City Garden Australia Pty Ltd (in administration) as trustee for the Ming Tian City Garden Unit Trust v Dai (No 2)

[2024] NSWSC 22

Supreme Court

New South Wales

Medium Neutral Citation:

City Garden Australia Pty Ltd (in administration) as trustee for the Ming Tian City Garden Unit Trust v Dai (No 2) [2024] NSWSC 22

Hearing dates:

On the papers, last submissions 22 January 2024

Date of orders:

31 January 2024

Decision date:

31 January 2024

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Compensation and costs orders made.

Catchwords:

COSTS – indemnity costs – plaintiff sues former director in respect of invalid appointment of his wife as company secretary and entering into series of unauthorised loans to provide working capital for his building company – director maintained the lie to the end – provided a basis for other defendants to strenuously defend all aspects of plaintiff’s claim – resulted in longer trial – increased plaintiff’s costs significantly – indemnity costs order made.

COSTS – plaintiff loses claims against lenders who advanced the unauthorised loans – plaintiff now in liquidation – gross sum costs order made to avoid wasted costs of assessment, to both the lender and liquidator – s98(4)(c) Civil Procedure Act 2005 (NSW)

EQUITABLE COMPENSATION – plaintiff’s solicitor to provide equitable compensation, being 75% of plaintiff’s indebtedness to lenders – whether equitable compensation can include lenders’ costs.

Legislation Cited:

Corporations Act 2001 (Cth), section 1317H

Civil Procedure Act 2005 (NSW), section 98(4)(c)

Cases Cited:

Australian Securities and Investments Commission v Rich (2009) 236 FLR 1

Barrett Property Group Ltd v Metricon Homes Pty Ltd (No 2) [2007] FCA 1823

Baychek v Baychek [2010] NSWSC 987

Beach Petroleum NL & Anor v Johnson (No 2) (1995) 57 FCR 119

Berkeley Administration Inc v McClelland [1990] FSR 565

Berry v British Transport Commission [1962] 1 QB 306

City Garden Australia Pty Ltd (in administration) as trustee for the Ming Tian City Garden Unit Trust v Dai [2023] NSWSC 1498

Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643

Dustan v Human Rights and Equal Opportunity Commission (No 3) [2006] FCA 916

Gate v Sun Alliance Insurance Ltd (1995) 8 ANZ Ins Case 61-251

Gould v Vaggelas (1985) 157 CLR 215

Gray v Sirtex Medical Ltd (2011) 193 FCR 1

Hadid v Lenfest Communications Inc [2002] FCA 628

Hamod v New South Wales [2011] NSWCA 375

Harrison v Schipp (2002) 54 NSWLR 738

Idoport Pty Ltd v National Australia Bank Ltd [2007] NSWSC 23

In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356

Ivory v Telstra Corporation Ltd [2001] QSC 102

Leary v Leary [1987] 1 WLR 72

Leary v NSW Trustee & Guardian (No 2) [2017] NSWSC 1226

Ragata Developments Pty Ltd v Westpac Banking

Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135

Corporation (FCA 5 March 1993, unreported)

Sande v Medsara Pty Ltd (No 2) [2004] NSWSC 262

Sony Entertainment (Australia) Ltd v Smith (2005) 215 ALR 788

Sparnon v Apand Pty Ltd [1998] FCA 164

Stemson v AMP General Insurance (NZ) Ltd [2007] 1 NZLR 289

Talacko v Talacko (2021) 389 ALR 178

Vance v Vance (1981) 128 DLR (3d) 109

Texts Cited:

Dal Pont, Law of Costs (4th ed, 2018)

Ritchie’s Uniform Civil Procedure NSW

Category:

Consequential orders

Parties:

City Garden Australia Pty Ltd (Plaintiff)
Meng Dai (First Defendant)
Gerrard Toltz Pty Ltd (Second Defendant)
Gemi 130 Pty Ltd (Third Defendant)
Bridge Street Capital No 2 Pty Ltd (Fourth Defendant)
Wallis Island Pty Ltd (Sixth Defendant)
Maxmara Trinity Pty Ltd (Seventh Defendant)
Lin Zhu (Eighth Defendant)
Gemi Investments Pty Ltd (Ninth Defendant)
Weriton Finance No 2 Pty Ltd (Tenth Defendant)
Saddleback Mountain Estates No 2 Pty Ltd (Eleventh Defendant)
Maxmara and JA International Pty Ltd (Fifteenth Defendant)

Representation:

Counsel:
Ms M Hall (Second Defendant)
Mr MW Young SC (Fourth, Tenth, Eleventh Defendants)

