Ipex ITG Pty Ltd (recs & mgrs apptd) v Melbourne Water Corporation

SUPREME COURT OF VICTORIA
COURT OF APPEAL

S APCI 2010 0069

IPEX ITG PTY LTD (ACN 007 433 623) (RECEIVERS AND MANAGERS APPOINTED)	First Appellant
	and
TAKAPANA INVESTMENTS PTY LTD	Second Appellant
and
JOEL SCHWALB	Third Appellant
v
MELBOURNE WATER CORPORATION	Respondent

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JUDGES:	REDLICH and MANDIE JJA, BEACH AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	27 October 2011
DATE OF JUDGMENT:	13 August 2012
MEDIUM NEUTRAL CITATION:	[2012] VSCA 169
JUDGMENTS APPEALED FROM:	Ipex ITG Pty Ltd v Melbourne Water Corporation (No 5) [2009] VSC 383 and Ipex ITG Pty Ltd v Melbourne Water Corporation (No 6) [2009] VSC 571 (Byrne J)

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TRADE PRACTICES – Misleading and deceptive conduct – Information technology outsourcing agreement – Whether representation as to number and type of help desk calls in preceding six months accurate – Whether implied representation as to number and type of calls in future – Whether representation by silence misleading or deceptive – Whether reliance – Whether causation of loss.

PRACTICE AND PROCEDURE – Costs – Whether judge erred in ordering payment of costs on a solicitor and client basis – Whether judge erred in ordering costs against a non-party.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr R C Macaw QC with Mr D G Robertson	AJH Lawyers
For the Respondent	Mr G H Garde QC with Mr M G Roberts	Allens Arthur Robinson

REDLICH JA:

For the reasons given by Mandie JA, the appeal should be dismissed.

MANDIE JA:

Introduction[1]

[1]The background facts are drawn from the reasons of the learned trial judge – Ipex ITG Pty Ltd v Melbourne Water Corporation (No 5) [2009] VSC 383 (‘Reasons’).

The first appellant (‘Ipex’) initially carried on business as an IT hardware company but, by the late 1990s, it had begun to develop a business of providing IT outsourcing services for commercial enterprises and government departments. In 1998, Ipex submitted a tender to a group of five Commonwealth departments or agencies to provide IT services. This tender was unsuccessful and then Ipex submitted a tender to provide IT services for seven Commonwealth departments or instrumentalities (‘the G8 project’). The G8 project involved servicing over 9000 work stations for which Ipex tendered at a price of $130 million for five years. This tender was successful. At about this time, Ipex also tendered for two other projects, one for the provision of IT services for the NSW WorkCover Authority and one for the provision of IT services to the respondent (‘Melbourne Water’).

Seven IT service providers were invited to submit tenders or proposals for the Melbourne Water project and the tenders were required to be lodged by 17 May 2000. The invitation to tender was accompanied by a request for proposal (‘RFP’) prepared on behalf of Melbourne Water and delivered to tenderers on or about 10 April 2000. The RFP was a lengthy document setting out information about Melbourne Water’s IT environment that the successful tenderer was required to service and, in considerable detail, the services which the tenderer was to provide. The RFP also required each tenderer to provide information as to its costings.

The learned trial judge said, concerning the RFP:[2]

A feature of the RFP was that it was expressed in terms that the tenderers were to provide what were described as outcomes. How these outcomes were to be achieved was, to a very large extent, a matter for the tenderer. Another important feature was that the tenderers were required to submit a lump sum price for providing those outcomes. While there was provision in the form of contract for an adjustment of the price in the event that the scope of work was varied, the wording of the specification was such that a change of this nature would be unlikely. The end result was that the successful tenderer, Ipex, was required to assume most, if not all, of the risks involved of providing IT services for Melbourne Water over the three year term of the project and it was therefore required to build into its tender price an allowance for this.

[2]Reasons, [8].

The Ipex tender price was $5,218,204 plus GST. It was the lowest tender and was successful. The contract with Melbourne Water was entered into on 27 July 2000 and commenced on 1 August 2000 for a term ending on 31 July 2003.

The learned trial judge described the function of Melbourne Water and the nature of the services to be provided by Ipex as follows:[3]

A significant part, but by no means all, of the services to be provided under the contract involved the provision of help desk services. The function of Melbourne Water, as its name suggests, was and is the management of the water supply catchments, sewerage, waterways and drainage systems for the Melbourne region. In 2000 it operated from some 24 locations in Victoria, mostly near Melbourne and its personnel are described in the RFP as numbering 561 staff, 690 PCs and 51 NT servers. When one of these employees encountered an IT problem they would contact by telephone or email the help desk which Ipex operated from Sydney. The help desk operator, available 24 hours per day seven days per week, was expected to resolve a substantial proportion of these enquiries and those which could not be resolved would be referred to a technician who would resolve them from the Ipex offices in St Kilda Road, Melbourne or by attending the site and doing what was required.

[3]Reasons, [10].

The RFP contained a table which set out the number and categories of help desk calls recorded by the Melbourne Water help desk (operated at that time by the previous contractor, ‘Unisys’) from October 1999 to March 2000 (a six months period) – ‘the HD Calls Table’.

The occasion for the litigation was summarised by the judge as follows:[4]

The figures for total calls in the HD Calls Table vary from month to month from a low of 364 in March 2000 to a high of 527 in November 1999, but the average is 433 per month. Soon after its entry upon the project, Ipex experienced help desk calls at a greater monthly rate, reaching a maximum of 1,448 calls in March 2002 and averaging over the three years of the project 675 per month.
During the project term Ipex complained about this disparity and sought payment for the extra costs involved in servicing this number of help desk calls as a variation in scope pursuant to cl 15 of the contract. This claim was, in November 2001, rejected by Melbourne Water on various grounds, but principally because the Melbourne Water contract was a lump sum contract and Ipex bore the risk. I should note at this point that Ipex made other applications for variation of the contract sum pursuant to cl 15 and were, to some extent, successful, but these were not concerned with the subject-matter of this proceeding.

[4]Reasons, [11]-[12].

Ipex commenced a proceeding on 17 February 2003[5] making claims for payment under the contract, and claiming damages for misleading and deceptive conduct under the Trade Practices Act 2004 (Cth) and the Fair Trading Act 1999 (Vic). The claims that went to trial were contained in the fifth amended statement of claim filed 19 February 2009, although further amendments were made during the trial.[6] The trial was conducted over a period of 18 days in February and March 2009 and there was also a hearing on 31 August 2009. Judgment was handed down on 11 September 2009. The judge dismissed all of the claims by Ipex and judgment was entered for Melbourne Water.
[5]It was initiated in the Federal Court and transferred to the Supreme Court of Victoria later in 2003.
[6]For ease of reference, I will refer to this final amended pleading as ‘the statement of claim’.

The Ipex claims as advanced at trial were based on a number of alleged misrepresentations by Melbourne Water and the notice of appeal and the written outline of appeal submissions on behalf of Ipex attacked the rejection by the trial judge of each principal aspect of these claims. However, by a fax from Ipex’s solicitors sent to Melbourne Water’s solicitors and the Court of Appeal registry a few days before the commencement of the hearing of the appeal, the grounds of appeal were substantially narrowed. The fax stated, and senior counsel for Ipex confirmed at the commencement of the appeal, that the live issues in the appeal related to:

(a)the ‘fourth representation’ (paragraph 4(bb) of the Statement of Claim), that is, the representation that the data in the HD Calls Table was a representative sample sufficient to allow the tenderers to cost their proposals on a proper basis;
(b)the ‘representation by silence’ (paragraph 10(a) of the Statement of Claim);
(c)the ‘authority point’ raised by [Melbourne Water] in its Notice of Contention; and
(d)the solicitor-client costs and the non-party costs issues (but only if [Ipex] fails on the substantive issues).

During the hearing of the appeal, Melbourne Water abandoned the authority point raised in its Notice of Contention. As a result, apart from costs, the issues to be decided on this appeal are confined to those lettered (a) and (b) in the preceding paragraph. Notwithstanding that the issues on appeal are so confined, it is necessary to refer to the other claims by Ipex that were rejected by the learned trial judge whose conclusions on those claims are now not challenged by Ipex. It is necessary to refer to them because the context of the trial and the evidence given by the principal witnesses cannot properly be understood without an appreciation of the claims that are not now put in issue.

As part of its misleading conduct case, Ipex alleged that Melbourne Water had, on or about 10 April 2000, made representations to Ipex (by means of the HD Calls Table) to the effect that:

(i)the average number of help desk calls recorded had been 433 per calendar month during the period October 1999 to March 2000 (‘the first representation’);[7]
(ii)the information contained in the HD Calls Table was an accurate summary of the categories, number and time of help desk calls recorded during the said period (‘the second representation’);[8] and
(iii)the average number of help desk calls would continue to be approximately 433 per calendar month during the proposed contract period the subject of the tender (‘the third representation’).[9]

[7]See para 4(a) of the statement of claim.

[8]See para 4(aa) of the statement of claim.

[9]See para 4(b) of the statement of claim.

The judge found that the first representation had been made as it was easy to calculate the average total number of calls from the information contained in the HD Calls Table.

The judge found that the second representation had also been made because the HD Calls Table expressly provided the information as to the categories, number and time of help desk calls recorded for the relevant six months period. Further, his Honour was satisfied that the information in the HD Calls Table was intended for the assistance of tenderers in their task of preparing their tenders, it being clear that a substantial part of the contract services involved the handling of help desk calls during the period of the contract. His Honour analysed the evidence relating to this question and gave detailed reasons for his conclusion. In particular, in considering the accuracy of the information contained in the HD Calls Table, his Honour concentrated, first, on the total number of calls and, second, on how many of them fell into the category referred to as MAC[10] (these were the more expensive calls to deal with). This was because tenderers were only interested in these two aspects. His Honour concluded that the information contained in the HD Calls Table conformed ‘with such of the Unisys data based on the help desk logs as is available to me.’ After considering the foregoing and a number of other evidentiary matters, his Honour was not satisfied that the information contained in the HD Calls Table was inaccurate, or could be characterised as misleading or deceptive, or likely to mislead or deceive, a tenderer who received it. On appeal, Ipex did not seek to contend that the information contained in the HD Calls Table was in itself inaccurate or misleading (subject to what appears below regarding the ‘fourth representation’ and the ‘representation by silence’).
[10]‘a MAC call is one which concerns the moving, adding or changing of an IT component’ – see Reasons, [101].

