Australian Receivables Ltd v Tekitu Pty Ltd
[2011] NSWSC 1425
•23 November 2011
Supreme Court
New South Wales
Medium Neutral Citation: Australian Receivables Ltd v Tekitu Pty Ltd (Subject to Deed of Company Arrangement) (Deed Administrators Appointed) & ors [2011] NSWSC 1425 Hearing dates: 16 November 2011 Decision date: 23 November 2011 Jurisdiction: Equity Division Before: Ward J Decision: Costs orders made. Stay of judgment denied.
Catchwords: COSTS - what costs orders should be made where there were multiple issues in the proceedings with mixed success for both parties - whether judgment in favour of cross-claimant should be stayed pending assessment of costs orders on primary claim in order to permit set-off - HELD - plaintiff to have its costs of the primary claim - cross-claimant to have its costs of cross-claim without apportionment of costs referable to separate issues - no stay of judgment in favour of cross-claimant Legislation Cited: Civil Procedure Act 2005 (NSW)
Uniform Civil Procedure Rules 2005 (NSW)Cases Cited: Australian Beverage Distributors Pty Limited v Evans & Tate Premium Wines Pty Limited [2006] NSWSC 560; (2006) 58 ACSR 22;
Barnes v Addy (1874) LR 9 Ch App 244
Bostik Australia Pty Limited v Liddiard (No 2) [2009] NSWCA 304
Bowen Investments Pty Limited v TAB Corp Holdings Limited (No 2) [2008] FCAFC 107
Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44
Chief Commissioner of Stamp Duties v Buckle [1998] HCA 4; (1998) 192 CLR 226
Cretazzo v Lombardi (1975) 13 SASR 4
Dodds Family Investments Pty Limited v Lane Industries Pty Limited (1993) 26 IPR 261
Elite Protective Personnel Pty Limited v Salmon [2007] NSWCA 322
Elite Protective Personnel Pty Ltd v Salmon (No 2) [2007] NSWCA 373
Evans v McLean (No 2) (1985) 9 ACLR 796
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20
Hardoon v Belilios [1901] AC 118
Hodge v TCN Channel 9 (No 2) [2006] NSWSC 1272
Hughes v Western Australian Cricket Association (1986) ATPR 40-748
James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296
Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534
Lavender View Regency Pty Ltd v North Sydney Council (No 2) [1999] NSWSC 775
Leallee v the Commissioner of the NSW Department of Corrective Services [2009] NSWSC 518
LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd (No 2) [2002] NSWSC 72
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
Ohn v Walton (1995) 36 NSWLR 77
Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72
Owners Strata Plan No 64970 v Austruc Constructions Ltd (in liq) (No 5) [2010] NSWSC 568
Pacific General Securities Ltd v Soliman & Sons Pty Ltd [2006] NSWSC 724
Padkohe Pty Ltd v Fletcher [2006] NSWSC 1239
Re a Debtor No 21 of 1950 [1951] Ch 612
Roache v News Group Newspapers [1992] TLR 551
Sabah Yazgi v Permanent Custodian Ltd (No 2) [2007] NSWCA 306
Sahab Holdings Pty Ltd v Registrar-General and Anor [No 3] [2010] NSWSC 403
Seaton v Burnand [1900] AC 135
Sivritas v Sivritas (No. 2) [2008] VSC 580
Standard Commodities Pty Limited v Societe Socinter Department Centragel [2005] NSWSC 493; (2005) 54 ACSR 496
Stena Rederi Aktibolag v Austal Ships Sales Pty Limited [2007] FCA 1141
Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2010] NSWSC 1106
Timms v Clift [1998] 2 Qd R 100
Trade Practices Commission v Nicholas Enterprises Pty Limited (No 3) (1979) 28 ALR 201; 42 FLR 213
Turner v Hancock (1882) 20 Ch D 303
Uniline Australia Ltd (ACN 010 752 057) v Sbriggs Pty Ltd (ACN 007 415 518) and Another (No 2) [2009] FCA 920; (2009) 82 IPR 56
Vacuum Oil Company Pty Ltd v Wiltshire (1945) 72 CLR 319
Wentworth v Wentworth (unreported, 21 February 1996)
Windsurfing International Incorporated v Petit (1987) AIPC 90-441Texts Cited: Handley, Estoppel by Conduct and Election
Heydon and Leeming, Jacobs' Law of Trusts in Australia (7th edn)
Ritchie's Uniform Civil Procedure (online edn)Category: Costs Parties: Australian Receivables Ltd (Plaintiff/First Cross-Defendant)
NCO Australia Pty Ltd (Second Cross-Defendant)
Tekitu Pty Ltd (First Defendant/First Cross-Claimant)
Ross Edward Smith (Second Defendant/Second Cross-Claimant)
Lynette Mary Smith (Third Defendant/Third Cross-Claimant)Representation: Counsel
R J Brender (Plaintiff/Cross-Defendants)
N Cotman SC with Ms M Fisher (Defendants/Cross-Claimants)
Solicitors
Forbes Dowling Lawyers (Plaintiff/Cross-Defendants)
Malcolm Johns and Company (Defendants/Cross-Claimants)
File Number(s): 07/257468
Judgment
HER HONOUR : On 31 October 2011 I published my reasons for judgment in this matter in which opposing claims were made to moneys held in a controlled moneys account and various matters were in dispute in relation to the outworkings of a sale of business from the first defendant (Tekitu) to the plaintiff (Australian Receivables). Conscious of the possibility that there may have been an error in the mathematical calculations I had carried out, I stood the matter over to permit the parties an opportunity to correct any arithmetical errors and to address the question of costs. The matter then came back before me for argument on 16 November 2011. I now address the remaining issues following the submissions (and further application made for Australian Receivables) made on that occasion and yet further written submissions served since that occasion.
The background to the present dispute is set out in my earlier reasons for judgment. Where relevant, I have adopted the same definitions in these reasons as those in my earlier reasons.
Issues
There are three issues which were raised when the matter came back before me (the first of which was disposed of by agreement, as will shortly be seen). Those issues are as follows:
(i) the correct calculation of the amount payable to Australian Receivables out of the controlled moneys account having regard to my earlier findings;
(ii) what costs order should be made; and
(iii) whether (if any costs order is made in Australian Receivables' favour) the payment out of the controlled money account to Tekitu of some or all of the balance should be stayed either to permit Australian Receivables to assert what it now claims as an equitable interest in that fund (to satisfy the right of recoupment it says arises from its position as a beneficiary of the trust money in relation to the costs incurred in preservation of that fund) or, alternatively, to permit a set-off as between any costs awarded to Australian Receivables, once assessed, and the judgment debt owing by it to Tekitu.
I consider each of those issues in turn.
(i) Calculation of amount payable to Australian Receivables out of controlled moneys account
For the reasons set out in my earlier judgment, I found that of the $224,607.72 presently held in the controlled moneys account (pursuant to an interlocutory regime that had been put in place on a without admissions basis after the commencement of the proceedings) all but $54,577.60 was impressed with a trust in Australian Receivables' favour.
The quantum of Australian Receivables' retained moneys claim (though in issue at an earlier stage in the proceedings) had been agreed by the time of the hearing before me at $567,084.73 (the only issue being as to whether the moneys so retained, and the moneys representing the then balance of those funds - $331,314.00 - when paid into the controlled moneys account, were impressed with a trust).
Tekitu had claimed by way of set off against the retained moneys various amounts that it said were due to it under the Sale of Business Agreement (that being the same agreement that gave rise to the trust in relation to the retained moneys). Some at least of those amounts (including an earn-out payment of $122,177.28) were conceded by Australian Receivables to be owing to Tekitu.
The Sale of Business Agreement had contemplated that there would be an adjustment to the purchase price (payable by instalments including the earn-out payments) to reflect moneys payable to Australian Receivables under the agreement and it was apparent that there was to be an adjustment of amounts owing from either party to the other as part of the financial implementation of the sale process. Complicating the wash-up of the various amounts claimed in the proceedings were claims for breach of warranty levelled by both parties against the other (not strictly adjustments under the contract but off-setting claims nonetheless).
Both parties approached the proceedings before me, as I understood it, on the basis that there would be a set-off, as against the amount payable in respect of the retained moneys, of whatever amount was found to be payable to Tekitu on its cross-claim.
Prepared during the course of proceedings were a number of reconciliation schedules in which the amounts in dispute between the parties were identified. At least in relation to one item (the BPay amounts) there was some vacillation as to whether they were to be treated as part of Australian Receivables' principal claim or (as they ultimately were) as a partial defence by Australian Receivables by way of set-off to the claims made by Tekitu for reimbursement of bank fees incurred in relation to the BPay accounts.
The amended reconciliation schedule attached to the Defence to Cross-Claim filed by Australian Receivables in court at the conclusion of the proceedings noted a concession by Australian Receivables as to some of the amounts claimed by Tekitu for software rental ($23,825.56), consulting fees ($39,927.26) and business expenses, excluding Bpay charges ($89,998.30). As Counsel for Australian Receivables (Mr Brender) notes, what was ultimately litigated in relation to those three categories of expense was only the relatively small amount that in each case remained in dispute for that item after the concession by Australian Receivables. (Australian Receivables was ultimately successful in resisting the claims for the disputed portion of those claimed items, totalling around $20,000 in all.)
