Gabelich v Donaghey
[2018] VSC 184
•10 May 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY & PROBATE LIST
S CI 2016 04737
| MATTHEW GABELICH | Plaintiff |
| v | |
| ANDREW DONAGHEY | Defendant |
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JUDGE: | Daly AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 November 2017, further written submissions dated 11 December 2017, 18 December 2017, 29 January 2018, and 31 January 2018 |
DATE OF JUDGMENT: | 10 May 2018 |
CASE MAY BE CITED AS: | Gabelich v Donaghey |
MEDIUM NEUTRAL CITATION: | [2018] VSC 184 |
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COSTS – Application by defendant for relief under r 63.23 of the Supreme Court (General Civil Procedure) Rules 2015 (‘the Rules’), s 29(1) of the Civil Procedure Act 2010 (Vic) (‘CPA) and the Court’s inherent jurisdiction – Plaintiff had issued proceeding in respect of alleged breach of agreement involving transfer of title of houseboat to defendant as security for a loan – Receiver appointed to plaintiff’s income and personal property prior to issue of proceeding – Defendant communicated intention to seek indemnity costs on basis plaintiff was not entitled to issue proceeding – Plaintiff discontinued proceeding forthwith, without notice – Defendant alleged he was unable to settle the sale of houseboat as a result of plaintiff’s issue of proceeding – Plaintiff’s solicitor passed away after defendant’s application filed – Whether plaintiff’s solicitor’s estate ought be jointly and severally liable with the plaintiff to pay those costs – Whether defendant should be denied any entitlement to legal costs by reason of a term of a Deed which prescribes priority in which proceeds of houseboat sale are to be applied – Whether there is sufficient evidence to establish that any financial loss was caused by the conduct of the plaintiff or his solicitor – Whether an order ought be made in favour of the defendant for financial losses arguably suffered by his company – ‘Wasted costs’ jurisdiction – Dura (Australia) Construction Pty Ltd v Hue Boutique Living Pty Ltd (No 5) [2014] VSC 410, referred to – Gatto Corporate Solutions Pty Ltd v Mountney [2016] VSC 752, referred to – Held plaintiff’s solicitor jointly and severally liable for defendant’s costs of proceeding up to date of discontinuance of proceeding – Manner in which defendant applied proceeds of houseboat sale irrelevant to exercise of discretion to award costs in defendant’s favour – Plaintiff and plaintiff’s solicitor ordered to pay defendant’s costs of the proceeding up to the date of discontinuation on an indemnity basis.
PRACTICE AND PROCEDURE – Whether defendant’s application under s 29(1) of CPA is statute barred – Meaning of the term ‘finalisation’ in s 30(2) of CPA – Whether application under s 29(1) of CPA permitted to be made after finalisation of proceeding – 1165 Stud Road Pty Ltd v Power & Ors (No 2) [2015] VSC 735, distinguished – Kenny v Gippsreal Ltd [2015] VSC 284, distinguished – Gippsreal Ltd v Kenny [2016] VSCA 319 – Talacko & Ors v Talacko [2017] VSC 804, referred to – Yara Australia Pty Ltd v Oswal (2013) 41 VR 302, referred to – CPA ss 30 and 31 – The Rules, r 63.15 – Relevance of defendant not having been on notice of pending finalisation of the proceeding – Held application not statute barred – Whether the issue of the proceeding amounted to a breach of an overarching obligation or other conduct which would justify the award of indemnity costs in defendant’s favour – Failure of plaintiff’s solicitor to file a ‘proper basis’ certificate – Relevance of plaintiff’s lack of standing to issue the proceeding – Finding of no proper basis for issuing proceeding – Ugly Tribe Pty Ltd v Sikola [2011] VSC 189, applied – CPA, s 18 – Indemnity costs awarded in defendant’s favour – No evidence that financial loss claimed was suffered by the defendant personally – Defendant’s claim for financial loss unsuccessful.
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APPEARANCES: | Counsel | Solicitors |
| No appearance for the Plaintiff | ||
| For the Defendant | Mr S Stuckey | Rotstein Commercial Lawyers |
| For the estate of Darroll Nelson (non-party) | Mr H Obst | Obst Legal |
HER HONOUR:
Background
On 17 November 2016 the plaintiff, Mr Matthew Gabelich, issued a writ in the Trusts, Equity and Probate List of this Court. The writ was accompanied by a General Indorsement, which stated as follows:
1.The Plaintiff entered into an agreement (‘Agreement’) with the Defendant on or about the 5th August 2015.
Particulars
The Agreement involved the Defendant advancing the Plaintiff monies, and the Plaintiff transferring title of a houseboat registered no. QL305, Serial Number 9131733 HIN USTK201494I123 known as ‘Salisbury’ (the ‘Security’) for the period of the loan and for the title of the houseboat to be transferred back to the Plaintiff upon payment. The Agreement also included a clause preventing the Defendant from transferring the asset without the consent of the Plaintiff.
2.The Plaintiff and the Defendant have had a disagreement in relation to the terms of the Agreement.
3.The Defendant is attempting to sell the Security that was transferred subject to the Agreement in breach of the terms of the Agreement.
Particulars
The Defendant has engaged a real estate agent Mike Dalmau and/or his company known as High Country Houseboat Sales who have advertised the Security for sale in breach of the terms of the Agreement and without consent of the Plaintiff.
AND THE PLAINTIFFS CLAIM:
4.The Plaintiffs seek the following:
a.An order that the Defendant honour the Agreement
b.A declaration that the Plaintiff and/or its agents may not sell the Security
c.Any other order that the Honourable Court deems fit
d.Costs
No statement of claim was ever filed and served. On 21 February 2017, the defendant, Mr Andrew Donaghey, filed a Notice of Appearance. On 24 February 2017, Mr Donaghey’s solicitors, Rotstein Commercial Lawyers (‘RCL’), wrote to the solicitor for Mr Gabelich, Mr Darroll Nelson, stating, in summary, as follows:
(a) Mr Nelson’s firm first became aware that a receiver had been appointed by the Federal Circuit Court to Mr Gabelich’s income and personal property on 3 November 2016, before the issue of this proceeding;
(b) the Federal Circuit Court order appointing the receiver makes it clear that Mr Gabelich’s rights to deal with his personal property ceased after the appointment of a receiver, thus Mr Gabelich was not entitled to issue this proceeding;
(c) RCL stated as follows:
We find it astonishing that your firm, having knowledge of Mr Gabelich’s true position, still proceeded to issue the Supreme Court proceedings’;
(d) Mr Nelson’s attention was drawn to the decision of Scholl J in Schieske v Overseas Construction Co Pty Ltd,[1] where this Court made an order for costs against a solicitor personally because the solicitors had acted without authority;
[1]Unreported, Supreme Court of Victoria, 29 August, 17, 29 October 1958.
(e) RCL stated as follows:
We put you on notice that our client will seek payment of all abortive costs on a full indemnity basis. This includes, but is not limited to, our client’s rights (which are reserved) to bring an action for damages against you for any forfeited sale of the Houseboat.
(f) RCL demanded that Mr Nelson cease to act in this proceeding and file a notice of discontinuance; and
(g) RCL stated as follows:
We put you on notice that this letter and earlier correspondence will be produced to the court on the question of costs on a full indemnity basis.
Mr Nelson did not respond to this letter. However, on the following business day, 27 February 2017, Mr Nelson filed a notice of discontinuance on behalf of Mr Gabelich.
On 10 March 2017, RCL wrote to Mr Nelson, in effect restating their position regarding the question of whether this proceeding should ever have been issued, and their assertion that Mr Nelson must have known that, by reason of the appointment of a receiver, Mr Gabelich was not entitled to issue this proceeding. Further, RCL stated:
The statement of claim filed by your firm misstated the words and effect of the express terms of the Deed and entirely disregarded the express provisions of clause 4 of the Deed. In short, there was no proper basis upon which a statement of claim could be drawn to plead the case outlined in the General Indorsement or which would satisfy the ‘proper basis’ requirements and the overarching obligations to which you and your clients are subject, under the Civil Procedure Act 2010.[2]
[2]The reference in this letter to a Deed is a reference to the Agreement referred to in the General Indorsement.
RCL stated that Mr Donaghey’s legal costs and expenses of the proceeding to date totalled $17,931, including counsel’s fees, and stated further as follows:
Additionally, as you are aware, the Proceeding issued by your firm delayed the sale of our client’s Houseboat. This necessitated our client applying [sic] a short term loan pending the receipt of the sale proceeds from the sale of the Houseboat. On or about 23 February 2017, our client obtained a short term loan from Fundit Pty Ltd (ACN 601 130 527) trading as ‘Banjo Finance’ in the sum of $250,000. This loan carried a fixed costs of $16,850.00 plus an establishment fee of $3,750, being a total of $20,600 (excluding interest charges) in respect of which our client looks to you for full and complete compensation.
Finally, RCL stated as follows:
In the event that we not receive payment in the sum of $38,531.00 on account of our client’s legal costs and expenses incurred in connection with the Proceeding to date, by 12p.m. noon, Friday, 10 March 2017 we are instructed to make an application to the Court for an order that you and your client pay our client’s legal costs and expenses on an indemnity basis, without further notice.
Should such action prove necessary, this letter and previous correspondence will be produced on the question of the costs incurred of an [sic] incidental to such application.
Our client also reserves his rights to bring an action for damages against your client and/or firm for any forfeited sale of the Houseboat.
It appears that Mr Nelson did not respond in any substantive way to this letter.
The Application, filed 26 May 2017
On 26 May 2017, RCL, on behalf of Mr Donaghey, issued a summons seeking the following orders pursuant to r 63.23 of the Supreme Court (General Civil Procedure) Rules (‘the Rules’), s 29(1) of the Civil Procedure Act 2010 (Vic) (‘CPA’), and the inherent jurisdiction of the Court:
1.The Plaintiff’s solicitor, Darroll Nelson, pay the Defendant’s costs of and incidental to defending the proceeding on an indemnity basis.
2.Further or alternatively to Order 1, the Plaintiff pay the Defendant’s costs of and incidental to defending the proceeding on an indemnity basis.
3.Alternatively to Orders 1 and 2, Darroll Nelson and the Plaintiff jointly and severally pay the Defendant the sum of $20,600.00 in finance loss suffered by the Defendant as described in the affidavit accompanying this summons.
4.Darroll Nelson or the plaintiff pay the Defendant’s costs of and incidental to making this application to the Court, on an indemnity basis.