Although his Honour concluded that Ipex had failed to establish that the first and second representations were misleading or deceptive, the judge went on to consider whether Ipex had relied on these representations in preparing and submitting its tender and entering the contract. As to this, his Honour said:[11]
[11]Reasons, [152]-[155],[157], [173].

The starting point must be the evidence of Mr Keedle. He said that he used the information as to help desk calls to identify which of them were the more time consuming MAC calls and, generally, to calculate the FTE values for the different functions which Ipex would be required to perform. This was described in the evidence as the ‘bottom up’ approach to the pricing exercise. This is to be contrasted with the ‘top down’ approach which starts with the number of work station users and applies to this an industry standard of numbers of calls per work station per month. Mr Keedle maintained that he calculated the number of FTEs and arrived at a consequent price from the number and type of calls described in the HD Calls Table. He said that the top down approach was used by him to verify the accuracy of the figures arrived at using the bottom up approach.
A heroic effort was directed to demonstrating that factors other than the information in the HD Calls Table had a role to play in the costing process and that other methods were used in the industry. But Mr Keedle did not depart from his evidence that the information in the HD Calls Table was important for his purpose.
He said, too, that the information was important as an indicator of the stability of the IT environment which, itself, was a factor in the pricing.
I have indicated my assessment of Mr Keedle as an honest witness doing the best he could in the circumstances given that he was being asked about routine events of many years before. Accepting the criticism offered on behalf of Melbourne Water, based on the absence of other witnesses, I am nevertheless satisfied, in the light of the evidence explaining the tender process, that it is inherently probable that the help desk information provided was in fact relied upon by the tenderer and I so find.
…
I am satisfied that Ipex did in fact rely in preparing its tender upon the accuracy of the information in the HD Calls Table as to the number and type of calls.
…
I conclude that … a sufficient causal link has been demonstrated between the representations and the entering into of the contract in July 2000. On the evidence, it cannot be denied that the given number of help desk calls played a significant part in the decision of Ipex to enter into a contract with Melbourne Water at the tender price.

Notwithstanding the judge’s above conclusion as to causation, his Honour was not satisfied (with one exception) that Ipex had established any of its claimed heads of loss as flowing from the first and second representations (assuming, contrary to his finding, that they were misleading or deceptive). I will make further reference to the question of Ipex’s heads of loss later below.

As regards the ‘third representation’, it is sufficient to state the judge’s explanation for concluding that it was not made:[12]

The third representation is as to a future matter. What is pleaded is that it was a notorious industry practice that the number of help desk calls over a period of time remained constant providing there was no change to the IT environment. And so, it was said, the provision of historic figures of help desk numbers carried with it the representation that ‘the average number of Help Desk Calls would be and would continue to be approximately 433 per calendar month during the period of the outsourced provision of IT infrastructure services to Melbourne Water for which Ipex was requested to tender’.
I do not accept this to be the case. First, no witness attested to the proposition that help desk calls would remain constant in an unchanged IT environment. Dr Niemann in his first report addressed this very question saying no more than that there were few if any studies on the question. He later said that, given the absence of future call volumes, tender costings were usually based on historical data. But this is not the proposition for which Ipex contends. All of the experts were agreed that when a tender of this kind is put together some regard is had to the historic data. None of them said that the process was to assume constancy of numbers.
Furthermore, there is nothing in the tender specification to lead the reader to a conclusion that the Melbourne Water IT environment would remain constant over the three year term of the contract. The RFP itself warns the tenderers that they must accommodate future changes. Furthermore, Ipex knew that it would be working in a dynamic environment.
I conclude therefore that the third representation was not made.
[12]Reasons, [87]-[90].

Issues (a) and (b): how they were pleaded and how the judge decided them

The fourth representation, as alleged in paragraph 4(bb) of the statement of claim, was to the effect that on or about 10 April 2000, Melbourne Water represented to Ipex that

the Help Desk Call data contained on page 105 of the Requirements Specification[13] for the six month period from October 1999 to March 2000 was a representative sample sufficient to allow the tenderers to cost their proposals on a proper basis.

[13]ie, using the abbreviations adopted in this judgment, ‘the HD Calls Table contained in the RFP’.

The statement of claim provided particulars of the fourth representation as follows:

[the representation was] implied by [Melbourne Water] having made the [representation] … in circumstances where industry practice, of which [Melbourne Water] was well aware, was to calculate the cost of providing outsourced IT infrastructure services on the basis of historical Help Desk Calls data on the assumptions that
(a)Help Desk Calls were a major driver of the cost of providing outsourced IT infrastructure services; and
(b)Help Desk Calls within an organisation's IT environment on average remained approximately constant over time, provided there were no major changes to the IT environment (‘the Assumption of Constancy’).

The particulars of the fourth representation further alleged that:

[Melbourne Water] was well aware of the industry practice … from the following:
(a)in the years prior to 2000, [Melbourne Water] had been an acquirer of outsourced IT infrastructure services including services in response to Help Desk Calls from Unisys. [Melbourne Water] required the provision to it of outsourced IT infrastructure services for a specified period at a fixed price;
(b)in order for any person providing outsourced IT infrastructure services to [Melbourne Water] to be able to forecast what resources would be required to provide outsourced IT infrastructure services including services in response to Help Desk Calls for the life of any such contract, it was necessary for [Melbourne Water] to provide a history of the outsourced IT infrastructure services it had required including services in response to Help Desk Calls over a previous period of months or years, and the outsourced IT infrastructure service provider would rely on such history and the Assumption of Constancy in determining the contract price to be offered to [Melbourne Water] in that service provider's tender;

(c)on or about 18 May 1999 [Melbourne Water] issued a request for tender for the outsourced provision of IT services (‘the May 1999 tender’) which contained a summary of the number of Help Desk Calls recorded each month during the period June 1998 to April 1999;
(d)on or about 25 May 1999, and as part of the May 1999 tender process, [Melbourne Water] provided tenderers with a summary of the calls by categories from the Unisys Reports recorded for each of the eleven months during the period June 1998 to April 1999;
(e) [Melbourne Water] made the [representation] … in the expectation that [it] would be relied on by outsourced IT infrastructure service providers to calculate their tender contract price.

In its statement of claim, Ipex alleged (inter alia) that, relying on the truth of the fourth representation and induced thereby, it calculated the costs of providing outsourced IT infrastructure services to Melbourne Water on the basis that the average number of Help Desk calls during the proposed term of its contract would be approximately 433 per calendar month and submitted its tender and entered into an agreement with Melbourne Water on that basis.

In its statement of claim, Ipex next alleged that (so far as the fourth representation was concerned):

[The HD Calls Table] was not a representative sample sufficient to allow the tenderers to cost their proposals on a proper basis.

As a result of the foregoing, Ipex alleged that the making of the fourth representation by Melbourne Water constituted misleading and deceptive conduct by which it had suffered loss and damage. I will refer later to the basis upon which the damages claim was put.

The judge found that the fourth representation was not made. His Honour said:[14]

The fourth representation concerns the representative nature of the sample. Again, nothing in terms is found in the RFP as to this matter. What is put is that, since Melbourne Water expected that tenderers would calculate their tender price from the information contained in the HD Calls Table, it impliedly represented that the information was proper and sufficient for that purpose. This argument is advanced against a background where the number of help desk calls recorded for the months prior to October 1999 was in fact very much greater than those in the six months from October 1999 contained in the HD Calls Table.
Counsel for Melbourne Water resisted this contention on a number of bases, some of which I have already dealt with in considering the other representations. A point which they made with special reference to this representation was the inherent ambiguity which lies within the expression ‘a representative sample sufficient to allow the tenderers to cost their proposals on a proper basis’. This, they said, contains assumptions that there is some common basis upon which tenderers would approach their task of costing and that Melbourne Water was aware of this. Neither of these assumptions, they said, has been established. There was evidence as to the way in which Ipex approached the task of costing. This was challenged. There was also evidence from the expert witnesses called by Melbourne Water that different approaches may be and were used. While it may be supposed that every tenderer would like to have as much information as possible, this is a case where there was no statement to tenderers to the effect that no further information as to help desk numbers was available. It is one where there is no evidence that any tenderer sought further information as to the number or types of help desk calls in the past.
I am, nevertheless, satisfied that the information in the HD Calls Table was intended for the assistance of tenderers in their task of preparing their tenders. It is clear that a substantial part of the contract services involved the handling of help desk calls during the period of the contract. What is said, in the suggested representation was that the information was representative and that it was sufficient to allow them to cost their proposals on a proper basis. I accept that the information was offered as an indication of the number of calls which were then being received. It was a representation that the figures recorded for the months October 1999 to March 2000 was representative of the number of calls over that six month period. I do not accept, however, that Melbourne Water made any representation that this was sufficient to allow tenderers to cost their proposals. A feature of the tender process was that Melbourne Water asked tenderers to approach the achievement of the stipulated objectives in their own way and to introduce innovation and change where they thought this to be useful. Changes of this kind, the witnesses said, would be very likely to affect the number and type of help desk calls in the short term and in the long term. In the short term the numbers would increase, as was the experience during the SOE[15] period; in the long term, changes were hoped to produce greater efficiencies and reduce the number of calls. In these circumstances, the number of calls as shown in the HD Calls Table could not be taken to be a representation that these were the numbers to which they should apply a per call cost figure over the three year term of the contract in order to arrive at the their tender price.
The fourth representation has not been made out. The information in the HD Calls Table was provided to tenderers without the further statement such as is contained in the fourth representation.

