Deputy Commissioner of Taxation v Young (No. 2)

[2017] NSWDC 294

District Court

New South Wales

Medium Neutral Citation:	Deputy Commissioner of Taxation v Young (No. 2) [2017] NSWDC 294
Hearing dates:	11 October 2017
Date of orders:	31 October 2017
Decision date:	31 October 2017
Jurisdiction:	Civil
Before:	Gibson DCJ
Decision:	(1) Second defendant’s application for indemnity costs against the plaintiff is dismissed. (2) Second defendant to pay the plaintiff’s costs of this application.
Catchwords:	COSTS – plaintiff successful against one defendant but not the other in “either/or” litigation – whether plaintiff should pay the costs of the successful defendant on an indemnity or other basis – whether Sanderson or Bullock order appropriate
Legislation Cited:	Civil Procedure Act 2005 (NSW), s 98 Income Tax Assessment Act 1936 (Cth) Taxation Administration Act 1953 (Cth), Sch 1, s 269-20 Uniform Civil Procedure Rules 2005 (NSW), rr 42.1 and 42.5
Cases Cited:	Almeida v Universal Dye Works Pty Ltd & Ors [2001] NSWCA 156 Brandon v Commonwealth [2005] FCA 109 Bullock v London General Omnibus Company [1907] 1 KB 264 Cassaniti v Commissioner of Taxation (2010) 186 FCR 480 Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 Commissioner of Taxation v Sims (2008) 72 NSWLR 716 Coombes v Roads and Traffic Authority (RTA) (No 2) [2007] NSWCA 70 Council of the City of Liverpool v Turano (No 2) [2009] NSWCA 176 Deputy Commissioner of Taxation v Young [2017] NSWDC 146 Dominello v Dominello (No. 2) [2009] NSWCA 257 Edginton v Clark [1964] 1 QB 367 Gould v Vaggelas (1985) 157 CLR 215 Leichhardt Municipal Council v Green [2004] NSWCA 341 Nadinic v Drinkwater [2017] NSWCA 114 Nelipa v Robertson [2009] ACTSC 16 Ng v Chong [2005] NSWSC 385 Oshlack v Richmond River Council (1998) 193 CLR 72 Sanderson v Blyth Theatre Co [1903] 2 KB 533 Secretary, Department of Social Services v Cassaniti (No 2) [2015] NSWSC 1795 Sneddon v Speaker of the Legislative Assembly [2011] NSWSC 842 St George Bank - A Division of Westpac Banking Corporation (formerly St George Bank Ltd) v Jin [2013] NSWCA 306 State of Victoria v Horvath (No. 2) [2003] VSCA 24 Stephens v Giovenco (No 2) [2011] NSWCA 144 Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang (2016) 93 NSWLR 561
Category:	Costs
Parties:	Plaintiff: Deputy Commissioner of Taxation First Defendant: Matthew John Neil Young Second Defendant: Wlodzimierz Antoni Kozlowski
Representation:	Counsel: Plaintiff: Mr R Scruby / Mr N Swan First Defendant: No appearance Second Defendant: Mr C Stomo   Solicitors: Plaintiff: ATO Legal Services First Defendant: No appearance Second Defendant: Lou Baker & Associates
File Number(s):	2015/84609
Publication restriction:	None

Judgment

1. The plaintiff, the Deputy Commissioner of Taxation, commenced proceedings for recovery of PAYG withholding related liabilities and penalties against the first defendant as sole director of a company which employed the second defendant. The first defendant claimed, in his defence, that the second defendant had never been an employee of the company. The plaintiff was granted leave to amend the Statement of Claim to join the second defendant and to bring its claim against the second defendant in the alternative to the claim against the first defendant.

2. On 14 June 2017, I gave judgment (Deputy Commissioner of Taxation v Young [2017] NSWDC 146) for the plaintiff against the first defendant for $226,529.00 plus interest and dismissed the plaintiff’s claim against the second defendant. I ordered the first defendant to pay the plaintiff’s and the second defendant’s costs and granted liberty to restore in relation to interest and costs generally.

3. The second defendant brings an application to vacate that order, and to seek instead an order that the plaintiff pay the second defendant’s costs on an indemnity basis. These are my reasons for holding that the second defendant is not entitled to an order for costs against the plaintiff on an indemnity basis, or on the ordinary basis.