The summons was supported by an affidavit affirmed by Mr Hamish Rotstein of RCL and an affidavit affirmed by Mr Donaghey, both dated 26 May 2017. A further affidavit was affirmed by Mr Rotstein on 1 June 2017, providing an up to date figure with respect to legal costs. The application came before Clayton JR for directions on 2 June 2017, who directed that Mr Nelson file and serve a notice of ceasing to act forthwith, made directions for the filing and service of an amended summons, affidavits and submissions, and listed the application for hearing on 17 October 2017. The orders provided for Mr Nelson, who was represented by counsel at the directions hearing, to file and serve any affidavit upon which he intended to rely by 28 July 2017. Further orders were made by Clayton JR on 10 July 2017 providing for substituted service upon Mr Gabelich.
Mr Gabelich did not appear at the hearing of the application, and no documents were filed on his behalf in response to Mr Donaghey’s application. Notwithstanding the orders, Mr Nelson did not file and serve any affidavit evidence in response to the affidavits filed on behalf of Mr Donaghey, or the submissions in support of the application filed and served on or about 2 June 2017. Further submissions, which were substantially similar to the submissions dated 2 June 2017, were filed and served by the defendant on 25 September 2017, along with a further affidavit affirmed by Mr Rotstein on that day providing a further update upon the legal costs incurred by Mr Donaghey in this proceeding, which were said now to be in the sum of $50,070.02.
On 9 October 2017, I made orders adjourning the hearing scheduled for 17 October 2017 to 16 November 2017, as a result of Mr Nelson having passed away on or about 14 August 2017. In the meantime, Obst Legal assumed conduct of the matter on behalf of Mr Nelson’s estate, and filed submissions on 14 November 2017, shortly before the resumed hearing.
The recitation of the procedural history of this application is of some significance to the determination of this application in three respects:
(a) it appears the prospects of Mr Donaghey recovering any costs or damages against Mr Gabelich are slim, probably non-existent;
(b) notwithstanding the months which elapsed before the issue of the summons and Mr Nelson’s death on or about 15 August 2017, no evidence was filed on Mr Nelson’s behalf concerning the matters raised on behalf of Mr Donaghey in RCL’s letters of 24 February 2017 and 10 March 2017, and the affidavits in support of the summons. There is no evidence before me concerning the extent to which Mr Nelson was ill and/or incapacitated in the period before he died, although I am personally aware that he was a gentleman of advanced years;
(c) a substantial sum has been incurred by Mr Donaghey in respect of legal costs in this proceeding, the substantive part of which went nowhere. The costs incurred in pursuing the claim for legal costs are more than double the costs incurred by Mr Donaghey prior to the discontinuance of the proceeding on 27 February 2017. Mr Rotstein’s affidavit of 16 November 2017 states that the defendant’s costs now total $65,841.58.
Evidence
In his affidavit of 16 May 2017, Mr Rotstein deposed, in summary, as follows:
(a) he exhibited an email sent by the receiver appointed by the Federal Circuit Court to Mr Nelson on 3 November 2016. The copy of the email exhibited to Mr Rotstein’s affidavit attaches what appears to be an incomplete copy of the orders, along with the reasons for judgment of the Federal Circuit Court;
(b) he separately exhibited a complete copy of the order;
(c) he asserted that by reason of the email referred to in (a) above, Mr Nelson was aware of the order and the appointment of a receiver when he issued this proceeding;
(d) he asserted that the General Indorsement misstated the words and effect of the Deed, and disregarded the express provisions of clause 4 of the Deed, which stated as follows:
In the event that the loan is not repaid by the due date the lender is free to, without delay, sell the Houseboat. The lender shall pay to the Borrower any proceeds of sale after payment to the Lender of all monies owing to him including all selling expenses, all legal and other fees on a full indemnity basis and all monies owing to Variant Technology as at the Due Date;
(e) he repeated the assertion made in RCL’s letter of 10 March 2017 that there was no proper basis for issuing the proceeding and exhibited the letters of 24 February 2017 and 10 March 2017; and
(f) he deposed that Mr Donaghey’s legal costs and expenses of the proceeding, excluding the costs of the summons issued on 16 May 2017, amounted to $17,931.00, inclusive of counsel’s fees, and exhibited RCL’s accounts in that regard.
Mr Donaghey deposed, in summary, as follows:
(a) he is the managing director of SodaKING Australia Pty Ltd (‘SodaKING’), and the managing director of Variant Technology Pty Ltd (‘Variant’);
(b) he deposed as follows:
On or about 15 February 2017, SodaKING received a large number of stock orders. In response to these orders, SodaKING bought $111,444.00 worth of stock from its overseas manufacturer (‘the Stock Purchase’). Variant was also required to pay $40,731.00 for other supplier (stock) payments, $93,000.00 for existing loan payments and $4,825.00 for other current creditors (‘the Other Expenses’).
SodaKING did not have the necessary cash flow to finance the Stock Purchase and the Other Expenses. In or about February 2017, I arranged to sell my Houseboat in order to raise the necessary funds to finance the Stock Purchase and the Other Expenses. Settlement of the sale of my houseboat was scheduled to complete on 24 February 2017. As part of that sale, the purchaser of the House Boat (‘House Boat Purchaser’) required that I give the following warranty in a statutory declaration: ‘To the best of my knowledge there are no proceedings issued or about to be issued against me or the vessel or the equipment in any Court in any jurisdction [sic] nor have I committed any act which would give rise to any such action being taken.’
(c) as a result of the issue of this proceeding, he was unable to settle the sale of the houseboat scheduled for 24 February 2017;
(d) he deposed as follows:
When I was unable to complete the Houseboat Sale as explained above, the need to raise funds to finance the Stock Purchase and the Other Expenses became a matter of urgency for the following reasons:
(i)Without the funds to pay for the Stock Purchase and the Other Expenses, SodaKING would be unable to satisfy its outstanding customer orders; and
(ii)SodaKING faced significant ongoing costs and penalties if the stock the subject of the Stock Purchase remained in wharfage for an extended period of time.
(e) he exhibited a letter from his accountant dated 24 April 2017 confirming the ‘urgent requirement for a short term loan for $250,000 that was required on or before 23 February 2017’;
(f) he deposed as follows:
Given the sale of the Houseboat could not be settled due to the issue of Proceedings, I had no choice but to apply for a short term loan on behalf of Variant pending the receipt of the sale proceeds from the sale of the Houseboat.
On or about 20 February 2017, I obtained a short term loan from Fundit Pty Ltd (ACN 601 130 527) trading as ‘Banjo Finance’ in the sum of $250,000. I sought a short term loan from Banjo Finance as opposed to the major banks because it was a finance provider that specialised in short term loans. I needed the funds quickly and could not wait for an extended period of time to obtain my loan application. My experience with major banks was that it could take upwards of four weeks and I was looking to fix my borrowing costs for the short term loan which Banjo Finance was able to offer me. Now produced and shown to me and marked ‘AD-3’ is a true copy of my Loan Schedule with Banjo Finance, showing this loan carried a fixed cost of $16,850.00 plus an establishment fee of $3,750.00, being a total of $20,600.00.
But for the issue of the Proceedings, I would have been able to sell the Houseboat in time to finance the Stock Purchase and the Other Expenses, which would have obviated the need for me to obtain the short term loan from Banjo Finance.
(g) he believed that Mr Gabelich is impecunious, by reason of the following:
(i) the appointment of a receiver to his income and personal property on 16 August 2016;
(ii) the fact that, as at 16 May 2017, the appointment was ongoing; and
(iii) he was informed by the National Sales Manager at SodaKING Australia Pty Ltd and an unnamed person who had worked with Mr Gabelich at SodaKING on multiple occasions between September 2016 and December 2016 that Mr Gabelich ‘was having significant cash flow issues and was struggling to meet his debts’.
Submissions
Written submissions were filed on behalf of both parties. Mr Donaghey submitted, in summary, as follows:
(a) that he has been put to unnecessary cost, expenditure, and loss associated with the proceeding, in circumstances where Mr Gabelich and/or Mr Nelson should not have instituted the proceeding;
(b) no ‘proper basis’ certificate was filed by Mr Nelson when he issued the proceeding;
(c) section 46 of the CPA provides that a court may take into account any failure to comply with any certification requirement of the CPA in determining the question of costs in a proceeding;
(d) he referred to the terms of rr 63.23 and 63A.23 of the Rules, and stated:
Mr Nelson filed the Proceeding on behalf of the Plaintiff on 17 November 2016 and either had full knowledge, or should have had full knowledge, of all the facts set out at paragraph 27 herein above, and that there was no clause in the Deed “…preventing the Defendant from transferring the asset without the consent of the Plaintiff” (as pleaded incorrectly in paragraph 1 of the Plaintiff’s General Indorsement).
But for Mr Nelson preparing and filing the Proceeding, the Defendant would not have incurred his legal costs or financial loss.
The Court should infer that the lack of a proper basis certification in compliance with section 42 of the CPA was because there was actually no proper basis for the allegations of fact in the Proceeding, or a valid exception to the requirement to file a proper basis certification (sic).
The Court should also infer that the express wording of the Deed was ignored or misrepresented by Mr Nelson contrary to the overarching principles of the CPA.
(e) he referred to my decision in Gatto Corporate Solutions Pty Ltd v Mountney (‘Gatto’),[3] where I ordered that Mr Nelson be jointly and severally liable with his former client for a defendant’s costs, on the basis that his conduct had caused or materially contributed to that defendant incurring legal costs;
[3][2016] VSC 752.
(f) he also referred to the decisions of Dura (Australia) Construction Pty Ltd vHue Boutique Living Pty Ltd (No 5) (‘Dura’)[4] and Yara Australia Pty Ltd v Oswal (‘Yara’),[5] which referred to the intention of the Parliament in enacting the CPA of effecting cultural change within the legal system, and acknowledged that the jurisdiction under s 29 of the CPA has both compensatory and punitive elements;
[4][2014] VSC 410.
[5](2013) 41 VR 302.
(g) the factual matters relied upon in his application are relatively straightforward; and
(h) the submissions stated as follows:
Taking Mr Nelson’s case at its highest, he cannot claim to have ‘acted upon instructions’ regarding his obligation under section 42 of the CPA for failure to file a proper basis certification.
Further, his conduct is amplified by the withdrawal of the Proceeding on 27 February 2017 under pressure from the Defendant.
‘But for’ his conduct in filing an unmeritorious proceeding, the Defendant would not have been put to the cost of retaining legal advisors to prepare to defend the matter. There is no other causative factor for his:
(a) legal expenditure as a Defendant to the Proceeding; or
(b)being put to the expense of seeking and obtaining the Short Term Loan.
All the Defendant’s losses are caused by, and attributable to, the filing of the Proceeding.
The Court does not need to resolve all factual disputes in order to determine costs.