Solicitors:
Swaab (Plaintiff)
Sparke Helmore Lawyers (Second Defendant)
Summer Lawyers (Third, Ninth Defendants)
VMV Lawyers (Fourth, Tenth, Eleventh Defendants)

File Number(s):

2020/128125

JUDGMENT

1. HER HONOUR: I gave judgment in this matter on 5 December 2023: City Garden Australia Pty Ltd (in administration) as trustee for the Ming Tian City Garden Unit Trust v Dai [2023] NSWSC 1498. I also made directions for the parties to provide affidavits and submissions:

1. to enable a compensation order to be made against the first defendant, Meng (Adam) Dai, under section 1317H(1) of the Corporations Act 2001 (Cth);

2. to enter judgment against the second defendant, solicitor Gerrard Toltz Pty Ltd, for equitable compensation; and

3. to hear from the parties in respect of costs.

2. Some of these matters have since been agreed between the parties. This judgment addresses the remaining issues and assumes familiarity with my primary judgment; the same defined terms are used.

3. In respect of the remaining issues, the plaintiff provided written submissions. No submissions were received from Mr Dai, eighth defendant Lin (Julianne) Zhu, or their family companies, although Mr Dai and Ms Zhu signed short minutes of order proffered by other parties. The solicitor provided written submissions, reply submissions and proposed short minutes of order.

4. The lenders provided a Dobbs certificate (after Dobbs v National Bank of Australasia Ltd [1935] HCA 49; (1935) 53 CLR 643) setting out the moneys owing to the ‘third round’ lenders, together with an affidavit of solicitor Vanessa Vallejo, submissions and proposed short minutes of order. At my request, these lenders also assisted in performing the calculation referred to in my primary judgment at [479]. The lenders also provided the solicitor with a separate itemisation of the amount owing in respect of principal and interest, on the one hand, and legal costs on the other. I am grateful for the lenders’ assistance on both matters.

5. Two things emerged from this material. First, whilst judgment was reserved, the plaintiff went into liquidation. Second, the funds advanced in the third disputed transaction in October 2019 totalled $5,292,543. The loan was not repaid when due and went into default. The amount owing was unknown at trial. The Dobbs certificate revealed that the amount owing has grown to $21,870,688.55, albeit this figure includes legal costs. A further breakdown of this amount, as provided by the lenders, is as follows:

Principal, interest and other charges as provided for in the security documents, excluding legal costs and any interest and charges on such costs, from 15 October 2019 to 12 December 2023	$18,437,119.66
Legal costs, including accrued interest and charges on legal costs of $617,588.50 as at 12 December 2023	$3,433,561.89

6. Mr Liang’s remonstrations to Mr Dai at the time concerning the potential cost of the loans appears to have been borne out: City Garden at [119].

Compensation order against director

7. I concluded in my primary judgment that a compensation order should be made against Mr Dai under section 1317H(1) of the Corporations Act 2001 (Cth). As to the amount of the compensation order, I concluded at [479]-[480]:

479 As the first loan was paid out by the second loan, which was paid out by the third loan, a convenient measure of the damage suffered by the plaintiff as a result of Mr Dai’s contravention of the civil penalty provisions is the amount now owing to the third round lenders, Gemi 130 and Bridge Street Capital. Section 1317H(1) of the Corporations Act requires that an order for compensation must specify the amount of the compensation. Where the lenders did not adduce evidence as to the amount owing by the plaintiff under these facilities and, in any event, that figure would now be out of date, it is necessary for these lenders to provide this figure in order that an order may be made. The $391,000 paid to NSW Revenue for land tax ought be deducted from this figure, together with interest on the $391,000 from 16 July 2019 on.

480   The first round lender and second round lenders have also incurred costs in defending these proceedings. Whether these lenders intend to seek these costs from the plaintiff under the terms of their respective loan agreements, including on a solicitor and client basis, is not known. If that be the case, then these sums should also be captured in a further compensation order made when the amount of the lenders’ costs is known. I have not made orders in this regard, however, as I suspect that Mr Dai will be in no position to pay the first compensation order, let alone a second compensation order.

8. The lenders calculated that the land tax payment, together with interest on that amount from 16 July 2019 on, totalled $1,606,638.39. Deducting this figure from the Dobb’s certificate amount results in a net amount of $20,264,043.61. This is the appropriate amount for the compensation order, as it removes a benefit which the plaintiff received from the loans obtained by Mr Dai in breach of his director’s duties.

