taxation, the provisions of O 62 and Sch 2 provide assistance in fixing an appropriate gross sum: Charlick Trading Pty Ltd v ANRC, at [10], per Mansfield J.”
8. A number of further propositions about the power to order gross sum costs are discernible from the cases.
(a) Complex cases are especially suitable for the application of the rule. Leary v Leary:[3]
[3][1987] 1 All ER 261 at 265 a to d.
The purpose of this rule is to achieve exactly the objectives mentioned by the judge, namely the avoidance of expense, delay and aggravation involved in a protracted litigation arising out of taxation. This would be achieved especially in complex cases. The order, therefore, does not envisage that any process similar to that involved in ‘taxation’ should take place.
(b) The discretion can be exercised at any stage of the proceedings, or after the conclusion of the proceedings, and even where orders previously made envisage that costs would be taxed. Beach Petroleum v Johnson (No 2):[4]
[4][1995] 57 FCR 119 at [5].
Pursuant to O 62 r 3(1) the Court may exercise its powers and discretions as to costs at any stage of the proceedings, or after the conclusion of the proceedings. In my opinion the Court has power to make a gross sum order at this stage notwithstanding that costs orders were earlier made which envisaged taxation in the ordinary way.
(c) There may be occasions on which the judge will make a discount on the figures produced to him, although there is no statutory obligation to do this and care should be taken not to cause injustice to the party entitled to costs. Leary v Leary:[5]
[5][1987] 1 All ER 261 at 265 f.
… there may well be occasion on which the judge will make a discount on the figures produced in the schedule on a fail-safe or ‘not less than’ basis. Again there is no statutory obligation for him to do this; and, indeed, unless there appears some reasonable ground to invite inquiry into the actual figures an arbitrary reduction of the kind suggested by counsel for the husband could well cause an injustice to the successful party. …
(d) Where the liability for costs may be expected to be large and a taxation complex and expensive, the financial position of the party liable is a matter relevant to be taken into account in exercising the discretion. Hadid v Lenfest Communications Inc:[6]
To those considerations another should be added, relating to the applicant’s financial situation. In a judgment delivered on 14 April 2000 I held, in considering a motion for an order that the applicant produce documents in accordance with the notice to produce served by Mr Price, that the applicant’s financial position was relevant to an application for an order for payment of a gross sum instead of total costs. The view which I had formed, and to which I adhere, was stated at para 14 as follows:
How, then, does evidence of the financial position of a party liable under a costs order fit into that picture? In my view it does so substantially in the way suggested by the sixth respondent. Where the amount of costs likely to be payable is very substantial and where, in any event, taxation is likely to be drawn-out, burdensome and expensive, the burden borne by the successful party is aggravated if it appears that, in any event, the party obliged to pay costs may not be able to meet liability of the order likely to be involved. For that reason, in my view, in a case where the liability for costs may be expected to be large and a taxation complex and expensive the financial position of the party liable is a matter relevant to be taken into account in exercising the discretion.
[6][2000] FCA 628 at [25].
The defendant filed amended written submissions dated 8 March 2013 at the hearing. These submissions make reference to events that have occurred in the intervening period. For example, a fresh undertaking to pay interest on any taxed sum for a period which represents the extra time a taxation would take over a gross sum exercise. This will be addressed at paragraphs 46 to 50 below. The more significant addition is the reliance upon, and impact of, the amendments to the Civil Procedure Act 2010 that commenced on 24 December 2012. These include the insertion of section 65C which states as follows :
65COther costs orders
(1)In addition to any other power a court may have in relation to costs, a court may make any order as to costs it considers appropriate to further the overarching purpose.
(2)Without limiting subsection (1), the order may—
(a)make different awards of costs in relation to different parts of a proceeding or up to or from a specified stage of the proceeding;
(b)order that parties bear costs as specified proportions of costs;
(c)award a party costs in a specified sum or amount;
(d)fix or cap recoverable costs in advance.
(3)An order under subsection (1) may be made—
(a)at any time in a proceeding;
(b)in relation to any aspect of a proceeding, including, but not limited to, any interlocutory proceeding.
The amendments also included the insertion of section 1(2)(b) which provides that the purpose of the Act is to expand the powers of the courts in relation to costs in civil proceedings. The overarching purpose is to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute (see section 7(1) of the Act). In oral argument the defendant also relied on Aon Risk ServicesAustralia Limited v Australian National University[7] which deals in part with the impact of delay and costs in case management by courts. French CJ observed “the courts are concerned not only with justice between the parties, which remains their priority, but also with the public interest in the proper and efficient use of public resources”[8].
[7] [2009] 239 CLR 175
[8] Ibid [23]
In oral argument the defendant used the analogy of scales, with justice on one side, and cost effectiveness and timeliness on the other. It was put that the balance is in favour of the defendant for a gross sum having regard to the impact of timeliness and cost effectiveness. In effect, it was submitted that it would be difficult to justify the taxation process at all when considered against these considerations.