The background to this application

4. The Statement of Claim was filed on 20 March 2015 against the first defendant only. The second defendant was joined to the proceedings on 1 July 2016 in response to the first defendant’s affidavits of 7 November 2015 and 28 January 2016, in which the first defendant denied that the second defendant was an employee of his company, or indeed that the company had any employees and stated that payments made to the second defendant were not salary. He also alleged that documents provided by the second defendant that appear to indicate to the contrary had been forged by the second defendant, although, as is noted in paragraphs 12 and 13 of my judgment, no plea of fraud was ever formally made.

5. The pleading in the Amended Statement of Claim at paragraph 16 commences “[a]lternatively to paragraphs 4 to 11 above, if as the first defendant alleges no amounts were withheld by the company”, then a claim would be brought against the second defendant. In other words, the plaintiff neither made nor endorsed the allegations of the first defendant, but sought alternative findings if those allegations were accepted by the court, for whatever reasons. In those circumstances, I am satisfied that the plaintiff did not endorse or rely upon any allegation of fraud against the second defendant and that it was not necessary for the plaintiff to file a Reply.

6. As was set out in my judgment, there are certainly some unusual features in the transactions between the first and second defendants. For example, as I set out at [30]-[38], the manner in which payments were made by way of cash deposits and immediately withdrawn on 3 July 2013 was, in my view, implausible (at [36]). What rescued the second defendant from the consequences of this implausibility was the even greater hopelessness of the first defendant’s claim (at [37]-[38]).

Costs on the ordinary or the indemnity basis?

7. I have considered each of the second defendant’s arguments on the basis not only of the application for indemnity costs but on the basis of whether any costs order at all should be made.

8. The power to award indemnity costs is set out in s 98 Civil Procedure Act 2005 (NSW) and Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) r 42.5. The court should be cautious in relation to the making of such orders and should only do so in clear cases: Leichhardt Municipal Council v Green [2004] NSWCA 341; Ng v Chong [2005] NSWSC 385 at [13]. This is generally expressed as being a “sufficient or unusual feature” (Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233-234), or some “relevant delinquency” in the litigation (Oshlack v Richmond River Council (1998) 193 CLR 72). I have set out below why, in relation to each of the arguments put forward by the second defendant, I do not accept that such a costs order should be made here.

9. The entitlement of the second defendant to a costs order on the ordinary basis, as “following the event” would appear, at first blush, to be a more appropriate order, since the second defendant, in an “either/or” claim by the plaintiff, was the victor. However, for the reasons set out below, I am satisfied in relation to each of the claims brought by the second defendant that, but for the extraordinary nature of the documentation in this case, for which the second defendant is largely responsible, no claim would have been brought against him. The plaintiff had no alternative to joining the second defendant and, in those circumstances, the second defendant should not be entitled to any costs order against the plaintiff.

10. I note that the second defendant’s “all or nothing” approach to costs meant that no submissions for an order for payment of a proportion of the second defendant’s costs were made.

The bases for the second defendant’s claim for costs

11. The second defendant puts forward the following grounds:

1. The plaintiff is in breach of its obligations as a model litigant (written submissions, paragraphs 15-22);

2. The pleading against the second defendant was hopeless and the plaintiff held “exculpatory evidence” in its hands (written submissions, paragraphs 23-36);

3. The plaintiff’s conduct of this litigation generally (written submissions, paragraphs 37-39);

4. The second defendant’s offer of compromise (written submissions, paragraphs 41-43); and

5. The first defendant’s impecuniousness.

12. The second defendant also attacks the form of the Sanderson order (Sanderson v Blyth Theatre Co [1903] 2 KB 533) as being not made pursuant to established principles (written submissions, paragraph 51), in that the judgment does not make an adverse finding against the second defendant such that a Sanderson order should be made, and seeks a Bullock order (Bullock v London General Omnibus Company [1907] 1 KB 264). Reference is also made to relevant provisions of the UCPR (written submissions, paragraphs 61-66).

Model litigant obligations

13. The second defendant submits that prior to joining the second defendant to the proceedings, the Model Litigant Code of Conduct required the plaintiff to provide a statement outlining the Commissioner’s model litigant obligation and a copy of Appendix B to the Legal Services Direction 2005 (written submissions, paragraph 15). As it was incumbent upon the plaintiff to comply with its published Model Litigant Code of Conduct and dispute resolution procedures, the failure to do so amounts to a breach in that the second defendant would have known it could have sought a stay on the proceedings and required a review of the second defendant’s defences to the Amended Statement of Claim before the second defendant was joined.