9. The plaintiff submitted that the effect of my judgment was that Mr Dai was effectively liable on an indemnity basis for the legal costs payable by the plaintiff to the other defendants in the proceedings, save for the solicitor. The compensation order should cover such costs to ensure clarity. Accordingly, the plaintiff sought an order for indemnity costs against Mr Dai. As I understood it, where section 1317H(1) requires that the compensation order fix an amount, and where the lenders’ legal costs are not presently known such that no amount can be fixed, the liquidator was content for this matter to be addressed by a costs order against Mr Dai rather than a separate compensation order in respect of the lenders’ costs when such an amount could be fixed.

10. I do not have the benefit of any submissions from Mr Dai in respect of the plaintiff’s suggestion that an indemnity costs order should be made against him in respect of any legal costs which the plaintiff is obliged to pay the lenders. Nor do I consider that such an order should be made. The concern expressed in my primary judgment (at [480]) was that the plaintiff may be liable to the ‘first round’ lender and ‘second round’ lenders as a consequence of the loan documents executed by Mr Dai with these lenders, in breach of his fiduciary duties. However, these lenders do not seek costs from the plaintiff under the terms of their respective loan agreements but simply on the basis that the plaintiff has failed, and the lenders had succeeded, in this litigation.

11. As I mentioned in my primary judgment, only damage that has “resulted from” the contravention of a civil penalty provision may be compensated under section 1317H: City Garden at [472]. To satisfy this test, it must be shown that the defendant’s acts or omissions were so connected with the company’s losses that, as a matter of “ordinary common sense and experience” they should be regarded as the cause of those losses: Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC1229 at [7311]-[7312] (per Austin J). The plaintiff’s liability to pay the costs of the ‘first round’ and ‘second round’ lenders is referable to the plaintiff’s decision to join these lenders to the proceedings, rather than any breach of Mr Dai’s duties as a director. The circumstances warranting a second compensation order in respect of the costs of these lenders do not exist.

Costs as against the director

12. In addition to the ground advanced by the plaintiff for indemnity costs against Mr Dai at [8], the plaintiff submitted that there were other reasons why costs should be ordered against Mr Dai on an indemnity basis including, but not limited to, his misconduct in causing the plaintiff to incur unnecessary costs in the proceedings: forging the signature of parties to transfer funds for his own benefit; attempting to mislead the Court by asserting that payments received by his companies were reimbursement of payments; continuing to assert that the disputed loans benefitted the plaintiff; and refusing to acknowledge that he had appointed his wife as secretary without Mr Liang's knowledge. This was said to have unduly prolonged the proceedings: Ragata Developments Pty Ltd v Westpac Banking Corporation (FCA 5 March 1993, Unreported). Otherwise, costs should be ordered on the usual basis.

13. It is necessary to determine the application for indemnity costs “by reference to the conduct of the proceedings, not the conduct that is the subject of the substantive dispute”: In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356 at [8] (per Black J). Conduct which will ground an order for indemnity costs includes misbehaviour of a serious nature in the course of a proceedings, such as fraud (Gate v Sun Alliance Insurance Ltd (1995) 8 ANZ Ins Cas 61-251 at 75,817-75,818); perjury or contempt (Berkeley Administration Inc v McClelland [1990] FSR 565 at 568-569; Ivory v Telstra Corporation Ltd [2001] QSC 102) and dishonest conduct (Vance v Vance (1981) 128 DLR (3d) 109 at 122). As noted in Dal Pont, Law of Costs (4th ed, 2018) at [16.71], “… where the fabrication of evidence, or other misleading conduct, has a direct correlation with unnecessarily exposing the successful party to the incurrence of costs, an indemnity costs order is appropriate”, citing Barrett Property Group Ltd v Metricon Homes Pty Ltd (No 2) [2007] FCA 1823 at [16] (per Gilmour J); Sande v Medsara Pty Ltd (No 2) [2004] NSWSC 262 at [8]; Stemson v AMP General Insurance (NZ) Ltd [2007] 1 NZLR 289; [2006] UKPC 30 at [28]; Leary v NSW Trustee & Guardian (No 2) [2017] NSWSC 1226.

14. Barrett Property Group Ltd v Metricon Homes Pty Ltd (No 2) is a good example of where such an order may be appropriate. When making an order for indemnity costs in favour of the applicants, Gilmour J noted:

[14]   These illustrate a determined effort on the part of the respondents and their witnesses to establish a defence on one of the central issues in the case which they knew to be false. It was left to the forensic efforts of the applicants’ solicitors and counsel and some belated and limited concessions made by Popple and Bugeja during their oral evidence, which led to these attempts to mislead the Court being exposed.