[14]Reasons, [91]-[94].

[15]Standard Operating Environment.

His Honour went on to state that, even assuming that the fourth representation was made, it was not false or misleading. His Honour said that:[16]

I have concluded that this representation … was not made. Assuming, however, that it was made, I would not conclude on the evidence that it was false or misleading. Again, the matter must not be looked at in a vacuum. The information was provided to tenderers experienced in the provision of IT services of the kind in question. Despite the contentions of counsel for Ipex, it cannot be correct that the tender price was arrived at in the mechanical way which they suggest. The submission was largely based on the approach adopted by Mr Cohen in the preparation of the G8 tender which, he said, he recommended to Mr Keedle for the preparation of the Melbourne Water tender. There was, however, an important difference between the basis for these two tenders. The G8 tenderers were provided with the general number of help desk calls upon which they should base their cost; extra calls would warrant a price adjustment. The Melbourne Water tenderers were required to build the risk of extra calls into their price. This meant that they were required to make their own assessment of the likely demands upon the help desk over the three year contract period. Again, I emphasise that the philosophy underlying the Melbourne Water tender was that the successful tenderer was to achieve an outcome in terms of the extensive performance requirements set out in the RFP. For present purposes, assuming that the numbers of calls shown in the HD Calls Table was to be taken as a representative sample of the experience of Melbourne Water upon which the tenderers were to rely, it could be relied upon only as indicative of the existing position. How this might be used for the purpose of predicting the future was a matter for the tenderers. In this sense it was sufficient for them to perform this task.
One further matter was relied upon by Ipex. In Melbourne Water’s request for proposal prepared in May 1999, for the tender which was never completed, tenderers were provided with details of help desk calls by category for an 11 month period from June 1998 to April 1999. The numbers of help desk calls shown in this table were of the order of 700 per month for the months June 1998 to January 1999 with a sudden increase in the following three months to over 900 per month, but it had a footnote warning tenderers that ‘SOE was rolled out during February, March and April’. It was said that this information, which was thought to be relevant for tenderers in May 1999, should have been provided to the tenderers, including Ipex, 12 months later. In the present context, it was argued that, without this information, it could not be said that the information contained in the HD Calls Table was sufficient to allow the tenderers in 2000 to cost their proposals on a proper basis.
The answer offered on behalf of Melbourne Water was a convincing one: the decline in help desk call numbers to September 1999 was not then known and that the figures after July 1999 and, in particular, those for the six months to March 2000 disclosed a very different picture. The relevant information which was available to Melbourne Water in May 1999 differed from that which was available six months later. Accepting that tenderers might want to know as much as possible so that they might make up their minds what was useful for costing purposes and what was not, the absence of this earlier information cannot be said to mean that the information in fact provided was insufficient.
I conclude that the fourth representation, if made, has not been shown to be insufficient to allow the tenderers to cost their proposals on a proper basis.

[16]Reasons, [126]-[129].

His Honour further found, assuming that the fourth representation was made, that it was not relied upon by Ipex. His Honour shortly stated:[17]

I find also no reliance upon the fourth representation if it were made. I accept Mr Keedle’s evidence as to how he went about pricing the tender information. He did not agree that he used the information in the manner described in this representation.

[17]Reasons, [160].

The ‘representation by silence’ was in substance an allegation of conduct by Melbourne Water, constituted by inaction, that was in all the circumstances alleged to be misleading and deceptive. The alleged conduct was pleaded in para 10(a) of the statement of claim, relevantly as follows:

10. At all relevant times prior to and during the tender process [Melbourne Water] refrained (otherwise than inadvertently) from:
(a)disclosing the information regarding Help Desk calls contained in the Unisys report to Ipex

Particulars
[Melbourne Water], with the knowledge referred to in paragraph 9 above, included in the [RFP] an average number of 433 Help Desk Calls for the period October 1999 to March 2000, instead of and without disclosing the information regarding Help Desk Calls contained in the Unisys Reports to Ipex in the [RFP] or at all.

The circumstances in which that alleged conduct was said to be misleading and deceptive were described in para 9 of the statement of claim relevantly as follows:

9. [Melbourne Water] … at all material times knew that:
(a)the information regarding Help Desk Calls contained in the Unisys Reports was relevant to the calculation of the contract price to be tendered by Ipex and other tenderers in respect of the Services Agreement and that if Ipex and the other tenderers had been aware of the information regarding Help Desk Calls contained in the Unisys Reports, they would have calculated the contract price for the purpose of their tenders in respect of the Services Agreement on the basis that the average number of Help Desk Calls would be and would continue to be significantly higher than 433 per calendar month; and
(b)the information regarding Help Desk Calls contained in the Unisys Reports demonstrated that the [fourth representation was]... inaccurate, false and untrue.

Thus, in the statement of claim, Ipex alleged that the failure by Melbourne Water to disclose the information regarding Help Desk calls contained in the Unisys reports constituted misleading and deceptive conduct which caused it loss and damages.

The judge found that the alleged conduct of Melbourne Water had been proved, explaining this finding as follows:[18]

What is put here is that Melbourne Water did not disclose to Ipex the information as to help desk calls which was contained in monthly reports provided to it by the previous IT services provider, Unisys, from July 1997. It is not disputed that this information was not disclosed and that this was not due to inadvertence. The conduct alleged therefore has been proved. I shall return to the question whether it was misleading and deceptive.

[18]Reasons, [95].

However, his Honour found that Melbourne Water’s said conduct, constituted by the failure to disclose to Ipex the information as to Help Desk calls contained in the Unisys reports, was not misleading and deceptive. His Honour said:[19]
[19]Reasons, [130]-[138].

The final representation was that, by refusing to disclose to tenderers the prior help desk calls history, the representation contained in the HD Calls Table was misleading. It contained only half of the story. The information as to help desk calls in the RFP would have had a different significance for tenderers had it been supplemented by the prior help desk calls history. As pleaded, the undisclosed information is alleged to be that contained generally in the Unisys reports … It will be recalled that the fourth representation depended upon the assumption that the six months data provided to tenderers was not representative of the whole help desk history. In a sense, this raises the same issue as the representation by silence. This is because Melbourne Water took the position that information as to help desk call numbers prior to October 1999 would not tell tenderers anything useful which might modify the information presented in the HD Calls Table. Essentially, this was because its help desk experience in the period prior to the commencement of the SOE was not relevant because the SOE program had changed the IT environment. Furthermore, the period of and immediately after the SOE program was characterised by disruptions caused by that program.
It is necessary that I say something now about the SOE program. By the end of 1998 the Melbourne Water computer network, originally outsourced in 1995, was proving inadequate. It lacked capacity to use current technology and, in many respects, was outdated. Furthermore, it had developed in a way which meant that there were inefficiencies in its operation and in its maintenance program. Mr Cox described this IT environment as being ‘utterly uncontrolled’. Melbourne Water therefore commissioned BHP IT to examine the system and to make recommendations. This was done and a number of recommendations were made which Melbourne Water decided to implement. These became known as the SOE program because a principal feature of them was the establishment of a standard operating environment (SOE).
It is not necessary that I descend to the detail of the SOE program which is set out in the SOE project charter prepared by Anthony Paul Cox who was then Melbourne Water’s IT projects manager. Mr Cox said that the project was large by Melbourne Water’s standards, having a cost of about $2m. It impacted upon nearly all employees and every piece of hardware or software. It involved upgrading the system to one based on Windows NT Workstation 4.0, Windows 95 and MS Office 97. In all, some 170 software applications had to be integrated into the SOE.
It is common ground that the disruption involved in the rolling out of the SOE program would have dramatically increased the volume of help desk traffic, as the staff came to grips with the new environment. This created an immediate problem which bears upon this case inasmuch as these extra help desk calls were the responsibility of Wang Global which had the SOE contract. A fresh category of calls was developed to identify those which were the consequence of the SOE. In the Unisys monthly reports for January, February, March and April 1999 the numbers of this category were reported. I accept that the number of calls allocated to the SOE category does not, however, necessarily represent the totality of all calls generated by the SOE events of those four months.
The SOE program was completed by 27 April 1999 when staff training and deployment was concluded. According to the SOE program closure report of April 1999 there still remained to be completed by May 1999 what was described as ‘server rationalisation’, as well as a number of miscellaneous outstanding issues. There was some controversy as to when the impact of the SOE program, in terms of increased help desk calls, would have disappeared. Estimates varied from days after the end of April 1999 to months after that date. What is remarkable is that Mr Rundell’s graph shows that the total number of calls per month plummeted in a fairly straight and very steep line from 870 in May 1999 to 488 in September of that year.
Mr Ryan said that his expectation was that the number of help desk calls would reduce by 30% as a result of the SOE program. This was one of the benefits for which Melbourne Water was expending a considerable sum of money. Assuming, as appears to be the case, that the total number of calls was running at about 700 per month prior to the SOE program, this would take them to about 490 calls per month. His expectation was, I was told, consistent with industry experience and it accorded with the opinion of Mr Rundell. Other witnesses expressed the view that the number of help desk calls might be expected to return to their pre-SOE level after the period of its roll-out. Again, it was Mr Rehkopf who subjected this reduction to a more rigorous analysis. He pointed out that the reduction of about 200 calls per month compared with the number of calls in the SOE period occurred in only two categories – email system calls and out of scope software calls. This, he said was consistent with the expected benefits of the SOE. He explained, too, how the SOE would have had this effect.
Two conclusions may be drawn from this, for present purposes. First, it explains the spectacular decrease in the total number of help desk call numbers following May 1999 and, second, it provides a good reason for not burdening tenderers with this information which, after all, concerned a vanished environment. These conclusions may be contrasted with those drawn from the data by counsel for Ipex. They said, first, that the reported decrease did not occur or was not as severe, because the figures in the HD Calls Table were understated. This, of course, begs the question. Second, they said that if and insofar as these figures were not understated by up to 200 calls per month, then the post-SOE decline in numbers is simply inexplicable.
In this context reliance was again placed upon the failure of Melbourne Water to provide tenderers with the information as to the number of help desk calls made in the 11 month period from June 1998 to April 1999. I have considered this matter and, for the reasons there set out, I do not consider that this period is relevant for the purposes of the 2000 tenderers.
I return then to the question presently under consideration: whether the failure of Melbourne Water to provide the help desk call data for the period prior to October 1999 had the consequence that the information supplied to tenderers was misleading or deceptive. For reasons which I have ventured to set out in a little detail, I accept the evidence of Mr Ryan and Mr Rehkopf that this was not the case; it was not relevant to the period covered by the HD Calls Table.