14. The second defendant’s claim is misconceived. The proceedings against the second defendant arise from credits for PAYG withholding and the entitlement of such credits is not a matter that is the subject of an assessment under the Income Tax Assessment Act 1936 (Cth). Accordingly, it could not be the subject of a Review by the Administrative Appeals Tribunal, as senior counsel for the plaintiff notes in his written submissions (paragraphs 17, footnote 4, citing Cassaniti v Commissioner of Taxation (2010) 186 FCR 480 at [174].

15. The circumstances in which an asserted breach of the model litigant obligation may result in an order for indemnity costs is considered at some length in another case with a similar name, Secretary, Department of Social Services v Cassaniti (No 2) [2015] NSWSC 1795, which was not referred to by the parties, but which deals at length with the obligations of being a model litigant. The applicants in those proceedings argued that the Secretary, Department of Social Services had unjustifiably brought proceedings in a second forum, causing oppression or injustice and used the court’s procedures in a way which was unjustifiably oppressive.

16. Implicit in the second defendant’s submissions is the argument that the model litigant obligations are designed to restrain a litigant which would otherwise misbehave. This is a misconception. As Whitlam J noted in Brandon v Commonwealth [2005] FCA 109 at [11]:

“While the Commonwealth is no doubt a behemoth of sorts, it is not obliged to fight with one hand behind its back in proceedings. It has the same rights as any other litigant notwithstanding it assumes for itself, quite properly, the role of a model litigant.”

17. There are very few cases discussing the obligations of model litigants, so this decision is of particular assistance, in that Slattery J has collected what authority there is, and set out the model litigation obligations (and potential breaches thereof). It is helpful to set out this portion of His Honour’s judgment in full:

“[20] Under Judiciary Act 1903 (Cth), s 55ZF, the Commonwealth Attorney General may issue directions that are to apply generally to Commonwealth legal work. Pursuant to that section, the Attorney General has promulgated the Legal Services Directions 2005 (Cth) (“Directions“), para 4.2 of which requires litigation to be conducted in accordance with the Directions set out at App B, titled “The Commonwealth’s Obligation to Act as a Model Litigant“. The general obligation in App B, set out in cl 4.2, is that “the Commonwealth and Commonwealth agencies are to behave as model litigants in the conduct of litigation“. Of particular relevance here, the Cassanitis contend, is the nature of the obligation which requires the Commonwealth to “act honestly and fairly in handling claims and litigation“, including (at cl 2(d)) by:

endeavouring to avoid, prevent and limit the scope of legal proceedings wherever possible, including by giving consideration in all cases to alternative dispute resolution before initiating legal proceedings and by participating in alternative dispute resolution processes where appropriate.

[21] The Cassanitis contend that the conduct of the applicants in this case merits the applicants paying the Cassanitis’ costs on an indemnity basis because by that conduct the applicants failed to discharge their obligation to behave as model litigants under the Directions.

[22] But Judiciary Act 1903, s 55ZG(2) and (3) stand somewhat against this argument. Those subsections provide:

(2) Compliance with a Legal Services Direction is not enforceable except by, or upon the application of, the Attorney-General.

(3) The issue of non-compliance with a Legal Services Direction may not be raised in any proceeding (whether in a court, tribunal or other body) except by, or on behalf of, the Commonwealth.

[23] Subsection (2) does not preclude the Cassanitis now raising the point as they do. By raising the issue of compliance with the model litigant obligation as a factor relevant to the court’s assessment of the applicants’ conduct for the purposes of deciding whether to order costs on the indemnity basis, the Cassanitis are not seeking to “enforce“ compliance with the Legal Services Direction.

[24] But subsection (3) is a more direct obstacle to the Cassanitis’ argument. The Cassanitis have sought to raise the issue of alleged non-compliance with the App B of the Directions, the model litigant obligation. But Judiciary Act, s 55ZG(3) prevents just that course of action. The policy reasoning behind that subsection, according to the Explanatory Memorandum to the Bill introducing ss 55ZF and 55ZG that was subsequently enacted as the Judiciary Amendment Act 1999 (Cth), is that:

the question of compliance with the Directions should be a matter primarily between the Attorney-General as First Law Officer and the relevant Department or agency. Any other approach could give rise to technical arguments and result in additional costs and delay in litigation involving the Commonwealth.