Accordingly, Australian Receivables had admitted liability for sums totalling just in excess of some $150,000 in respect of those three items. However, when I came to calculate the amount to be set-off as against Australian Receivables' retained moneys claim (having found against Tekitu on the relatively small amount of the disputed software rental, consulting fees and business expense claims) I omitted to include in the calculations the amounts that had been conceded to be owing to Tekitu in respect of those three items. That was an error on my part and both parties are in agreement that this should be rectified in the final orders to be made.
What was in dispute, however, as at 16 November 2011 was the princely sum of $11,320.91 that had also been claimed as business expenses by Tekitu in its pleadings [61 - [62]. This business expense item had not been included in the reconciliation schedule (that schedule having recorded only the $94,832.40 claimed business expenses; not the additional $11,320.91). Nor was it included in my calculations.
Australian Receivables at first resisted the addition of $11,320.91 or any part thereof to the calculation of the sum payable to Tekitu, on the bases that this was not a figure found in the reconciliation schedule and there were no separate submissions made about it. It was said that the Tekitu parties had not established that there was such an indebtedness. Mr Brender submitted that, had the claim been advanced at the hearing, the matter could then have been addressed (and it was suggested that if it were now to be pressed then it would be necessary to go through the various invoices that comprised this amount). Mr Brender indicated that the four invoices in question recorded a variety of charges including the cost of bank guarantees, the costs for "MJ O'Connor fees to chase bank guarantees", various BPay charges and other bank charges. It was suggested that these matters had been overlooked by the Tekitu parties. Mr Brender submitted that Australian Receivables "was unaware of the claim because it was not in the reconciliation schedule of which various iterations were provided during the trial as matters became agreed and the issues narrowed".
I accept that various iterations of the schedule were provided during the course of the hearing - at least some of them, as I understood it, having been produced by Australian Receivables itself (hence it is a moot point what reliance it could place on the omission of that amount from its own document). In any event, I have some difficulty insofar as it seemed to be suggested that, the parties having run the case on the basis of the disputes summarised in the reconciliation schedules, Tekitu should not now be permitted to raise the claim for this amount (or at least for that part of the amount which Australian Receivables did not in its Defence to Further Amended Cross-Claim dispute - see [31(b)] in which there is an express admission that $5,899.84 is due and then [31(f)] Australian Receivables relies upon the set-off in respect of that claim).
True it is that parties may be bound by forensic decisions in the conduct of the litigation (see Handley AJA writing extra-judicially in Estoppel by Conduct and Election at [15-041], to the effect that a litigant is bound by the conduct of his or her case, the reference there being made to Seaton v Burnand [1900] AC 135,145, and may be precluded from taking new points after the close of evidence or on appeal). However, at least ordinarily, one would test whether a party should be held to be bound by a forensic decision so made by reference to the prejudice the other would suffer if it were not held to be so bound. Moreover, it is by no means clear that any forensic decision as such was made in the present case. It seemed to me that there was considerable confusion at the bar table during the course of the hearing as to what was conceded in relation to various of the amounts claimed (or as to what particular concessions meant), as will be evident by some of the exchanges between Counsel recorded on the transcript. It is fair, I think, to say that some of the numbers become somewhat of a moveable feast in that regard. I think it quite possible that the $11,390.21 claim was simply assumed to be covered in principle by the debate in relation to the similar expenses claimed elsewhere or at least to have been inadvertently overlooked in the conduct of the case.
As to any prejudice to Australian Receivables in now addressing the question of liability for the invoices in question (to which invoices ultimately it was not necessary for me to have regard), as I understand it those invoices raised expenses in categories already the subject of broad rulings (such as legal fees incurred in the release of bank guarantee funds or property matters for the benefit of the Tekitu parties). Therefore, I am not convinced that those four invoices could not similarly have been dealt with (without any need for further evidence).
Further, I found the suggestion that no account should be taken of the claimed additional expenses at all, in circumstances where there was an apparent admission on the pleading that at least some of the amounts referred to in those invoices were owing to Tekitu, a troubling one. (While Mr Brender in his written submissions contended that there was an admission that invoices were received but no admission as to liability to pay the $11,320.91 "or any part of it", that seems to be an overstatement - and I can only assume that this was a function of the haste with which it seems the submissions were prepared and served only shortly before the matter was listed before me on 16 November 2011 - since the Defence to the Further Amended Cross-Claim itself contains an admission that, of the $11,320.91, Australian Receivables is obliged to pay $5,889.84 [31].)
Pressed by me as to the position of Australian Receivables in this regard, Mr Brender obtained instructions that it was prepared (as it had in its pleadings) to concede that this amount (approximately half of the claim that had been omitted from the schedule) was not in dispute. For its part Tekitu then (consistently with the statutory objective for the just quick and cheap disposition of the real issues in dispute) indicated that it would not take up further court time in relation to the balance of this amount. Hence it was agreed that there should be an adjustment to the judgment figures to take into account the agreed omissions from my calculations together with the now not disputed balance of the additional sum.
The parties have now agreed the final calculations in that regard, the upshot of which is that (after taking into account the moneys already paid to Australian Receivables on a without admissions basis and after setting off the moneys that have either been admitted by Australian Receivables or I have found to be owing to Tekitu) an amount of $57,591.74 is payable to Australian Receivables from the controlled moneys account by way of the balance of the retained moneys sum (leaving a balance in that account, excluding any interest, of $167,015.98).
Subject to the matters raised below as to the claimed stay (or set-off) in respect of the balance of the moneys in the controlled moneys account (that would otherwise be payable to Tekitu), orders are now agreed in relation to the allocation of moneys in that account in accordance with the findings I have made in the judgment on the respective cross-claims.
(ii) Costs
There is no dispute between the parties as to the applicable principles to be applied on the exercise of the discretion to award costs pursuant to the power conferred by s 98(1) of the Civil Procedure Act 2005 (NSW). The exercise of this discretion is subject to the rules of court and to statute. It has been recognised that the discretion is a very wide one ( Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72; Elite Protective Personnel Pty Limited v Salmon [2007] NSWCA 322). An order for costs in favour of the successful party is compensatory in nature in order to reflect the vindication of its successful claim, rather than punitive ( Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534; (1990) 97 ALR 45; Ohn v Walton (1995) 36 NSWLR 77).
Rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) provides that, subject to Part 42, if the court makes any order as to the costs it is to order that costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.
The first question, therefore, is as to what (for the purposes of that general rule) is the 'event'. The need carefully to determine the relevant 'event' in a case involving multiple issues was recognised in Owners Strata Plan No 64970 v Austruc Constructions Ltd (in liq) (No 5) [2010] NSWSC 568, by Bergin CJ in Eq.
As to what is the relevant 'event' in any particular case, it is clear that this is not limited to consideration of the event in a technical pleading sense. In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20, at 22, Young J, as his Honour then was, noted in the context of a costs application that "one does not look at issues as if they were pleader's issues, but approaches the matter with a broad brush".
The English Court of Appeal in Roache v News Group Newspapers [1992] TLR 551, as cited by the Queensland Court of Appeal in Timms v Clift [1998] 2 Qd R 100, usefully posed the question as to who is to be seen as the successful party "in the event" as being a question as to:
...who, as a matter of substance and reality, had won? Had the plaintiff won anything of value or anything he could not have won without fighting the action through to a finish? Had the defendant substantially denied the plaintiff the prize which the plaintiff fought the action to win?
In this regard, both parties have, in their submissions, referred to the background to the commencement of proceedings (which I have set out in my earlier reasons and do not wish here to repeat). Suffice it to say that Tekitu had retained an amount of money (eventually quantified in the agreed amount of $567,084.73) that, under the Sale of Business Agreement, I held it was obliged to account for to Australian Receivables; Australian Receivables in turn had chosen not to pay to Tekitu amounts that it conceded were owing under the Sale of Business Agreement (and had purported to treat as off-sets under a loan reconciliation account). There were ongoing disputes between the parties as to other amounts claimed to be owing to one or the other. At least in relation to the amounts conceded by each to be owing to the other, both parties can be said to have, in effect, taken it upon themselves to withhold those amounts pending resolution of the claims that they considered they had to amounts owing under the agreement by the other. (There was a suggestion in the correspondence between the Tekitu parties and their business consultant that the unpaid amount could be used as some form of leverage over Australian Receivables; it is hard not to see the unilaterally imposed "loan reconciliation" performed by Australian Receivables as a similar exercise by it.) In my view, insofar as there is to be criticism of such conduct, the evidence tars both sides with the same brush in this regard.
As it turns out, taking into account the moneys received by Australian Receivables under the interlocutory regime (to which Tekitu acceded once the court proceedings were instituted by Australian Receivables though it later made application unsuccessfully to vary that regime), the bulk of the money remaining in the controlled moneys account is money which Australian Receivables is obliged to pay to Tekitu (as reflected by the relatively small sum now payable out of the controlled moneys fund to Australian Receivables). Thus, from a practical point of view, Tekitu has been held out of its money (in the sense of not having been paid money to which it was contractually entitled) for longer than Australian Receivables (although Tekitu had the earlier benefit of the moneys that it had wrongly retained in respect of the retained moneys sum).