[15]   The result of this was that very significant costs have been incurred by the applicants both in preparation for and the conduct of the trial which ought never to have been required. Had this not been done then only those issues legitimately before the Court involving both questions of fact and law would have been tried.

[16]   The question then is whether the respondents’ conduct in relation to its defence on the issues of derivation and copying constitutes a sufficient reason to take this case, in that respect, out of the ordinary, so far as concerns the exercise of my discretion on the question of costs. I am persuaded that it does. This is not a case where merely arguments ‘attended by uncertainty’ were before the Court as in Hamod. It is not a case involving witnesses who gave evidence believing it to be true but as to which they were mistaken. It is not a case where judgment depended essentially upon the inherent probabilities of one version of events against another but not involving questions of credit. It is not even a case, such as Walker, where one witness gave fabricated evidence as to part of a case. This matter involved a concerted effort on the part of four key witnesses to present a false defence which has led to the applicants incurring very considerable costs over a long period in meeting and overcoming that defence. …

15. Mr Dai certainly engaged in sharp business practices vis a vis Mr Liang and others. As to whether Mr Dai’s conduct of the proceedings unnecessarily exposed the plaintiff to incurring costs, Mr Dai largely did not take issue with Mr Liang’s version of events, at least insofar as Mr Dai’s affidavit went: City Garden at [18]. Mr Dai did maintain at trial, however, that his wife had been duly appointed as secretary and that Mr Liang knew and approved of each of the disputed transactions. Mr Dai maintained this lie to the end. In fact, Mr Dai appointed his wife as secretary to the plaintiff to bypass the obstacle which Mr Liang presented to obtaining working capital for Mr Dai’s company, the builder. Mr Dai was also associated with the forgery of Mr Liang’s signature on a Unitholders Consent to the second transaction (see [328]-[332]) and endeavoured to mislead the Court in respect of the misappropriation of $876,000: City Garden at [383]-[387].

16. In terms of Mr Dai’s conduct during the trial, he was unrepresented. Apart from his effort to mislead the Court, Mr Dai did not unduly delay the progress of the trial. Mr Dai’s cross-examination of witnesses and his submissions were undertaken with reasonable efficiency. He accepted guidance and direction from the Court without demur.

17. The trial was, however, indirectly prolonged as the other defendants – the solicitor and the lenders – seized upon Mr Dai’s evidence, which gave them a proper basis to defend strenuously the plaintiff’s claims on all fronts. Without Mr Dai’s stance, the matters in issue would have limited, as the solicitor and the lenders would have proceeded on the basis that Ms Zhu had not been validly appointed, and the three disputed transactions were unauthorised by the plaintiff. The trial would have been far shorter. Some witnesses would not need to have been called. The evidence of the witnesses who remained relevant would have been of shorter compass; these witnesses would likely not have been subject to such lengthy cross examination. As a consequence, Mr Dai’s dishonest conduct in maintaining the lie had the overall effect that the plaintiff was put to substantial additional legal costs in advancing its claims. In all of these circumstances, I consider it appropriate to order that Mr Dai pay the plaintiff’s costs of the proceedings on an indemnity basis.

Costs of lenders

18. It is next convenient to consider what costs orders should be made in respect of the lenders. A costs order has been agreed between the plaintiff and the ‘first round’ lender, being the ninth defendant.

19. As against the ‘second round’ lenders, being the tenth and eleventh defendants, the plaintiff agreed to pay their costs on a party and party basis up to 19 April 2021 and on an indemnity basis thereafter, where the plaintiff failed to accept a Calderbank offer. The only matter in issue was whether the Court should make a gross sum costs order under section 98(4)(c) of the Civil Procedure Act 2005 (NSW) in respect of such costs.

20. The ‘second round’ lenders submitted that, in order to remove future costs associated with a costs assessment, there should be a lump-sum costs order made in their favour in the amount of $231,398.50. This amount was calculated on the basis of 70% of their costs incurred prior to 20 April 2021 and 100% of their costs incurred from 20 April 2021 onwards.

21. The solicitor and counsel for the ‘second round’ lenders also represented a ‘third round’ lender, being the fourth defendant (together referred to as the Weriton lenders). The costs attributable to defending the ‘second round’ lenders were calculated by allocating one-third of the fees incurred for tasks performed for both the ‘second round’ and ‘third round’ lenders, to which was added the cost of work performed exclusively for the ‘second round’ lenders. Adopting this methodology, pre-20 April 2021 costs were $15,438.66; 70% of that figure was $10,807.06. Costs from 20 April 2021 on were $220,591.44, which when added to $10,807.06 resulted in a total of $231,398.50.