[25] Gray J in ACCC v Leahy Petroleum Pty Ltd (2007) ATPR 42-200 noted a further policy reason for not introducing costs orders as a sanction for breaches of the Directions, at [25]:

There were some suggestions in argument that orders for indemnity costs against the ACCC might be appropriate because it had failed in some respects to act in accordance with the model litigant policy of the Commonwealth of Australia. In my view, considerations as to whether there has been compliance with that policy are irrelevant to questions of indemnity costs. The model litigant policy has been adopted by the Australian Government as a guide to the manner in which it and its agencies should conduct themselves in litigation, so as not to take advantage of the superiority of resources for litigation, which the Commonwealth often has when compared with those against whom it is litigating. The policy is of significant value to parties against whom the Commonwealth is involved in litigation, and to the courts in which that litigation is conducted. To use lapses in compliance with the policy as a ground for awarding indemnity costs against Commonwealth agencies might have the result that the Commonwealth abandoned the policy. This would be detrimental to the public good.

[26] The model litigant obligations found in the Legal Service Directions are a policy that the Commonwealth has imposed upon itself. It is for the Commonwealth Attorney-General to review compliance with those obligations as expressed in the Directions and to censure those responsible for non-compliance. It is for that reason that Justice GT Pagone, speaking extrajudicially in a speech titled “The Model Litigant And Law Clarification“ on 17 September 2008 at the ATP Leadership Workshop, said that the term “model litigant” represents “an ethical, rather than a legal, standard”. The policy of the section makes that clear enough. In any case Judiciary Act, s 55ZG(3) precludes non-Commonwealth parties to litigation raising non-compliance with the Directions as an issue in proceedings before a court.

[27] But s 55ZG(3) does not prevent a court from considering whether the Commonwealth has complied with the courts’ expectation at general law that the Commonwealth will act as a model litigant. The Full Federal Court explained in Scott v Handley [1999] FCA 404 at [43]; 58 ALD 373 at 383 (per Spender, Finn and Weinberg JJ) that an Officer of the Commonwealth:

is to be expected to adhere to those standards of fair dealing in the conduct of litigation that courts in this country have come to expect — and where there has been a lapse therefrom, to exact — from the Commonwealth and from its officers and agencies. The spirit of this “model litigant” responsibility, now long enshrined in a policy document of the Commonwealth, is perhaps best captured in the observations of Griffith CJ in Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333 at 342:

I am sometimes inclined to think that in some parts – not all – of the Commonwealth, the old-fashioned traditional, and almost instinctive, standard of fair play to be observed by the Crown in dealing with subjects, which I learned a very long time ago to regard as elementary, is either not known or thought out of date. I should be glad to think that I am mistaken.

[28] The Cassanitis did not submit that the court should measure the applicants’ conduct against this general law standard rather than against the standard the Legal Service Direction establishes. But s 55ZG(3) means that the Commonwealth’s general law responsibility is the only available basis for the Cassanitis to submit that the applicants’ conduct should be judged at a higher “model litigant” standard.

[29] Commonwealth entities have in the past failed to meet courts’ expectations of conduct becoming of a model litigant, and this has been a factor relevant to costs orders made against them: see, for example, Director-General, Dept of Ageing, Disability and Home Care v Lambert [2009] NSWCA 102; 74 NSWLR 523 at [96]; Nelipa v Robertson [2009] ACTSC 16 at [97] per Refshauge J and Deputy Cmr of Taxation v Clear Blue Developments Pty Ltd (No 2) [2010] FCA 1224 at [48] per Logan J.”

18. Slattery J considered that the conduct complained of had fallen far short of these requirements, and explained why this was the case:

“[30] But the applicants did not fail to meet the court’s expectation to act as a model litigant here. Nor did they act in a way that occasioned some particular prejudice to the Cassanitis. The applicants’ motion sought either (a) a declaration that as non-parties they were not bound by the declarations in the Final Orders of the Supreme Court proceedings in the AAT proceedings, or (b) joinder to the Supreme Court proceedings followed by such a declaration. That application was novel but not hopeless. It was not unreasonable for the applicants to bring the motion and seek to be joined as parties to the proceedings. Consistently with that conclusion, it cannot be said that the applicant’s motion was “preposterous” or “tenuous”: cf Deputy Cmr of Taxation v Denlay [2010] QCA 217; 80 ATR 109 at [50] and Solak v Registrar of Titles [2011] VSCA 279; 33 VR 40 at [86]. The application was precipitated as a not unreasonable but misguided response to the Cassanitis’ claim in their 13 April 2015 letter to the Secretary that the effect of the relevant declarations would be a matter for “evidence, legal submission and argument” in the AAT proceedings.