The defendant relied on a number of cases in addition to those referred to in the written submissions. In relation to prospect of recovery of costs being a factor to consider, reference was made to Sony Entertainment v Smith[9], Playcorp Group of Companies Pty Ltd v Peter Bodum A/S (No 2)[10], Julien v Secretary, Department of Employment and Workplace Relations (No 2 )[11], and Nine Films & Television Pty Limited v Ninox Television Limited[12]. In those cases there is reference to evidence concerning the actions and financial state of the party liable said to be relevant in relation to the prospects of recovery.
[9](2005] 215 ALR 788 [194] – “based on the conduct of the respondents to date”
[10][2010] FCA 455 [24]
[11][2009] FCA 1259 [10 to 12] – “having regard to the financial capacity of the appellant”
[12][2006] FCA 1046 [6] – “some evidence to suggest that the respondents may not be in a position to meet the costs order”
In oral argument the defendant took time to recite the tortured history of the matter before Redlich J (2006) , the Court of Appeal (2008), remittal to a trial Judge (Croft J) of certain questions, the initiation of the 2009 proceeding and ultimately a 17 day trial of both proceedings in 2011 and hearing on damages in 2012. It is accepted that the issues were complex.
The plaintiffs in their written submission dated 28 November 2012 accepted that the principles applicable to a gross sum costs order application were correctly set out in the defendant’s submissions as reproduced under paragraph 5 above including the footnotes applicable thereto (also reproduced above).
In their written submission the plaintiffs also rely on additional passages from various authorities. What follows is a compilation of these additional comments with commentary taken from the plaintiffs’ written submission :
“3. The observations of von Doussa J in Beach Petroleum v Johnson (No 2)[13] at 123 emphasise the risk of unfairness inherent in the exercise of the power to order the payment of a gross sum:
[13](1995) 57 FCR 119.
“… before exercising the power to fix a gross fee, the Court should be confident that the approach taken to the estimate of costs is logical, fair and reasonable. The Court should be astute to avoid both overestimating the recoverable costs and underestimating the appropriate amount, for example by applying an arbitrary discount to the amounts claimed.”
4. Justice Sundberg in WM Wrigley JR Company v Cadbury Schweppes Pty Ltd[14] was anxious to ensure he did not give mere lip service to the requirement that a gross sum costs order be fair and reasonable. His Honour stated with respect to the Federal Court counterpart rule, at [5]:
[14][2006] FCA 1186.
Order 62 r 4 confers what has been called an unlimited discretion, which of course must be exercised in a judicial manner. How the powers are to be used varies widely from case to case and each case must be decided on its own merits: Leary v Leary [1987] 1 WLR 72 at 76. The approach to be adopted to an application under O 62 r 4(c) has recently been described in Sony Entertainment v Smith (2005) 215 ALR 788 at 812–813. There Jacobson J quoted (at 813) with approval the following passage from the judgment of Giles J in Harrison v Schipp (2002) 54 NSWLR 738 at [22]:
[T]he approach taken to estimate costs must be logical, fair and reasonable. The power should only be exercised when the Court considers that it can do so fairly between the parties, and that includes sufficient confidence in arriving at an appropriate sum on the materials available.
5. In that case, Cadbury Schweppes’ expert costs consultant included in her report a calculation of what she believed to be a fair and proper amount as a fixed sum. The affidavits filed on behalf of WM Wrigley JR Company identified aspects of the assessment of profit costs and disbursements that it was contended were excessive and unreasonable or required detailed analysis. His Honour dismissed the gross sum application, concluding at [9] that:
…I must, however, bear mind that of its nature, specification of a gross sum is not the result of a process of taxation or assessment of costs: Harrison at [22]. Rather a broader brush must be applied than would be appropriate on taxation. The present relevance of the Wrigley claims and contentions is that their existence, unresolved, has brought me to the clear view that I should not exercise the power to order a lump sum under O 62 r 4(c) because I am not satisfied that I can do so fairly between the parties, and with sufficient confidence that I would be arriving at an appropriate sum on a logical and reasonable basis, rather than selecting figures at random on the basis of an arbitrary preference for one expert’s view over another’s. See Sony Entertainment at [199].
6. As Beach J commented this year in Thomas v Powercor Australia Limited in refusing a gross sum costs application:
Additionally, while a shorter gross costs assessment procedure will obviously involve less expense than a more detailed and longer taxation, the short and more summary the gross costs assessment might be, the more likelihood that the costs assessed might vary from those which would have been allowed on a ‘traditional taxation’. Care needs to be taken in resolving any dispute to ensure that a procedure is not so short and lacking in detail as to risk an unfair or wrong outcome.[15]
[15][2012] VSC 207 at [15].
7. In cases where gross sum costs have been awarded, the percentage of costs ultimately ordered to be paid vary very significantly. Sackville J summarised some of those cases in Seven Network Ltd v News Ltd:[16]
[16][2007] FCA 2059 at [33].