As regards ‘reliance’ upon Melbourne Water’s conduct, his Honour said:[20]

As to the representation by silence, the requirement of reliance plays a rather different role. It is that, by definition, the representor has said nothing; if the omitted information had been provided this would have changed the impact of the disclosed information on the mind of the representee. Again, this is a question of fact, but the fact is essentially a suppositious one. Ipex must fail on this point for essentially the same reason that I have concluded that the silence did not have a misleading or deceptive effect.

[20]Reasons, [161].

I will now consider in turn the submissions advanced on appeal on behalf of Ipex.

Whether the fourth representation was made or relied upon

Ipex submitted that the judge was wrong in concluding that Melbourne Water had not represented that the HD Calls Table was ‘a representative sample sufficient to allow the tenderers to cost their proposals on a proper basis’. Ipex criticised one of the reasons given by the judge for reaching that conclusion, namely, that, because the tenderers were required to approach the achievement of the stipulated objectives in their own way and to introduce innovation and change, there was no representation that the information about Unisys’s actual experience reflected in the HD Calls Table conveyed ‘the numbers’ which the tenderers should apply ‘to arrive at the tender price’. Ipex contended that this reasoning was in error because the costing of the tenders was based on help desk calls by category and the history of help desk calls by category had been supplied by Unisys in its monthly reports – those reports contained the quantitative data in respect of the ‘current IT environment’ from the time that Unisys had commenced its service agreement. Ipex submitted that the judge was in error ‘because the current IT environment was the required base for the costing process and the expectation of innovation and change did not make the actual experience of the IT system irrelevant for the purpose of costing the provision of help desk services.’ Reference was made to provisions in the RFP which referred to the required services as being provided ‘in respect of the current IT environment’.

Ipex submitted that:

The HD Calls Table was not merely a representation concerning the actual experience of Unisys in the 6 months of the Table … It necessarily was also a representation that the experience of Unisys in those 6 months was typical of the help desk service required by the Respondent’s IT system at the time of the request for tender. Paraphrasing the language in which this representation is pleaded, it was necessarily represented that the information in the HD Calls Table was sufficiently typical or ‘representative’ of the Respondent’s IT system that the information was appropriate or ‘proper’ for use in the costing process and could be relied on for that purpose.

The above is a summary of Ipex’s written outline on this point. The argument advanced appeared to me to be an attempt to resolve ambiguities in Ipex’s pleaded case, because the representation as pleaded and as dealt with by the judge did not explicitly state of what the six months ‘sample’ was supposed to be ‘representative’. Indeed the judge recorded an argument put on behalf of Melbourne Water that there was an inherent ambiguity in the representation as pleaded and the judge considered that the only representation made was that the figures were representative of the number of calls over the six months period. It does not appear that Ipex submitted at trial that the representation was to be understood as a representation that the figures were ‘typical’ of the current IT environment and the way the matter was approached by the judge suggests that this was a gloss developed on appeal. Indeed Melbourne Water so submitted, adding that the reference to the provisions in the RFP referring to the ‘current IT environment’ was made for the first time on appeal.

In Melbourne Water’s written outline, in addition to contending that Ipex was introducing a new approach to the fourth representation on appeal, Melbourne Water pointed out that, in its pleading, Ipex had based the implication of the fourth representation on the basis of an alleged industry practice of calculating the cost of providing IT infrastructure services on the basis of historic help desk call data because of certain assumptions including what Ipex described as ‘the Assumption of Constancy’. The ‘assumption of constancy’ was said to be an assumption that ‘help desk calls within an organisation’s IT environment on average remained approximately constant over time, provided there were no major changes to the IT environment.’ Melbourne Water referred to what the judge recorded in para [88] of his reasons for judgment:

… no witness attested to the proposition that help desk calls would remain constant in an unchanged IT environment … all of the experts were agreed that when a tender of this kind is put together, some regard is had to the historic data. None of them said that the process was to assume constancy of numbers.

Ipex’s oral submissions on the question whether the fourth representation was made took a somewhat different approach to that contained in its written outline. Ipex submitted that the judge had misunderstood the nature of the fourth representation as alleged by Ipex – the judge had read the pleaded representation disjunctively as meaning that the data in the HD Calls Table was not only ‘representative but also alone sufficient to allow tenderers to cost their proposals on a proper basis.’ Ipex submitted that the alleged representation was a representation that the data in the HD Calls Table was ‘sufficiently representative’ to allow tenderers to cost their proposals on a proper basis (accepting that other relevant matters could also be taken into account). However, when asked of what it was that the data had to be ‘sufficiently representative’, the answer given was sufficiently representative or ‘typical’ of ‘the environment in which tenderers would have to provide their services.’

I do not agree that the judge adopted a ‘disjunctive’ approach in his analysis although it is clear that His Honour considered that the fourth representation as alleged contained two elements. The judge considered that the provision of the HD Calls Table was a representation that the figures recorded for the months of October 1999 to March 2000 were representative of the number of calls in fact received over that period. In other words, his Honour was rejecting any contention that the figures were advanced as representing any longer period or as representing Melbourne Water’s IT environment in any other period than that period of six months. It is true, no doubt because of the ambiguity of the alleged representation, that his Honour went on to conclude that Melbourne Water was not representing that the data in the HD Calls Tale was sufficient by itself to allow tenderers to cost their proposals – but it was also at least implicit, probably explicit, in what his Honour was saying that Melbourne Water was indeed putting the data forward as material to be taken into account in costing the proposals, but only as data reflecting that six months period.

I can find no error in his Honour’s conclusion that the fourth representation as pleaded was not made. That is because, if for no other reason, there was no evidence that anyone on behalf of Ipex considered or believed or acted upon the basis that the provision of the data in the HD Calls Table conveyed a representation that the data constituted a ‘representative sample’. The data in the HD Calls Table does not appear to have been advanced as a ‘sample’ and does not appear to have been treated by Mr Keedle, the only relevant witness on behalf of Ipex on this point, as a sample. The data appears to have been put forward and the evidence shows that Mr Keedle treated it as information accurately reflecting Melbourne Water’s help desk calls experience during the period of six months covered by the table. As regards that six months period, the data was not merely a ‘sample’ – it purported to be a full record. The pleading did not state of what the data was supposed to be a sample.

The considerations in the preceding paragraph no doubt explain why Ipex’s written outline ‘paraphrased’ the pleading by contending that the representation was that ‘the information in the HD Calls Table was sufficiently typical or ‘representative’ of [Melbourne Water’s] IT system …’ In that regard there is an important logical slide within the written outline because Ipex attempts to equate Melbourne Water’s IT system, described also as its ‘current IT environment’, as being that system or environment which existed throughout the period covered by the Unisys monthly reports. This is an attempt to assimilate Melbourne Water’s ‘current IT environment’ with a period that includes the time before the SOE was introduced and the time during which it was being introduced. This again shows the ambiguity in the alleged fourth representation, an ambiguity which was not clarified or resolved by any evidence from Mr Keedle or any other relevant witness on behalf of Ipex.

For those reasons, it seems to me that the making of the fourth representation either as pleaded or as ‘paraphrased’ in Ipex’s written outline was not proved. In addition, I do not think that the making of the fourth representation in the sense explained by Ipex’s oral submissions was a matter covered by the pleading, raised at trial or supported by the evidence.

His Honour found that the data in the HD Calls Table was accurate and relied upon as such by Ipex but that did not entail a finding that Ipex relied upon that data in the way characterised in the alleged fourth representation and his Honour rightly found that there was no evidence of reliance of that kind at all.

For those reasons, I would reject all of Ipex’s submissions in relation to the above issues.

Whether the representation by silence was misleading or deceptive

Senior counsel for Ipex said that a central issue in the case was what the effect of the Standard Operating Environment (‘SOE’) could be expected to be. He referred to the fact that Melbourne Water had introduced an SOE in 1999. He said that Melbourne Water’s case was that it was appropriate to include only the six months’ data in the HD Calls Table because that reflected the position post-SOE, whereas Ipex’s case was that it was inappropriate, alternatively, at least, that ‘the possibility could not be excluded, given the state of uncertainty, that help desk calls would revert to their earlier higher levels’.[21] So, senior counsel said, the central issue in the case was the SOE, the expectations for it, what the effects of it were, and whether those expectations, to the extent that they existed, were ‘certain ones which could exclude the prospect of reversion to a former position.’ In relation to the ‘conduct by silence point’, senior counsel said that it would be misleading to supply a set of figures representing an environment which you couldn’t be confident would be permanently maintained and that, if there was a real possibility that ‘all levels would revert to those levels that they previously had been at’, then to supply only that six months period of data would be misleading.
[21]Senior counsel for Ipex conceded that this alternative was not put at the forefront of the case at trial.