[31] The expectation to act as a model litigant should not discourage the Commonwealth from exploring novel or inventive lines of legal argument that would assist it, so long as they are at least arguable. As Whitlam J noted in Brandon v Commonwealth [2005] FCA 109 at [11]:

While the Commonwealth is no doubt a behemoth of sorts, it is not obliged to fight with one hand behind its back in proceedings. It has the same rights as any other litigant notwithstanding it assumes for itself, quite properly, the role of a model litigant.

[32] In any case, I do not regard the conduct of the applicants as failing the court’s expectations of a litigant, either judged against the standard of an ordinary litigant or a “model” litigant, if indeed, in litigation governed according to the overriding purpose set out in Civil Procedure Act 2005, s 56, there remain two different standards: Priest v New South Wales [2007] NSWSC 41 at [34] per Johnson J. The legal basis for the applicants’ motion was flawed. But the applicants did not abuse the court’s process merely by bringing a flawed motion.

[33] Bringing the motion in the Supreme Court did not cause injustice or oppression to the applicants. The motion sought to clarify the applicants’ rights in the AAT proceedings in the face of the Cassanitis expressing an unsustainable position regarding the effect of the declarations made in this court. The court should not infer some improper purpose in the bringing of the motion in those circumstances. The bringing of the motion was wrong in law, as it turned out but not an abuse of process.”

19. This brings me to the asserted failures to comply with model litigant requirements in this litigation, a submission also put to Slattery J.

20. These objections (paragraphs 20-22 of the second defendant’s written submissions) include complaints about the failure to file a Reply and the plaintiff’s approach to what is described as “the unpleaded but implied claim of fraud” by the plaintiff in the Amended Statement of Claim. These submissions overlap with the third ground, a generalised attack on the manner in which the plaintiff has conducted this litigation.

21. As Slattery J did, I shall do no more than note that this is not only contrary to what I have found to be the manner in which the case has been conducted but also contrary to the statement by the second defendant’s junior counsel at trial in his opening address to the court, when he stated (T 15) that “we are not suggesting that the plaintiff has pleaded fraud or made an allegation of fraud against my client”, which must extend to any “implied” claim of fraud as well.

22. Counsel for the second defendant did not refer to Slattery J’s judgment, or to the only case I could find where a party enjoyed some success in an application to vary a costs order on the basis of conduct of litigation, namely in Nelipa v Robertson [2009] ACTSC 16, where a plaintiff successfully obtained a variation of the costs orders which would otherwise flow from discontinuance of proceedings by reason of failure of the model litigant in question to give full discovery. However, that variation of costs orders was expressly stated to be on general principles only, and the application for such orders by reason of asserted breaches of the model litigant policy were rejected.

23. The second defendant next asserts (paragraph 22 of the written submissions) that the plaintiff’s obligations to the second defendant in relation to costs “must also be viewed with respect to… the legal practitioners’ obligations to the Solicitors Rules for Conduct [Rules 21 and 32] and the Rules of the New South Wales Bar Association [Rule 65] respectively” (written submissions, paragraph 22, footnotes omitted). While counsel for the second defendant has indicated to the court that he now resiles from his earlier attacks upon the plaintiff’s legal representatives, this portion of the revised written submissions remains in place, so I will deal with it briefly.

24. Given the conduct of the second defendant in the course of his transactions with the first defendant, I consider such criticisms and complaints to be without basis, the more so in circumstances where particulars of the asserted breaches are not identified and where the conduct of these proceedings by and on behalf of the second defendant is itself open to criticism of the kind that I have set out in my principal judgment.

25. I also note the observations of Mr Scruby SC and Mr Swan in paragraph 12 of his written submissions and in particular to his observations as to the “unexplained” reasons for the second defendant seeking costs orders on an indemnity basis against the plaintiff for purportedly alleging fraud when he does not seek such orders (or indeed any costs orders) against the first defendant, who plainly did make such allegations. I am satisfied that the conduct of the plaintiff’s legal representatives of these proceedings has been above reproach.