In his oral submissions during the course of the hearing, counsel for Mr Donaghey referred again to the decision in Gatto,[6] not in support of a submission that Mr Nelson has a propensity to engage in conduct which falls foul of the CPA, but rather, given the timing of that proceeding (the application was heard, albeit not determined, on 23 November 2016, a few days before this proceeding was issued), Mr Nelson must have been acutely aware of his obligations under the CPA, and the possible consequences of breaching those obligations.
[6][2016] VSC 752.
In his oral submissions during the course of the hearing of the application, counsel for Mr Donaghey submitted that Mr Nelson received a copy of the orders and the reasons for judgment on 3 November 2016, but the evidence indicates that he had also spoken to the receiver. Counsel submitted that Mr Nelson was clearly in breach of the overarching obligations under the CPA. A solicitor, when asked to do something by a client when he knows a receiver has been appointed to the property of that client must exercise great care: in this case his conduct has stymied a legitimate transaction.
Mr Obst, acting on behalf of Mr Nelson’s professional indemnity insurer, made the following submissions in his written outline of submissions (excluding those which were not pressed at the hearing of the application):
(a) Mr Gabelich had an arguable case on the proper construction of the Deed that Mr Donaghey had no right to sell the houseboat;
(b) in determining an application made against a solicitor under s 29 of the CPA, the Court must be satisfied to the Briginshaw standard of proof;
(c) he referred to the following statement of Judd J in ACN 005 490 540 Pty Ltd v Robert Frederick Jane Pty Ltd (‘Robert Frederick Jane’):[7]
[7][2016] VSC 217, [24].
Facts which justify an order for indemnity costs against a party do not automatically translate into a basis for such an order against that party’s legal practitioners. The court must be satisfied that the conduct of the practitioners was in breach of a relevant duty or overarching obligation, and that the breach justified a personal order for costs.
and noted that Judd J observed that the onus was not on the lawyer to show that he complied with the relevant overarching obligation but rather it is for the Court to be satisfied that he did not;[8]
[8]Ibid [26].
(d) in applications of the current kind, lawyers are restricted in defending their position by reason of their clients holding legal professional privilege in their communications. Further, as Mr Nelson is now deceased, he is not able to explain his knowledge or motivations at any relevant time;
(e) Mr Donaghey’s contention that the proceeding was discontinued because RCL advised Mr Nelson that Mr Gabelich had no case was mere speculation;
(f) he noted that Mr Donaghey claims the full costs of the proceeding despite no bill in taxable form being provided to the Court, none of the bills being addressed to Mr Donaghey, and no evidence as to those bills having been paid or by whom;[9]
[9]Referring to the ‘indemnity principle’ in Shaw v Yarranova Pty Ltd [2011] VSCA 55, [8].
(g) as for the damages claimed by Mr Donaghey, he noted the advance from Banjo Finance was used to pay stock purchases for SodaKING, and for liabilities of Variant; and
(h) he submitted as follows:
There is no evidence as to:
(a)whether the whole $250,000 advance was a substitute for the proceeds of the sale of the houseboat;
(b)what was the quantum of the proceeds of the houseboat sale;
(c)when such quantum was received noting the Banjo advances were being made as late as August 2017 and noting that the payments appear to have been made before 27 April 2017.
It follows, there is no proof to the sufficient standard of the necessary causal connection between the alleged breach of duty by the Solicitor in commencing the proceeding and the loss claimed by the Defendant.
Further, the evidence is that the Banjo loan was not to the Defendant but to Variant Technology Pty Ltd of which the Defendant is managing director. While Variant Technology Pty Ltd may have suffered a loss, there is no evidence that the Defendant suffered any loss.
Such as there is evidence of the purpose for which the Banjo loan was put, a significant amount went for the benefit of SodaKING Pty Ltd. There is no evidence of the means by which the SodaKING Pty Ltd purpose was met;
(a) Was it by loan by the Defendant to SodaKING Pty Ltd;
(b)Was it by such a loan but by Variant Technology Pty Ltd? By some other person or entity?
(c)In any of these cases, what were the terms of such loan? What consideration did SodaKING Pty Ltd pay, whether by interest or otherwise, to the lender? If the lender was Variant Technology Pty Ltd, what account has that company taken of the interest received in calculating its costs of the Banjo loan?
On the evidence there can be no safe finding that any particular person suffered any and, if so what, loss.
It is contended for the Solicitor there was a proper basis to bring the claim and the application, insofar as it is made for costs and alleged loss and insofar as it made against the Solicitor, should be dismissed with costs since there is no, or insufficient, probative evidence to provide the ‘sound evidentiary basis’ to meet the Briginshaw test as would justify the ‘serious charge’ made against the Solicitor unable to speak for himself.
Mr Obst also submitted that the Court could not be satisfied, in accordance with the Briginshaw standard, that Mr Nelson knew, at the time of the issue of the proceeding, that Mr Gabelich had no standing to bring the proceeding. The email relied upon by Mr Donaghey, being exhibit ‘HSR-2’ to Mr Rotstein’s affidavit of 16 May 2017, does not appear to be a true copy of the email and its attachments, and thus its evidentiary value is questionable.
Mr Obst also submitted that Mr Donaghey’s damages claim was questionable: there was no evidence as to when the sale of the houseboat was settled, whether the full fee for the drawdown was incurred and paid, and why the loan of $250,000 was required.
Counsel for Mr Donaghey responded as follows:
(a) there is no sensible argument that the terms of clause 6 of the Deed somehow limits the ability of Mr Donaghey to sell the houseboat pursuant to clause 4 of the Deed;
(b) the contention that somehow Mr Donaghey had waived his right to sell the houseboat, or some estoppel arose, by not selling the houseboat immediately upon default is unsupportable, and in any event, no such contention was referred to in the General Indorsement;
(c) the need for a short term loan is clearly connected to this proceeding: as Mr Donaghey was unable to provide the warranty required by the purchaser, he had no choice but to raise short term finance;
(d) Mr Donaghey was the sole shareholder of Variant, and the loan was guaranteed by him;
(e) he rejected Mr Obst’s criticisms of the evidence on the basis that there had been no request prior to the hearing for the production of documents; and
(f) the invoices have been addressed to Mr Donaghey, and there is no evidence that the invoices have been paid by anyone else. In any event, s 29(1) of the CPA enables the Court to make an order for compensation in favour of ‘any person’, not just a party to a proceeding.
Further Developments
During the course of the preparation of these reasons, I identified three matters I felt warranted further submissions from the parties. My associate wrote to the parties seeking further submissions concerning the following issues:
(a)Whether in relation to the Defendant’s claim for the costs of the proceeding prior to the filing and service of the notice of discontinuance (27 February 2017), any order for costs could be made against the Plaintiff, given that the proceeds of sale of the houseboat arguably do not appear to have been applied in accordance with clause 4 of the Deed, which binds the Defendant as well as the Plaintiff?
(b)Further, given the above, whether the failure of the Defendant to apply these funds to the costs of the proceeding is a relevant factor in the exercise of my discretion with respect to costs, insofar as costs are sought against Mr Nelson’s estate?
(c)Finally, given that the loan referred to by the Defendant in his affidavit of 16 May 2017 was made to Variant Technologies Pty Ltd (‘Variant’), not the Defendant personally, could an order under s 29 of the Civil Procedure Act 2010 (Vic) (‘CPA’) be made in favour of the Defendant (as opposed to Variant, which is not a party to this proceeding), in the absence of any evidence that the Defendant personally paid the fees claimed in the summons?
In particular, my concerns with respect to questions (a) and (b) above arose out of the terms of clause 4 of the Deed, which allows Mr Donaghey to apply the proceeds of sale of the houseboat in the following order: ‘all monies owing to him including all selling expenses, all legal and other fees on a full indemnity basis and all monies owing to Variant Technology’. The question which arises is whether the terms of clause 4 of the Deed obliged Mr Donaghey to apply the proceeds of sale of the houseboat in the order specified in the deed, and, if so, the implications for his application for costs against Mr Gabelich and/or Mr Nelson. Of course, in any event, there was no evidence regarding how much was received from the sale of the houseboat, and how the proceeds were applied, although ‘evidence’ concerning these matters was contained in the submissions made by Mr Donaghey in response to these questions.
In Mr Donaghey’s submissions filed 11 December 2017, Mr Donaghey’s submissions stated, in summary, as follows:
(a) the houseboat was sold for $360,000, and the sale was completed on 1 April 2017;
(b) at the time of the sale, Mr Gabelich owed $195,166.51 to Mr Donaghey, and $154,474.73 to Variant;
(c) the selling expenses associated with the sale of the houseboat were $16,889.16; and
(d) after the application of the proceeds of sale to the selling expenses and the loans owing to Mr Donaghey and Variant, no surplus was available to fund the legal costs incurred by Mr Donaghey in this proceeding.
Mr Donaghey submitted as follows:
First, it is submitted that the proceeds of sale of the houseboat were applied in accordance with clause 4 of the Deed. There is no breach or failure that could form a basis for refusing the Defendant the costs order it seeks against the Plaintiff or the estate of Mr Nelson.
Second, if there were such a breach or failure it did not prejudice any person, let alone the Plaintiff or Mr Nelson.
Third, the manner in which the Defendant applied the proceeds of the sale should not be a relevant factor in the exercise of the Court’s discretion with respect to costs, as it affects proprietary interests in which neither Mr Nelson nor the Plaintiff (since his receivership) has any stake.
Fourth, an order can be made under section 29 of the CPA in favour of the Defendant in the absence of evidence that the Defendant personally paid the fees claimed in the summons.
In relation to (a) above, Mr Donaghey referred to the terms of s 105 of the Property Law Act 1958 (Vic), a mortgagor holds the proceeds of sale of mortgaged property on trust to be applied:
(a) first, in payment of all costs, charges and expenses properly incurred by the mortgagees as incident to the sale;
(b) secondly, in discharge of the mortgage money, interest and costs, and other money (if any) due under the mortgage; and
(c) thirdly, to any subsequent encumbrancer, or the mortgagor if there are none.
Mr Donaghey submitted that he had not breached the Deed in discharging the loans owing to him and Variant from the proceeds of sale, and noted that there has been no complaint made by Mr Gabelich or the receiver that any surplus was improperly retained.
Mr Donaghey submitted that, even if the legal fees incurred by him in this proceeding were caught by the terms of clause 4 of the Deed, clause 4 of the Deed does not provide for any order of priority in which the proceeds of sale are to be applied. In any event:
A party is entitled to an order for legal costs whether or not they have paid the costs at the time of the order. The right to deduct costs from the mortgaged property arises only to the extent that no person has paid them.
Further, while Mr Donaghey’s primary position was that there was no breach of the terms of the deed, he submitted that any breach could not prejudice either Mr Gabelich or Mr Nelson’s estate.