22. The plaintiff opposed a gross sum costs orders, where the plaintiff had not had an opportunity to assess the detail of the costs claimed. However, this submission was made before the ‘second round’ lenders shared the exhibit to Ms Vallejo’s affidavit with them. Some time has now passed. I consider that the plaintiff has had ample opportunity to assess the amount of costs sought by these lenders, but has made no further comment.

18. Section 98(4)(c) of the Civil Procedure Act provides:

Courts powers as to costs

In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to:

…

(c) a specified gross sum instead of assessed costs …

24. As Giles JA noted in Harrison v Schipp (2002) 54 NSWLR 738; [2002] NSWCA 213 at [21]:

The power … of [section 98(4)] is not confined, and may be exercised whenever the circumstances warrant its exercise. It may appropriately be exercised where the assessment of costs would be protracted and expensive, and in particular if it appears that the party obliged to pay the costs would not be able to meet a liability of the order likely to result from the assessment …

25. It is a relevant consideration “where the financial capacity of the party liable to pay costs is such that the additional burden of taxation will impose a significant burden on the party in whose favour costs are ordered without real prospects of recovering those costs”: Dunstan v Human Rights and Equal Opportunity Commission (No 3) [2006] FCA 916 at [24], citing Hadid v Lenfest Communications Inc [2000] FCA 628; Sparnon v Apand Pty Ltd [1998] FCA 164; Sony Entertainment (Australia) Ltd v Smith (2005) 215 ALR 788; [2005] FCA 228. With the plaintiff now in liquidation, its financial capacity to pay any costs order is in question. I do not consider that either the ‘second round’ lenders, or the liquidator, should be put to the additional expenses involved in a costs assessment. Making a gross sum order will assist not only the ‘second round’ lenders but also the liquidator and thus I consider it appropriate to make such an order.

26. As to the amount of the gross sum, in Idoport Pty Ltd v National Australia Bank Ltd [2007] NSWSC 23, Einstein J summarised the relevant principles at [9]:

ii.   the touchstone requires that the Court be confident that the approach taken to estimate costs is logical, fair and reasonable: Beach Petroleum at [16];

iii.   the fairness parameter includes the Court having sufficient confidence in arriving at an appropriate sum on the materials available: Harrison v Schipp (2002) 54 NSWLR 738, per Giles JA at [22] …;

iv.   a gross sum assessment, by its very nature, does not envisage that a process similar to that involved in a traditional taxation or assessment of costs should take place: Harrison v Schipp at [22];

v.   the gross sum “can only be fixed broadly having regard to the information before the Court”: Beach Petroleum at 124;

[In Hadid v Lenfest Communications Inc [2000] FCA 628 at [35] it was said that the evidence enabled fixing a gross sum “only if I apply a much broader brush than would be applied on taxation, but that … is what the rule contemplates”.]

vi.   nevertheless the power to award a gross sum must be exercised judicially, and after giving the parties an adequate opportunity to make submissions on the matter: Leary v Leary [1987] 1 WLR 72 at 76, and Beach Petroleum NL & Anor v Johnson (No 2) (1995) 57 FCR 119 at 120;

vii.   In terms of the necessity for the approach taken to be logical, fair and reasonable, Von Doussa J in Beach Petroleum NL & Anor v Johnson & Ors (No 2) (1995) 57 FCR 119, put the matter as follows, at [16]:

“On the one hand the Court must be astute to prevent prejudice to the respondents by overestimating the costs, and on the other hand must be astute not to cause an injustice to the successful party by an arbitrary “fail safe” discount on the cost estimates submitted to the Court: Leary v Leary at 265 …”

27. His Honour’s summary has been cited with approval in the Court of Appeal: Hamod v New South Wales [2011] NSWCA 375 per Beazley JA, with whom Giles and Whealy JJA agreed, at [793]. Her Honour continued, at [816]:

… the factors that merit particular consideration include: the relative responsibility of the parties for the costs incurred … the degree of any disproportion between the issue litigated and the costs claimed; the complexity of proceedings in relation to their cost; and the capacity of the unsuccessful party to satisfy any costs liability: Ritchie’s Uniform Civil Procedure NSW at [s 98.45].

28. And at [820] (citations omitted):

The costs ordered should be based on an informed assessment of the actual costs having regard to the information before the court (for example, by relying on costs estimates or bills). The approach taken to estimate the costs to be ordered must be logical, fair and reasonable. This may involve an impressionistic discount of the costs actually incurred or estimated, in order to take into account the contingencies that would be relevant in any formal costs assessment.