Whether the plaintiff should have, or did, plead fraud against the second defendant

26. This argument was put as a “stand alone” submission, as well as in relation to the asserted breaches of the model litigant requirements.

27. The second defendant submits (written submissions, paragraphs 23-29) that the plaintiff’s claim “never had prospects of success [against the second defendant] because the Plaintiff did not plead fraud against the Second Defendant”, citing Nadinic v Drinkwater [2017] NSWCA 114 at [1], [45] and [152]. It is asserted that the plaintiff “recklessly advanced its case on the unsupported allegations of the First Defendant cognizant of the risks of its costs liability, in the circumstance that the Plaintiff did not have any cogent evidence to include in its own evidence” (written submissions, paragraph 24).

28. The plaintiff’s Amended Statement of Claim asserts that liability to pay the sums sought ($226,529.00) arose from the liability of the first defendant to pay a director penalty pursuant to s 269-20(1), Sch 1, Taxation Administration Act 1953 (Cth). It was in response to the first defendant’s affidavit that the alternative pleading was brought. The pleading against the second defendant (see for example, paragraph 16) relied on the statutory consequences in the event that the first defendant’s evidence was accepted. As already noted above, I accept Mr Scruby SC’s submission that the plaintiff made no allegations of fraud expressly or impliedly against either defendant, and that this was clear from the plaintiff’s submissions as well as its conduct of the case.

29. Nor was this a hopeless case in terms of a decision to bring an alternative pleading. As I noted in [7], [10], [27], [31] and [35]-[36] of my judgment, there were unsatisfactory aspect of the second defendant’s defence. I accept Mr Scruby SC’s submission that this was not a case where the second defendant’s defence and the documents provided in support so clearly refuted any possible liability of the second defendant that no reasonable plaintiff could possibly have joined him. To the contrary, the extraordinary and often implausible documentation was such that the plaintiff had no option but to join the second defendant so that the court could determine where the truth lay.

30. The plaintiff’s conduct in joining the second defendant was both reasonable and proper, as it was a matter for the court to resolve the contest between the first and second defendants in terms of their evidence.

The early provision of “exculpatory evidence”

31. In paragraph 30 of the second defendant’s submissions, my attention is drawn to the early provisions of what is called “exculpatory material”, namely 320 pages of supporting documents and the offer to meet the plaintiff’s lawyer prior to being joined, which is asserted would have, if properly considered, resulted in the second defendant not being joined.

32. I have already set out above references to my findings, in my judgment, about the implausibility of some, if not most, of these documents, the contents of which, both individual and as a whole, was unpersuasive. I do not regard the early provision of these documents as being either persuasive or determinative of the issues in this litigation. If anything, those documents raise more questions than answer them.

The second defendant’s offers of compromise and Calderbank offers

33. These are set out in the second defendant’s written submissions as follows (at paragraphs 41-43):

“41. On 25 May 2016, after receiving notice of the draft ASofC and the sealed Notice of Motion to join the Second Defendant, the Second Defendant made an offer to further inform the Plaintiff of the basis that the claim would fail. Further, that offer included notice for the Plaintiff to replead the ASofC.

42. While the Second Defendant’s letter sets out issues that were factual reasons that the Plaintiff’s claim would fail, it was not incumbent for the Second Defendant to inform the Plaintiff of the defects in pleading that was then current law and was subsequently relied upon in the Second Defendant’s closing submissions that fraud cannot be found where the plaintiff has not particularised the case of fraud that a defendant must answer, per Nadinic v Drinkwater [2017].

43. On 19 June 201743, the Second Defendant issued a Calderbank Offer in respect of costs to amend the Orders made 14 June 2017. On 21 June 2017, in reply to an enquiry by Plaintiff, the Second Defendant provided notice of the anticipated costs claim against the Plaintiff” (Footnotes omitted)

34. Although these offers appear under the heading “offers of compromise” in the second defendant’s written submissions, it is not identified which of these offers amounts to an “offer of compromise” under the relevant provisions of the Civil Procedure Act and regulations.

35. I have read the affidavit of Mr Kozlowski of 14 May 2017 and the attached correspondence. These letters were not so much “offers” as warnings as to the costs consequences of failure to drop any claim against the second defendant. I also note, although it does not form part of the written submissions, that an application for summary dismissal of the claim against the second defendant was brought and not proceeded with.