Mr Donaghey’s submissions also referred to the particular rights of a mortgagee to deduct their costs of any proceeding involving the secured property from the proceeds of sale of the property. However, the existence of a mortgage, without more, of itself would not make those costs recoverable from Mr Gabelich in the absence of a court order. Further, that right would not preclude the making of an order in favour of Mr Donaghey, either against Mr Gabelich, or Mr Nelson’s estate.
Mr Donaghey submitted as follows (citations omitted):
The right to discharge legal costs from the mortgaged property, whether it be under contract, equity or the rules of court, is clearly a right for the benefit of the mortgagee. It does not benefit the mortgagor, as it increases the amount secured against the property and diminishes any surplus that might be returned to her or him. Accordingly, the right may be waived or not exercised at the election of the mortgagee.
There is no reason in principle why there might be an obligation to discharge costs from the proceeds in priority to the substantive liabilities. No such obligation appears in the authorities. Similarly, prior to the mortgagor’s death, there is no obligation to satisfy the costs from the security in priority to enforcement of any personal obligation.
If, therefore, contrary to the above submissions, the Variant Technology obligations should not have been paid from the proceeds of sale and the legal costs and expenses could or should have been, the most that can be said is that the receiver of the Plaintiff’s estate would have a claim against the Defendant for payment of the surplus that should have remained (if any).
It says nothing about the propriety of costs orders against either the Plaintiff or Mr Nelson because they are personal obligations which do not arise from the status of the sale proceeds. The interests of those entitled to any surplus are advanced by the making of personal costs orders, as this increases the chances that an individual obligee will meet the costs and the sale fund will thereby be enlarged. Any failure to satisfy the costs from the fund (if such there were) would not provide a reason for not making the costs orders sought.
Further, Mr Donaghey submitted that s 29(1) of the CPA enables costs orders to be made against a party that has caused those costs to be incurred, and these costs were directly attributable to the conduct of Mr Gabelich and Mr Donaghey, who had been put on notice that costs would be sought against them.
In relation to the issue of whether an order for the legal costs of the proceeding ought to be made against Mr Gabelich and Mr Nelson, the solicitor for Mr Nelson’s estate submitted, in summary, as follows:
(a) Mr Donaghey’s submissions are based upon assertions of fact which are not in evidence, being the date upon which the sale proceeds were received, the amount of the sale proceeds, and how they were applied;
(b) if in fact Mr Donaghey has deducted the legal costs from the sale proceeds, as he was entitled to do, he would have no entitlement to an order for legal costs in his favour;
(c) consistent with the decision of the Court of Appeal in Shaw v Yarranova Pty Ltd,[10] if Mr Donaghey did not pay the costs, about which there is no evidence, he cannot recover costs from any other party; and
(d) therefore, there is insufficient evidence to safely infer that Mr Donaghey is entitled to an order for costs.
[10][2011] VSCA 55, [8].
In relation to the issue of whether Mr Donaghey can recover damages for financial loss pursuant to s 29 of the CPA in circumstances where the loan was made to Variant, not to him personally, Mr Donaghey submitted as follows:
(a) the discretion of the Court to make orders under the CPA is very broad, noting that s 29(1)(a) provides that the Court may make:
“(a)an order that the person pay some or all of the legal costs or other costs or expenses of any person arising from the contravention of the overarching obligation”; [emphasis in original]
and that the use of the words ‘any person’ rather than ‘any party’ appears to be a deliberate choice by the drafters of the CPA.
(b) while the financial loss arose from a loan made to Variant, an order should be made in favour of Mr Donaghey, as he is the sole shareholder and director of Variant, and Mr Donaghey provided a personal guarantee for the loan;
(c) any loss sustained by Variant was directly sustained by him because the value of Variant was diminished;
(d) Mr Donaghey was Variant’s agent for the purpose of procuring security rights for Variant pursuant to the Deed; and
(e) Mr Donaghey submitted as follows:
To the extent that Mr Donaghey’s wholly owned company [Variant] has sustained loss as a result of this conduct, so has Mr Donaghey to the same extent because his company is now worth that much less. Given that the parties were content to treat the two as interchangeable for the purposes of their agreement, such losses are within the statute and can be recovered regardless of whether the funds came from the pocket of the man or his company.
Given the Financial Loss is easily identifiable and deposed to in the affidavit material and that the Defendant was ultimately liable for the loss, it is in the interests of justice to make orders in favour of the Defendant for the Financial Loss without recourse to costly ‘satellite litigation’ elsewhere.
In response, the following submissions were made on behalf of Mr Nelson’s estate:
The submitted entitlement of the Defendant to the benefit of any Variant Technologies Pty Ltd claim for costs by reason of his asset being ‘devalued’ is misconceived. In circumstances where the company continues to exist, such a claim should be brought by the company, or, pursuant to leave granted under s.237 of the Corporations Act, by a person in the name of the company.
Following receipt of these further submissions, and in the course of preparing my reasons concerning the application, I identified a further issue potentially affecting the outcome of the application concerning which I sought further written submissions from the parties. In particular, I was concerned about the terms of ss 30 and 31 of the CPA, which govern the timing of applications under s 29 of the CPA. Essentially, if Mr Donaghey is barred from bringing an application under s 29 of the CPA, his claim for financial loss falls away, and the question of costs is to be dealt with under the relevant rules, and the inherent jurisdiction of the Court, having regard to the principles underlying and overarching obligations under the CPA. Arguably, given recent authorities concerning the construction of s 30 of the CPA, which will be discussed further below, Mr Donaghey is unable to bring an application under s 29(1) of the CPA, as the proceeding had been finalised with the filing of the notice of discontinuance, and no application for relief under s 29 of the CPA was made prior to that time.
Further, in the circumstances of this case, any application by Mr Donaghey to extend the time for making an application pursuant to s 31 of the CPA would be unlikely to succeed, as the Court may only grant an application for an extension of time if it is satisfied that Mr Donaghey was not aware of any contravention of any overarching obligation prior to the finalisation of the proceeding. While RCL’s letter of 24 February 2017 did not expressly refer to the CPA or any alleged breaches of any overarching obligations, the tenor of and complaints made in this letter makes it clear that RCL made assertions to the effect that Mr Gabelich was not entitled to issue the proceeding, and that it was ‘astonishing’ that Mr Nelson issued the proceeding. This letter also foreshadowed an application for indemnity costs and damages, and recommended that Mr Nelson forward a copy of this letter to his professional indemnity insurer. Further, at the hearing of the application, Mr Obst produced a letter from RCL to Mr Nelson on 17 February 2018, prior to Mr Donaghey being served with the proceeding, concerning Mr Donaghey’s rights under the Deed, and his intention to sell the houseboat. The letter stated as follows:
The General Indorsement on the Writ in our respectful opinion quite misstates the words and effect of the express terms of the Deed and entirely ignores the express provisions of clause 4 of the Deed. We do not believe that a statement of claim could be drawn properly to plead the misconceived case outlined in the General Indorsement or which would satisfy the ‘properly basis’ requirements or the other overarching obligations under the Civil Procedure Act 2010.
Sections 30 and 31 of the CPA provide as follows:
30 Applications for orders under section 29
(1) An application for an order under section 29 is to be made –
(a)in the court in which the civil proceeding was, or is being, heard; and
(b)in accordance with the rules of court.
(2)An application for an order under section 29 must be made prior to the finalisation of the civil proceeding to which the application relates (excluding any period for appeals).
(3)For the purposes of subsection (2), if an order, including an order in respect of costs, is made after the date of finalisation of the civil proceeding to which the application relates, the date of making of the last of the orders is taken to be the date of finalisation of that proceeding.
31Extension of time for application
(1)Despite section 30(2), a person may apply to the court for an extension of time to apply for an order under section 29 after the finalisation of the civil proceeding.
(2)The court may grant an extension of time for making an application under section 29 if satisfied that the person making the application was not aware of the contravention of the overarching obligations until after the end of the period specified in section 30(2).
(3)An application under this section may be made by –
(a)any party to the civil proceeding; or
(b)any other person who has a sufficient interest in the civil proceeding.
In Kenny v Gippsreal Ltd (‘Gippsreal’),[11] an application for costs was made under, among other things, s 29 of the CPA. The application was made by the solicitors for Gippsreal Ltd (‘Gippsreal’) against the solicitors and a barrister acting for another party in two proceedings (‘lawyers’), which had been dismissed by consent. The application for costs was made more than two years after orders were made dismissing the proceeding.
[11][2015] VSC 284.
In response to the applications issued by Gippsreal, the lawyers issued two proceedings by way of originating motion, each seeking substantially the same relief, being declarations that the summonses issued by Gippsreal seeking costs against the lawyers were incompetent, and/or that Gippsreal’s applications were made after the finalisation of the proceeding to which the application related, contrary to s 30(2) of the CPA.
Vickery J identified that the central question in the applications was whether the consent orders made in the relevant proceedings ‘finalised’ those proceedings, such that Gippsreal’s applications were ‘statute barred’.[12] He noted that, given the correspondence between the parties prior to the making of the consent orders, any application by Gippsreal to extend time under s 31 of the CPA may well have been refused.[13] His Honour noted:[14]
Indeed, the ‘finalisation’ of a civil proceeding for this purpose is neither defined in the CPA, nor does it enjoy any accepted meaning as a term of art in statutory or general law. Yet the word has been used in s 30(2) as the pivotal event which governs the time limit within which a s 29 application must be brought.
[12]Ibid, [42].
[13]Ibid, [43].
[14]Ibid, [45].
His Honour considered s 30 of the CPA, observing as follows:[15]
In this context, in its ordinary and natural meaning the word ‘finalisation’ as used in s 30(2) means to ‘complete’, ‘conclude’ or ‘bring to an end’ the relevant civil proceeding. It is a concept to be applied looking at the position at the end of a case overall and in a practical way, rather than in any technical sense.
[15]Ibid, [49].
His Honour went on to say as follows:[16]
The facility provided by s 29 of the CPA alters the balance in favour of litigants who would otherwise incur a costs burden or suffer loss which was materially contributed to by a contravention of an overarching obligation, and does so in a significant way. The CPA in this way gives very valuable, and commercially important advantages to litigants.
Further, and in the interests of justice, achieving finality in litigation is a clear and necessary objective.
The availability of the rights conferred by s 29 of the Act is therefore balanced and governed by due observance of the time limit found in s 30(2), which it is expressed in mandatory terms.
The legislative purpose of s 30(2), calls for the time limit to be observed, with the result that, if it is not, the rights of a party to a civil proceeding or any other person to make an application are statute barred.
[16]Ibid, [51]-[54].
His Honour went on to state that the orders in the first of the two proceedings, which gave the parties ‘liberty to apply’, did not detract from the orders operating to effect the finalisation of the proceeding for the purposes of s 30(2).[17]
[17]Ibid, [57].