Of course, as set out earlier above,[22] the learned trial judge rejected submissions along these lines on the essential basis that the Melbourne Water IT environment prior to the introduction of the SOE in 1999 was irrelevant to those tendering in the year 2000. In its submissions, Melbourne Water pointed out that the tenderers had been provided with information concerning the SOE in the RFP. The RFP stated that the SOE was in three varieties to cater for classes of hardware (class 1 consisting of desktop PCs connected to the local area network (‘LAN’) and class 2 being notebook computers connectable to the LAN). The RFP described the software comprising the SOE (namely Windows NT, Office Professional and a number of other software programmes). The RFP also set out a very lengthy list of other software described as ‘shrinkwrap applications [that] will be loaded on an as needed basis’. Melbourne Water said that that meant to the tenderers that in the previous year there had been a major change in Melbourne Water’s operating environment and any tenderer, including Ipex as an expert in IT, would have been fully aware of the ramifications of that. Melbourne Water contended that it was obvious that with a transformation such as was Melbourne Water’s first ever SOE in 1999 there would be a large number of help desk calls. Before this, users had different hardware and different software and this was a transformation of the operating environment.
[22]See para [31].

Senior counsel for Ipex accepted that the question whether the conduct of Melbourne Water in failing to disclose the help desk calls data prior to the period covered by the HD Calls Table was misleading and deceptive had to be tested objectively. He accepted that the key question was whether the information not disclosed was reasonably material for the assessment of the information that was disclosed. He submitted that there was evidence, including expert evidence, led at trial bearing on that question and that the Court on appeal was in as good a position as the trial judge to draw appropriate inferences. Senior counsel referred to a number of aspects of that evidence.

The difficulty with Ipex’s argument is that expert evidence was given at trial by Mr Rehkopf, who was called by Melbourne Water, concerning the significance of the SOE. Mr Rehkopf said that there were three relevant IT environments – the original environment, the changeover environment where there was a combination of old and new software and then the new SOE environment. Mr Rehkopf said that these were fundamentally different environments and, in effect, that help desk call figures were not comparable as between the three environments, regardless of whether the figures were different or the same. He said that it would have been confusing to provide information that related to the environments existing prior to the new SOE environment. This evidence was essentially unchallenged in cross-examination and it was well open to the judge to accept the substance of it as he clearly did.

There was some discussion, on appeal, concerning the significance of evidence given by Mr Ryan of Melbourne Water concerning his expectations of the effect of the SOE on the number of help desk calls but, in my opinion, Mr Ryan’s evidence was, even if otherwise relevant, not determinative on the point dealt with by Mr Rehkopf referred to above. Ipex also made some reference to the evidence of its expert, Dr Niemann, but did not identify any evidence from him that directly contradicted Mr Rehkopf’s evidence. Ipex pointed to Dr Niemann’s continuing opinion that, on all the material provided to him, it was impossible to give any precise opinion on the expected or actual effect of the introduction of the SOE, but that opinion does not meet or grapple with Mr Rehkopf’s view that statistics from each of the three environments were not comparable.

In my opinion, Ipex has failed to establish that the judge should have found that the representation by silence (i.e. the conduct constituted by the non-disclosure of help desk figures arising from earlier IT environments) was misleading or deceptive.

Damages

Finally, arising out of the misleading conduct case agitated by Ipex and the issues raised on appeal, the parties advanced the following submissions in relation to damages.

Under the heading of ‘Causation of loss’, the judge had dealt with the question whether Ipex, had it established a misleading conduct case, suffered any loss under various headings. The judge said:[23]
[23]Reasons [162], [173]-[183].

In many cases it will be but a small step from the proof that a plaintiff entered into an unprofitable contract in reliance upon a misleading representation, to the conclusion that this representation caused the loss. As with so many aspects of this case, it is here not so simple. I assume, contrary to my conclusions, that Melbourne Water made misleading representations and that Ipex relied upon them in preparing its tender.
(The judge then considered issues relating to causation and continued:)
I conclude that, notwithstanding this, a sufficient causal link has been demonstrated between the representations and the entering into of the contract in July 2000. On the evidence, it cannot be denied that the given number of help desk calls played a significant part in the decision of Ipex to enter into a contract with Melbourne Water at the tender price.
The next step in the causation [sic] is that between the representation and the losses which were suffered by Ipex in this contract inasmuch as it was required to commit more resources than budgeted. I am not required to quantify these losses but I must identify them.
The claimed heads of loss are set out in paragraph 13 of the statement of claim:
(i)Had Ipex been given the correct information about the number and type of help desk calls it would have submitted a higher tender price and entered into a contract with a higher contract price. Its loss, therefore, represents the difference between the actual contract price and this higher price.
(ii)Further, Ipex incurred greater cost in performing the contract. This is represented by difference between 17.37 FTEs, being the number of FTEs which were in fact required, and 12.06 FTEs, being the number allowed for in the contract. It is also represented by an increased hourly rate for FTEs. These figures are then applied to the actual work hours in the contract period to produce the amount of this head of claim.
(iii)Further, Ipex incurred costs investigating the misleading and deceptive conduct by Melbourne Water and negotiating the same.

I express no view as to the prospect of Ipex establishing these losses. I am concerned only with the question whether they are sufficiently related to the misleading and deceptive conduct.
A number of difficulties immediately present themselves. First, given the way Melbourne Water evaluated the tenders, it is by no means certain that a higher Ipex tender would have been accepted. The other tenders, other than that of Unisys, were close to that of Ipex. If, as seems inevitable, an increased Ipex tender would not have been accepted, this first head of loss cannot be attributed to the conduct of Melbourne Water in question.
The second head of loss appears to contain a good deal of overlap with the first. It appears to start with the assumption that the contract price would have been $7,965,390 rather than the actual contract price of $5,218,204. This assumption must overcome the difficulty that I have mentioned with respect to the first head of loss.
It contains a further assumption which, in this case, is very problematic. It is that the contract price of $5,218,204, based as it is upon 12.06 FTEs, would have sufficed for the performance of the contract work. In this regard Mr Patishman’s email of 31 May 2000 is significant. It seems from this that the basis for this calculation should perhaps be 16.5 FTEs rather than 12.06 FTEs.
It is not for me at this trial to express a view upon the prospect that the quantum of these losses be proved. I am concerned whether the claimed losses of the kind pleaded are sufficiently related to the misleading and deceptive conduct as to satisfy the test of causation. This is the point at which global claims such as this must be addressed.
The point at which this trial stops is at the quantification of proved loss. There was no satisfactory evidence to establish any of this loss. It is nothing more than mere assertion and assertion of a very high improbability. Nor was there any real attempt to provide a factual basis for the required causal link. The plaintiff’s case was that the misleading conduct occurred and that Ipex suffered loss under its contract. I am not prepared to ignore the possibilities, which are for Ipex to disprove, namely that the contract price was not a proper one, assuming the alleged misleading and deceptive conduct was not present, and that the extra cost in fact incurred by Ipex in performing the contract work was due to its own performance deficiencies or to some reason other than the alleged misleading and deceptive conduct.

The third head of loss, if indeed it is not more properly characterised as part of the costs of the litigation, is for the cost of investigations and negotiations. There was some evidence that investigations and negotiations occurred. I would accept that these would have cost Ipex something in staff time. I would accept that this cost is causally related to the conduct being investigated.
I conclude therefore that this final ingredient of the Ipex claim has been satisfied, but only in respect of the third head of damage.

Ipex submitted that the judge should have found that if Ipex had been given correct information about the number and type of help desk calls, it would have submitted a tender at a higher price. Ipex argued that the judge had[24] ignored the fact that all of the tenderers would probably have submitted higher tenders if they had received the correct information. Ipex argued that Melbourne Water’s misleading and deceptive conduct had caused Ipex to suffer the loss of the opportunity to tender at a proper price and that the value of that lost opportunity could be assessed at a damages hearing. Melbourne Water submitted that there was no basis for the assertion by Ipex that all tenderers would have submitted higher tenders – there was no evidence to this effect and no witness gave evidence of the basis on which other tenderers had proceeded or as to the extent (if at all) that other tenderers had had regard to the HD Calls Table.
[24]In [177].

In my opinion, Melbourne Water’s submission is to be preferred. In addition, senior counsel for Ipex conceded that there was no evidence at trial from any witness on behalf of Ipex as to how the help desk call information not disclosed by Melbourne Water would have affected Ipex’s tender price, apart from general statements from Mr Keedle that, in effect, if the disclosed help desk call numbers had been much larger, this would have dramatically changed the way Ipex looked at pricing.

Ipex also claimed (necessarily in the alternative) that it had incurred a greater cost in performing the contract than it would have done had the misleading and deceptive conduct not occurred. Ipex submitted that, in rejecting this category of loss,[25] the judge had confused the effect of the conduct on setting the contract price with the cost of performing the contract and, further, it was mere speculation by his Honour when he referred to the possibility that the extra cost in fact incurred was due to Ipex’s own performance deficiencies or some other reason. On the other hand, Melbourne Water said that no witness gave evidence in relation to the actual losses of Ipex in performance of the contract, despite senior counsel for Ipex indicating in the course of the trial that certain named persons would be called in relation to that issue. The respondent submitted that there was no evidence of any losses or any causal link between alleged representations and extra costs.
[25]See [178]-[181].

Again, I consider that the respondent’s submissions should be accepted. Further, senior counsel for Ipex conceded that there was no evidence as to what profit margin Ipex had budgeted for and what in fact the financial results of the contract were.

For the foregoing reasons, I would dismiss the substantive appeal.