29. Further, as Ball J explained in Baychek v Baychek [2010] NSWSC 987at [11]:

Implicit in this principle is that the gross sum bear a reasonable relationship to the actual costs of the party making the application, and to the costs that that party might reasonably be expected to recover on assessment. That means, among other things, that there must be a reasonable evidentiary basis for the order the court makes. That evidentiary basis is normally provided by the costs applicant in the form of an affidavit setting out the actual costs incurred and how they were calculated. Often, the evidence also includes evidence of the amount that is likely to be recovered on assessment.

30. I accept the submission of the Weriton lenders’ senior counsel, Mr Young SC, that the ‘second round’ lenders have never been the prime targets of the plaintiff, and that it was not in fact clear why they needed to be joined as defendants at all where their loan had been paid out, their mortgage discharged, and these lenders made no further claim against the plaintiff such that orders avoiding their mortgage would have little or no practical effect.

31. This, of course, did not mean that the ‘second round’ lenders were not put to the cost of defending the claim against them. But they did so in circumstances where it was the fourth defendant who was the important defendant, being a lender on the current and outstanding loan facility. The Weriton lenders filed three affidavits in the proceedings by Graham Werry. The first affidavit was filed before the ‘second round’ lenders were joined as defendants. The later affidavits were brief, as was the cross-examination of Mr Werry at trial. The trial itself occupied ten days. A large portion of the hearing was occupied by the Weriton lenders’ attack on the plaintiff’s case, in particular, in an extensive cross-examination of Mr Liang.

32. Taking a ‘broad brush’ approach, I consider that the apportionment of one-third of the Weriton lenders’ legal costs to the ‘second round’ lenders is on the high side; one-quarter is a more accurate portion in my mind. Further, even when costs are assessed on an indemnity basis, I do not accept that 100% of the costs claimed would be allowed on an assessment. Taking both matters into account, I consider that an appropriate amount for the ‘second round’ lenders’ costs would be in the order of $185,000.

33. I note that the plaintiff has provided security for the costs of the ‘second round’ lenders by way of two guarantees totalling $181,015.18. The bank guarantees were provided by Rose Ives Pty Ltd, such that the fact that the plaintiff has gone into liquidation does not affect the ability of the ‘second round’ lenders to call on the guarantees. Where there is little difference between the gross sum (which I consider appropriate) and the total amount of these bank guarantees, I am minded simply to order that the gross sum equate to the total amount of the bank guarantees and leave the matter at that.

34. The plaintiff consents to the form of costs order vis a vis the ‘third round’ lenders. Of these lenders, the fourth defendant also sought a costs order against Mr Dai as guarantor. The fourth defendant submitted that clause 12.1 of the Loan Agreement entered into on 15 October 2019 and clause 6.1(g) of the Mortgage Memorandum gave the fourth defendant the right to claim indemnity for its costs on a solicitor and own client basis. Clause 12.1 related to costs which include enforcement costs or costs with respect to preservation of the lender’s rights, whilst clause 6.1 was drafted even more widely so as to include any costs “in respect of a Transaction Document” or facility thereunder. Mr Dai was a guarantor of this loan and hence had materially the same contractual liability to the fourth defendant as the plaintiff. As such, Mr Dai should be ordered to pay the fourth defendant’s costs of the proceedings on an indemnity / solicitor and own client basis. No submissions were made by Mr Dai.

35. I accept the lender’s submission as to the form of costs order which ought be made against Mr Dai as guarantor. I note, however, that Mr Dai has also been ordered to pay these costs to the plaintiff as a component of the compensation order. In the event that Mr Dai pays the ‘third round’ lenders’ costs to these lenders, then his liability to pay compensation to the plaintiff should be reduced accordingly.

Costs as against the solicitor

36. It is next convenient to consider what costs order should be made in respect of the solicitor. The solicitor proposed that it pay the costs of the plaintiff’s claim against the solicitor only, on an ordinary basis as agreed or assessed. Any costs distinct from and not referable or necessary to the successful claim against the solicitor ought not be included in a costs assessment. The claims which the plaintiff had pursued against the other defendants were said to be distinct. A significant and separate portion of hearing was expended (both in evidence and legal argument) on matters solely pertinent to the unsuccessful claims against the lenders and Mr Dai. While there undoubtedly was a substratum of core facts, much time was expended on issues in no way necessary or referable to the confined claim against the solicitor. The solicitor ought not bear the costs arising from the plaintiff’s decision to maintain unsuccessful litigation against the lenders. Nor was there a basis to order costs on an indemnity basis. Whatever the wrongdoing of the solicitor, and whatever liability was agreed to under the mortgage documentation, fundamentally it was the plaintiff’s decision to expose itself to that liability by pursuing what was ultimately unsuccessful claims against the lenders. Although found to be a defaulting fiduciary, that did not extend the solicitor’s liability to being liable for the legal costs expended by a party who decided to bring complex, protracted litigation against multiple parties with no success.