As can be seen from this summary of events, I consider that both parties bear some share of the blame for the position in which they now find themselves. It is regrettable that the parties were not able to bring some form of commercial commonsense to the table in order to compromise the claim at a stage prior to the incurring of expense in the running of the hearing but so be it. There was clearly a level of distrust between the parties and both were seemingly convinced of the merits of their respective claims. What is clear is that there has been very much a mixed outcome for both parties on those claims.
Mr Brender submits that Australian Receivables was compelled to commence proceedings in order to seek to preserve the retained moneys sum "or what remained of it". Senior Counsel for the Tekitu parties (Mr Cotman SC) in turn submits that Tekitu was effectively forced to maintain its cross-claims in light of the attempt by Australian Receivables to gain access to the whole of the moneys paid into the controlled moneys account. On any view of things, as noted above, it seems to me that (at least once the proceedings were commenced and the interlocutory regime was in place), Tekitu was effectively held out of moneys owing to it under the Sale of Business Agreement for longer than Australian Receivables was (suggesting that the moral outrage displayed throughout the hearing by Australian Receivables at the conduct of Tekitu in having retained the moneys the subject of the retained moneys claim is perhaps if not misplaced then overstated).
In any event, by the hearing (the quantum of the retained moneys sum then having been agreed), the contest between the parties on the claims made in the Further Amended Statement of Claim were as to the legal consequences of what had occurred, namely whether the amount in the controlled moneys accounts was trust money (having regard to the means by which it had arrived in that account). Although Mr Brender also says that in issue was whether Australian Receivables was entitled to retain the payments that it had already received out of the controlled moneys account (and otherwise directly from the release of bank guarantee funds), there was no debate on this issue before me; it seemingly being accepted by the Tekitu parties that Australian Receivables would be entitled to retain those sums if the balancing exercise resulted in the conclusion that they formed part of the overall amount owing to it.
Therefore, while the claim to the retained moneys is clearly an 'event' for the purposes of considering the costs to be ordered (on which event Australian Receivables was successful), the time occupied in the course of hearing in relation to this event was relatively small.
If the cross-claim (and defence thereto) were treated as part of the overall event, as I understand Mr Brender to submit in seeking an overall costs order in favour of Australian Receivables, then the question would arise as to how to deal with the mixed outcome on the cross-claim (and, in that regard, I would have been inclined to think that the appropriate order would be for each party to pay its own costs of the proceedings including the cross-claim, on the basis that Australian Receivables had been successful on its claim and Tekitu had broadly been successful on its cross-claim). If, on the other hand, the cross-claim is treated as a separate 'event' from the primary claim, then Australian Receivables should have its costs of the primary claim (as part of the general rule that costs follow the event) and the question would be as to whether there should be any apportionment of costs by reference to the separate issues in the cross-claim.
Both parties (perhaps surprisingly since they also seem to accept that there was a necessary link between the retained moneys claim and Tekitu's defence thereto, which was based on its cross-claim) contend that the appropriate costs orders include an order that the plaintiff have its costs of the retained moneys claim. The only difference between them in this regard seems to be whether the costs orders should be against Mr and Mrs Smith personally as well as against Tekitu. Mr Brender notes that Australian Receivables succeeded in its Barnes v Addy ( (1874) LR 9 Ch App 244) claim against Mr and Mrs Smith (although in the end that did not sound in any equitable compensation as the retained moneys were able to be recouped from the funds already paid to Australian Receivables and the amount now to be paid out of the controlled moneys account). Mr Cotman's submissions do not expressly address the point but the draft orders proposed by him suggest costs made orders only against Tekitu.
As to whether a costs order should be made against Mr and Mrs Smith personally, it is noted by Mr Brender that not only are they party to the primary claim by Australian Receivables (and were unsuccessful in defending the Barnes v Addy allegations) but also that, at the time orders were made permitting the insolvent Tekitu to proceed with its cross-claim, they agreed not to oppose any order against them for the costs of the cross-claim in the event that the cross-claim did not succeed. In that regard it is submitted that, by reason of the agreement not to oppose a costs order on the cross-claim, they are effectively to be treated as in the position of a party to the cross-claim and a costs order should also be made against them on the cross-claim (if Mr Brender's submissions as to costs orders on the cross-claim, which I deal with below are accepted). Mr Brender notes that the Smiths were clearly the guiding minds of the company and were the natural persons who stood to gain from the successful pursuit of the cross-claim.
As to this issue, I am of the view that (as the Smiths were defendants to the primary claim and were unsuccessful on the Barnes v Addy allegations) the appropriate order is that the Tekitu parties be jointly and severally liable for the costs of the primary claim. (As to the cross-claim, having consented to orders of the kind referred to above, if a costs order were to be made in favour of Australian Receivables on the cross-claim then the Smiths should be jointly and severally liable for such costs.)
What then of the costs of the cross-claim and its defence? The substance of the case, in terms of the disputes litigated in the hearing and the evidence adduced in that regard, turned on the matters raised in the Tekitu parties' cross-claim and Australian Receivables' defence to that cross-claim. Mr Brender submits that those matters were inextricably linked with the claim brought by Australian Receivables (noting that from a procedural perspective the case proceeded as if it were one case in that Australian Receivables called all bar one of its witnesses first, followed then by the witnesses called by the Tekitu parties). In this regard, Mr Cotman accepts that the real joinder of issue in these proceedings was in relation to the cross claim and the defence to the cross claim (referring in particular the set-offs sought by Australian Receivables for damages for breaches of warranty in relation to the alleged shortfall in the IAG account and the provision in the accounts for long service leave).
Mr Cotman submits that the Tekitu parties have had substantial success on their cross-claim (having established their claim and defeated the claimed set-off for breaches of warranty). Mr Brender submits, however, that, by value and importance, the overwhelmingly significant matter raised in the cross-claim was Tekitu's claim for damages for alleged breach of the obligation to carry on business as usual during the earn-out period, on which Australian Receivables was successful. (Since the long service provision claim was put in varying amounts, its relative "value" depends on when one is assessing it. There was similar toing and froing over the IAG account claim - it being put at one stage in the order of around $130,000). Therefore it is by no means apparent that the final quantum of the respective claims provides a ready basis for proceeding to apportion costs.
The question as between the parties boils down to whether the costs of the cross-claim (and Australian Receivables' defence to it, in which Australian Receivables raised unsuccessful breach of warranty claims) should be treated as a single 'event' (on which the Tekitu parties were broadly successful) or should be treated as a series of events (on not all of which were the Tekitu parties successful).
In that regard, Mr Brender points out that litigated within the framework of the cross-claim was a series of issues on some of which Australian Receivables succeeded (namely as to a portion of the software rental and the Ricoh printers claim, the claim for an indemnity in respect of the Commander voice data systems, as to some of the claimed business expenses and the disputed claims in respect of the Smiths' service agreements, and as to the defence of the claim made against it for breach of the "business as usual" obligation) and on some of which the Tekitu parties succeeded (namely, the basis for calculation of the December acquisition commission, the IAG claim and the long service leave claim, though he notes that a breach of warranty was established in relation to the latter).
Mr Brender submits that of the seven sub-issues as postulated at [24] of my earlier reasons, Australian Receivables succeeded on four. He concedes that at a monetary level (leaving aside the "business as usual" claim) the issues on which Tekitu succeeded (in relation to the December acquisition commission, long service leave and IAG amounts) well exceeded the issues on which Australian Receivables' succeeded (namely in defending the disputed amounts of the software rental and business expense claims). (Mr Brender notes, however, that the Commander claim for an indemnity was for a large sum ($167,942.00) and the Ricoh printer claim on the pleadings was for a larger sum ($87,106.94) than ultimately pressed at trial.) In financial terms, from Australian Receivables' perspective it is submitted that it succeeded in retaining around $177,000 and receiving a payment out of about $60,000 from the controlled moneys account (making a total of over $230,000, which it is said comfortably exceeds the amount that may be returned to Tekitu).
In terms of court time, Mr Brender concedes that the IAG and long service leave matters took some time but notes that the "business as usual" claim took "considerable" time. As an indication of the time taken, he points to Australian Receivables' submissions as having devoted about one third to Australian Receivables' primary claim and another third to the "business as usual" claim, with the balance dealing with the other smaller issues on which he accepts that the parties each had some measure of success.
In Australian Receivables' submission, "the result" was that it succeeded in the claim as a whole. Mr Brender submits that Australian Receivables should have its costs of the whole proceedings, subject to a possible reduction of a small fixed percentage (put by him in submissions at 25%) if considered appropriate to reflect the fact that it did not win on all issues. In Mr Cotman's submission it is relevant to note that up until the hearing Australian Receivables had denied that it owed any money to Tekitu with the exception of $122,177.28 in relation to the second earn-out and a sum of just over $5,000 in relation to business expenses (and had maintained unsuccessfully its claim for breach of warranties in defence of the cross claim).