I was referred to a number of Federal Court cases in order to illustrate the range of gross sum costs orders that have been made. The range, measured by reference to the percentage of total costs and disbursements allowed by the Court, is quite wide. The cases to which I was referred include Beach Petroleum v Johnson (No 2) (a gross sum costs award equivalent to 64.7% of the successful party’s total costs and disbursements); Canvas Graphics Pty Ltd v Kodak (Australasia) Pty Ltd (unreported, O’Loughlin J, 23 January 1998) (38.19% of the amount claimed); Datadot Technology Ltd v Alpha Microtech Pty Ltd [2003] FCA 1449 (59.05% of total costs and disbursements); Williams Advanced Materials Inc v Target Technology Co LLC [2004] FCA 1405 (65%); Nine Films and Television Pty Ltd v Ninox Television Ltd [2006] FCA 1046 (67.31%); Sparnon v Apand Pty Ltd [1998] FCA 164 (60.98%); and Sony Entertainment (Australia) Ltd v Smith [2005] FCA 228 (40.79%). If these cases are any guide, most awards seem to fall broadly within the range of 60 to 70% of total costs and disbursements, although sometimes the award may amount to less than 40% of total costs and disbursements. As Mr Sheahan pointed out, none of the cases appears to have allowed the proportion of total costs claimed by Telstra in this case (77.24%).
. . . .
12. In Hadid v Lenfest Communications Inc[17] at [25], Lehane J stated that
…The purpose of the rule is to avoid the expense, delay and aggravation involved in protracted litigation arising out of taxation. The power is appropriate to be used in complex cases….
13. One needs to ask whether it is the complexity of the proceedings or rather the complexity of the taxation itself which is relevant. It is submitted that, even if the Court were to accept that the proceedings themselves (that is, the trial and appeal) were complex, it does not necessarily flow that the taxation is also complex.
14. Justice Middleton in Playcorp Group of Companies Pty Ltd v Peter Bodum A/S (No 2)[18] accepted that assessment of costs on a gross sum basis was ‘likely to be faster than a traditional taxation process’,[19] but refused the application nevertheless, stating that:
I hold the view that an order for a gross sum assessment should not be made by the court in this proceeding. At one level there may be time and expense saved by adopting a gross sum assessment rather than a traditional taxation process. However, this may depend upon the approach taken to the task. After all, even with a gross sum assessment material must be lodged and filed with the court to enable a logical, fair and reasonable assessment of the costs, which will be open here to scrutiny by Bodum. I have already explained above the need to adhere to the basic principles of taxation.
. . . .
I accept that a gross sum assessment order may be appropriate where it will avoid a counter productive dispute about costs, but, I am far from satisfied that this will occur in this case. Assuming that Bodum prior to instituting the proceedings left “no stone unturned” in its approach, I do not conclude that further unnecessary conflict between the parties upon a taxation will necessarily occur.”
[17][2000] FCA 628.
[18][2010] FCA 455.
[19]At [10].
In oral argument the plaintiffs stressed that the complexity of the taxation was a more important factor than the complexity of the litigation. They did not dispute that the litigation was complex and had been on foot for a long time.
The plaintiffs made the point that the overall costs of the defendant were in excess of $5 million and the relative disparity between the estimates of both experts when comparing the costs of taxation and gross sum exercise was relatively small in comparison. Reliance was placed on the passage in Julien (supra) where Spender J stated that the expense that taxation and delay would cause “would be disproportionate to the amount of costs recoverable.”[20] In other words, the difference between the experts on the costs of taxation would be around $135,000 and the difference between them on the gross sum exercise would be around $40,000. In comparison to $5 million expended by the defendant this is ‘not much more’. The defendant in reply took issue with this construction – namely that a successful defendant who has expended $5 million in winning shouldn’t be ‘too fussed’ about spending a bit more for a taxation.
[20][2009] FCA 1259 [12]
It is a given that the quantification of costs is invariably the result of a full taxation if the parties do not resolve the matter. A precise figure that represents the liability of the losing party is then arrived at in the taxation process. A gross sum is, just that. It is not arrived at with the same rigour and precision. It is a rare event when an unsuccessful party is not afforded the opportunity to participate in a full taxation. As the cases make clear there needs to be sufficient justification for the less precise option to be adopted, and the application of arbitrary discounts is not permitted if a gross sum exercise is selected as the option of quantification.
The expert reports of Ms Harris and Mr Weingart obviously differ in relation to their estimates of the costs and timelines that would be involved in a taxation, as opposed to a gross sum exercise. They are both experienced experts in the area and the extent of disagreement is testament to the difficulties in achieving some sort of precision in these matters. The were not cross examined, which can be one way to assist a court to come to a conclusion that one expert ought to be preferred over another. In this case there is no obvious basis to prefer one over the other as they are drawing on their respective experiences to arrive at the sums and the time lines that they do. As noted by Sundberg J in Wrigley “I should not exercise the power to order a lump sum under O 62 r 4(c) because I am not satisfied that I can do so fairly between the parties, and with sufficient confidence that I would be arriving at an appropriate sum on a logical and reasonable basis, rather than selecting figures at random on the basis of an arbitrary preference for one expert’s view over “.[21] To some extent the time and cost in any costs dispute is determined by how difficult and costly one party wishes to make it, and how cognizant they are of their responsibilities under the Civil Procedure Act 2010. Also the time involved in drawing a bill, for example, will vary depending on the state of the file, the efficiency of the individual or the efficiencies delivered by use of software technology.