Costs

The judge made elaborate orders as to costs in the judgment dated 11 May 2010 as follows:

Costs of the Proceeding
2.[Ipex] and Takapana Investments Pty Ltd pay [Melbourne Water]’s costs of the proceeding to be taxed on a solicitor and client basis, including:
(a) all costs reserved in the proceedings unless otherwise ordered;
(b) the costs of the mediations … (as specified);
(c)save where costs were ordered in favour of [Ipex]or where there was no order as to costs, the costs of all transcript in the proceeding, including interlocutory and directions hearings, the trial and post-trial hearings;
(d)the costs of [Ipex]’s applications for substitution and/or addition of a plaintiff made 12 August 2008;
(e) the costs of [Ipex’s] application brought by summons dated 16 September 2009, but only insofar as it concerned the application for costs against the non-parties such costs to include the costs of the day of 6 October 2009 and the costs of settling the final orders on 11 December 2009 and 19 March 2010;
(f)[Melbourne Water]’s costs thrown away and of and occasioned by, the amendment or proposed amendment of [Ipex’s] statements of claim; and

(g) 70% only of its costs relating to the court book

but excluding;
(h) its costs of and incidental to the attendance of the witness Papanagiotou as to which the parties shall bear their own costs.

3. Without derogating from the generality of paragraph 2 of these orders, Takapana Investments Pty Ltd pay [Melbourne Water]’s costs which have been ordered to be paid by [Ipex] in this proceeding, and, in particular the costs of:
… (various specified items)
4.Any payment made by or on behalf of Takapana Investments Pty Ltd of costs or interest pursuant to these orders or any undertaking referred to in these orders shall pro tanto reduce the liability of [Ipex] to pay those costs or that interest under these orders.

5. There be no order as to the costs of:
(a)[Melbourne Water]’s foreshadowed application to have the claim dismissed as champertous;
(b)the application of 21 August 2007 regarding the Unisys reports;
(c)the application of 2 June 2008 for extension of the report back date for mediation; and

(d) the day of 14 October 2009.

… (various further orders as to costs in relation to specific matters)
11. After taking into account any payments made in respect of the costs of this proceeding and any interest payable thereon including:
(a) any costs ordered upon the taxations of costs;
(b) the security paid out pursuant to these orders;
(c)any payments made under the undertaking given by [Melbourne Water] included in the Other Matters to these orders;
(d)any payments made under the undertaking given by Takapana Investments Pty Ltd in proceeding No. 5802 of 2009 set out the Other Matters to the order of Efthim AsJ dated 14 August; and
(e) the setting off of entitlements to costs in accordance with these orders

Joel Schwalb pay any costs liability which [Ipex] and Takapana Investments Pty Ltd have incurred to [Melbourne Water] or will incur to [Melbourne Water] pursuant to these orders and those undertakings.
Recourse to Security
12. The security for costs in the total amount of $1,948,800 together with any interest thereon held by the Court in relation to this proceeding and proceeding No, 5802 of 2009 be paid out by the Prothonotary to [Melbourne Water] and such payment, when made, shall be applied first against the amount to which [Melbourne Water] is or shall become entitled in respect of costs or interest on costs against [Ipex] in this proceeding and against Takapana Investments Pty Ltd and Mr Joel Schwalb or either of them pursuant to these orders and thereafter in accordance with the undertaking.
13. (a) the parties’ respective entitlements to costs in this proceeding; and
(b) the entitlement to costs of Takapana Investments Pty Ltd in proceeding No. 5802 of 2009 against Melbourne Water Corporation

whether pursuant to these orders or otherwise shall be set off as if the liability of Melbourne Water Corporation to Takapana Investments Pty Ltd were a liability of [Melbourne Water] to [Ipex] and the balance only resulting after all entitlements and liabilities for costs have been determined be payable by [Ipex] and Takapana Investments Pty Ltd to [Melbourne Water] or by [Melbourne Water] to the [Ipex] as the case may be.
14. Liberty to apply with respect to the payment of costs is reserved to the parties.

The appellants appeal (or, where appropriate, seek leave to appeal) in relation to various aspects of the above orders as to costs. Ipex appeals against paras 2-5 and 10-14. The second appellant (Takapana) appeals against paras 2-4 and 11-13. The third appellant, a non-party (Mr Schwalb), appeals against paras 11-12.

Solicitor and client costs

The first question that arises is whether the judge was correct in ordering the payment of costs by Ipex and Takapana on a solicitor and client basis. The parties agree that leave to appeal is required.

The learned trial judge decided the question of costs in reasons for judgment dated 11 December 2009.[26]
[26]Ipex ITG Pty Ltd v Melbourne Water Corporation (No 6) [2009] VSC 571 (‘Reasons (No 2)’).

In relation to the question of solicitor-client costs the judge said:[27]
[27]Reasons (No 2), [3]-[22].

Basis of Taxation[28]
[28]Melbourne Water draft order para 2.
Counsel for Melbourne Water seeks costs of the proceeding to be taxed on an indemnity basis. Ipex resisted a special costs order.
The case for the special costs order depended upon an offer of compromise made by Melbourne Water on 17 June 2003. The offer was expressed as a defendant’s offer made in accordance with Order 26 to pay $1.5m in satisfaction of the Ipex claim and its own counterclaim. Having regard to its success as to liability, the costs consequences pursuant to Rule 26.08(3) of the failure of Ipex to accept the offer have no effect. The plaintiff, Ipex, cannot expect an order for costs prior to the offer; an order in favour of the defendant, Melbourne Water, for costs on a party and party basis from the date of the offer is nothing more than a successful defendant might expect.
In Foster v Galea (No2),[29] I held that an offer of compromise under the rules might be treated as a Calderbank offer, so that the offeror might claim a special order if the offeree’s non-acceptance was unreasonable. For the reasons there stated I approach the present case on that basis.
[29][2008] VSC 331.
The offeror must establish the offeree’s unreasonableness at the time of the offer. Unlike an offer made in accordance with Order 26, there is no automatic application of a special order where the result of the litigation is not more favourable than the offer. There is not even a rebuttable presumption to that effect. That may seem a surprising result given that the burden which falls on the offeror may require it to prove unreasonableness when the facts bearing upon such a conclusion may be known only to the offeree who is not obliged to disclose them and, indeed, may resist the offeror’s efforts by asserting legal professional privilege. But this is the law which I am obliged to apply.
In the leading case of Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No2)[30] the Court of Appeal set out six matters which the court should ordinarily have regard to in exercising its discretion as to costs in a Calderbank case.
[30](2005) 13 VR 435, 442, [25] (Warren CJ, Maxwell P, Harper AJA).
(a)       The stage of the proceeding at which the offer was received;
(b)       The time allowed to the offeree to consider the offer;
(c)       The extent of the compromise offered;
(d)      The offeree’s prospects of success, assessed as at the date of the offer;
(e)       The clarity with which the terms of the offer were expressed; and
(f)Whether the offer foreshadowed an application for an indemnity costs order in the event of the offeree’s rejecting it.

These are, of course, merely a check list for the ordinary case.[31]
[31]Luxmore Pty Ltd v Hydelade Pty Ltd (2008) 20 VR 481, 484, [11] (Maxwell P, Kellam JA)
It was said that the offer was made at an early stage of the proceeding. The proceeding had been commenced in the Federal Court on 17 February 2003. In April of that year it was adjudged more suitable for this court and it was received by this court pursuant to the cross-vesting legislation.
At the time the proceeding was commenced the contract entered into between the parties on 27 July 2000 was still on foot; it did not expire until 31 July 2003. The obligations which underlay the Ipex claim were then and have always been that the number of help desk calls which it was required to service and the consequent financial burden of the contract was greater than it had been led to expect in the pre-contract period.
The contract made provision for an adjustment of the price where the scope of the contract works enlarged and Ipex had in 2002 sought such an adjustment but this was refused.
The correspondence in late 2001 and early 2002 which is exhibited to the affidavit of Jesse Sol Gleeson affirmed on 30 September 2009 shows that Ipex was in November 2001 asserting a loss for the first 15 months of the three year contract at approximately $75,000 to $80,000 per month or about $2.8m for the whole contract term. In February 2002 this was said to have been about $107,399 per month for the first 18 months, a total of $3.86m for the term. These figures represent a substantial increase over the fixed contract price of $5.218m.
It appears that the position adopted by Melbourne Water at this stage and in the litigation was that the help desk call information provided to tenderers was accurate and that it was for the tenderers, including Ipex, to make their own assessment of the work and cost required to provide the services set out in the Request For Proposal ‘RFP’.
As required in the contract, the parties in November 2002 referred their dispute to mediation, but without success. Following this, on 19 November 2002, Ipex made a Calderbank offer to accept $2.2m all in, in settlement of its claim.
Soon after its arrival in this court, there broke out in this proceeding the first of a series of pleading skirmishes which characterised it until December 2007 when the fourth amended statement of claim was filed.
In June 2003 when the Melbourne Water offer of compromise was made, the original Federal Court statement of claim filed in February 2003 set out the Ipex claim. It was primarily a claim for extra payment under the contract:
(a)For the period from the commencement of the contract to January 2002 the monthly average number of help desk calls was 645 instead of 433 as appeared in the RFP. This represented a change in the nature, extent or content of the contract works within the meaning of cl 15 of the contract, entitling Ipex to an increase in the contract price. Ipex was required to spend more work hours and to incur extra costs for this in the sum of $3,268,310.38.
(b)For the period February 2002 to January 2003, extra work was required to comply with a variation instruction [direction]. This entitled Ipex to extra payment pursuant to cl 15. The claim for this was $1,893,654.13.