His Honour went on to consider the effect of the orders made in the second of the two proceedings, which expressly reserved the question of whether any non‑party may be liable to pay the costs of that proceeding. His Honour found that reservation ineffective to attract the operation of s 30(3) of the CPA, which extends the definition of the date of finalisation of the proceeding to the date in which further orders, including orders relating to costs, to the date of any later orders. His Honour stated as follows:
… if no such further orders are in fact made, even if they may be contemplated by the initial orders made on the ‘finalisation’ of the relevant civil proceeding, for example by the reservation of costs in the initial orders, the intention of the statutory framework is to confer on the first-made initial orders the status of the final orders made by ‘finalisation’ of the relevant civil proceeding within the purview of s 30(2), if they otherwise have this effect.
I do not accept that the effect of s 30(3) of the CPA is to defer the date of ‘finalisation’ of the relevant civil proceeding to the date on which a party’s costs application is finally determined following the making of orders which otherwise result in the ‘finalisation’ of proceedings. Construing the sub‑section in this way would itself extend the time in which to make an application for the special s 29 costs order, notwithstanding the clear legislative intent to provide for the time limit set out in s 30(2) of the Act.
The decision of Vickery J in Gippsreal[18] referred to with apparent approval by Sloss J in Talacko & Ors v Talacko.[19] Sloss J also paraphrased the reasoning of Vickery J in Gippsreal[20] as follows:[21]
His Honour also referred to the provisions of s 30(3), noting that where an order in respect of costs is made after the ‘finalisation’ of the relevant civil proceeding, the date of the making of the last of those orders is taken to be the date of finalisation of the proceeding. However, his Honour stated that he did not accept that the effect of s 30(3) was to defer the date of ‘finalisation’ of the relevant civil proceeding to the date on which a party’s costs application is finally determined following the making of orders which would result in the ‘finalisation’ of the proceedings. He said that construing the subsection in that way would itself extend the time in which to make an application for the s 29 costs order, notwithstanding the clear legislative intent to provide for the time limit set out in s 30(2).
[18][2015] VSC 284.
[19][2017] VSC 804.
[20][2015] VSC 284.
[21]Ibid, [128].
Sloss J also referred to the decision of the Court of Appeal in GippsrealLtd v Kenny,[22] where Gippsreal appealed against a later refusal of Vickery J to make costs orders against the lawyers pursuant to r 63.23 of the Rules, on the basis that there had been an inordinate and not satisfactorily explained delay on the part of Gippsreal in making its applications for costs against the lawyers. The Court of Appeal noted his Honour’s decision in Gippsreal[23] to the effect that Gippsreal’s claims were not made within the time specified by s 30 of the CPA, and stated: ‘It is not necessary for us to refer to the judge’s reasons for that decision.’[24]
[22][2016] VSCA 319.
[23][2015] VSC 284.
[24]Ibid, [27].
However, later in its reasons, the Court held that Vickery J was correct in finding that the discretion under r 63.23 is to be informed by the time limits imposed by s 30 of the CPA, especially where an application under r 63.23 is based upon an alleged breach of an overarching obligation by a lawyer.[25] The Court stated as follows:
This is because ss 30 and 31 of the CPA evince a clear legislative intention that applications for relief based on a breach of an overarching obligation must be made prior to final orders being made in the relevant litigation, subject to the power of the Court to grant an extension where the person making the application was not aware of the breach prior to the making of final orders.[26]
[25]Ibid, [106].
[26]Ibid.
In 1165 Stud Road Pty Ltd v Powers & Ors (No 2) (‘1165 Stud Road’),[27] another application by a party under s 29 of the CPA that non‑parties pay that party’s costs of the proceeding, Vickery J held that the reference to ‘finalisation’ in s 30(2) of the CPA included the discontinuance of a proceeding.[28]
[27][2015] VSC 735.
[28]Ibid, [100]. The decision was the subject of an appeal (see John Gdanski v Palms Court Management Pty Ltd [2017] VSCA 348), which noted (at [23]) Vickery J’s finding that the s 29 application was out of time, but did not consider his Honour’s reasons in that regard.
Accordingly, the reasoning in both Gippsreal[29] and 1165 Stud Road[30] caused me some concern that Mr Donaghey’s claim under s 29 of the CPA was statute barred, or alternatively, the Court lacked jurisdiction to entertain the application.
[29][2015] VSC 284.
[30][2015] VSC 735.
The further submissions advanced on behalf of Mr Nelson’s estate were brief, as set out below:
On behalf of the deceased estate of Darroll Nelson, I advise that the estate does not contend that the application brought by the Defendant in this matter is ‘statute barred’ by reason of the operation of s 30(2) of the [CPA] since the discontinuance in this case was without leave and so an administrative act with costs consequences flowing, not from an order but from the rules ‘unless the Court otherwise orders’. Adopting the ‘textual context’ approach referred to by his Honour Justice Vickery in Gippsreal at paragraph [47] the current circumstances are distinguishable from those earlier considered. (emphasis in original).
The submissions filed on behalf of Mr Donaghey were somewhat more fulsome, and can be summarised as follows:
(a) reference was made to the purposes of the CPA, which are significant when construing the provisions of the CPA;
(b) the direct purpose of s 29(1) of the CPA is to permit the Court to make order ‘ameliorating the loss, detriment or other harm suffered by a person as a result of a contravention of any overarching obligation’;
(c) s 30(1) of the CPA permits, by its terms, an application under s 29 to a court in which a civil proceeding had previously been heard, or where it is currently being heard. The reference to ‘the civil proceeding was, or is being heard’ in s 30(1)(a) of the CPA (emphasis added) contemplates an application under s 29 being made after the proceeding has been heard;
(d) the term ‘finalisation’ is not defined in the CPA, and it is often the case that litigation does not cease at the moment judgment is handed down, with applications for costs and interest often being made after the entry of judgment. The position is even more ambiguous where a proceeding comes to an end otherwise than by the delivery and entry of judgment;
(e) the submissions highlighted the difficulties arising out of Vickery J’s construction of the term ‘finalisation’, as follows:
A tension exists between this constraint and the fact that it may remain [un]controversial (sic) during the proceeding whether the obligation has been breached or not. A party may contend that a dubious argument is sustainable right up until a court determines that it is not, is misconceived or wholly unmeritorious. The courts have expressed an unwillingness to engage in such voluminous arguments about breaches of obligations while the litigation remains on foot. Judgement [sic] may well mark the first time in the proceeding that the application might legitimately be made, yet also represent the finalisation of the proceeding.
(f) the facts in Gippsreal[31] illustrate the vice that the time constraint in s 30(2) was intended to avoid. However, in the current case the position is different, given that Mr Gabelich discontinued the proceeding unilaterally and without notice;
[31][2015] VSC 284. Presumably here Mr Donaghey is referring to Gippsreal’s delay in bringing the applications for non-party costs, which exceeded two years.
(g) section 30(3) provides that if an order is made after the date of the finalisation of the proceeding, the date of the making of the last order is taken to be the date of the finalisation of the proceeding;
(h) the term ‘an order in respect of costs’ in s 30(3) of the Act should be given a broad meaning, and should be taken to include Mr Donaghey’s application for costs filed on 16 May 2017, which has not yet been determined; and
(i) it was submitted as follows (with respect to Mr Donaghey’s application for costs made on 16 May 2017):
Provided at least one of those applications is not brought pursuant to section 29 of the Civil Procedure Act 2010 (Vic) but either the Rules of Court or some other statutory provision or inherent power, the proceeding has not been finalised for the purposes of section 30 as a relevant order will, of necessity, be made.
Resolution
The issues in this application are as follows:
(a) whether Mr Donaghey’s application under s 29(1) of the CPA is statute barred;
(b) did the issue of the proceeding amount to a breach of an overarching obligation or other conduct which would justify an award of indemnity costs in favour of Mr Donaghey?
(c) ought Mr Nelson’s estate be jointly and severally liable with Mr Gabelich to pay those costs?
(d) ought Mr Donaghey be denied any entitlement to legal costs by reason of:
(iv)the terms of clause 4 of the Deed, which arguably prescribes the priority in which the proceeds of sale of the houseboat were to be applied, having regard to the lack of evidence concerning the manner in which the sale proceeds have been applied; and
(v) the alleged lack of evidence as to whether the legal costs have been paid, or by whom;
(e) whether there is sufficient evidence to establish that any financial loss was caused by the conduct of Mr Gabelich and/or Mr Nelson;
(f) whether an order ought to be made in favour of Mr Donaghey for financial losses arguably suffered by Variant; and
(g) if an order for costs ought to be made, how any costs are to be quantified.
Whether an application under s 29 of the CPA is ‘statute barred’
Strictly speaking, the terms of s 30 of the CPA do not impose a limitations period upon an applicant under s 29 of the CPA (which could be waived by a respondent to the application). Rather, in my view, the bringing of an application prior to the finalisation of a proceeding, whether by reason of judgment, default of appearance or defence, or, as in this case, discontinuance, is a necessary pre‑condition to the court exercising its jurisdiction under s 29 of the CPA. Accordingly, the fact that Mr Nelson’s estate does not take the point is, with respect, somewhat beside the point.
The decisions of Vickery J in Gippsreal[32] and 1165 Stud Road[33] (by which I am bound) tell against the persuasive submissions advanced on behalf of Mr Donaghey to the effect that requiring a party to make an application under the CPA prior to the finalisation of the proceeding would severely curtail an aggrieved party’s right to relief under s 29 of the CPA. The potential injustice of such a construction of the Act is starkly highlighted in the current case, where the notice of discontinuance was filed, without notice, on the first business day after RCL sent its letter demanding that the proceeding be withdrawn.
[32][2015] VSC 284.
[33][2015] VSC 735.
As noted above, in 1165 Stud Road,[34] Vickery J held that filing a notice of discontinuance was a ‘finalisation’ for the purposes of s 30 of the CPA. Further, he repeated his finding in Gippsreal[35] to the effect that making an application for costs under s 29 of the CPA after the finalisation of a proceeding, even if accompanied by an application for costs under the Rules, and pursuant to the inherent jurisdiction of the Court, did not enable an applicant to in effect, extend time for the purposes of s 30(3) of the CPA, because such an application would impermissibly allow an applicant to circumvent the strict time limit applied by s 30(2) of the CPA.
[34]Ibid.
[35][2015] VSC 284.
This construction of s 30 of the CPA may leave s 30(3) of the CPA, which recognises that many things often can and do occur after, say, entry of judgment, little work to do. The current case highlights the potentially harsh consequences of such a construction of the CPA, and I doubt that such a strict limitation upon the rights of people who have incurred costs and suffered damages by reason of conduct which would otherwise be sanctioned under the CPA was intended by the legislature. Further, such a construction sits uncomfortably with the philosophy underpinning the Court of Appeal’s decision in Yara[36] to the effect that courts and legal practitioners must actively promote the just, efficient, timely and cost effective resolution of disputes, a principle which might be undermined if parties were required to bring applications of this nature prior to the entry of judgment or other finalisation of the proceeding. However, that is the law as it currently stands in this state, unless an alternative construction is found to be available, or there is some modification of s 30(2) by the legislature.
