Crimson SRL and Anor v Claudia Shoes Pty Ltd and Ors (No.8)
[2008] FMCA 363
•15 April 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| CRIMSON SRL & ANOR v CLAUDIA SHOES PTY LTD & ORS (No.8) | [2008] FMCA 363 |
| COSTS – BANKRUPTCY – Application against former solicitor – whether indemnity costs appropriate. |
| Federal Magistrates Court Rules 2001, r.21.07 |
| Andromeda Handelsaktieselskab v Holme (1924) 130 LT 329 Lexis Nexis Williams Civil Procedure Victoria |
| First Applicant: | CRIMSON SRL |
| Second Applicant: | LYNCH FASHION MARKETING PTY LTD (ACN 010 466 485) |
| First Respondent: | CLAUDIA SHOES PTY LTD (ACN 050 235 491) |
| Second Respondent: | CLAUDIA ASSERAF |
| Third Respondent: | SOLOMON ASSERAF (AKA SALAMON ASSERAF) |
| Fourth Respondent: | YL IMAGE HOUSE PTY LTD (ACN 113 824 230) |
| Fifth Respondent: | XIAO LIN DONG |
| Sixth Respondent: | YI LI QIAN |
| File Number: | MLG 1432 of 2006 |
| Judgment of: | Riley FM |
| Hearing date: | 20 March 2008 |
| Date of Last Submission: | 20 March 2008 |
| Delivered at: | Melbourne |
| Delivered on: | 15 April 2008 |
REPRESENTATION
| Counsel for the Applicants: | Mr Wise |
| Solicitors for the Applicants: | Middletons |
| Counsel for the First, Second and Third Respondents: | Mr Hoyne |
| Solicitors for the First, Second and Third Respondents: | Kliger Partners |
| Counsel for MW Lawyers: | Mr Montgomery |
| Solicitors for MW Lawyers: | Monahan + Rowell |
ORDERS
MW Law pay the first, second and third respondents’ costs of and incidental to the application heard on 11 December 2007, including the preparation for hearing, the hearing and taking judgment, such costs to include all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred, so that, subject to those exceptions, the first, second and third respondents be completely indemnified by MW Law in relation to the application dated
4 December 2007.
MW Law pay:
(a)a proportion of the applicants’ costs of:
(i)the written submissions on damages filed on 15 October 2007; and
(ii)the written submissions on costs filed on 13 November 2007,
with the question of the extent of the proportion being reserved;
(b)the applicants’ costs of the preparation for and appearances on:
(i)16 October 2007;
(ii)30 October 2007;
(iii)11 December 2007; and
(iv)8 February 2008; and
(c)the applicants’ costs of the attempted enforcement of the orders made on 30 October 2007, including the winding up and bankruptcy proceedings;
such costs to include all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred, so that, subject to those exceptions, the applicants be completely indemnified by MW Law in relation to the said costs.
MW Law pay the applicants’ costs of the application filed on
20 February 2008on a party/party basis on the Federal Magistrates Court scale.
The costs payable under orders 1, 2(b) and 2(c) hereof be taxed by a Registrar in default of agreement.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 1432 of 2006
| CRIMSON SRL |
First Applicant
| LYNCH FASHION MARKETING PTY LTD (ACN 010 466 485) |
Second Applicant
And
| CLAUDIA SHOES PTY LTD |
First Respondent
| CLAUDIA ASSERAF |
Second Respondent
| SOLOMON ASSERAF (AKA SALAMON ASSERAF) |
Third Respondent
| YL IMAGE HOUSE PTY LTD (ACN 113 824 230) |
Fourth Respondent
| XIAO LIN DONG |
Fifth Respondent
| YI LI QIAN |
Sixth Respondent
REASONS FOR JUDGMENT
The application
This is an application for indemnity costs brought by the applicants and the first, second and third respondents (“the respondents”) against MW Law, the former solicitor for the respondents. Rule 21.07 of the Federal Magistrates Court Rules 2001 provides that the court may order a lawyer to pay costs if he has caused them to be incurred or thrown away “because of undue delay, negligence, improper conduct or other misconduct or default.”