There is no doubt that there were a number of separate claims made by the respective parties in the context of the cross-claim and defence thereto. The question is whether the success or otherwise on those issues should be reflected in the costs orders (by awarding separately the costs of particular issues or in a reduction in the costs that might otherwise be payable in respect of the cross-claim).
It is accepted by Mr Cotman that the court may in appropriate cases award costs of a separate issue where a clearly defined and separate issue (on which the otherwise successful party failed) had occupied a significant part of the trial ( Pacific General Securities Ltd v Soliman & Sons Pty Ltd [2006] NSWSC 724) and that it may be appropriate to deprive a successful party of its costs altogether if the matters upon which that party was unsuccessful took up a significant part of the trial either by way of evidence or argument ( Sabah Yazgi v Permanent Custodian Ltd (No 2) [2007] NSWCA 306). However, he maintains that this is not such a case.
Mr Cotman notes, and I accept, that where there are multiple issues in a case the court does not generally attempt to differentiate between those issues on which a party was successful or failed, but instead awards costs of the proceeding to the successful party ( Elite Protective Personnel Pty Ltd v Salmon (No 2) [2007] NSWCA 373) and that the discretion to apportion costs is one to be exercised in the most exceptional of circumstances ( Trade Practices Commission v Nicholas Enterprises Pty Limited (No 3) (1979) 28 ALR 201; (1979) 42 FLR 213). It has been said in this regard that the court needs to be mindful not to discourage litigants from canvassing all material issues for fear of an adverse costs order ( Cretazzo v Lombardi (1975) 13 SASR 4 at [12]; Stena Rederi Aktibolag v Austal Ships Sales Pty Limited [2007] FCA 1141 at [12]).
Mr Cotman submits that as the Tekitu parties have substantially succeeded on their cross claim the general rule should apply and costs should follow the event. It is submitted that in order for the Tekitu parties to be deprived altogether of their costs on the cross claim (which is the effect of what Mr Brender seeks) Australian Receivables would have to show that the most exceptional circumstances exist and that the matters upon which the Tekitu parties were unsuccessful took up a significant pari of the trial either by way of evidence or argument.
It is submitted by Mr Cotman that the principal matter upon which the Tekitu parties failed (namely the "business as usual" claim for breach of clause 2.2 and an entitlement to an additional payment in respect of the first earn out) took up very little time during the trial and was not the subject of any expert evidence (at least by Australian Receivables; there being evidence for Tekitu by Ms Bateman on this issue) or significant separate lay evidence put on by Australian Receivables.
In that regard, the evidence relied upon by Australian Receivables on the "business as usual" issue was in substance limited to the evidence by Mr Cooney and Mr Wyett as to the manner in which the business was run after Australian Receivables acquired the business; Mr Cooney being a necessary witness in any event in relation to the balance of the claims and Mr Wyett also giving evidence in relation to the long service leave aspect of the claims. Mr Duncan's evidence was relied upon generally in relation to the accounting issues and, insofar as it touched upon the running of the business after the acquisition of the business, this seems to have been secondary.
I do not accept that this part of the hearing occupied "a considerable time" if by that it is suggested that it was a or the dominant issue of the hearing. True it is that there was cross-examination of Mr Horn in some detail as to the rather glib assessment he had made of the causes for the fact that budget or target income had not been achieved by Australian Receivables in respect of various clients but it seemed to me that this could well have been shortened without any adverse effect upon the outcome of this claim in Australian Receivables' favour; there was some cross-examination of Ms Bateman but that was not extensive in length.
Mr Cotman submits, and this is consistent with my recollection of the hearing, that the discrete issues which took up the most time during the trial were the breaches of warranty pleaded by Australian Receivables in defence to the cross claim in relation to the alleged overdrawn IAG account and under-provisioning of long service leave. On those issues, Australian Receivables failed (though, as conceded by Mr Cotman, I found that there was a breach of warranty in relation to the long service leave provisioning, I did not find that any damage had been suffered in reliance thereon).
Having regard to the time occupied by the various issues at the hearing; the interlinked nature of the defences to the primary claim and the defences to the cross-claim; and the fact that in essence this was a hotly contested dispute between the parties as to the minutiae of the financial outworking of the sale of the business, I am not satisfied that I should depart from the usual order as to costs in relation to the cross claim.
I accept that Tekitu was not wholly successful on the matters that it raised by way of cross-claim (and, in particular, that it was unsuccessful on the business as usual claim - in preparation for which costs in relation to the Bateman expert report will have been incurred). However, I am mindful of the caution exhorted in the authorities as to departure from the usual rule and of the need not to discourage parties from taking reasonable issues in defence of claims made against them. While the business as usual claim did not succeed, it was not in my view an unreasonable claim having regard to the significant drop in revenue over the period of the second earn-out (and Tekitu's suspicions in this regard were no doubt, and not unreasonably, excited by the internal communications between Mr Cooney and his American business colleagues from which there was a suggestion that Australian Receivables may have had the intention of using the business acquired in order to build up its own revenues to the detriment of Tekitu).
In Windsurfing International Incorporated v Petit (1987) AIPC 90-441, Waddell J (as his Honour then was) (referring with general approval to decisions to the effect that in recent years the approach had been that a successful party should have the whole costs of the proceeding, including the costs of an issue on which it has failed, unless in respect of that issue the successful party has "unfairly, improperly, or unnecessarily increased the costs" (at p37,861-37,862)) said:
It is, I think, probably generally accepted that the words 'follow the event' refer to the event of the claim or counter claim. However, it may be noted that in other contexts similar words have been held to refer to the event of distinct issues with the result that the general costs went to the party who on the whole succeeded in the action but that the other party got the costs of separate issues on which he succeeded.
His Honour's decision in Windsurfing has been taken (see for example Lavender View v North Sydney Council (No 2) [1999] NSWSC 775, per Rolfe J; Uniline Australia Ltd (ACN 010 752 057) v Sbriggs Pty Ltd (ACN 007 415 518) and Another (No 2) [2009] FCA 920; (2009) 82 IPR 56, per Greenwood J; Leallee v the Commissioner of the NSW Department of Corrective Services [2009] NSWSC 518, per Price J; Sahab Holdings Pty Ltd v Registrar-General and Anor [No 3] [2010] NSWSC 403, per Slattery J, at [36]) to be that in an appropriate case a costs order may be moulded to reflect the degree of success on distinct issues.
However, I am not persuaded that this is a case in which, in the exercise of the court's broad discretion in relation to costs, an apportionment of the costs as between various issues in the case (or an order other than that which would generally follow the overall outcome of the proceedings) should be made.
In James v Surf Road Nominees (No 2) [2005] NSWCA 296, where Beazley, Tobias and McColl JJA recognised (at [22]) that where there are multiple issues involved in proceedings the court is entitled to make a different costs order, their Honours noted (among others) the observations of Toohey J in Hughes v Western Australian Cricket Association (1986) ATPR 40-748. In that case, Toohey J said:
It seems to me that the only basis on which it would be appropriate to depart from the general rule that costs follow the event, by reason of the circumstance that the appellant lost what might be regarded as the dominant issue, is that the judgment is made that, had that issue been excluded then, although the dominant issue was not clearly separable, the costs incurred on the appeal would be likely to have been substantially less, perhaps because there was less at stake.
While in James (at [35]), their Honours were of the opinion that it was preferable not to speak in terms of 'rules' in this context, they accepted that an available approach to the exercise of the court's discretion in particular cases could be to estimate the time taken on discrete issues at the hearing and make orders accordingly. In the present case, I am not satisfied that the "business as usual" issue (or any of the other issues on which Australian Receivables succeeded) is so "clearly dominant or separable" as to make it appropriate to differentiate between those particular issues on Australian Receivables was successful and those on which it failed. It does not seem to me (to adopt the approach of Barrett J in LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd (No 2) [2002] NSWSC 72, (at [46]) that the respective claims litigated in the cross-claim and defence thereto were so separate and dissociated that they should be treated for costs purposes as if they had been the subject of separate trials.
In Cretazzo v Lombardi , Jacobs J said at 12 :
But trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issues of fact or law. The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues, however doubtful, which might be material to the decision of the case. There are, of course, many factors affecting the exercise of the discretion as to costs in each case, including in particular, the severability of the issues, and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues.
The exercise of the court's discretion as to costs ultimately requires an assessment of what is fair in all the circumstances. In Bowen Investments Pty Limited v TAB Corp Holdings Limited (No 2) [2008] FCAFC 107 Finkelstein and Gordon JJ said (at [5]):
Costs are in the court's discretion. Fairness should dictate how that discretion is to be exercised. So, if an issue by issue approach will produce a result that is fairer than the traditional rule, it should be applied.
citing also Hodge v TCN Channel 9 (No 2) [2006] NSWSC 1272 and Standard Commodities Pty Limited v Societe Socinter Department Centragel [2005] NSWSC 493; (2005) 54 ACSR 496.