[36](2013) 41 VR 302.
Accordingly, it is not open to me to formulate an alternative construction of the relevant provisions, if one were available, as urged upon me by Mr Donaghey. Further, I can see the merits of the construction of s 30 adopted by Vickery J, insofar as it is a construction in conformity with the need to ensure finality in litigation. Any alternative construction might offend that principle. However, upon close analysis, there is a material difference between the current proceeding and the proceedings before Vickery J in Gippsreal[37] and 1165 Stud Road.[38] In Gippsreal,[39] a review of the orders ‘finalising’ the two proceedings is instructive. In the first of the two proceedings, orders were made by consent, among other things, for the payment of a sum of money to Gippsreal, the dismissal of the claim and counterclaim, and for the clients of the lawyers to pay Gippsreal’s costs of the proceeding from a certain date on an indemnity basis. In the second of the two proceedings, orders were made, by consent, among other things, that the clients of the lawyers pay Gippsreal’s costs on an indemnity basis, the costs of some other parties on an indemnity basis in a fixed sum, and expressly reserving ‘the question of whether any third parties may be liable to pay any or all’ of Gippsreal’s and the other parties’ costs.
[37][2015] VSC 284.
[38][2015] VSC 735.
[39][2015] VSC 284.
In 1165 Stud Road,[40] Vickery J was faced with a summons seeking the payment of legal costs from non‑parties, including, but not limited to, the solicitor of a party who had discontinued a proceeding some seven months prior to the date of the issue of the summons. Again, a review of the orders leading up to the finalisation of the proceeding are instructive. On 12 May 2014 I made orders (which were varied on 14 May 2014) as follows:
[40][2015] VSC 735.
1. Subject to Rockwell Olivier filing and serving a notice of discontinuance on behalf of the plaintiff with respect to its claims against the third defendant by 4.00pm today, Rockwell Olivier has leave to file and serve a notice of ceasing to act forthwith.
2. Subject to paragraph 3 of these orders, the plaintiff pay the third Defendant’s costs of the proceeding, including reserved costs.
3. The parties have liberty to apply with respect to the costs payable pursuant to paragraph 2 of these orders.
4. The trial date of 4 June 2014 be vacated.
5.By 4.00pm on 26 May 2014 the solicitors for the liquidator notify the solicitors for the remaining defendants whether the Plaintiff intends to proceed with its claim in the proceeding.
6.By 4.00pm on 10 June 2014 the remaining defendants file and serve any applications for leave to proceed against the company, and any claim for security for costs, returnable on 16 June 20154 at 10.30am.
7.The parties’ costs be otherwise reserved.
Discussions in open court referred to in Vickery J’s reasons confirm my recollection that the third defendant foreshadowed making, as it did, an application that the costs payable pursuant to the above order be paid by non‑parties, including the plaintiff‘s solicitors. Vickery J held, as he did in relation to the second proceeding considered in Gippsreal,[41] that reserving the question of costs, or granting liberty to apply with respect to costs, did not operate to postpone the finalisation of the proceeding such as to enable an application to be made under s 29(1) of the CPA.
[41][2015] VSC 284.
The above might be considered to be fatal to Mr Donaghey’s application in the current case. However, there is at least one significant difference between the circumstances of the current case and the proceedings considered by Vickery J in Gippsreal[42] and 1165 Stud Road.[43] In particular, in each of the proceedings considered by Vickery J, the orders that in effect finalised the proceeding also dealt with the question of costs at the same time, in the case of the proceedings considered in Gippsreal,[44] by consent. Arguably, in 1165 Stud Road,[45] it was not strictly necessary for me to make an order for costs, given the operation of r 63.15 of the Rules, but I did. While possibly of less significance to the proper application of s 30 of the CPA in the current case, another point of distinction between the proceedings considered by Vickery J and the current case is that in those proceedings, the party which subsequently made an application for costs was on notice of the pending finalisation of the proceedings. In Gippsreal,[46] the relevant proceedings were dismissed by consent, and, in the rather unusual circumstances of 1165 Stud Road,[47] the grant of leave to the plaintiff’s solicitors to cease to act was conditional upon the discontinuation of the proceeding, such that the relevant defendant was on notice of the forthcoming discontinuance of the proceeding. If the applicants for costs in 1165 Stud Road[48] had turned their mind to the provisions of s 30 of the CPA, they had a brief window of time to make any application under s 29(1) of the CPA prior to the proceeding being finalised, even if only a matter of days. In the current case, Mr Donaghey and his solicitors were not on notice of the pending finalisation of the proceeding, and, while the provisions of r 63.15 provide the ‘default position’ with respect to the cost consequences of Mr Gabelich’s discontinuation of the proceeding, the terms of r 63.15 mean that the question of costs remains ‘at large’.
[42][2015] VSC 284.
[43][2015] VSC 735.
[44][2015] VSC 284.
[45]Ibid.
[46][2015] VSC 284.
[47][2015] VSC 735.
[48]Ibid.
Rule 63.15 provides as follows:
Unless the Court otherwise orders, a party who discontinues or withdraws part of a proceeding, counterclaim or claim by third party notice shall pay the costs of the party to whom the discontinuance or withdrawal relates to the time of the discontinuance or withdrawal. (emphasis added)
Accordingly, the language of the rule makes it clear that it is open to a party to a proceeding which has been discontinued to apply to the Court for orders departing from the default position, and indeed, this occurs from time to time. For example, an aggrieved defendant may seek orders for indemnity costs (as has occurred here), or a party who discontinues a proceeding may seek to persuade the Court that the circumstances were such that the discontinuing party should not bear the costs consequences of the default position. Therefore, in the circumstances of the current case, the making of a costs application pursuant to the liberty granted by the terms of r 63.15 could restart time for the purposes of s 30(3) of the CPA.
The distinction between the current case and the proceedings which were the subject of the decisions in Gippsreal[49] and 1165 Stud Road,[50] is subtle, but real. I also note that in Gippsreal Ltd v Kenny,[51] the Court of Appeal did not consider the question of when a proceeding is ‘finalised’, but when finding that Vickery J’s reliance upon the time limits in s 30(2) in exercising his discretion under r 63.23 of the Rules was correct,[52] the Court referred to ‘final orders’ being made in the relevant proceeding, rather than the proceeding being ‘finalised’. Whether the use by the Court of Appeal of different terminology was intentional or is of any significance to the current proceeding is not discernible from the reasons.
[49][2015] VSC 284.
[50][2015] VSC 735.
[51][2016] VSCA 319.
[52][2016] VSCA 319, [106].
I appreciate that my view on the distinction between the circumstances in the current case and the proceedings considered by Vickery J could be criticised as carrying the vice referred to by Vickery J in Gippsreal[53] and 1165 Stud Road,[54] that is, allowing such applications to be made after the finalisation of the proceeding would be productive of delay, and would risk the undue prolongation of litigation. However, the question of costs (including any application under s 29) is always within the discretion of the Court, and any undue delay in the making of any such application would no doubt be a matter to be taken into account in the exercise of discretion, as demonstrated by the decision of the Court of Appeal in Gippsreal Ltd v Kenny,[55] where the Court agreed that Gippsreal’s inordinate delay in making an application for costs under r 63.23 warranted exercise of the discretion to make orders under that rule being exercised against Gippsreal.
Did the issue of the proceeding amount to a breach of an overarching obligation which would justify an award of indemnity costs in favour of Mr Donaghey?
[53][2015] VSC 284.
[54][2015] VSC 735.
[55][2016] VSCA 319.
As noted above, Mr Donaghey is entitled to a costs order in his favour against Mr Gabelich by reason of the terms of r 63.15. The question is whether the circumstances are such that Mr Donaghey is entitled to an award for costs he incurred prior to the discontinuance of the proceeding on an indemnity basis.
Of course, it is not necessary for Mr Donaghey to rely upon any breaches of the overarching obligations under the CPA to be successful in obtaining an award for indemnity costs. The principles concerning the circumstances in which such an award will be made are well established, and pre‑date the CPA. Reference is frequently made in this jurisdiction to the principles articulated by Harper J in Ugly Tribe Pty Ltd v Sikola,[56] where his Honour held that the following circumstances may justify an award of indemnity costs (omitting citations):[57]
[56][2001] VSC 189.
[57]Ibid, [7].
(a)the making of an allegation, known to be false, that the opposite party is guilty of fraud;
(b)the making of an irrelevant allegation of fraud;
(c)conduct which causes loss of time to the Court and to other parties;
(d)the commencement or continuation of proceedings for an ulterior motive;
(e)conduct which amounts to a contempt of court;
(f)the commencement or continuation of proceedings in wilful disregard of known facts or clearly established law; and
(g)the failure until after the commencement of the trial, and without explanation, to discover documents the timely discovery of which would have considerably shortened, and very possibly avoided, the trial.
Of course, the categories of circumstances which would warrant an award for indemnity costs are not closed. Mr Donaghey relied upon the alleged breach of the overarching obligation under s 18 of the CPA in support of his application under s 29 of the CPA, which provides that:
A person to whom the overarching obligations apply must not make any claim or make a response to any claim in a civil proceeding that –
(a) is frivolous; or
(b) is vexatious; or
(c) is an abuse of process; or
(d)does not, on the factual and legal material available to the person at the time of making the claim or responding to the claim, as the case requires, have a proper basis.
Mr Donaghey also relied upon the failure of Mr Nelson to file a ‘proper basis’ certificate upon the issue of the writ, as required by s 42 of the CPA. Section 46 provides that the Court may take into account any failure to provide a proper basis certificate when determining questions of costs in a proceeding.
In the current case, there are some evidentiary difficulties associated with the question of whether the conduct of Mr Gabelich and/or Mr Nelson in merely issuing the proceeding was so egregious as to warrant making an order for indemnity costs, not the least of which are Mr Gabelich’s failure to participate in the proceeding, and Mr Nelson’s death. The relatively short period of time in which the substantive part of the proceeding was on foot also means that there was little opportunity for Mr Gabelich’s claims, or Mr Donaghey’s response to those claims to be evaluated, perhaps through the mechanism of a summary judgment application. However, while Mr Gabelich’s and Mr Nelson’s subjective beliefs regarding Mr Gabelich’s standing to bring the claim, and the merits of any such claim are relevant to the question of costs, they are not determinative, such that it is possible to determine the application for indemnity costs in their absence.