There were alternative non-contractual claims for unspecified damages for misleading and deceptive conduct relating to the stated number of calls of 433 per month, and a claim for restitutionary relief.
Given the terms of cl 15 and the limited rights to vary the contract price conferred under it, the contractual claim has always faced considerable difficulties. Moreover, the Ipex statement of claim attracted a substantial defence and a counterclaim, which filed on 6 June 2003, for damages for defective performance of its contractual obligations. The amount of damages claimed by Melbourne Water was about $870,000. This is how things stood at the time of the offer of compromise by Melbourne Water of 17 June 2003.
Counsel for Melbourne Water subjected the claim of Ipex as it stood at this early stage of the proceeding to an analysis based upon the fundamental assertion, made at the time by Ipex, that the actual number of help desk calls was 645 per month, an increase of 212 over the suggested 433 calls per month appearing in the HD Calls Table. This is an increase of 49%. The application of this increase to the whole of the contract sum produces an extra cost of $2.557m. The evidence before me showed that most, but not all, of the contract sum was affected by such an increase in the number of help desk calls so that this extra cost should be reduced. It was put on behalf of Melbourne Water that, if the extra 212 calls per month were extended to the whole 36 month contract period, it would produce an extra 7,632 calls to be dealt with. Counsel then pointed to the costing sheets for the G8 contract upon which the Melbourne Water tender was built. These showed a cost of $23.71 for each non-MAC call and $112.36 for each MAC call. If all the 7,632 extra calls were MAC calls, which is more than any witness contended, the extra cost would be only $857,532.
Other, less favourable, calculations were offered by Melbourne Water based upon the suggested excess of 212 calls per month. The point made on behalf of Melbourne Water was that, even on Ipex’s own figuring, its claim with no allowance made for risk was not greater than $2m. If the value of the counterclaim was included in the assessment, the Melbourne Water offer was even more attractive. It was certainly one to be considered seriously.
The response on behalf of Ipex was to say that, at the time of the offer, it had not had time to consider the strength of the case against it; to address this risk. I am not persuaded that this is so. I infer from the history of this matter that Ipex had a very good idea of the value of its claim, which was very much overstated in the pleading, and of its chances of success. It was well aware of the position taken by Melbourne Water. Its contractual claim had to address the difficulties raised by the terms of the clauses upon which it depended. It must have been well aware of these difficulties because it had already had its contractual claim rejected by Melbourne Water for reasons which it must have seen and understood. Notwithstanding this, it sought, unsuccessfully, to formulate this contract claim for some time thereafter until it was abandoned in December 2007.
Next, it was said that, at the time Ipex was called upon to consider the June 2003 offer, it did not have the Unisys reports for the months prior to the time of tender except one. These, it was said, would have confirmed its belief that the help desk calls history prior to that provided in the RFP showed that calls were running at a very much greater rate than 433 per month. Furthermore, nothing had been said about the impact of the Standard Operating Environment (‘SOE’) on the earlier help desk call numbers. These matters are interrelated, as appears from my trial judgment. The SOE provided an explanation for the decision of Melbourne Water not to provide the earlier statistics. Until the earlier and higher numbers of help desk calls had been provided, there was no cause to consider whether they were an indication of the inaccuracy of the 433 per month figure which was provided in the RFP, or an indication of the number of calls likely to be encountered in the future.
I am satisfied that the Ipex rejection of the offer was, in all the circumstances, unreasonable. Although in its terms, the offer did not contain a warning that it would be relied upon in support of a special costs order, there can be no doubt that a litigant such as Ipex, supported as it was by a team of experienced commercial lawyers, would have understood this to be the case. I will therefore make a special costs order.
The order sought by Melbourne Water is that its costs be taxed on an indemnity basis. I will not adopt this course. The objective of encouraging a plaintiff to give serious consideration to an offer is achieved by moving the basis of taxation up one notch, rather than two, that is, to a solicitor client basis. The essential difference between this basis and an indemnity basis appears to be the imposition of the burden of satisfying the taxing officer that a particular cost item is reasonable. Given the history of this matter, it is appropriate to cast this onus on the party supporting the bill, in this case, Melbourne Water.

The appellants, in a brief written outline, submitted that the judge exercised his discretion as to costs on a wrong basis for the following reasons. First, they said that the judge did not properly consider the proceeding as a whole because Ipex was successful in relation to its claim for an unpaid instalment of the contract price (that claim having been paid by Melbourne Water before the trial but after the service of the offer of compromise) and because Ipex was also successful in relation to Melbourne Water’s counterclaim. Second, they said that the judge did not properly consider whether the decision to reject the offer of compromise was unreasonable at the time that it was served (17 June 2003) because, at that time, only one Unisys monthly report had been obtained, nothing had been said by Melbourne Water, in its pleadings or otherwise, about the impact of the SOE project, a matter which ultimately assumed great importance, nothing had been said by Melbourne Water about the absence of call log data about the number of help desk calls and no issue had been taken concerning the pleading of the contract claim. Third, the offer of compromise did not state that a special costs order would be sought if the offer were not accepted. Fourth, the offer of compromise was served under order 26 which provided for its own costs regime, not solicitor-client costs.

Melbourne Water referred to what was said by Ormiston JA in Transport Accident Commission v O’Reilly:[32]

[it] is extraordinarily difficult to show that a court of first instance … with wide discretionary powers has erred in the exercise of its powers to award costs, if there be some basis for making an order other than the conventional order in favour of the successful party.

[32][1999] 2 VR 436, 457 [46].

Melbourne Water said that the evidence of the claims made and abandoned by Ipex was the subject of affidavits and comprehensive submissions and that there was no reason to doubt or reconsider the exercise of the judge’s discretion as to costs. Melbourne Water submitted that Ipex was at all times being advised by solicitors who were in a position to appreciate the potential for costs being awarded against their client on a special basis, notwithstanding that the offer of compromise did not make an express statement about this. Melbourne Water further submitted that the single unpaid service fee instalment claim was paid by it one year before the trial and did not feature as an issue during the trial and that the costs orders made by the trial judge addressed the counter-claim which did not form part of the trial. Melbourne Water contended that the judge gave comprehensive consideration to all relevant costs issues, as his reasons demonstrated.

I would accept Melbourne Water’s submissions. In my opinion, the arguments advanced by the appellants do not show that the judge’s order as to solicitor-client costs is attended by sufficient doubt as would justify a grant of leave to appeal. I can find no arguable error of law in the matters raised by the appellants, which matters are essentially a discretionary consideration. Importantly, the judge had the overwhelming advantage of being very familiar with all the details of this long and complex litigation and was thus able to balance the many factors involved. There is nothing in his Honour’s consideration of the matter which, to my mind, suggests that his discretion has probably, or even may have, miscarried.

Order for costs against Mr Schwalb

The judge made an order for costs against Mr Schwalb, a non-party to the principal proceeding. The judge explained that Ipex was in liquidation and could not meet any order for costs, that Takapana was Ipex’s former parent company and that Mr Schwalb was a director of Takapana. There was no opposition to an order against Takapana but an order against Mr Schwalb personally was opposed. The judge said:[33]
[33]Reasons (No 2), [47]-[69].

It is not necessary that I set out at any length the history of the proceeding and of the involvement of Takapana and Mr Schwalb prior to Ipex going into receivership. It will be recalled that the Ipex shares were owned by Takapana until they were sold to Volante in December 2003 and that Volante in 2006 became a wholly owned subsidiary of Commander Communications Ltd. In August 2008 Commander and its subsidiaries, including Volante and Ipex, went into administration and receivership. On 24 November 2008 the creditors of Ipex resolved pursuant to s 439C(c) of the Corporations Act that Ipex be wound up.
Takapana is, and at all material times since the commencement of this proceeding has been, the trustee of the Schwalb Family Trust No. 1. Its directors and secretaries are and were Joel Schwalb and Yoav Abraham Schwalb, both of 34 Otira Road, Caulfield. Under the 2003 share sale agreement it appears to have been the intent of Takapana and Volante that this litigation would be continued for the benefit of the Schwalb Family Trust.
The current ASIC search shows that Takapana has a paid up capital of $3. There is no evidence that it has any assets other than, I would suppose, a right of indemnity against the trust assets, if any. Efthim AsJ was in August 2009 not satisfied that Takapana had the means to support its undertaking to pay the costs of Melbourne Water of this proceeding and those of the State of Victoria in another proceeding. I proceed on that basis.
In the course of argument it was asserted, and I accept, that the Schwalb Family Trust No. 1 is a discretionary trust for certain members of the Schwalb family. No further details are in evidence. At the hearing before Efthim AsJ counsel for Takapana said that Mr J Schwalb stood behind Takapana and that ‘It’s a trustee company and he’s a beneficiary among others, I think’.
The evidence showed that Mr J Schwalb was the motivating force behind the Melbourne Water contract and the litigation which it has produced. He interviewed Mr Keeble in Singapore and persuaded him to give evidence at the trial. It was he who provided instructions to the Ipex lawyers.
The sale price for the Ipex shares under the share sale agreement was paid by the issue by Volante of 50,854,700 new shares plus a contingent call option. It seems that these shares when issued were registered, not in the name of Takapana but in the name of Summit Nominees Pty Ltd, a company in which Mr J. Schwalb had, in September 2005, a relevant interest within the meaning of s.608 of the Corporations Act. The value of the consideration for the Ipex shares was given at $70 million. This gave Takapana a 46.75% interest in Volante and entitled it to three members on the board. Mr J Schwalb and Mr YA Schwalb and another Ipex director became directors of Volante in February 2004.
About this time, in March 2004, Volante, in response to pressure on behalf of Melbourne Water, agreed to provide a guarantee of the Ipex costs.
In June 2005 Mr Y Schwalb resigned as director of Volante and in September of that year so too did Mr J Schwalb. In the meantime, the Schwalb controlled shareholding in Volante was reduced to not more than 5%. It was in the following year that Volante became part of the Commander group. The Volante guarantee nevertheless remained in place.
The litigation continued thereafter under the direction of Takapana and Mr J Schwalb.
The burden lies on Melbourne Water to establish the factual basis for the non-party costs order which it seeks. No attempt was made on behalf of Mr J. Schwalb to offer any evidence as to the matters bearing on this issue. He swore a short affidavit on 25 September 2009 asserting only that his involvement was that of a director of Ipex and later of Takapana. This affidavit was not challenged. He was not cross-examined.
In the course of the hearing before Efthim AsJ, where one matter in issue was the ability of Takapana to support its proposed undertaking, his Honour put directly to counsel for Takapana the question whether their client had any assets. The exchange recorded in paragraph 35 of the affidavit of Jesse Sol Gleeson affirmed 16 September 2009 is disturbing. In response to the question, senior counsel for Takapana said this:
A.Your Honour knows a number of things. First, Your Honour knows it has the proceeds of the sale of its shares.