[21][2006] FCA 1186 [9]
Ms Harris estimates that the whole taxation process would take twelve to seventeen months. With the lower end being more realistic if the issues identified from paragraphs 22 to 35 below were clarified. Her estimate of $290,000 to $445,000 for the costs of the whole taxation is qualified on the same basis. The taxation hearing would take seven to twelve days and cost between $140,000 and $210,000. She bases her figures on rates of $450 per hour for the cost lawyers with 440 to 600 hours to draw the bill (five to seven months). This would equate to $135,000 to $220,000 plus $15,000 for the assistance of a lawyer from the firm to complete the drawing of the bill. Ms Harris estimates it would take five to seven weeks to prepare the affidavit in support of a gross sum, and cost $83,250 if there was a one day hearing.
Mr Weingart estimates that the taxation process would take nine months and a gross sum exercise five and a half months. He estimates the cost of taxation to be $79,400 if the bill is drawn on scale and $129,000 if drawn on hourly rates. These estimates exclude the cost of preparing a bill. He estimates 300 to 400 hours to draw the bill on scale and 100 to 150 hours on hourly rates. Even accepting the mid point of Ms Harris (520 hours) he states that it should only take three months, at $350 per hour which would equal $182,000 on scale and $43,750 on hourly rates (assuming 125 hours at $350 per hour). The gross sum exercise would cost $96,750 if it ran for a day and $120,000 if it ran for three days. The costs of the expert report would be $78,750 to $90,000 depending on the length of the hearing.
The true picture is probably at a mid-point between the experts and probably closer to Mr Weingart but it is impossible to be more accurate than that. For the sake of the argument at this point I will assume the defendant’s expert (Ms Harris) is more accurate in the time and cost differential. There is no dispute that a gross sum exercise would invariably be quicker and cheaper than a full taxation. This would be so in all cases, not just in these proceedings. If that were the sole criteria there would be a gross sum sought and ordered in every case. In practice it is a rare event. There clearly needs to be more justification than the time/cost differential.
There are a number of matters that are not in dispute. The litigation ran for 10 years. The 2002 proceeding has two plaintiffs but it initially involved additional plaintiffs (Paul and Thomas Oates - “Oates parties”) who later settled with the defendant. The 2009 proceedings was initiated by only one of the two surviving plaintiffs from the 2002 proceeding. Both proceedings ran together from 2009 until judgment in 2012. The defendant utilised solicitors from the same firm with offices located in both New South Wales and Victoria and there was a division of work and ongoing communication between them throughout.
Ms Harris raises a number of questions that, in her view, require answering as part of the consideration of any quantum of a gross sum. These issues are however also relevant in considering whether to make a gross sum order in the first place. Arguably the more difficulties that can be identified that would arise at a practical level in the process of assessment of the quantum in a gross sum exercise, the less appropriate such an order might be. There would be no point in making a gross costs order to be then confronted with insurmountable practical difficulties later on. If those difficulties make the prospect of having to make discounts more likely, and the lack of specifics will require arbitrary discounts more likely, then the chances of a sufficiently accurate figure being arrived at diminishes, and it becomes less appropriate for a gross sum exercise to be embarked upon in the first place.
THE EFFECT OF THE INDEMNITY COSTS ORDER
Ms Harris states that “it is a matter of contention amongst Costs Lawyers as to whether Order 63.34 operates to limit recovery under an indemnity cost order to scale.”
The Rules states at 63.34(1) :
“Subject to paragraph (3), the solicitor for the party to whom costs are payable shall be entitled to charge and be allowed the fees set forth in Appendix A”.
In my view if there is contention, there should not be. The test to be applied for indemnity costs is outlined in Rule 63.30.1. The basis of calculation is contained in Rule 63.34(1) which deals with the basis of any entitlement to recover, namely on scale, absent any order of the Court to the contrary. Ironically, the same Judge who has referred this matter and made the indemnity costs order in this matter (Croft J) also made an indemnity cost order in Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd(No 3)[22]. On that occasion he added the words “calculated by reference to the retainer between each of the defendants and their respective legal advisers” to the final cost order. The absence of these words in the current order makes it clear therefore that the intention, and the wording of the costs order provides for costs on scale. In Sunland the effect of the order was to make it clear that in that case the entitlement was not on scale but on the basis of existing cost agreements. This is entirely consistent with the rationale in Flotilla Nominees Pty Ltd v Western Australian Land Authority & Anor.[23] The absence of these words in the present order means costs are to be taxed on scale consistent with the words in the order and the Judge’s intention.
[22][2012] VSC 399
[23][2003] WASC 122 [30]
By way of comment, the Court was persuaded in Sunland to order gross costs on an indemnity basis by reference to the hourly rates in the retainer agreements. That case had none of the characteristics and potential issues of the matter currently being considered by the Court (as discussed in paragraphs 27 to 31 below).
It is also worth noting that out of an abundance of caution, and consistent with the Law Institute Report (entitled “Proposed New Victorian Supreme Court Scale of Costs” co-authored by Ms Harris which the Court considered and substantially adopted), Rule 63.34 is to be amended from 1 April 2013 to make it clear that a costs order on an indemnity basis is on scale absent an order to the contrary. The new Rule will say “Subject to paragraph (3), a legal practitioner for a party to whom costs are payable (whether the basis of taxation is the standard basis or the indemnity basis) shall be entitled to charge and be allowed costs in accordance with the scale in Appendix A unless the Court or the Costs Court otherwise orders”.