In my view, Mr Donaghey is entitled to an award of indemnity costs, by reason of the question of Mr Gabelich’s lack of standing alone. The objective fact is that Mr Gabelich had no standing to bring the proceeding, by reason of the appointment of a receiver to his income and property. He was represented by lawyers in both this proceeding and the Federal Circuit Court proceeding where the orders appointing a receiver were made, such that it is unlikely that he had been unaware of the effect of the order appointing a receiver.
Further, while submissions were made on behalf of Mr Nelson’s estate to the effect that there was a construction of the Deed available which could give Mr Gabelich a right to relief, it seems to me that such a construction is very strained, and not available on a plain reading of what is rather a simple document.
Accordingly, subject to further consideration of the other issues in the application, Mr Donaghey would be entitled to an award of indemnity costs in his favour, on the basis that the proceeding was commenced ‘in wilful disregard of known facts or clearly established law’. Further, bringing a proceeding in the absence of any standing to bring that proceeding is arguably an abuse of process, and certainly lacks a proper basis.
Ought Mr Nelson’s estate be jointly and severally liable with Mr Gabelich to pay those costs?
Having found that Mr Donaghey is entitled to an indemnity costs order in his favour, the question remains as to whether Mr Nelson’s estate ought to be liable for the payment of those costs together with Mr Gabelich. As previously noted, Mr Donaghey relies upon the Court’s inherent jurisdiction, s 29 of the CPA, and r 63.23 of the Rules.
Rule 63.23 provides as follows:
Costs liability of lawyer
(1)Where a solicitor for a party, whether personally or through a servant or agent, has caused costs to be incurred improperly or without reasonable cause or to be wasted by a failure to act with reasonable competence and expedition, the Court may make an order that –
(a)all or any of the costs between the solicitor and the client be disallowed or that the solicitor repay to the client the whole or part of any money paid on account of costs;
(b)the solicitor pay to the solicitor’s client all or any of the costs which the client has been ordered to pay to any party;
(c)the solicitor pay all or any of the costs payable by any party other than the client.
(2)Without limiting paragraph (1), a solicitor fails to act with reasonable competence and expedition for the purpose of that paragraph where any application in or trial of a proceeding cannot conveniently be heard or proceed, or fails or is adjourned without any useful progress being made, by reason of the failure of the solicitor to –
(a)attend in person or by a proper representative;
(b)file any document which ought to have been filed;
(c)lodge or deliver any document for the use of the Court which ought to have been lodged or delivered;
(d)be prepared with any proper evidence or account; or
(e)otherwise proceed.
(3)The Court shall not make an order under paragraph (1) without giving the solicitor a reasonable opportunity to be heard.
(4)The Court may, before making an order under paragraph (1), refer the matter to a Costs Judge or another Associate Judge for inquiry and report.
…
(6)The Court may order that notice of any proceeding or order against a solicitor under this Rule be given to the client in such manner as the Court directs.
(7)This Rule applies, with any necessary modification, to a barrister as it applies to a solicitor.
It is accepted that the current formulation of r 63.23, which was introduced in its current form in 2000, along with the terms of s 29 of the CPA, significantly extends the ambit of what is often described as the ‘wasted costs’ jurisdiction. In particular, the terms of r 63.23 provide that it is not necessary for a party seeking costs from a legal practitioner to establish ‘serious or gross’ negligence on the part of that legal practitioner: mere negligence will suffice.
In Dura,[58] John Dixon J summarised the matters which need to be considered by the Court in its exercise of the wasted costs jurisdiction:[59]
[58]Dura, [53]-[55], also see Apollo 169 Management Pty Ltd v Pinefield Nominees Pty Ltd (No 2) [2010] VSC 475, [30]-[33].
[59]Ibid, [57].
(a)The court’s jurisdiction to make a wasted costs order against a solicitor is founded on breach of the duty owed by the legal practitioner to the court to perform his duty as an officer of the court in promoting, within his own sphere, the cause of justice.
(b)‘Negligent’ should be understood in an untechnical way to denote failure to act in a way no reasonably well-informed and competent ordinary member of the profession would have done.
(c)The jurisdiction to order a legal practitioner to pay the costs of legal proceedings in respect of which he or she provided legal services must be exercised with care and discretion and only in clear cases.
(d)The wasted costs jurisdiction discloses a tension between two important public interests, one that the wasted costs orders should not become a back-door means of recovering costs not otherwise recoverable against a legally-aided or impoverished litigant, and that the remedy should not grow unchecked to become more damaging than the disease and, two, that litigants should not be financially prejudiced by the unjustifiable conduct of litigation by their or their opponents’ lawyers.
(e)A legal representative is not to be held to have acted improperly, unreasonably or negligently simply because he or she acts for a party who pursues a claim or a defence that is plainly doomed to fail.
(f)The legal practitioner is not the judge of the credibility of the witnesses or the validity of the argument.
(g)A judge considering making a wasted costs order arising out of an advocate’s conduct of court proceedings must make full allowance for the exigencies of acting in that environment; only when, with all allowances made, an advocate’s conduct of court proceedings is quite plainly unjustifiable can it be appropriate to make a wasted costs order.
(h)A legal practitioner against whom a claim for a costs order is made must have full and sufficient notice of the complaint and full and sufficient opportunity of answering it, and a legal practitioner should not be called on to reply unless an apparently strong prima facie case has been made.
(i)Where a legal practitioner’s ability to rebut the complaint is hampered because the client maintains client legal privilege, full allowance must be given for the practitioner’s inability to tell the full story and he or she should be given the benefit of the doubt. In such circumstances, the court should not make an order against a practitioner without satisfying itself that it is in all the circumstances fair to do so, or, put the other way, it is only when, with all allowances made, a practitioner’s conduct of proceedings is quite plainly unjustifiable that it can be appropriate to make a wasted costs order.
(j)The procedure to be followed in determining applications for wasted costs must be fair and as simple and summary as fairness permits.
In Dura,[60] his Honour also made a number of other observations of particular relevance to the current application, as follows:
[60][2014] VSC 400, [57].
(a) in relation to the circumstances where costs are claimed against a lawyer on the basis that he or she issued a claim that has no real prospects of success (omitting citations): [61]
[61]Ibid, [66].
the challenge in the wasted costs jurisdiction is to distinguish the hopeless case per se and the hopeless case advanced in breach of duty to the court. Where there has been an abuse of process, a breach of duty may more readily be found.
(b) whether there has been a breach of duty to the Court, the concept of ‘unreasonableness’ is relevant by reference to the terms of r 63.23;[62]
[62]Ibid, [71], [73].
(c) a further relevant factor is the nature and complexity of the litigation. The more complex and factually dense the proceeding, the less likely it is able to be said that the claim is totally unarguable;[63] and
[63]Ibid, [74].
(d) his Honour stated as follows:[64]
[64]Ibid, [75].
The jurisdiction to affix liability for costs to the losing party’s solicitor for breach of duty to the court where a claim has failed requires that the applicant satisfy the court to the requisite standard that:
(a)the solicitor has instituted or maintained a claim on behalf of a client that has no, or substantially no, prospect of success;
(b)in doing so the solicitor acted unreasonably –
(i)by abusing the court’s process, or
(ii)engaging in conduct that has a tendency to defeat the interests of justice, or
(iii)failing to ensure the business of the courts was expediently conducted consistent with the due administration of justice.
(c)resulting in circumstances demonstrating an abuse of process or a failure to act to the standard of competence expected of a solicitor (specialising in building and construction law and litigation) in promoting the cause of and the proper administration of justice.
His Honour also considered the changes to the principles governing and approach to the wasted costs jurisdiction by the enactment of s 29 of the CPA, particularly in the context of an application pursued on the basis that a lawyer has breached the obligation not to make a claim that does not have a proper basis. His Honour observed:
(a) it is no longer a relevant consideration that the conduct complained of might have been imposed upon the legal practitioner by the client’s instructions;[65]
[65]Ibid, [84].
(b) the Court of Appeal in Yara[66] made it clear that ‘parties to a civil proceeding are under a strict, positive duty to ensure that they comply with each of the overarching obligations and the court is obliged to enforce those duties’;[67]
[66](2013) 41 VR 302.
[67]Dura, [92].
(c) notwithstanding the public interest affirmed by the CPA (that litigants not be financially prejudiced by the unjustifiable conduct of their opponents’ lawyers), the jurisdiction to award costs against the opponents’ lawyers is still to be approached with ‘considerable caution’ and only exercised in ‘clear cases’;[68]
[68]Ibid, [97].
(d) the Court should guard against claims under s 29(1) which could be held to be an abuse of process, or would involve complex satellite litigation;[69]
[69]Ibid, [100], [107].
(e) the discretion under s 29 is governed by the principles in Briginshaw;[70]
[70]Ibid, [108].
(f) in relation to the traditional principles governing the wasted costs jurisdiction in circumstances where a legal practitioner is constrained from putting his or her side of the story by reason of client legal privilege, his Honour stated as follows:[71]
[71]Ibid, [128].
the statutory regime under the Civil Procedure Act constrains the operations of the common law principle that a legal practitioner must have the benefit of the doubt where unable to tell the full story.
(g) the constraint referred to above arises, first, because s 13(2) of the CPA provides that a legal practitioner must comply with the overarching obligations notwithstanding any obligation the legal practitioner has to act in accordance with the instructions and wishes of the client, and secondly, the overarching obligations may be non‑delegable;[72] and
(h) where a legal practitioner seeks to rely upon the benefit of the doubt, that practitioner bears:
the burden of proving that there was privileged communications that might permit it the benefit of a doubt that relevant exculpatory circumstances were understood by the court.[73]
[72]Ibid, [129]-[131].
[73]Ibid, [137].
The need for caution when exercising the Court’s wasted costs jurisdiction and the risk of satellite litigation was emphasised by Judd J in Robert Frederick Jane.[74] Judd J also expressed concern regarding the possible adverse impact of applications under s 29 (or threats of such applications being made) upon ‘the integrity of the adversarial process, and the dependency of the courts on continuing representation of litigants by competent counsel and solicitors.’
[74][2016] VSC 217, [18].