36. There is a qualitative difference between an offer of compromise, a Calderbank offer and correspondence warning about costs consequences if the proceedings are not dropped and it would not have been reasonable for the plaintiff to accept them. I would not categorise any of the correspondence from the second defendant’s solicitor to the plaintiff as amounting to an offer of a Calderbank nature, or of being anything other than restatement of the asserted strength of the second defendant’s defence to these proceedings, let alone an offer which the plaintiff should have accepted.

37. Given the nature of the documentary evidence cited in support of these warnings to drop the litigation, the second defendant’s solicitor’s correspondence was robbed of much of its authority. It was not unreasonable of the plaintiff, given the factual background in these proceedings, to seek determination of the contested issues of fact in court, in those circumstances.

The first defendant’s impecuniosity

38. The second defendant relies upon his “close association with the First Defendant since 2005” (written submissions, paragraph 48) to express the view that the first defendant does not have the capacity to meet the judgment debt owed to the plaintiff, as well as the plaintiff’s costs and the second defendant’s costs. Whether or not the first defendant pays the plaintiff, he also expresses the “genuine belief” (written submissions, paragraph 49) that the first defendant is not likely to pay any of the second defendant’s costs unless he is sent bankrupt, which is an expense which the second defendant should not be put to. The second defendant draws the court’s attention to a personal solvency index document which indicates that the first defendant was discharged from bankruptcy in July 2008, as well as his directorship of two companies in liquidation.

39. I accept Mr Scruby’s submission that there is insufficient evidence of the first defendant’s impecuniosity but that, if such evidence were available, it would not amount to sufficient grounds to make a costs order that would not otherwise be made.

Costs following the event and costs not on an indemnity basis

40. Finally, in apparent addition to the application for indemnity costs and a Bullock rather than a Sanderson order, the second defendant relies upon r 42.1 Uniform Civil Procedure Rules 2005 (NSW) to assert that he has been successful in the litigation and that the costs should follow the event. As is the case with the other submissions discussed above, I have considered this application in relation to an award of costs on the ordinary basis as well as the indemnity basis.

41. This argument includes a restatement of the other grounds for the making of a costs order, noting the asserted disregard of the plaintiff’s Model Litigant Code of Conduct (written submissions, paragraph 63), failure to mitigate costs by ignoring the information provided by the second defendant, the conduct of this litigation (paragraph 65) and an assertion that the plaintiff has failed to discharge the burden to refute the presumption that costs follow the event. I reject each of these submissions for the same reasons as set out above. The nature of the litigation and the result means that the “event” which costs should follow is the success of the plaintiff in one of the two alternative claims.

Whether a Bullock order or a Sanderson order should have been made

42. The second defendant also asks me to make a Bullock order rather than a Sanderson order (written submissions, paragraphs 52-60).

43. In making a Sanderson order, I took into account the New South Wales Court of Appeal’s observations in Council of the City of Liverpool v Turano (No 2) [2009] NSWCA 176 at [15]:

“[15] In determining whether it is fair to make such an order, two matters are usually considered to be relevant. First, it must have been reasonable for the plaintiff to have brought the proceedings against the successful defendant: see Gould v Vaggelas [1985] HCA 85; (1985) 157 CLR 215 per Gibbs CJ (at 230); Wilson J (Murphy J agreeing) (at 247); Brennan J (at 260); Lackersteen v Jones (No 2) (1988) 93 FLR 442 (at 449); Stevedoring Industry Finance Committee v Gibson [2000] NSWCA 179; (2000) NSWCCR 417 (at [128]) per Mason P (Stein and Heydon JJA agreeing). In this case, it was reasonable for Mrs Turano to bring proceedings against the Council. Secondly, there must be some conduct on the part of the unsuccessful defendant which would make it fair to impose liability on it for the costs of the successful defendant: Gould v Vaggelas (at 230; 247 and 260).”

44. I also note the discussion of when a Bullock order should be made, as set out in Almeida v Universal Dye Works Pty Ltd & Ors [2001] NSWCA 156.

45. To justify a Sanderson order, it is sufficient to show it was reasonable for the plaintiff to bring proceedings against the successful defendant: Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang (2016) 93 NSWLR 561 at [229].