Counsel for MW Law conceded that there had been a default within the meaning of Rule 21.07 so as to give the court power to make a costs order against MW Law. Counsel also conceded that MW Law should indemnify its former clients for the costs of the application dated
4 December 2007, including the costs thrown away. Those costs include the preparation for hearing, the hearing itself and taking judgment. There was some discussion about whether the respondents were seeking costs on an indemnity basis or a solicitor/client basis. However, ultimately, it was clarified that the respondents sought costs on an indemnity basis and MW Law did not oppose such an order being made. In my view, such an order is appropriate. There will be orders accordingly.
The respondents also sought orders that:
a)they be indemnified by MW Law for any costs the respondents were ordered to pay the applicants; or, alternatively,
b)MW Law pay the applicants directly any of their costs thrown away in connection with the application dated 4 December 2007.
The parties were in agreement that the second option was preferable. MW Law conceded that it should pay any costs that the respondents were ordered to pay the applicants in connection with the application dated 4 December 2007. The dispute concerned the proper basis for calculating those costs and whether it was premature to attempt to calculate them now.
Factual background
The applicants alleged that the respondents engaged in misleading and deceptive conduct and passing off. The unchallenged evidence relevant to the present application was as follows. The respondents engaged David Denby of MW Law in December 2006. MW Law filed a defence on behalf of the respondents on 15 February 2007. MW Law advised the respondents by letter dated 27 February 2007 that MW Law had filed and served a list of verified documents. The respondents received no further communication from MW Law until 22 August 2007.
In the meantime, on 24 May 2007, the applicants filed a summary judgment application which was listed for hearing on 30 May 2007. Mr Denby appeared for the respondents on that occasion and sought and was granted an adjournment until 15 June 2007 on the basis of short service. No one appeared for the respondents on the adjourned date. A hearing on liability proceeded in the respondents’ absence. Judgment against the respondents on liability was delivered on 20 June 2007.
On 21 June 2007, MW Law received from the court a sealed copy of the orders made on 20 June 2007. MW Law did not advise the respondents that any orders had been made. Those orders included directions for the further conduct of the proceeding in relation to the assessment of damages. The directions required the respondents to file and serve a list of documents relevant to damages by 29 June 2007, file and serve any affidavits they wished to rely upon on or before 3 August 2007 and attend a mediation on a date to be agreed. The respondents did none of those things. They were not aware of the directions.
The matter was listed for a further directions hearing on 23 August 2007. On 22 August 2007, the solicitors for the applicants contacted Mr Denby seeking an adjournment by consent of the directions hearing listed on 23 August 2007 due to the ill health of the applicants’ counsel. Mr Denby contacted the third respondent who gave instructions to consent to an adjournment. Minutes of proposed consent orders were signed by MW Law on 23 August 2007 saying that:
1. The hearing on damages and quantum listed on 23 August 2007 at 11 a.m. be adjourned until 16 October 2007 at 9:30 a.m.
2. The First, Second and Third Respondents file and serve any affidavit material on which they intend to rely at the hearing on damages and quantum on or before 15 September 2007.
Orders were made by the court in the terms of the minutes of proposed consent orders. A sealed copy of the orders was sent by the court to MW Law. Mr Denby did not advise the respondents of the terms of the orders. There was no further contact between the respondents and Mr Denby until 21 November 2007. On that date, the first respondent received a creditor’s statutory demand from the applicants and the third respondent telephoned Mr Denby seeking an explanation.
In the meantime, the respondents did not file any affidavit material by 15 September 2007 or at all. On 15 October 2007, my deputy associate advised Mr Denby that the hearing would begin at 10.00 am rather than 9.30 am on 16 October 2007.
Mr Denby appeared on 16 October 2007 and advised the court that he had not been aware that the matter was listed for 16 October 2007 until the previous day. He acknowledged that he had signed the minutes of proposed consent orders. However, he said he thought they meant the first available date after 16 October 2007. Mr Denby claimed that he had received no notice from the court of the actual date of the adjourned hearing. He sought an adjournment on the basis that he had no instructions. He said, “I wasn’t able to contact my client.” I refused the adjournment for reasons that were stated at the time, including the reason that the respondents did not seem to genuinely intend to defend the matter, especially as they had sought and were granted an adjournment of the liability hearing but failed to appear on the adjourned date. Mr Denby then sought and was granted leave to withdraw.
The hearing proceeded in the absence of the respondents on 16 October 2007. Judgment on damages was handed down on 30 October 2007. The applicants sent a copy of the orders made on 30 October 2007 to MW Law on 2 November 2007 and requested payment of the damages as assessed. There was no response. On or about 12 November 2007, the applicants prepared bankruptcy notices against the second and third respondents and commenced winding up proceedings against the first respondent. On 13 November 2007, the applicants filed written submissions on costs in accordance with directions made on 30 October 2007.