The manner in which the claims overlapped in the present case was due to the set-offs claimed by the respective parties against money that was conceded to be owing or payable to one or other of those parties. Nevertheless, looked at individually, there were a number of separate claims, each in their own right being able to be regarded as separate 'events' in this case. As to which were dominant, my impression at the time (and on reflection in the context of the current application) was that the issues on which Australian Receivables lost in respect of its defence to cross-claim dominated more of the hearing than those on which it won.
Having regard to the conduct of the case, and bearing in mind the caution one must exercise in apportioning costs between separate issues, I am not satisfied that this is a case where the particular issues (on which there was mixed success for each of the parties) was such as to warrant apportioning costs as between those separate issues nor do I consider that it will cause unfairness to one or other of the parties if that were not done. This is a case where the accounting as between the parties of amounts owing has been explored almost down to the last cent. Where there is a mixed outcome in litigation and it is appropriate to entertain the process of apportioning costs as between different issues in the proceedings, in general it seems that such an exercise will be carried out on a relatively broad brush basis, or as a matter of impression and evaluation on the part of the trial judge ( Fexuto v Bosnjak Holdings Pty Limited (No 3) (1998) 30 ACSR 20 at 22; Dodds Family Investments Pty Limited v Lane Industries Pty Limited (1993) 26 IPR 261 (at 272); James at [36]; Bostik Australia Pty Limited v Liddiard (No 2) [2009] NSWCA 304).
On that basis, my impression is that the appropriate costs orders would be for Australian Receivables to have its costs of the primary claim from the Tekitu parties and for Tekitu to have its costs of the cross claim. (As noted above, there would be an attraction in having a wash-up of the opposing orders but in the absence of evidence as to the respective quantum of those costs and particularly as I am unable to assess the time spent in preparation of matters put in issue and later agreed, I do not think such a course is warranted and it has not been suggested). That being the case, there is no need to consider the imposition of a personal costs order against the Smiths on the cross-claim in accordance with the acknowledgment that they gave in that regard.
(iii) Stay/set-off in relation to moneys in controlled moneys account
In the submissions served on the morning of 16 November 2011, an order was sought for the stay of any order for the payment out to Tekitu of the balance of the moneys in the controlled moneys account (but not the payment out of the sum representing the balance of the retained moneys claim after setting off the moneys payable to Tekitu for breach of contract). Reliance is placed on the power under s 135 of the Civil Procedure Act to make directions in relation to enforcement of judgments or orders, including the power to stay enforcement (which Mr Brender notes is additional to the power to stay proceedings under section 67 of that Act). Reference was made to the authorities and practice referred to in Ritchie's Uniform Civil Procedure at [135.5] concerning the power to stay.
Mr Brender initially put the claim for a stay on the basis that, by analogy with the position of a non-defaulting trustee (who is entitled to be reimbursed out of trust property in respect of all charges and expenses properly incurred in the execution of the trust at general law, as noted in Jacob's Law of Trusts in Australia (7th edn) at [2102]). He noted that equity alleviates the position of creditors of the trustee at common law by deeming the creditors entitled to the rights of the trustee against the trust fund and as subrogated accordingly (citing Octavo Investments Pty Ltd v Knight (1919) 144 CLR 360 and Re Chief Commissioner of Stamp Duties v Buckle (1998) 192 CLR 226), relying on this as evidence of the importance placed on the right of indemnity (since it prevails over the rights of beneficiaries). Pausing there, Mr Cotman accepts as uncontroversial the above principles (though disputes their relevance to the case at hand), noting Turner v Hancock (1882) 20 Ch D 303 as authority for the former and Octavo v Knight as authority for the latter.
Mr Brender then submits that the recoupment right is an example of a common approach of courts to award costs out of a fund to those preserving or defending that fund, such as executors and liquidators. (Mr Cotman's response to this is that, whether or not as a general proposition that is right, it is in any event a much narrower form of right than the general right of indemnity based in the equity that denies a person benefited by preservation a capacity to take the fund without making the preserver whole for their costs of preservation.)
The fundamental submission on which Mr Brender's argument rests is that, by analogy, a beneficiary (in this case, Australian Receivables) who has been compelled to sue a recalcitrant trustee (in this case, Tekitu) to protect trust property has an equitable interest in the fund for its costs and expenses properly incurred in that exercise and could not be in a worse position than a non-defaulting trustee would be (nor in a worse position than a creditor third party of such a trustee, which creditor has a subrogated right).
The nub of this submission is that approximately $170,000 of the current balance of the controlled moneys account has been held to be money over which there was a constructive trust "and hence ARL's money". After payment out of the now agreed sum of $57,591.74 to Australian Receivables, at least a portion of the money remaining in that account is said to be trust money (albeit the subject of an offsetting debt in contract). It is submitted that there is a question then as to the priorities between Australian Receivables' claimed equitable rights with respect to its assessed costs in preserving the trust fund and Tekitu's contractual claim to an amount equivalent to the balance remaining in the controlled moneys account.
Mr Brender submitted that any proposed order declaring or ordering the payment out of the balance of the money in the controlled moneys account after payment of Australian Receivables' conceded entitlement, until determination of the equitable claim which Australian Receivables now wishes to assert (that determination he considered could be made in the present proceedings by motion or in fresh proceedings directed to be filed within a stipulated period).
I considered that the statutory objective for which provision is made in s 56 of the Civil Procedure Act did not point to the adoption of the latter of the two courses suggested by Mr Brender and that any determination of the claimed equitable interest (which Mr Brender asserted had priority over the enforcement by Tekitu of the judgment debt in its favour out of the moneys in the controlled moneys account) should be dealt with in the present proceedings. As Mr Cotman had almost as little notice of the stay application as I had, directions should be made for submissions by the Tekitu parties on this point (at which stage Mr Brender sought leave to put on further submissions in chief on this point).
Mr Cotman's principal position was that the argument that Australian Receivables has a proprietary right to any monies remaining in the controlled moneys account (raised only in the context of costs) should properly have been advanced in the substantive proceedings and hence the Court should not entertain this argument at this point in the proceedings. However, Mr Cotman accepted that the issue probably did not involve any additional facts than were traversed at hearing and, in the event that the argument were to be entertained, made submissions as to the question whether any proprietary right had arisen of the kind now claimed.
As to whether this issue should have been raised prior to the stage of submissions on costs, I think there is much force in the submission made by Mr Cotman. Mr Brender submits that it was not appropriate to raise it at an earlier time when the outcome of the cross-claims and claims in defence thereto (and the making of any costs orders as a result) was not known. That said, in circumstances where the preservation of (and rights to) the moneys in the controlled moneys account has been a principal feature in the conduct of the case to date, I am by no means persuaded that this was an issue that could properly have been left to the stage of the costs argument. It seems to me that the raising of this argument at the heel of the hunt has all the hallmarks of a last ditch attempt to prevent Tekitu recovering the moneys that Australian Receivables has not been prepared to acknowledge are owing to it under the very same agreement pursuant to the provisions of which the claimed constructive trust has arisen. However, in circumstances where no prejudice is pointed to by Mr Cotman in the matter now being raised, I consider it appropriate to deal with the claim now. (I add for completeness that it is by no means apparent whether Australian Receivables is still pressing its claim to a proprietary interest in the fund to secure an entitlement to reimbursement for its costs of the proceedings, having regard to the subsequent submissions by Mr Brender. However, in case it is, I deal with it below.)
As noted above, Mr Brender has relied on the right of a trustee to reimbursement and indemnity out of the trust assets in respect of expenses or debts reasonably and properly incurred in its capacity as trustee (see Vacuum Oil Company Pty Ltd v Wiltshire (1945) 72 CLR 319 at 324; [1946] ALR 50 at 53). This right of indemnity, as noted by Jacob's in the passage to which Mr Brender has drawn my attention, arises in recognition of the onerous position in which a trustee is placed "the price paid by the beneficiaries for the gratuitous and onerous services of trustees" ( Jacobs' citing Hardoon v Belilios [1901] AC 118 at 125), as a way of equity dealing with the trustee's predicament insofar as the trustee is personally liable for such debts. It is by no means clear that a beneficiary seeking to secure for its own advantage payment of moneys claimed to be the subject of a trust can exercise a similar right of indemnity - nor am I persuaded that this would be the logical extension of the principles referred to above.
Turning then to the proposition, labelled by Mr Cotman as controversial, that a beneficiary compelled to sue its trustee to protect trust property has an equitable interest in the fund for costs and expenses properly incurred in that exercise, no authority drawing such an analogy has been drawn to my attention. Mr Cotman argues that the analogy may break down at the outset of the argument when the 'trustee' (for present purposes, say Tekitu) properly claims a right in the "trust property" against the alleged preserver of the fund and cost is incurred in disputing that claim. Mr Cotman submits that the actual dispute thrown up by this argument is whether the fund, while capable of intermediate description as trust property, ceases to be such by reason of the disposal of all of the dispute.
It is submitted by Mr Cotman that where a beneficiary employs personal funds to take action against a recalcitrant trustee (and succeeds), the beneficiary is in the same position as any other successful plaintiff vis a vis an unsuccessful defendant as to costs, namely that the defendant trustee is liable to the plaintiff beneficiary personally for costs incurred in the action and that, ordinarily, the very success of the plaintiff beneficiary's action would destroy the trustee's right of indemnity for any costs (whether its own or those of the other side). It is said that the beneficiary in those circumstances has no right in equity to be reimbursed its expenses from the trust.