THE ENGAGEMENT OF NEW SOUTH WALES SOLICITORS
It is clear that work was done in both Victoria and New South Wales by the same firm. The effect of Rule 63.44 is that so far as practicable where work is performed by a lawyer practicing outside Victoria, “the charge shall, if allowed, be allowed in an amount appropriate to the place where the lawyer practices”.
Work done in Victoria will therefore be taxable on scale (for the reasons outlined above in paragraphs 24 and 25), and for work in New South Wales on the basis of what is ‘reasonable’ in line with their cost regime. This would not preclude an argument that work that could have been performed in Victoria was performed in New South Wales at a higher costs and therefore the allocation of work between the two states was ‘unreasonable’ (unless there were sound practical reasons).
The defendant seeks all costs on the basis of their hourly charge rates irrespective of where the work was performed. The Victorian work must be assessed on scale and there is no basis to depart from the operation of Rule 63.44 in relation to New South Wales work. Hence it would not be a simple matter to accurately assess costs on a gross basis in the face of these types of arguments, namely whether there was a reasonable distribution of work between the two states. There would be, of necessity, either a lengthy enquiry or some arbitrary discount to make allowance for it in the absence of a bill in taxable form. There would be the additional issue of the level of communication between solicitors in the two states, the extent of “chatter” and the double, triple and quadruple handling (between teams and within teams) that may result where there are teams of lawyers in both states. How this could be identified and fairly dealt with in a gross sum exercise would be problematic.
ADDITIONAL PARTIES
The Oates parties having been plaintiffs in the 2002 proceeding settled with the defendant at some point between 2006 and 2008 (see the affidavit of Fiona Hanlon at paragraph 54(b)). Costs of the defendant that were purely referrable to the Oates parties would have to be identified and excised from the task. This could not be done with the requisite degree of precision in a gross sum exercise without close analysis. A bill in taxable form would certainly provide the necessary information with sufficient accuracy to make that assessment.
APPORTIONMENT OF COSTS BETWEEN THE 2002 AND 2009 PROCEEDINGS
Difficulties arise because the party liable varies between the two proceedings which effectively ran together since 2009. The plaintiffs have different interests because the second plaintiff in the 2002 proceeding would have an interest in minimising their liability under the 2009 proceeding. All work involved in trial time, witness statements, written submissions, and counsel preparation would require close analysis to make a sufficiently accurate apportionment.
METHODOLOGY OPTIONS IN A GROSS SUM EXERCISE
One option is the ‘analogy’ method to “review previous gross sum cases to identify what the percentage reduction on costs was in those cases and adopt an appropriate reduction by reference to previous practice”. This is not favoured by Ms Harris and this makes sense having regard to the wide range of percentages referred to by Sackville J in the Seven Network case (pages 8 and 9 above).
The second option is the ‘adjusted fees’ methodology. This is favoured by Ms Harris where costs are recoverable on scale. It involves taking the base hours from time records and multiplying them by the scale rate, adjusting it to account for the different scale rates applicable for types of work and then applying a loading for general care.
The third option is the ‘Ausmaq’ method. This is favoured where costs are to be assessed on hourly rates. This involves actual costs incurred, identifying work that falls outside the scope of the costs order, and then breaking the figure down to costs and disbursements. As a next step appropriate hourly rates are determined and then a final calculation is made on the basis of the hourly rate options, the cost reduction for unreasonable work and the addition of disbursements.
The plaintiffs’ written submission includes the following passage :
“Ms Harris deposed that,[24] when using the Ausmaq methodology, ‘if appropriate, a reduction is applied to account for work which was unreasonably or unnecessarily incurred’, but does not explain the basis or amount of that reduction. It is difficult to see, keeping in mind the breadth of reductions in previous gross sum cases as set out in Seven Network above, how the defendant’s proposed approach can leave the Court comfortable in this case that any calculation of costs proffered by the defendant in a gross sum assessment will not be simply an ‘arbitrary discount’.[25]
Two additional factors are relevant:
(a) Contrary to the position in each of the cases referred to above and, indeed, each of the authorities cited by the defendant in its submissions,[26] the defendant has not adduced in support of this application any evidence as to the appropriate quantum of the gross sum it is proposed should be ordered or the nature of the costs and expenses represented by the gross sum. The result is that the plaintiffs’ expert costs consultant has not been able to make claims and contentions of the kind that were pivotal in the decision of Sundberg J in WM Wrigley JR Company v Cadbury Schweppes Pty Ltd, above, not to make a gross sum costs order. Whilst it appears that there is no express rule that prohibits the bifurcation of the application in the manner proposed by the defendant here, it is submitted that without a description of the nature and quantum of the costs sought and the identification by the opposing party of instances where those costs are excessive or inappropriate, it would be difficult, if not impossible, for this Court to properly assess whether it is possible to determine an appropriate sum on a logical and reasonable basis and therefore whether payment of a gross sum should be ordered; and
(b) although Croft J (before whom this application has been listed for hearing) was the judge on the proceedings remitted to the Supreme Court by the Court of Appeal and heard in 2011, he was not the initial trial judge. This was found to be relevant by Sundberg J in WM Wrigley JR Company v Cadbury Schweppes Pty Ltd, who stated at [10]:
In all but one of the cases collected in the appendix to Cadbury’s written submissions the judge who fixed a lump sum was the trial judge who, having heard the evidence and watched the proceeding unfold, was in a much better position than I am to reach informed conclusions about the costs issues that are now in dispute. In the Harrison case, Giles JA, as a member of the Court of Appeal, had sat on an appeal in the matter, and on one later proceeding that had been removed to the Court of Appeal in which the costs order made on the appeal was challenged. His Honour was deputed by the Court of Appeal to hear a lump sum application that followed upon that Court’s costs order. Thus his Honour had a similar advantage to that enjoyed by the trial judge in the other cases referred to in the appendix.