As stated above, on 21 November 2007, the first respondent was served with a creditor’s statutory demand and the third respondent contacted Mr Denby seeking an explanation. On 27 November 2007, Mr Denby wrote to the respondents confirming that he had not informed them of the hearing on 16 October 2007.
The respondents engaged new solicitors. On 3 December 2007, they asked Mr Denby for his file. He said he could not find it. On
10 December 2007, Mr Denby told the respondents’ new solicitor that he had no recollection of:
a)the summary judgment application;
b)his request for an adjournment of the summary judgment application; or
c)the summary judgment that was given on 20 June 2007.
Mr Denby also told the new solicitor that:
a)he still could not find the file;
b)he had “stuffed up” the file;
c)the original file might have been in his car when it was stolen in May 2007; and
d)he had spoken to the Legal Practice Liability Committee about this matter.
On 6 December 2007, the new solicitors subpoenaed MW Law’s file relating to the respondents. It contained Mr Denby's file note concerning his application for an adjournment on 30 May 2007. It contained no indication that MW Law had communicated to the respondents the fact that a summary judgment application had been made or that Mr Denby had sought and been granted an adjournment of it to 15 June 2007. MW Law's file contained a copy of the orders dated 20 June 2007. The covering letter was stamped to indicate that it had been received by MW Law on 21 June 2007. There was no indication on the file that MW Law had communicated to the respondents the outcome of the summary judgment application. Nor was there any indication on the file that MW Law had notified the respondents that the quantum hearing was listed for 16 October 2007. As stated above, none of this evidence was challenged.
On 4 December 2007, the respondents’ new solicitors filed an application seeking orders setting aside the assessment of damages made on 30 October 2007 on the grounds that the respondents had not appeared at the hearing. The matter came on for hearing on
11 December 2007. The respondents then sought and were granted leave to amend the application to seek orders setting aside the liability orders that were made on 20 June 2007. Ultimately, the liability orders were not set aside, essentially on the basis that the respondents had not put forward an arguable case on the merits. However, the assessment of damages was set aside, essentially on the basis that Mr Denby had not appeared in the substantive proceeding and there was some prospect of success on the merits.
The details of the applicants’ application
In these circumstances, the applicants sought costs from MW Law on an indemnity basis in relation to:
a)the application for damages heard on 16 October 2007, including the written submissions on costs in connection with that hearing;
b)the respondents’ application heard on 11 December 2007 to set aside the orders of 20 June 2007 and 30 October 2007;
c)the attempt to enforce the orders made on 30 October 2007, including the costs associated with the commencement of bankruptcy proceedings against the second and third respondents and the costs associated with the issuing of a statutory demand against the first respondent; and
d)the application for costs against MW Law.
In Re Bendeich (1994) 53 FCR 422, Drummond J held that a solicitor may be ordered to pay the costs reasonably incurred by another party to his solicitors where:
a)the first mentioned solicitor had committed a breach of his duty to the court to conduct litigation on behalf of his client with due propriety;
b)the breach involved more than mere negligence and amounted at the very least to gross negligence; and
c)the breach had resulted in the other party incurring useless costs.
In Da Sousa v Minister of State for Immigration, Local Government and Ethnic Affairs (1993) 41 FCR 544 at 547-8, French J said that the jurisdiction was to be exercised with care and discretion and only in clear cases that amounted to a serious dereliction of duty. The applicants submitted that those conditions were satisfied in the present case.
I accept that submission. MW Law:
a)failed to appear for its clients on 15 June 2007 and 16 October 2007;
b)failed to prepare affidavits and other documents for those hearings;
c)failed to notify its clients that a summary judgment application had been brought against them;
d)failed to notify its clients that a hearing for the assessment of damages was listed for 16 October 2007;
e)
failed to notify its clients of the outcome of the hearings on
15 June 2007and 16 October 2007; and
f)failed to notify the court that the respondents were unaware of the summary judgment that had been given against them and were unaware of the hearing listed for 16 October 2007.
I am satisfied that these failures on the part of MW Law amount to a serious dereliction of duty and amount to gross negligence. I also accept the submission of the applicants that if the court had been advised on 16 October 2007 that the respondents had no knowledge of the proceeding, the application would in all probability have been adjourned on that day, and many of the costs subsequently incurred by the applicants would not have been thrown away.