(As a fallback position it is submitted by Mr Cotman that if the court accepts the submissions that Australian Receivables can be indemnified, by reason of the analogy sought to be drawn by Mr Brender, from those moneys in the controlled moneys account that were found to have been impressed with a constructive trust for its costs of preserving the trust property, then at most Australian Receivables is only entitled to costs properly incurred in protecting the trust property, not in pursuing whatever claim it has to the property and therefore would be entitled to priority for no more than the costs incurred in obtaining those interlocutory orders by reference to which the trust fund was preserved.)
I am not persuaded that the analogy Mr Brender seeks to draw is apt in circumstances where what the party ultimately found to be the beneficiary of the claimed constructive trust is acting in its own interest in relation to the preservation of the property in question. I therefore do not accept that Australian Receivables has a proprietary interest in the funds held in the controlled moneys account beyond the interest it has consequent upon the finding that part of those moneys were impressed with a constructive trust. I find that it has no equitable interest in the fund to secure the reimbursement of costs incurred in these proceedings.
Mr Cotman, in addressing this aspect of the submissions made for Australian Receivables, also submitted that, after the set-off of the liability of Australian Receivables (on the cross-claim) to Tekitu, Australian Receivables was entitled only to $57,591.74 from the controlled moneys account (not $169,940.72). It is submitted by Mr Cotman that the liability of Australian Receivables to the Tekitu parties, insofar as it includes liability for the second tranche of the purchase price uplift ($122,177.28) and various sums payable under the sale arrangements, gives rise to an unpaid vendor's lien on the part of Tekitu over the property the subject of the sale to secure the payment to it of the unpaid sums (relying upon Evans v Mclean (No2) (1985) 9 ACLR 796 at 799) and that this lien is enforceable by judicial intervention. It is submitted that just as any trustee's lien defeats the claims of a beneficiary, Tekitu's unpaid vendor lien confers a priority proprietary claim on the moneys held to have been impressed with a trust and that, not having paid for the property, the purchaser cannot assert a better right to it than the unpaid vendor.
Mr Cotman submits that, therefore, Australian Receivables can only have access to the trust monies after the lien is satisfied, noting that the unpaid purchase price sum exceeds the trust monies still held in the fund after withdrawal of the judgment sum in favour of Australian Receivables (and suggests that as a result Australian Receivables may be compelled to accept that it has an in personam result only against Tekitu as to part of its judgment sum).
The Tekitu parties further submit that, once the Court makes the orders granting equitable set-off and the payment to the plaintiff of $57,591.74 from the controlled moneys account, the constructive trust is extinguished to the extent that it would extend to other monies in that account and that the balance of the moneys vests in Tekitu (whether the position is analysed as one where the parties contested the issue as one of access to the fund or as a result of a working out of the true proprietary claim contests).
As to the claim by Australian Receivables (that, after being paid $57,591.74 from the controlled moneys account, it continues to have a proprietary interest in $112,348.98 of those funds (comprised of $169,940.72 less $57,591.74), and has priority of access in relation to its costs) then Mr Cotman notes that if this is the case then the liability of Australian Receivables to Tekitu ($167,015.98) cannot be fully met by the funds in the controlled moneys account and an in personam judgment against Australian Receivables will then take effect.
In submissions in reply Mr Brender submits that the issue as to an unpaid vendor's lien was a matter raised before Ball J in an interlocutory application (reported at [2010] NSWSC 823) and rejected as not constituting a material change warranting the reversal of the earlier orders made by Brereton J (in relation to the interlocutory regime under which the moneys were paid into the controlled moneys account and orders were made restraining the defendants from disposing of their assets as outlined in my earlier reasons for judgment). Mr Brender notes that the point was then not put at trial and that it is inconsistent with the declaration of trust as to the retained moneys (to which the Tekitu parties have indicated their consent). Mr Brender submits that it is also inconsistent with the contractual provision requiring payment of money without 'deduction' and that it cannot be correct for the reason that the money (being the retained moneys) represents clients' money paid to Tekitu by mistake after settlement.
Pausing there, what this exchange of submissions highlights is that any submissions as to the existence of a proprietary interest in the balance of the controlled moneys account to secure a right of reimbursement for the costs of the proceedings themselves should have been made during the course of the submissions at the hearing. Had that occurred (and had there been proper notice of the submission), then presumably the unpaid vendors' lien submission would then also have been ventilated. Instead what has transpired has been an exchange of submissions each raising new matters not raised in the hearing itself.
The unpaid vendor's lien was raised before Ball J as a basis on which Tekitu sought a variation of the order restraining the Tekitu parties from disbursing moneys in the controlled moneys account (to permit the release of the sum of $145,019.08). (Ironically, on the findings I have made Tekitu's entitlement to moneys outstanding under the Sale of Business Agreement exceeds the amount that Tekitu then sought to have released.) Ball J dismissed the application for a variation of the injunctions on the basis that there had not been established a material change of circumstances since the original application was heard or the discovery of new material which could not reasonably have been put before the court on the hearing of the original application ( Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44). His Honour in the course of his reasons noted that:
There is still a question whether, particularly in view of the terms of cl 17.5 of the sale agreement, the first defendant has an unpaid seller's lien and, if it does, whether that lien takes priority over the constructive trust which forms the basis of the plaintiff's claim. In effect, the defendants seek summary judgment of those issues. In my opinion it is not entitled to an order that has that effect.
As Mr Brender correctly notes, no such argument was raised in the course of the hearing before me (which proceeded on the basis that the Tekitu parties' defence to the claim in relation to the retained moneys was by way of set-off). I do not consider that, the proceeding having been conducted on that basis, it is appropriate for an argument of this kind to be raised in submissions after the close of the hearing. Nor, however, am I satisfied (for the reasons adverted to above) that the proprietary interest claimed by Australian Receivables to secure a claim for indemnity or reimbursement of its costs out of trust assets succeeds.
For that reason it is not necessary to debate further the second objection raised in Mr Brender's final submissions (to Mr Cotman's proposition that once the court makes the agreed orders the trust is extinguished), namely, that the constructive trust is a flexible remedy moulded to the circumstances and will not be lost until the court so determines. (Mr Brender also submits that if the relief he now seeks were to be granted the court is not strictly granting equitable setoff but rather it is ordering that two sums be off-set to produce a balance, as he submits was contemplated by the orders permitting Tekitu to continue to sue and be sued despite being in administration.)
Finally, as to what I have described as the fallback argument (that the proprietary right if it exists would extend only to the costs of protecting the fund in interlocutory stages), Mr Brender contends this would be artificial as substantially all the litigation was devoted to that end. With respect, I disagree. It seems to me that in essence this litigation was devoted on the part of both litigants to those litigants seeking to establish their right to the payment of moneys for which provision is made in the Sale of Business Agreement and which the other had either wrongly retained or not acknowledged were owing to the party making the claim for those moneys.
In any event, as I am not satisfied that there is an equitable interest of the kind claimed, it is not necessary to consider further the above arguments.
That does not, however, dispose of the issue. In Mr Brender's final submissions (and during the course of argument on 16 November 2011 this was highlighted by Mr Cotman as the effect of what was being sought), he now puts the claim for a stay of enforcement of any orders in relation to the payment out of moneys to Tekitu on the basis that this is necessary to preserve those funds pending an assessment of the costs orders in these proceedings (and so as to permit a set-off as against any positive balance in that regard of the moneys the subject of the judgment in favour of Tekitu).
The practical import of such a stay is that Tekitu is presently in administration. It is feared (and Mr Cotman acknowledges that such a fear is well-founded) that if the money is paid out of the controlled moneys account to Tekitu that money will then be paid to creditors. Mr Brender submits that if this occurs, the court's costs order will be frustrated. Mr Cotman submits that the payment of creditors (in the ordinary course) cannot be said to be a deliberate frustration of the Court's orders as to costs, particularly if there are cross orders as to costs. In this regard it seems to me that the submission by Mr Brender is as to the effect of such a payment, not its intent (much as in Sivritas v Sivritas (No. 2) [2008] VSC 580, Kyrou J had regard to the unlikely result if a stay were not granted).
Mr Brender notes that once the proposed orders as to payment out to Australian Receivables are made there will remain $167,015.98 in the controlled moneys account. He submits that $112,438.38 of that amount is "on any view" Australian Receivables' money (it forming part of the subject of the trust), against which there is a judgment for that sum (in contract, after off-sets). He submits that if, arising out of the same proceedings by which the fund was created and the various off sets determined, Australian Receivables has a costs order in its favour, the question is whether Australian Receivables should be compelled to pay the judgment sum owing now (from its money held in the fund) in advance of an assessment of the costs orders (and possible set-off against those costs orders).