[24]Harris affidavit at [60].
[25]Beach Petroleum at 123.
[26]With the exception of Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3) [2012] VSC 399, in which his Honour stated at [87] that he was of the ‘opinion that a gross sum costs order should be sought, but on the basis that the parties are allowed a period of time within which to have prepared expert evidence in support of gross sum claims, with directions for a response from Sunland, together with the filing of any evidence in support of Sunland’s position.’
DISCUSSION AND ANALYSIS
From Wrigley it is clear that the trial judge’s knowledge is an important factor. However, leaving aside the fact that the trial judge in the matter at hand, who had the level of knowledge required, has made a referral to an Associate Judge to consider the application for a gross costs order, in the present case there would be a combination of the second and third methodologies (discussed at paragraphs 33 and 34 above for the reasons outlined in paragraphs 24 and 25 above) and there would be considerable guesswork as to what amount of work fell into each category. The New South Wales work would be assessed by the third methodology and the Victorian work by the second methodology but how much work fell into either could be an arbitrary decision without the benefit of considerable scrutiny and ideally, something close to an itemised bill. In other words, the foundation would involve guesswork and the next level involves guesswork - hence guesswork on guesswork.
There would be the additional problem of estimating what percentage of work should or could have been done in New South Wales for justifiable reason and what should or could have been done in Victoria in preference to New South Wales at less cost. This would not emerge with sufficient accuracy from a global approach and again something close to an itemised bill would assist.
The affidavit of Fiona Hanlon (paragraph 59) on behalf of the defendant asserts that the location of the various volumes of documents is not a true indicator of where the actual work was conducted. On the defendant’s own evidence therefore one basis for an easy apportionment has been removed as an option. This means that a closer analysis is required.
One of the cases relied upon by the defendant in argument was Wenkart v Pantzer (No 3) [27] where Flick J states “Although the power conferred by Order 62 r4(2)(c) may be particularly suited to complex litigation (cf Sony Entertainment (Australia) Limited v Smith), in the present proceeding the difficulty of attempting any assessment, without the benefit of more focussed evidence, is peculiarly exacerbated by the course which the proceeding has taken over the best part of this last decade. For the Court to fix any percentage would have the potential to cause injustice to Mr Pantzer by fixing a “fail safe’ discount and may also occasion prejudice to Dr Wenkart by over estimating the costs that may be recoverable: Beach Petroleum NL v Johnson”.
[27][2010] FCA 1423 [28]
The defendants rely on the fact that the litigation was long and complex. The plaintiffs submit that the issues identified that would have to be resolved in a taxation are matters that commonly arise. This is true, and the taxation process is able to accommodate these issues by the production of an itemised bill, and if necessary a full taxation. The issues identified above could make the assessment of any gross sum a complex and problematic exercise that would be much less accurate than a taxation. Resolution of most of these dilemmas would be in large part identified and resolved by the production of an itemised bill.
As a general proposition a gross sum order is appropriate in complex litigation where the taxation would be relatively simple but lengthy, aggravating and expensive. Here the issues would make for a taxation that was more complex than a simple case, but the issues would be extremely difficult to address with sufficient precision to give justice to the parties in a gross sum exercise in line with the authorities. If the defendant has to bear the time and trouble of preparation of a bill, then it makes more sense that costs are assessed under Part 8 of Rule 63 (“Alternative Assessment Procedure”) after the production of a bill, followed by a mediation with the experts present to obviate the time and expense of a full taxation. At the least a mediation may narrow issues. The defendant would no doubt embrace these options because as is often the case where a party seeks to tax their costs while an appeal is on foot, there is a reluctance to fully participate in a full taxation by producing documents given the potential impact on legal professional privilege.
The plaintiffs rely on the passage in Hadid where the word “aggravation” is used in addition to expense and delay when looking at what a gross sum exercise will avoid in comparison to a full taxation. They rely on the passage quoted from Middleton J in Playgroup (see pages 9 and 10 above) to the effect that a party may take a different approach to taxation. Just because the plaintiffs in the current matter appear to have made decisions to seek millions of dollars in litigation and to refuse reasonable offers well in excess of what they eventually recovered in the substantive litigation (well within Magistrates’ Court jurisdiction[28] , does not necessarily mean that, properly advised in a costing exercise, they will make unreasonable decisions.