37. The plaintiff sought an order that the solicitor indemnify the plaintiff for any costs orders obtained against it, on an indemnity basis. The plaintiff submitted that some of the adverse costs orders obtained by lenders against the plaintiff would be the subject of compensation orders, which in effect meant that the solicitor would be liable to the plaintiff for 75% of such adverse costs orders. As such, the plaintiff opposed the solicitor's contention that an order for costs against the solicitor should be made an ordinary basis and limited to the costs that related to the plaintiff's claim against the solicitor only. The plaintiff submitted that all substantive issues in the proceedings arose directly as a consequence of the solicitor's conduct and it would be impractical and unfair for the costs order to be restricted in the manner proposed. The claims made against the solicitor and the claims against the lenders could not be separated, where nearly all factual matters overlapped in respect of both claims. The solicitor should be ordered to pay the plaintiff’s costs on the ordinary basis.

38. In reply, the solicitor submitted that the plaintiff effectively sought a Bullock order but had made no attempt to establish the circumstances warranting the making of such an order. Ordinarily such an order will only be made where it was reasonable and proper for the plaintiff to join the defendants against which it failed: Gould v Vaggelas (1985) 157 CLR 215. This requires some degree of interdependence and necessity in the joinder; it is not satisfied where the purpose is merely to spread the potential net of liability: Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 [105]- [111]. There is also something in the conduct of the solicitor, beyond the denial of liability, that renders it fair to impose the liability of the other defendants’ costs on it, for example, creating uncertainty as to the proper defendant and the length and costs of the proceedings being extenuated due to the case solely brought against the solicitor. These elements were not satisfied here.

39. The plaintiff has succeeded in its claim against the solicitor and should have its costs accordingly. The plaintiff has failed in its claims against the lenders and is obliged to the pay the lenders’ costs. It cannot be said that the plaintiff’s decision to sue the lenders can be laid at the feet of the solicitor. True it is that the costs of litigation that are reasonably incurred in an attempt to reduce losses caused by wrongdoing are a head of loss: Talacko v Talacko [2021] HCA 15; (2021) 389 ALR 178 at [60] (the Court); Gray v Sirtex Medical Ltd (2011) 193 FCR 1; [2011] FCAFC 40 at [26]; Berry v British Transport Commission [1962] 1 QB 306 per Devlin LJ at 321. But it is necessary to plead a claim for costs as damages. No such claim was pleaded here. I accept the solicitor's submission that the plaintiff has not established the circumstances warranting a Bullock order in this case. I should not be taken, however, as accepting the solicitor’s submission that the bulk of the hearing was unrelated to the plaintiff’s claim against the solicitor. This will be a matter for a cost assessor to determine in due course.

Equitable compensation in respect of solicitor

40. This brings us to the final issue. I concluded in my primary judgment at [503]-[505]:

503   I accept that, but for the solicitor’s breach of fiduciary duty, the plaintiff would not have entered into the first transaction … . The loss which resulted from the breach was the plaintiff’s indebtedness to the lender, which was paid out and became an indebtedness to the second round lenders, which was paid out and became an indebtedness to the third round lenders.

504   … I do not think, however, that the amount of compensation is the whole of the plaintiff’s indebtedness to the third round lenders. This is because the loan advanced by the second round lenders not only paid out the first round lender but advanced additional funds. The plaintiff did not press its claim for breach of fiduciary duty against the solicitor in respect of the second transaction. I do not consider that the ‘uplift’ in the second loan, beyond paying out the first loan, resulted from the solicitor’s breach of fiduciary duty on the first transaction and does not fall to be compensated.

505   … This accounts for 25% of the loans advanced in the second transaction. Where the third transaction simply refinanced the second transaction, I consider that an appropriate measure of compensation is 75% of the current indebtedness of the plaintiff to the third round lenders.

41. The solicitor submitted that the amount of equitable compensation should not include any legal costs, which should be the subject of costs orders. The appropriate figure from which the 75% ought be calculated was $18,437,119.66, being the amount for principal, interest and other charges. That is, judgment should be entered for $13,827,839.74, being 75% of that amount. The remaining amount in the Dobbs certificate reflected legal costs, for which the solicitor ought not be liable. Legal costs were said to be matters for cost orders, not incorporation and intermingling in compensation orders. (No authority was cited in support of this proposition.)