Mr Brender notes that the first of the categories recognised in Ritchie's where there may be a stay on enforcement is where a defendant has a right of set off against the plaintiff's judgment (noting that the authority for that is cited as Re a Debtor No 21 of 1950 [1951] Ch 612). Mr Brender submits that Re a Debtor evinces a policy of allowing competing claims to be set-off despite their order of quantification on the basis of fairness or justice as between the two parties, so that one cannot rush to an advantage (referring to the judgment of Lord Eldon at 618.9, 621.8). Reliance was also placed on Sivritas where Kyrou J ordered that the costs order obtained by the plaintiff as to proceedings in which it established a 73% share in property in which the defendants were found to have a 27% share (for 2/3 of its costs to be paid by the defendants) could be set off against the defendants' share of the proceeds of sale of the property. In Sivritas , Kyrou J considered the preferable view to be that the source of the Court's power to make set-off orders in relation to costs to be the inherent jurisdiction of the court to control its processes [at 22], though accepting that equitable principles of set-off could also be invoked. There, his Honour considered that a set-off of entitlements from a common pool of funds was appropriate ([35]) in circumstances where there would otherwise be an injustice to the plaintiff, identified as follows, which his Honour considered would outweigh the likelihood that the practical result of the set-off order would be that the first and second defendants would not receive any part of the net proceeds of sale, saying at [37]:
In essence, the injustice to the plaintiff will arise out of the first and second defendants' failure to comply with an order of this Court that they pay two-thirds of the plaintiff's costs [it being accepted that if an order for set off were not made it was likely that the defendants would not be in a position to pay the costs, their only source of funds being the land in question and part of the defendants' share being subject to a charge in favour of the third defendant]. To allow them to benefit from such non-compliance in circumstances where it was their conduct that forced the plaintiff to incur those costs would be inequitable and would enable the first and second defendants to benefit from their flouting of the plaintiff's rights, not once, but twice.
White J in Australian Beverage Distributors Pty Limited v Evans & Tate Premium Wines Pty Ltd (2006) 58 ACSR 22; [2006] NSWSC 560 had earlier considered the question of set-off in relation to costs orders (with reference to Re a Debtor ) and formulated the principle as "what the justice of this case requires by way of exercise of the general jurisdiction of the Court over the suitors in it". His Honour said, from [68]- [70] and at [77]-[79], with which formulation of principle there was no demur by the Court of Appeal when it came later to consider his Honour's decision:
.... set-off of judgments for costs in different actions and in different courts has long been allowed, as has the set-off of judgments for costs against judgments for debt or damages. Such set-offs do not depend upon the statutes of set-off, or the general equitable jurisdiction, but on the control a court exercises over its own proceedings. The jurisdiction is explained in many cases dealing with claims by solicitors to assert a lien over a judgment for costs in favour of their client where the opposite party has obtained judgment against their client in the same or in other proceedings ( Edwards v Hope (1885) 14 QBD 922 at 926-927 ; Reid v Cupper [1915] 2 KB 147; Puddephatt v Leith ( No 2) [1916] 2 Ch 168 especially at 173-174; Re a Debtor No 21 of 1950 [1951] 1 Ch 612 at 617-618).
This jurisdiction is accurately described in R Derham, The Law of Set-Off , 3 ed, 2003, at paras 2.71-2.83. Although in Edwards v Hope , Brett MR and Bowen LJ (at 926 and 927) described the jurisdiction as an equitable jurisdiction, in truth, it was not a creature of the Court of Chancery, but was applied by all courts. Indeed, it was applied more liberally in the Courts of law than in the Court of Chancery owing to Lord Eldon's care that solicitors should not be deprived of liens for their costs ( Puddephatt v Leith (No 2) at 174-179).
Dr Derham says at para 2.80 that: "The basis of the set-off is the general jurisdiction of the Court over the suitors in it", citing Mitchell v Oldfield (1791) 4 Term Rep 123; [1791] EngR 1260; 100 ER 929. There, in a case where each party had recovered judgment against the other for separate debts in separate actions, Lord Kenyon CJ stated that the case did not depend on the statutes of set-off, but the general jurisdiction of the Court over the suitors in it.
The Court has jurisdiction to stay its own proceedings wherever the requirements of justice so demand. The jurisdiction is one to be exercised with caution. This jurisdiction extends to staying execution of judgments and orders. The jurisdiction is an inherent one and is, in any event, specified in wide terms in subs 135(1) of the Civil Procedure Act . The stay of execution of a judgment to give effect to a set-off between two judgment debts is but an instance of the control which the Court exercises over its own proceedings. (my emphasis)
Similarly, in Padkohe Pty Ltd v Fletcher [2006] NSWSC 1239, Barrett J considering a situation in which it was contended that costs under orders made in statutory demand proceedings and bankruptcy proceedings involving the parties were most likely to exceed the balance of the judgment debt still outstanding in these proceedings and a stay of execution of the judgment was sought, said at [4]:
I was taken to ss 21 and 96 of the Civil Procedure Act 2005 both of which deal with the general issue of set-off but neither of which is of any relevance. Both counsel approached the matter on the basis that the question of stay of execution and the more general issue of recognising any set-off are matters for the court's discretion. So far as staying execution of judgment is concerned, there is express power under s 135 of the Civil Procedure Act . There also exists an aspect of the inherent jurisdiction for the court to allow what is effectively set-off by granting a stay of execution of a judgment "if it be just": Re A Debtor No 21 of 1950 [1951] Ch 612 at p 621.
His Honour referred with apparent approval to the passage set out above by White J in Australian Beverage Distributors and formulated the issue to be considered by asking the question "what the justice of this case requires by way of exercise of the general jurisdiction of the court over the suitors in it, having regard to the application now before the court".
His Honour accepted that if there were not an intervention to stay the judgment, the judgment debtors were liable to suffer, at the hands of the judgment creditor, execution of the judgment in circumstances where the judgment debtors had separate entitlements to payment by the judgment creditor of unquantified sums for costs in other proceedings. However, his Honour went on to say:
It is, however, necessary to say more about the circumstances in which Mr Davis's right of recovery against Ms Fletcher and Tatlers arose. The terms of settlement and the orders giving effect to it (see items 2 and 3 of [2] above) expressly contemplated that Ms Fletcher and Tatlers would pay the sum of $75,000 to Mr Davis within 28 days and that the verdict and judgment in his favour for that sum would become enforceable at once if the payment was not made within that period. This regime was not one imposed by the court as a matter of compulsion against the will of the parties bound to pay. It was a regime to which those parties voluntarily and consciously submitted as part of an agreed basis of settlement.
Having entered into that agreement and submitted to orders of the court giving effect to it, Ms Fletcher and Tatlers then embarked on a deliberate course of unilateral conduct designed to deprive Mr Davis of the immediate enjoyment of the position into which the terms of settlement and the court's orders placed him. This was done by means of the evasive action involved in the successive application for instalment orders. It was said on behalf of Ms Fletcher and Tatlers that an application of that kind is something that the legislation and the court rules make available to any judgment debtor. That is true. But Ms Fletcher and Tatlers cannot, in the present context, be regarded as simply part of the faceless crowd of judgment debtors against whom judgments are entered in invitum. They are judgment debtors who voluntarily submitted to a particular payment regime (i.e. payment within 28 days after signing of the terms of settlement and the making of the consent orders).
The judgment debtors who thus voluntarily submitted to the particular payment regime now come to court asking that they be freed from the consequences of their agreement. They say that the person to whom they, jointly and severally, are bound by order of the court to pay $31,370 owes one of them one unquantified sum and the other of them another unquantified sum. That, they say, is a sufficient ground for the court to intervene to alter the consequences of the agreement they accepted, as reflected in a verdict and judgment of the court to which they consented.
But the fact that the costs in the statutory demand proceedings have not been assessed and that the costs in the bankruptcy proceedings have not been taxed means that, whether or not it is possible to estimate the amounts that might ultimately be allowed, the party with the benefit of the costs orders does not stand on the same plane as the party with the existing money judgment. Tatlers and Ms Fletcher, as beneficiaries of the respective costs orders, are not in a position to obtain execution. Neither of them could, for example, obtain a charging order over funds in court: Widgery v Tepper (1877) 6 ChD 364. To allow Ms Fletcher and Tatlers to assert their respective costs orders as a basis for denying Mr Davis the ability to obtain satisfaction of his judgment against Ms Fletcher and Tatlers would be to promote them to a position of equal ranking with him which, in the absence of an enforceable judgment for an ascertained sum, they have not in fact achieved.
The rationale of set-off is to avoid multiplicity of actions. Set-off operates, on principle, where there are, on each side of the account, what Cockburn CJ in Stooke v Taylor (1880) 5 QBD 569 (at p 575) referred to as "liquidated debts, or money demands which can be readily and without difficulty ascertained". The entitlements of Ms Fletcher and Tatlers under their respective costs order cannot, as to quantum, be ascertained at this point . (my emphasis)
Mr Brender (in his final additional submissions in reply) noted that another instance in which there was more than one order to be offset and a stay was granted was Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2010] NSWSC 1106 at [40] (following the Court of Appeal decision in Wentworth v Wentworth (unreported, 21 February 1996) which approved the conclusion at first instance in that case that there should be no execution on any costs order until the ascertainment of the amounts payable under all orders was complete and a final balance was struck).