[28][2012] VSC 177 [36]
It is true that Dixon J came to the opposite conclusion to Middleton J when he ordered gross costs after he concluded in Love v Thwaites & Anor(No 5),[29] that “the history of litigation in this court between Mr Love and Roads Corporation suggests a prospect of protracted litigation on a taxation”. Mr Love was self represented. Here, the parties have engaged two very experienced and well credentialed experts. The Court is entitled to have some confidence that these individuals are alive to the relevant provisions of the Civil Procedure Act 2010. It could also be said that there is no guarantee a gross sum exercise would only take one to two days. If the parties want to run the exercise like the litigation it could take longer than the estimates of either expert.
[29][2012] VSC 636 [10]
In another decision of Flick J relied upon by the defendant (Eat Media Pty Ltd Pty Ltd v Mulready Media Pty Ltd [30], it is clear that even if parties consent to such an order this is not sufficient reason as any discretion must be exercised by reference to the peculiar facts and circumstances of each case.
[30][2010] FCA392 [23-24]
It is worth noting that in almost all the authorities where a gross sum has been ordered, there was a one step process and the sum was fixed in the same exercise[31]. The Courts in those applications had the benefit of assessing the proposed quantification process or methodology in detail as part of the consideration of whether it was appropriate to order a gross sum. It is only in Love, Sunland and the present case that there has been a bifurcation of the application with the assessment of quantum and mode of quantification to be a second step once the order is made.
[31]Beach Petroleum, Harrison, Auspine, Charlick, Hadid, Nine Films and Sony. See also GM Holden Ltd v Paine (No 3) [2011] FCA 693
PREJUDICE TO DEFENDANT BY TAXATION
The plaintiffs’ written submission makes reference to an undertaking in a letter of 23 November 2012 by their “clients” to pay interest to the defendant for the period that would be involved in dealing with the costs by way of taxation as opposed to gross sum. They calculate that as beginning “on 15 May 2013, being 5.5 months after the first of potentially two hearings in relation to a gross sum costs order (per Ariel Weingart’s estimate), and ends on the date that the taxation is completed”.
From the defendant’s amended written submission it is apparent that this offer of an undertaking was withdrawn and replaced by one dated 4 December 2012. The new offer is in the following terms :
“Our client, Pegela, will pay interest at the Bank Swap reference rate, as published from time to time by the Australian Financial markets association, on your clients costs, as taxed, for the period by which the taxation exceeds the time that would have taken by a gross sum costs assessment.
For the purposes of this undertaking, the “time that would have been taken by a gross sum costs assessment” is to be 5.5 months from the date of any order that the matter proceed to taxation or the date on which the defendant consents to taxation. That is, if an order is made on 8 March 2013 that the matter proceed to taxation, the defendant will be entitled to interest from 23 August 2013 until the taxation is concluded.”
The defendant attaches little value to this offer as Pegela (the second plaintiff in the 2002 proceedings) has no assets. The plaintiffs stated at the hearing that Mr Hawkins controls this entity.
The other undertaking on offer is contained in the affidavit of Mr Hawkins (at paragraphs 4 and 5) where he undertakes to pay the costs of taxation in the 2002 proceedings.
This latter offers some comfort, but it only extends to interest for a limited period on the final figure and is not an undertaking in relation to payment of the final figure. The affidavit of Garrick Hawkins makes it clear that he is personally offering the undertaking.
PLAINTIFFS’ FINANCIAL CIRCUMSTANCES
The second plaintiff relies on an affidavit of Garrick Michael Hawkins who describes himself as “an advisor and beneficiary of the second plaintiff in the 2002 proceedings”. By the latter offer he undertakes to pay the defendant’s costs of the taxation in the 2002 proceeding prior to any apportionment between the 2002 and 2009 proceedings. I take this to mean to just pay the costs of taxation in the 2002 proceeding’s up until the point in the taxation process where the costs of the 2009 proceeding commences to be taxed. In other words, to the point where apportionment between the 2002 and 2009 proceedings commences. It is not an undertaking to pay the taxation sum owed to the defendant arising from the 2002 proceedings. The exhibited valuations establish that he owns a $33.5 million house with a $9.4 million mortgage. It is clear that the financial state of the party liable is but one factor to consider (see Love at [12] to [16] and Hadid quoted on page 4 above).
While it appears that the plaintiffs have no real disclosed assets, the defendants have had 10 years to bring appropriate security for cost applications to provide themselves with some financial protection. The litigation commenced in 2002 and security was sought twice and obtained in 2010 and 2011 for a total of $160,000. The orders were complied with. This was in the 2009 proceedings. It appears that no such application was ever brought in relation to the 2002 proceeding (see Affidavit of Fiona Hanlon [42-44]. The parties agreed at the hearing that an order for security had also been made in relation to the pending appeal. An order was made on 16 August 2012 by the Court of Appeal for close to $200,000 and presumably this was satisfied by 29 August 2012 in compliance with the order as the appeal is not stayed. The making of these orders would not have occurred unless there was some concern about a capacity to pay.
The defendant has issued summonses for taxation on two occasions, in respect of the original Court of Appeal hearing and in respect of a security for costs application. On both occasions the plaintiffs have settled the costs.
Hence, there are five occasions that the plaintiffs have been asked for money and on each occasions arrangements have been made which were satisfactory to the defendant. The defendant has expended $5 million in costs and has been content to only seek security on two occasions in the substantive proceedings and then only in relation to the 2009 proceeding. They have always known the asset position of the plaintiffs. There is no evidence before me to justify their pessimism in relation to costs recovery, other than the limited extent of the undertakings proffered and the fact that orders for security have been justified.