46. As noted by the New South Wales Court of Appeal in St George Bank - A Division of Westpac Banking Corporation (formerly St George Bank Ltd) v Jin [2013] NSWCA 306 at [14]-[16], in multiparty litigation, the exercise of the costs discretion can become more complex because of the court’s need to make “such costs orders against any parties as the justice of the case may require” (at [16], citing Edginton v Clark [1964] 1 QB 367 at 384; Commissioner of Taxation v Sims (2008) 72 NSWLR 716 at [38]). In particular, Sanderson or Bullock orders should be tailored to the situation so that the burden of successful party’s costs order is borne directly or indirectly by a party other than the one against which the costs were incurred.

47. Where there is conduct on the part of the successful defendant, as well as the unsuccessful defendant, warranting the making of a costs order in favour of the party which was obliged to join both defendants in order that the disputed issues of fact be properly determined by the court, care should be given to the determination of what triggered the litigation and to the appropriate costs order to be made in those circumstances.

48. Mr Scruby SC submits, and I accept, that it was necessary for the plaintiff, in the circumstances of these proceedings, to have joined the second defendant as the alternative to the claim against the first defendant, rather than to conduct it as an independent claim, with all the attendant additional problems and costs which would arise.

49. That joinder occurred on the basis of the defence and affidavit evidence filed by the first defendant (see the affidavit of Amon-Ra Barton affirmed on 20 May 2016). As explained above, the consequence of the court accepting the first defendant’s allegations was that the second defendant would not have been liable to the plaintiff for unpaid income tax. Not being privy to the relationship between the first defendant, second defendant and Asia Pacific Offsite Pty Ltd, the plaintiff was not able to ascertain which defendant would ultimately be liable. It was thus necessary to join both defendants, alleging their liability in the alternative. Also, doing so avoided the possibility of separate proceedings against the second defendant having to be subsequently filed (if the first defendant’s allegations were accepted) and the risk of inconsistent factual findings about the second defendant’s employment with Asia Pacific Offsite Pty Ltd being made in those later proceedings.

50. I also accept Mr Scruby SC’s submission that the first defendant’s conduct warranted the making of such an order, given the seriousness of his allegations concerning the second defendant (Dominello v Dominello (No. 2) [2009] NSWCA 257 at [20]).

51. One of the arguments for a Bullock order is that the first defendant is asserted to be impecunious. If I were satisfied (which I am not, on the evidence put before me by the second defendant) that the first defendant is impecunious, I note that the impecuniosity of an unsuccessful defendant does not preclude a Sanderson order being made: State of Victoria v Horvath (No. 2) [2003] VSCA 24 at [15], although it can be a factor to be taken into account.

52. Finally, I take into account what Mr Scruby SC calls “the unsatisfactory nature of much of the Second Defendant’s case” (written submissions, paragraph 26).

Conclusions concerning costs

53. I have rejected each of the arguments put forward by the second defendant for the reasons set out above. Those reasons apply not only to any application for indemnity costs but for ordered costs. The costs “event” was not the second defendant’s success, but the nature of the “either/or” litigation, which meant that one of the defendants always had to win and the other always had to lose, and the circumstances of the case meant that a Sanderson order best reflected the result.

Whether any costs order in favour of the second defendant should be given against the first defendant

54. The written submissions seeking the replacement of a Sanderson order with a Bullock order were enlarged by an oral application that there be no costs order in favour of the second defendant against the first defendant. No reasons for this were given.

55. In the absence of some explanation as to why there should be no costs order in favour of the second defendant against the first defendant (as to which see Gould v Vaggelas (1985) 157 CLR 215), I propose to leave the existing order in its present form. The conduct of the first defendant warrants the making of such an order: Coombes v Roads and Traffic Authority (RTA) (No 2) [2007] NSWCA 70 at [9]ff; Council of the City of Liverpool v Turano (No 2) at [15]; Stephens v Giovenco (No 2) [2011] NSWCA 144 at [18]; Sneddon v Speaker of the Legislative Assembly [2011] NSWSC 842 at [36].

54. The second defendant’s application for his costs to be paid by the plaintiff on an indemnity basis is dismissed. The second defendant would not be entitled to these costs on an ordinary basis. The second defendant is to pay the plaintiff’s costs of the application.

Orders

1. Second defendant’s application for indemnity costs against the plaintiff is dismissed.

2. Second defendant to pay the plaintiff’s costs of this application.

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Decision last updated: 31 October 2017