While Re Bendeich is authority for the proposition that, in an appropriate case, a defaulting solicitor may be ordered to pay the costs reasonably incurred by another party to his solicitors, the applicants in this case sought costs on an indemnity basis. They relied on the well known principles in Colgate Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 to the effect that:
a)the categories of case in which it may be appropriate to order costs on an indemnity basis are not closed and are not confined to cases of ethical or moral delinquency; and
b)there must be some special feature of the case to warrant a departure from the norm of party/party costs, such as undue prolongation of the case by groundless contentions.
In the present matter, the case has not been unduly prolonged by groundless contentions. MW Law made no contentions at all. However, the effect of MW Law’s conduct has been to unduly prolong the proceedings by their gross negligence. As a result, in my view, MW Law should, where otherwise appropriate, pay the relevant costs of the applicants on an indemnity basis.
The costs of the damages hearing on 16 October 2007
The solicitor for the applicants, Anthony Watson, swore an affidavit on 20 February 2008 in which he said that:
a)he had served an outline of submissions on damages on MW Law on 15 October 2007;
b)the damages hearing proceeded on 16 October 2007;
c)judgment was given on 30 October 2007;
d)in accordance with directions, on 13 November 2007, his firm had filed and served written submissions on the question of the costs of the damages hearing; and
e)as a result of the assessment of damages being set aside, “virtually all of the work [outlined above] has been wasted.”
Mr Watson was not cross-examined. However, counsel for MW Law took issue in submissions with Mr Watson's claim that the applicants’ written submissions on the questions of damages and costs had been wasted. MW Law submitted that much the same submissions would be relied upon when the matter is reheard, although there may need to be some additions. In the circumstances, it was submitted that the costs that were associated with the preparation of the written submissions were not entirely thrown away. Until it was known how much of the written submissions could be reused later in the proceedings, it was submitted that it was premature to make costs orders about them.
The applicants submitted that when the matter is reheard, different issues will have emerged and the written submissions will necessarily be substantially different from the existing written submissions.
I have read the submissions on damages that were provided to the court at the hearing on 16 October 2007. A large part of those submissions consists of an analysis of authorities of a general nature. I would expect that that analysis will continue to be relevant and will be relied on at the rehearing of the matter. However, the written submissions also note that the applicants have been unable to assess their loss of profits based on the actual number of garments sold as the respondents had not given proper discovery. As it appears that the respondents are now being properly represented, it may be that proper discovery will be given. It may also be that the respondents will concede some issues and emphasise other issues that the applicants’ written submissions did not dwell upon. Consequently, the existing submissions are likely to be supplemented to a considerable degree. I doubt that very much of the written submissions will be entirely wasted, unless, of course, the parties settle the proceeding. In that case, they will no doubt make an appropriate adjustment between themselves in relation to any outstanding costs.
With the agreement of the applicants and the respondents, I have not looked at the written submissions on costs. They referred to offers of settlement. The submissions on costs have been placed in a sealed envelope. Accordingly, I am in no position to make any assessment of how much of those submissions might be reused in any future application the applicants might make for costs. In the circumstances, I have no basis for determining whether any of the costs associated with the submissions on costs have been thrown away, and, if so, what proportion.
While it is unsatisfactory, and may just prolong litigation that has already been unduly protracted, I have no option but to reserve the question of the proportion of the costs of the written submissions on damages and costs. Having said that, it is clear that the proportion of those costs that have actually been wasted should be paid by the respondents on an indemnity basis.
In relation to the costs of the damages hearing on 16 October 2007, MW Law submitted that it only proceeded because the applicants opposed the application for an adjournment. The matter proceeded on 16 October 2007 largely because it appeared that the respondents had no genuine intention of defending the matter. If MW Law had advised the court that the respondents knew nothing of the listing for that day, the application for an adjournment would have been almost irresistible. If the adjournment application had been successful, the respondents, or MW Law, would probably have been required to pay the applicants’ costs thrown away. In all of the circumstances, I consider that MW Law should be required to pay the costs of the appearance on
16 October 2007, and the preparation for it, on an indemnity basis.
MW Law queried the applicants’ claim for preparation for taking judgment on 30 October 2007, arguing that there would not have been preparation of any substance. That is probably so. However, to the extent that any such costs were reasonably incurred, MW Law should pay them.