The situation was significantly different in Love however. In that case the financial position of the party liable had changed. At the time of the order for a gross sum exercise there was evidence of unpaid sums ($1.65m to the State of Victoria in untaxed costs and unpaid security for costs of $85,000), and litigation on foot for recovery of $3.575m (by former solicitors). Much of the land still held by Mr Love was subject to mortgages, covenants and caveats. He had spent $16.6m on his own costs and he faced untaxed liabilities of $16m.[32]
[32]Love v Thwaites & Anor (No 5) [2012] VSC 636 [12-13]
In the facts at hand, it appears there has been no change in the asset position of the plaintiffs, no evidence that a shorter time frame for a gross sum exercise will increase the chances of recovery as compared to the time frame for a taxation. Conversely, there is evidence that on five occasions sums demanded by way of security for costs and taxation have been satisfied.
Concerns about capacity to pay is but one factor to be considered. An order for a gross sum exercise to be embarked upon should not be made in the face of doubts about fairness and justice just because of a concern about ultimate recovery. It is ultimately a balancing exercise.
CONCLUSION
I accept that the litigation was complex (as are most matters in this Court) but not necessarily that it was ‘highly complex’ given the range of matters dealt with in the Supreme Court. The taxation would be time consuming and have some complexity. The gross sum exercise would in some ways be more problematic than taxation as the types of principles that may or may not be applied and determined in a taxation would have to be factored into a gross sum on an arbitrary basis in the absence of considerable detail.
For example, there would be too much guesswork about how much unreasonable ‘chatter’ occurred between Victoria and New South Wales, what the division of work was between the two states, whether there was a reasonable split of tasks between the states and to what extent there were ‘running briefs’ which add significant cost over 10 years. Experience in taxations shows that most solicitors send documents to counsel on a running basis whenever they are received, irrespective of whether counsel is actually performing a task in the case at the time. This increases the costs and can be regarded an unreasonable depending on the extent of the practice.
The defendant argues that problems exist in relation to retrieval of documents and problems dating their creation prior to 2009. This has come about as its lawyers changed systems in the course of the 10 years. However, the fact they would have difficulties discharging their onus of proof in a taxation should be given little weight as an argument in support of a gross sum exercise. Prudent solicitors running long litigation must have assumed they might be successful and considered the fact they may have to conduct a taxation. Storing documents in a more accessible format should have occurred. The problem identified is of their own making.
The amount of analysis that would be required to perform a gross sum exercise without making arbitrary discounts would be so detailed and time consuming that justice requires that I decline the application. I am not convinced that it would be logical, fair and reasonable without drilling down a long way into what actually occurred in the running of the case. The result would be almost as costly and time consuming as a taxation without the benefit of a fair and accurate result.
In the words of Beach J in Thomas - “Care needs to be taken in resolving any dispute to ensure that a procedure is not so...lacking in detail as to risk an unfair or wrong outcome” (quoted on page 6 above ). Consistent with Giles J in Harrison (quoted on page 5 above) I do not have sufficient “confidence in arriving at an appropriate sum” in a gross sum exercise.
I cannot be satisfied a gross sum exercise can be undertaken without discounts in a number of areas and it would not supply enough detail to ensure they were not arbitrary which is impermissible under the authorities. The issues described in paragraphs 27 to 31 means that discounts would need to be applied. The necessity to apply the two methodologies outlined in paragraphs 33 and 34 is a further complicating factor. The extent of the detail required to ensure that the necessary discounts and methodologies were applied with sufficient accuracy so as not to be arbitrary militates against a gross sum exercise.
Returning to the scales analogy employed by the defendant in oral argument at the hearing. In spite of the emphasis to be given to the efficient, timely and cost-effective resolution of the real issues in dispute outlined in the Civil Procedure Act 2010 as amended, the word “just” is also a relevant and competing factor. In the present case, for the reasons outlined, I am not satisfied that a gross sum exercise would do ‘justice’ and, further, the complicating factors identified in these reasons would compromise the efficiency and cost effectiveness goals.
As a point of comparison, the order made for a gross sum in Sunland was an appropriate one as there were none of the complicating factors of this case (identified in paragraphs 27 to 31 above) and the assessment will be on the simplest basis, namely the retainer agreements on hourly rates.
The effect of this conclusion is that a taxation should be commenced with a summons and the provision of an itemised bill. Not all is lost however, the parties will then have the option of considering the bill and either party can seek an assessment under Part 8 of Rule 63 of the Rules or a mediation with or without the provision of a formal notice of objection. The Court may order either of these courses in any event even without a request from the parties. This process will still deliver most of the cost benefits of a gross sum outcome if the parties are prepared to be reasonable. Once a summons is issued, the parties (more relevantly the plaintiffs) will also have the option to make a formal offer of compromise given the operation of Rule 63.36.
The defendant’s summonses dated 13 August 2012 should be dismissed. I invite the parties to consider these reasons and formulate and submit appropriate orders in both matters to that effect, including costs orders if there is agreement, and appropriately worded undertakings in line with those proffered. I grant liberty to apply.
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