42. The principles in respect of the assessment of equitable compensation are set out in my primary judgement: at [500]-[502]. In short, the object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation. In assessing compensation, the courts apply common sense views as to what loss resulted from the breach.

43. Here, I found that the loss which resulted from the breach was 75% of the plaintiff’s indebtedness to the ‘third round’ lenders. Under the loan documentation, that indebtedness (unsurprisingly) included the lenders’ legal costs. Specifically, clause 12.1 of the Loan Agreement between the plaintiff and the ‘third round’ lenders provided:

The Borrower will pay to the Lender on demand and keep the Lender indemnified against all expenses, including GST and legal costs and disbursements on a solicitor and own client basis, provided that such costs are agreed or assessed in accordance with the Legal Profession Uniform Law (NSW) and are incurred by the Lender in connection with:

…

(c)    (Enforcement): the enforcement, attempted enforcement or preservation of any rights under any Transaction Document including, without limitation, any expenses incurred in the evaluation of matters of material concern to the Lender and the Lender's internal costs for the time being of their employees in relation to any enforcement, attempted enforcement, preservation or evaluation costed at the rate certified by the Lender to be the rate then usually charged by them to the Lender's clients for the services of their employees.

44. In addition, clause 6.1 of the Memorandum of Mortgage Terms, incorporated into the mortgage dated 15 October 2019, obliged the mortgagor (the plaintiff) to pay on demand all costs and expenses incurred by the mortgagee in respect of the Transaction Document, facilities under or secured by a Transaction Document including legal costs on a solicitor and own client basis: clause 6.1. Further, clause 6.2 provided, “These costs and expenses are part of the Secured Money.” Secured Money means all money which the Mortgagor or the Debtor (here, in both cases, the plaintiff) now or in the future owes or may contingently owe to the mortgagee including by way of principal, interest, fees, costs or expenses: clause 1, Memorandum of Mortgage Terms.

45. The plaintiff would not have undertaken the contractual obligations in the Loan Agreement or Mortgage but for the solicitor’s breach of fiduciary duty. As such, I consider that the appropriate measure of equitable compensation is 75% of the plaintiff’s indebtedness to the ‘third round' lenders, including to the extent that that indebtedness reflects the lenders’ legal costs. By my calculations, 75% of this indebtedness is $16,403,016.

Orders

46. For these reasons, I make the following orders:

1. Pursuant to 1317H(1) of the Corporations Act 2001 (Cth), order the first defendant to compensate the plaintiff in the amount of $20,264,043.61.

2. First defendant to pay the plaintiff’s costs of the proceedings against him on an indemnity basis.

3. Judgment against the second defendant in the amount of $16,403,016.

4. Second defendant to pay the plaintiff’s costs of the proceedings against it on an ordinary basis as agreed or assessed.

5. Stay Orders 3 and 4 until 22 February 2024 or the filing of a Notice of Appeal, whichever is the earlier.

6. Plaintiff and first defendant to pay the costs of the third defendant and fourth defendant on a solicitor and own client / indemnity basis pursuant to clause 12.1 of the Loan Agreement dated 15 October 2019 and clause 6.1 of Memorandum of Mortgage registered as dealing number AN139532 incorporated into the mortgage dated 15 October 2019.

7. To the extent that the first defendant pays the costs of the third and fourth defendants in accordance with Order 6, then the amount the first defendant is obliged to pay to the plaintiff in compensation in accordance with Order 1 is reduced accordingly.

1. Plaintiff to pay the costs of the ninth defendant on the ordinary basis as agreed or assessed.

2. Pursuant to section 98(4)(c) of the Civil Procedure Act2005 (NSW), order that a lump-sum costs order be made in favour of the tenth and eleventh defendants and against the Plaintiff in the sum of $181,015.18.

3. Order 9 is to be satisfied by the moneys under the following bank guarantees being released to the tenth and eleventh defendants:

1. Bank guarantee number G689052 in favour of the Supreme Court of New South Wales dated 8 July 2022 in the amount of $81,015.18; and

2. Bank guarantee number G758697 in favour of the Supreme Court of New South Wales dated 31 July 2023 in the amount of $100,000.

11. In respect of the first cross-claim filed on 2 September 2022, there is no order as to costs.

12. In respect of the second cross-claim filed on 12 September 2022, there is no order as to costs.

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Decision last updated: 31 January 2024