The set aside application heard on 11 December 2007
MW Law submitted that it should only be required to pay the applicants’ costs of the respondents’ application filed on 4 December 2007 to set aside the previous judgments on a party/party basis. Those costs include the hearing on 11 December 2007 and taking judgment on 8 February 2008. MW Law submitted that the present case was no different from a case where judgment was set aside in circumstances where there had been a failure to file a defence, for example.
I accept that, in many cases, where there has been a failure to file a defence, there would have been negligence on the part of the solicitor concerned. However, that negligence would often have consisted of an isolated event, such as an incorrect diarising of the relevant date. The present case is far worse. The negligence in this case continued over many months. It involved not only failing to file a single document, but failing to file a number of documents, failing to prepare for two hearings, failing to keep the client informed of court events and failing to notify the court of relevant matters. In my view, these circumstances warrant costs being ordered on an indemnity basis in relation to the hearing on 11 December 2007.
The costs of enforcement
In Mr Watson’s affidavit sworn on 20 February 2008, he said that:
a)he had sent a demand for payment of the damages assessed to MW Law on 2 November 2007;
b)his firm had commenced the preparation of winding up proceedings against the first respondent and bankruptcy proceedings against the second and third respondents on or about 12 November 2007;
c)the creditor’s statutory demand was served on 20 November 2007;
d)a bankruptcy notice was issued against the second respondent on 28 November 2007;
e)no bankruptcy notice was issued against the third respondent due to an issue about the correct spelling of his name;
f)there were two attempts to serve the bankruptcy notice on the second respondent; and
g)as a result of the assessment of damages being set aside, “virtually all of the work [outlined previously] has been wasted.”
Counsel for MW Law referred to Lexis Nexis Williams Civil Procedure Victoria at page 5624.1, which says that:
If the court sets aside a default judgment, it will usually order the defendant to pay the costs thrown away as well as the costs of the application to set aside the judgment. The costs thrown away include all costs reasonably incurred in enforcing the judgment such as costs of the execution or of a garnishee application. … The costs of bankruptcy proceedings are outside the litigation and are not included. …
The authority cited for that proposition was Andromeda Handelsaktieselskab v Holme (1924) 130 LT 329. That case actually says that the costs of bankruptcy proceedings are not included in an order that simply provides for payment of the costs thrown away but that the court may, if it thinks fit, make a specific order for the payment of the costs of bankruptcy proceedings thrown away in consequence of a judgment being set aside. The applicants ask that such a specific order be made in this case.
Counsel for MW Law noted that the bankruptcy notice against the third respondent was only a draft because there was an issue in relation to the third respondent’s name. His name has different spellings. The bankruptcy notice was never filed or served. Orders were sought and obtained by consent on 11 December 2007 correcting the spelling of the name of the third respondent in the title of the proceeding. It seems that a company search showed the third respondent’s name as it was originally set out in the application.
I do not consider that the drafting of the bankruptcy notice with the wrong spelling caused any significant difference in the costs incurred by the applicants. The bankruptcy proceedings were terminated before a new bankruptcy notice against the third respondent was prepared. In the circumstances, I consider that a costs order should be made against MW Law on an indemnity basis for the costs of enforcement, including the costs of the bankruptcy proceedings and the statutory demand.
The application for costs against MW Law
Counsel for MW Law submitted that the applicants had not sent MW Law a letter of demand before issuing the application for costs. It was submitted that if a letter of demand had been sent there would have been an immediate effort to negotiate the amount of the costs and there may have been no need for the application to have been filed.
If the matter had been resolved after the application was filed but before hearing, the absence of a letter of demand prior to filing would have been relevant to whether the applicants were entitled to their costs associated with filing the application. However, the reality is that the costs were not successfully negotiated. There is no reason to suppose that sending a letter of demand prior to filing would have made any difference.
In the circumstances, I am not persuaded that MW Law should not pay the applicants’ costs of the application against them. They have been largely unsuccessful. However, there has been nothing in MW Law’s conduct in relation to the costs application filed on 20 February 2008 that justifies an order against them on an indemnity basis. Accordingly, they will be ordered to pay the costs of the application filed on
20 February on a party/party basis on the Federal Magistrates Court scale. I will hear the parties on the calculation of those costs.
I certify that the preceding forty-two (42) paragraphs are a true copy of the reasons for judgment of Riley FM
Associate: Catherine Wilson
Date: 15 April 2008
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