Mr Brender submits that there can be little to be said as to the justice of permitting an insolvent party (Tekitu) to receive a "hasty" payment out of a fund containing Australian Receivables' money, without allowing Australian Receivables to quantify and offset costs arising from the very case in which the judgment was obtained. In essence, what Australian Receivables is now seeking, by way of a stay, is the opportunity to set off the costs when those are quantified in circumstances where that opportunity is likely to be unavailable to it if the money is disbursed to Tekitu's creditors.
It was suggested that an order that had the effect that Tekitu received payment "from ARL's funds forthwith" might give Tekitu a priority over other creditors of Australian Receivables (though Mr Brender was quick to disclaim any inference that Australian Receivables is insolvent). It is said that ordinarily, a judgment creditor such as Tekitu would normally have to avail itself of the various creditors' remedies and that the money in the controlled moneys fund could be simply released to Australian Receivables and Tekitu left to those remedies. Mr Brender emphasised that the findings made meant that it was Australian Receivables own money.
Alternatively, it is submitted that the money should stay in the controlled moneys fund in order to allow the set off to be asserted when the costs are quantified. It is said that this will give Tekitu an advantage over most creditors, who are required to execute on judgements and do not have the advantage of having the debtor's money under court control - that being described as "a fortuitous circumstance that arose at least in part from the wrongful retention" of Australian Receivables' money in 2007.
In this regard, Mr Cotman notes that whether the plaintiff is entitled to offset the judgment against it on the cross claim against costs owing to it on its claim is intertwined to an extent with the issue as to what costs orders are to be made in the first place. It is submitted that if the Court awards Tekitu costs on its successful cross claim and the Court is minded to order an offset of the cost awards (namely, the costs of the cross claim against the costs of the claim), then these issues will fall away.
As to Mr Brender's submission that $122,438.38 of the remaining money in the controlled moneys account "is on any view" Australian Receivables' money, Tekitu takes issue with this (repeating its submission as to the unpaid vendor's lien, extinguishment of the trust and the vesting of monies in Tekitu. Mr Cotman submits that in reality what Australian Receivables is seeking (though characterising the question as one of enforcement) is security for its costs.
It is submitted that the facts in the present proceedings are distinguishable from those in Australian Beverage Distributors (where there were a number of proceedings between the parties that had resulted in judgment debts/orders in different jurisdictions) on the basis that here what Australian Receivables is seeking to do is to set-off a judgment debt against an order for costs arising from the same proceedings.
Mr Cotman submits further that the effect of what is claimed is priority in satisfaction of a debt that otherwise would have to be proved in Tekitu's administration, with the judgment and costs orders of Tekitu as assets in that administration. (In oral argument it was suggested that if Australian Receivables sought such relief then it should, as the price for the stay, pay to Tekitu, or perhaps into Court, the amount of the judgment debt - a suggestion that found no favour with Mr Brender.) Mr Brender contends that it is not a matter of Australian Receivables obtaining a priority; rather, that it is a matter of the debt order in favour of Tekitu and the costs order that was the price of obtaining the debt order, against Tekitu, being dealt with together and not giving one priority over the other.
I accept that the discretion to stay judgments is one that is to be exercised with caution. I also consider that there is a difference between the position in Sivratis (where the conduct of the first and second defendants had been criticised by his Honour as creating an injustice to the plaintiff in the first place that would be compounded if the plaintiff were not to receive the whole of its costs) and Australian Beverage Distributors (where there was a set-off as between orders in different jurisdictions and different proceedings) and Padkohe (where there had been a voluntary arrangement entered into that would be upset by the stay sought).
Here, both parties have breached their contractual obligations and both have retained moneys owing to the other party (and in some instances conceded to be owing to the other party). The fact that the moneys or part of the moneys in the controlled moneys account are impressed with a trust owing to the circumstances in which they were received and retained is in that sense perhaps fortuitous.
The proceedings were conducted on the basis that there was envisaged that there would be a set-off in respect of the claims in relation to the various amounts. The moneys were in that sense held in the controlled moneys account as security against the outcome of an overall exercise to be carried out to determine the respective offsetting claims that has now taken place. That reveals that Tekitu is owed a considerable sum of money by Australian Receivables (taking into account the considerable sums already paid out to Australian Receivables). The suggestion that payment out of the controlled moneys account of the balance is 'hasty' when the matter proceeded at least from a practical perspective on the basis that the claims were the subject of mutual set-offs (and there was no suggestion at that stage of any proprietary interest to secure a right of indemnity for costs or other dispute as to payment out of the balance once the mutual claims were determined) seems to me to be inapt.
I have no basis for assuming that the costs orders I propose to make (if set-off as against each other as I think appropriate) will result in a substantial or any sum being payable to Australian Receivables (i.e. that the costs it will be entitled to recover as assessed will exceed the costs as assessed that it is liable to pay or that any excess will be of an amount approaching the amount of the controlled moneys account balance). In any event, Australian Receivables has sought (and I propose to grant) a costs order personally against the Smiths on the primary claim (and the evidence to which I was referred during the course of the hearing indicates that they have a residential home with at least some equity available to meet an adverse costs order). I am not satisfied, having regard to the matters referred to above and the caution with which this discretion is to be exercised, that the requirements of justice demand that the judgment debt against Tekitu now be stayed or that the orders sought in relation to the payment out of the balance of the controlled moneys account should not be made.
In the circumstance, and having regard to the manner in which the case was conducted with respect to the set-off claims, I think the appropriate course is to make the costs orders foreshadowed above and then to order that the respective costs (once assessed or agreed between the parties) be set-off against the other, with an order that Australian Receivables pay any shortfall in the costs payable by it to Tekitu once the respective costs are assessed and conversely that Tekitu and Mr and Mrs Smith be jointly liable to pay to Australian Receivables any shortfall in the costs that may be owing to it at the end of that exercise (which should remove any 'unfairness' arising from the insolvency of Tekitu of the kind to which Mr Brender referred).
Orders
For the reasons set out above, I make the following orders and declarations broadly in the form prepared by Mr Cotman but with amendment to reflect the rulings on costs that I have made.
The Court:
1. Declares that the sum of $567,084.73 held by the first defendant in its bank account known as the Tekitu Trading Account account no. 02-865-1374 (the retained monies) after 9 January 2007 was held by it on constructive trust for the plaintiff.
2. Declares that the first defendant is liable to account to the plaintiff for the sum of $567,084.73.
3. Declares that the plaintiff is entitled to retain the sum of $177,784.60 paid to it since the commencement of these proceedings.
4. Declares that the plaintiff is entitled to trace $170,030.12 into the controlled monies account held by the defendants' former solicitors and that that amount is held on constructive trust for the plaintiff.
5. On the cross claim, give judgment for the cross claimant in the sum of $331,708.39 for loss occasioned by the cross defendant's breaches of contract.
6. Declares that:
(i) the cross defendant is entitled to off-set its liability to the cross claimants arising from its breaches of contract (being $331,708.39) against the shortfall in the retained monies (being $389,300.13); and
(ii) the first defendant is entitled to off-set its liability to the plaintiff arising from the retained monies (being $389,300.13) against the damages payable to it as a result of its successful cross claim (being $331,708.39).
7. Declares that the plaintiff is entitled to $57,591.74 from the controlled monies account (being the difference between $389,300.13 and $331,708.39), together with 25% of the interest accrued in the controlled monies account.
8. Orders that the plaintiff be paid the sum of $57,591.74 from the controlled monies account together with 25% of the interest accrued in the controlled monies account.
9. Declares that the constructive trust over the sum of $112,438.98 in the controlled monies account (being $170,030.12 less $57,591.74) is extinguished.
10. Orders that the sum of $112,348.98 in the controlled monies account (formerly the subject of the constructive trust) be paid to the cross-claimant/first defendant (as part of the amount the subject of order 11 below) in satisfaction of the amounts owing to it by the plaintiff in accordance with the judgment on the cross claim in order 5 above and taking into account the mutual set-offs provided for in these orders.
11. Declares that the first defendant/cross-claimant is entitled to the balance of the monies in the controlled monies account (after payment out of the amount provided for in order 8 above) being $167,015.98 and to 75% of the interest accrued in the controlled monies account.
12. Orders that the first defendant be paid the sum of $167,015.98 from the controlled monies account together with 75% of the interest accrued in the controlled monies account forthwith.
13. Orders that the defendants pay the costs of the plaintiff on the statement of claim.
14. Orders that the cross defendant pay the costs of the cross claimant on the cross claim.
15. Orders that the costs of the plaintiff on the statement of claim be set off against the costs of the cross claimant on the cross claim and that any amount of costs unpaid after that set-off be paid (if owing to the plaintiff) by the defendants jointly and severally and (if owing to the cross claimant) be paid by the plaintiff.
16. Dismisses the application made on 16 November 2011 for a stay of the judgment in favour of the cross-claimant on the cross-claim or of payment out of the controlled moneys account of the balance remaining after payment of the amount in 8 above.
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Decision last updated: 23 November 2011
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