In my view, Mr Nelson’s estate should be jointly and severally liable for Mr Donaghey’s costs of the proceeding up to the date of discontinuance of the proceeding. I accept there are some evidentiary gaps, in that it is not entirely clear from Mr Rotstein’s first affidavit whether the email to Mr Nelson relied upon by Mr Donaghey[75] enclosed a full copy of the orders appointing a receiver, although I think it is more likely than not that it did. However, it is clear from the contents of the email itself that a receiver had been appointed. Whether or not Mr Nelson was aware of the precise scope of the receivership at the time he took instructions to issue the proceeding, the very fact that orders had been made by a court to appoint a receiver should have at least alerted Mr Nelson to investigate the question of whether Mr Gabelich had standing to issue the proceeding. He was alerted to the appointment only a matter of weeks before the issue of the proceeding, such that a lapse in memory is unlikely. As such, Mr Nelson breached his obligation under s 18 of the CPA to ensure that any claim brought by him had a proper basis, and also, for the purpose of r 63.23 of the Rules, his conduct has caused Mr Donaghey to incur costs improperly and without reasonable cause. The fact that the proceeding was doomed to fail for other reasons, as it was based upon a construction of the Deed which was clearly unsustainable, only reinforces my view that in bringing this proceeding Mr Nelson was in dereliction of his duty to the Court.
[75]See Exhibit ‘HR-1’ to the affidavit of Hamish Rotstein affirmed 16 May 2017.
In Gatto,[76] I noted that it is incumbent upon a solicitor to do more than simply rely upon the oral instructions of his client.[77] This was merely a shorthand expression consistent with the observations of John Dixon J in Dura[78] referred to at paragraph 77 above, and the observations of Croft J in Pearl Lingerie Australia Pty Ltd v TGY Pty Ltd; Pearl Lingerie Australia Pty Ltd v John Giarratana,[79] to the effect that solicitors have an obligation to form a ‘professional view’ that there was a reasonable basis for lodging a caveat.[80] In that case, his Honour found that by preparing, lodging, and defending caveats without considering the underlying documents said to support a caveatable interest, but rather simply relying upon their clients’ instructions, the solicitors had ‘acted in wilful disregard of known facts and law which … amounts to serious misconduct and gross dereliction of duty on their part.’[81] While in the current case Mr Nelson was issuing a proceeding, rather than lodging a caveat, this proposition arguably has even more force when a party, via its solicitor, is invoking the jurisdiction of the Court, rather than simply making use of an administrative procedure.
[76][2016] VSC 752.
[77]Ibid, [19].
[78][2014] VSC 410.
[79][2012] VSC 451.
[80]Ibid, [25].
[81]Ibid, [26].
I note the caution expressed in the authorities regarding the imposition of costs awards against solicitors, and I appreciate the difficulties faced by Mr Nelson’s estate in responding to such an application. However, the proceeding, and the question of standing, are not complicated matters. Some complex issues have arisen in the course of resolving this application, but they do not stem from any complexity in the underlying dispute. Further, while Mr Nelson’s death does make it difficult for his estate to defend the application, orders were made for the filing and service of affidavits and submissions on 2 June 2017, where Mr Nelson was represented by counsel. There is no evidence about Mr Nelson’s capacity to provide instructions after the making of these orders and his death two and a half months later. I note that in the current case, Mr Nelson, unlike in Gatto,[82] would have been constrained by legal professional privilege in responding to the application, but as noted in Dura,[83] the applicability of the principle that legal practitioners be given the benefit of the doubt where they are so constrained has less force since the enactment of the CPA.[84]
[82][2016] VSC 752. In that case, Mr Nelson’s former client also made a claim for costs against Mr Nelson, thus waiving any privilege in documents relevant to the question of whether there was any breach of duty on the part of Mr Nelson.
[83][2014] VSC 410.
[84]Ibid, [128].
Accordingly, I will order that Mr Nelson’s estate be jointly and severally liable for Mr Donaghey’s costs of the proceeding, on an indemnity basis, up to and including 27 February 2017. The question of the quantification of those costs will be discussed later in these reasons.
Ought Mr Donaghey be denied any entitlement to legal costs by reason of the terms of clause 4 of the Deed, or by reason of insufficient evidence as to whether the legal costs have been applied, or by whom?
Contrary to the submissions advanced by Mr Donaghey, in my view, the terms of clause 4 of the Deed obliged Mr Donaghey to apply the proceeds of sale of the houseboat to any legal fees incurred by him in enforcing his security interest in the houseboat, and those legal costs would encompass the costs of defending this proceeding. According to Mr Donaghey’s submissions the proceeds of sale of the houseboat were applied first to selling expenses, then to extinguish Mr Gabelich’s loan from Mr Donaghey personally, and then to pay down Variant’s loan to Mr Gabelich, thus exhausting the sale proceeds of the houseboat, but not fully extinguishing Mr Gabelich’s debt to Variant. If Mr Donaghey had applied the sale proceeds in accordance with the Deed, he would have been able to recoup the costs of the proceeding, and Mr Gabelich’s debt to Variant would have been higher than it would otherwise now be.
However, the only party or parties who could rely upon Mr Donaghey’s arguable breach of the terms of the Deed for the purpose of arguing in this application that Mr Donaghey engaged in ‘double dipping’ are Mr Gabelich and the receiver. Neither of those parties participated in the hearing of the application. Mr Nelson’s estate, not being a party to the Deed, cannot rely upon Mr Donaghey’s alleged breach of the Deed in resisting the application for costs. Nor did Mr Nelson’s estate contend that the terms of the Deed should affect my discretion with respect to costs. Rather, Mr Nelson’s estate submitted that the terms of the Deed and the lack of sworn evidence as to how the proceeds of sale of the houseboat were applied raised real questions as to whether, in conformity with the indemnity principle,[85] Mr Donaghey was liable to pay and actually paid the costs claimed.
[85]Shaw v Yarranova Pty Ltd & Anor [2011] VSCA 55.
Turning first to the question of whether the manner in which Mr Donaghey apparently applied the proceeds of sale of the houseboat ought affect the exercise of my discretion to award costs in his favour on this application, upon reflection, I have concluded that it is not a relevant consideration, at least as between Mr Donaghey and Mr Nelson’s estate. Mr Donaghey was always entitled to his costs of the proceeding from Mr Gabelich pursuant to r 63.15. Of course, if he had those costs taxed and sought to enforce a judgment of the Costs Court, Mr Gabelich or his receiver might have been able to resist enforcement on the basis of the terms of the Deed, or be able to bring a claim for breach of contract. However, subject to the evidentiary issues raised by Mr Nelson’s estate, with which I will deal further below, giving effect to the terms of the Deed via the exercise of my discretion would be taking into account matters which would not ordinarily fall for consideration in the exercise of my discretion with respect to costs, and as such would be taking into account an irrelevant consideration.
As for the evidentiary issues, subject to Mr Donaghey filing and serving an affidavit which verifies the matters set out in paragraphs 12 to 14 of Mr Donaghey’s submissions filed on 11 December 2017, I accept that making an award of costs in favour of Mr Donaghey would not offend the indemnity principle. Further, given the amounts at stake, I do not wish to put the parties to any more cost and expense by requiring Mr Donaghey to apply to re‑open his case for the purpose of providing formal proofs, particularly given that the provision of information regarding the sale of the houseboat was prompted by my request for further submissions upon a potential issue identified by me, not the parties. Finally, I accept that given the invoices exhibited to Mr Rotstein’s affidavits are addressed to Mr Donaghey, there is no reason not to conclude that he has incurred the liability to pay those costs.
Did Mr Donaghey suffer financial loss by reason of the conduct of Mr Gabelich and/or Mr Donaghey?
Two issues arise with respect to this question: first, whether the breach of the overarching obligations on the part of Mr Gabelich and Mr Nelson caused any loss, and if so, to whom?
Any claim for costs and/or damages for financial loss under s 29 of the CPA is to be evaluated in accordance with the traditional principles of causation: that is, the conduct complained of must be a substantial cause of the losses suffered.[86] When the claim is for legal costs, questions of causation, especially in a relatively simple case such as this, are not generally very difficult. Claims for financial loss are not necessarily so straightforward, as illustrated by the current claim, notwithstanding that the size of the claim ($20,600) is relatively modest.
[86]Gatto, [17].
What can be accepted is Mr Donaghey’s evidence that the businesses in which he is involved, SodaKING and Variant, needed a substantial injection of cash in February 2017, and that he had taken steps to sell the houseboat (which he was entitled to do), to fund the shortfall. The evidence is that Mr Donaghey could not complete the sale of the houseboat, because he could not give the required warranty to the purchaser. The causal nexus between the breach of the overarching obligation (the bringing of a claim without a proper basis), and the need to take out a short term loan has been established. There is evidence that the lender required the payment of an upfront fee, and, given that no claim is made for interest, the duration of the loan, and the period of time for which the sale of the houseboat was delayed, is not particularly relevant. The amount of the loan was less than the sale proceeds of the houseboat, such that it could not be said that the sale of the houseboat would not have been sufficient to meet the needs described by Mr Donaghey in his affidavit, and the fees claimed were payable upfront (in the case of the establishment fee) or in instalments ‘front loaded’ into the earlier period of the loan, prior to the sale of the houseboat (in the case of the fixed fee). Arguably, the amount claimable for the fixed fee ought to be reduced to take into account the fact that the loan could have been repaid on or shortly after 1 April 2017, when the sale of the houseboat was settled, but it is not necessary to undertake that calculation, for the reasons which follow.
The real difficulty is that there is no evidence that the financial loss claimed, being the upfront fees, was suffered by Mr Donaghey personally. Variant was the borrower. The evidence is that the funds were borrowed to fund the immediate commercial needs of SodaKING and Variant, who are not parties to this proceeding or this application. There is no evidence as to who paid these fees. Further, even if Mr Donaghey’s attempt to stand in the shoes of Variant (as its sole director and shareholder) was permissible, which I do not accept, no such submission could be advanced with respect to SodaKING, given that Mr Donaghey is but one of a number of directors and shareholders. ASIC searches show that Mr Donaghey was one of three directors of SodaKING, and owns approximately 37 per cent of the issued shares of SodaKING. Accordingly, Mr Donaghey’s claim for financial loss fails. Mr Donaghey also relied upon the fact that he was a guarantor of the loan in support of his claim for financial loss. However, there is no evidence that Mr Donaghey personally suffered any actual loss by reason of merely executing a guarantee. All he suffered was a potential exposure to loss: no doubt if he had suffered any direct personal loss, he would have advanced evidence of such a loss.
How are the legal costs of the proceeding to be quantified?
The consequence of this ruling is that Mr Gabelich and Mr Nelson are liable to pay Mr Donaghey’s costs of the proceeding up to the date of the discontinuation of the proceeding on an indemnity basis. The question of the costs of this application, given the mixed outcome, will need to be dealt with on another occasion. Given the costs incurred by the parties in this application, and in particular Mr Donaghey, I am loathe to put the parties to the costs of a taxation of the costs which are the subject of these reasons. However, the sum claimed of $17,931 seems a little high, even on an indemnity basis, given that the proceeding was clearly doomed to fail, no summary judgment application was made, no court appearances occurred, and no defence was filed. I am prepared to fix the costs in a sum certain, but will seek brief written submissions on this question, and fix the amount after receipt of those submissions.
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