Q.       What are they worth?
A.       $1.7 a share I’m told and over 50,000,000 shares.
In fact, passing over the fact that there were actually 25,520,692 Ipex shares sold, so that counsel must have been referring to the number of shares in Volante which were issued, it is not at all clear that Takapana ever owned these Volante shares. Most of them are not presently owned by Takapana or by any company in which Mr J. Schwalb holds a relevant interest. Finally, the present value of the shares in Volante (in liquidation) is not likely to be a cause for any confidence.
I accept the invitation of counsel for Melbourne Water to infer that any evidence that might have been given by Mr J. Schwalb upon these matters would not have been of assistance to his present cause.
I am mindful that the party in question is Mr J. Schwalb. Some of the evidence upon which I was invited to rely came from other sources, but no objection was taken, nor was I encouraged not to act upon it. The position taken on his behalf was that no facts were established to detract from his contention that everything he did during this litigation, he did, not on his own behalf, but as a director of Takapana which was the true beneficiary of the litigation if it were successful.
On behalf of Melbourne Water, reliance was placed upon the general proposition that costs may be awarded against ‘the real party’ to litigation. Section 24 of the Supreme Court Act 1986 confers a broad discretion on the matter of costs.
24        Costs to be in the discretion of Court
(1)Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.

(2) Nothing in this section alters the practice in any criminal proceeding.

Rule 63.02 provides:
The power and discretion of the Court as to costs under section 24 of the Act shall be exercised subject to and in accordance with this order.

It is well established that the Court under these provisions may order that costs be paid against a person who is not a party in the proceeding. This is, of course, an exceptional order; costs are usually ordered only against a party and there is some debate as to the circumstances in which this exceptional power might be exercised.[34]
[34]See Burns Philp & Co Ltd & Anor v Bhagat [1993] 1 VR 203, 217 (Brooking J), cited with approval by Mason CJ and Deane J in Knight v FP Special Assets Ltd (1992) 174 CLR 178, 192 [25].
One of these circumstances, however, is that where the non-party promotes and funds the proceeding brought by an insolvent company solely or substantially for his or her own benefit. In the recent case of Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd[35] the majority of the High Court quoted with approval the following passage from Knight’s case which identified the general category of cases presently under consideration:
[35][2009] HCA 43, [31]-[32].
That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.[36]
[36]Knight v FP Special Assets Ltd (1992) 174 CLR 178, 192 [25].

It was put against the making of the order that Mr J. Schwalb was acting only as a director and that he should not by carrying out his directorial duties by exposed to personal liability.
So much cannot be doubted, but in the present case the nominal plaintiff had no real interest in the litigation. Under the share sale agreement, all the benefit and burden of this litigation was cast upon Takapana and this as a trustee company only. Mr J. Schwalb is one of the two directors of Takapana and, to that extent, a decision-maker with respect to the exercise of its discretionary powers. He is, as counsel conceded, a beneficiary of the trust and therefore a potential object of this discretion. All of this means that the fruits of the litigation were his or substantially within his gift.
His financial involvement in the litigation in terms of securing the Volante guarantee, meeting interlocutory costs orders and in offering personally ‘to provide appropriate security’ for costs in September 2008, was not denied. Equally, his active involvement, inasmuch as he provided instructions to the Ipex lawyers, was not disputed.
I accept, too, that, as a company with a $3 paid up capital, Takapana has not and has never had the resources to meet an order for costs out of its own funds. It is, however, likely that it has access to funds since very substantial amounts have been paid to meet orders for costs and for security. Whether these were made from the trust assets to which Takapana might look for indemnity, I do not know. Given the manner of the dealing with the proceeds of the sale of the Ipex shares, I consider it likely that these funds were sourced elsewhere from funds available to Mr J. Schwalb. On the slender evidence, and absent any evidence to the contrary, I so find.
This being the case, the situation is somewhat removed from that of the conscientious company director fulfilling his or her directorial duties. If it is sufficient to activate a claim for personal liability in a director that a company incurs a debt when insolvent, it can come as little surprise that a similar fate might befall a director of such a company who embarks for his own benefit upon ultimately unsuccessful litigation in which the company incurs a costs liability to another party to the litigation.
This case has the further dimension that Ipex is in liquidation. The order for costs which I make against it is a debt provable in the winding up. As it happens, there are, I have been told, no assets, so that creditors are not to receive any distribution. If the result of this litigation had gone in favour of Ipex, it would be most unfair to the creditors if they found themselves having to apply assets to meet a Melbourne Water costs order. The arrangement which I found to exist in rejecting Melbourne Water’s application that the lawyers on the record for Ipex were not authorised, is an arrangement which was put in place to avoid this possibility and also to ensure, so far as possible, that the fruits of litigation should not be shared with those Ipex creditors.
In the circumstances, I will make an order that Mr J. Schwalb pay any unsatisfied costs liability which Ipex has incurred to Melbourne Water after the costs payable have been determined and set off.

Mr Schwalb submitted that leave was not required to appeal against the costs order directed to him, alternatively, if leave was required, it should be granted because there was no basis for making the order against him. Mr Schwalb accepted that one of the circumstances where costs could be ordered against a non-party was where the non-party had promoted and funded the proceeding brought by an insolvent company solely or substantially for his own benefit – but it was submitted that there was no evidence that Takapana, which was conducting the litigation in the name of Ipex, was insolvent or did not have the resources to meet an order for costs. Further, Mr Schwalb submitted that there was no evidence that any fruits of the litigation were his or substantially within his gift and no evidence that his involvement went beyond his role as a director of Takapana.

Pursuant to leave granted, Mr Schwalb provided further written submissions after the conclusion of the oral hearing of the appeal. In that document, it was submitted, inter alia, that there was no evidence that Takapana was insolvent or ‘a man of straw’, no evidence that Mr Schwalb was the source of the monies provided by Takapana by way of security for costs or paid on account of costs or that Mr Schwalb provided, paid or funded any costs of the litigation, no evidence that Mr Schwalb controlled the fruits of the litigation or that they were substantially within his gift and that Mr Schwalb’s own uncontradicted evidence showed that his role in the litigation did not go beyond that of a diligent company director.

On the other hand, Melbourne Water submitted that leave to appeal was required and that the Transport Accident Commission v O’Reilly ‘threshold’ was not met. Melbourne Water further submitted that the evidence of the role of Mr Schwalb in the proceeding was the subject of comprehensive submissions and much was not disputed. Melbourne Water said that the following matters were not disputed:

(a)Since 24 November 2008, [Ipex] had been in liquidation and could not meet any order for costs.

(b) [Takapana] had a paid up capital of $3.
(c) The directors of Second Appellant at all relevant times were [Mr Schwalb] and Yoav Abraham Schwalb.
(d)[Takapana] acted as trustee for the Schwalb Family Trust No. 1 at all relevant times during the proceedings below.
(e)[Mr Schwalb] was at all relevant times a beneficiary of the Schwalb Family Trust No.1.

(f) [Mr Schwalb] instructed solicitors and counsel in the proceedings.
(g) [Mr Schwalb] was the motivating force in the proceedings.
(h) [Mr Schwalb] always provided the solicitors for [Ipex and Takapana] with instructions for the proceedings, and, at all material times when the proceedings were under the control of [Takapana], ‘instructions came from [Mr Schwalb and Takapana]’.
(i)[Mr Schwalb] met with witnesses prior to the trial and received transcript of the trial during the trial.

Melbourne Water said that the evidence given by Mr Schwalb was that his involvement was limited to acting in his capacity as a director of Ipex and later as a director of Takapana in his capacity as a trustee of the Schwalb Family Trust No 1 and that all instructions were given in that capacity and not in his personal capacity and that Mr Schwalb’s evidence did not deal with the undisputed matters set out above.

The question whether leave to appeal is required, on a proper construction of s 17A(1)(b) of the Supreme Court Act 1986 (Vic), is one of some difficulty.[37] I prefer to assume that leave to appeal is required – I would grant leave to appeal but dismiss the appeal for the following reasons.
[37]See In re Land and Property Trust Co PLC [1991] 1 WLR 601, Wilkinson & Anor v Kenny & Anor [1993] 1 WLR 963, Emanuel Management Pty Ltd (in liq.) v Foster’s Brewing Group Ltd [2003] QCA 516, Gaskin v Heinicke [2007] SASC 256, Oxer v Astec Paints Australia Pty Ltd [2008] SASC 64.

In my opinion, the judge referred to and applied the relevant principle as stated in Knight v FP Special Assets Ltd,[38] although as was recognised therein there may be other categories of case where an order for costs might be made against a non-party:

… we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party … That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party … has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.

[38][1992] 174 CLR 178, 192-3 (Mason CJ and Deane J – with whom Gaudron J agreed).

I further consider that the judge correctly applied that principle to the facts. In other words, the evidence showed that Mr Schwalb had played an active part in the conduct of the litigation and had an interest in the subject of the litigation. In my opinion, the fact that Takapana was a trustee of a family trust with a paid-up capital of $3 was prima facie evidence that Takapana, although not necessarily insolvent, was a man of straw. In the absence of evidence to the contrary, it could be safely assumed that Takapana had no assets of its own and at best some right of indemnity against any assets of the family trust. Further, as the family trust had the real financial interest in any fruits of the litigation, the evidence showed that Mr Schwalb had a sufficient interest in the fruits of the litigation to justify an order for costs against him because he, and no doubt other members of his family, were objects of the discretionary trust and he, along with the other director of Takapana, was in a position to determine any distribution to beneficiaries.

To the extent that the judge overstated the position on the evidence (and I do not think that he did), I consider that the discretion was in any event correctly exercised in the interests of justice for the reasons above stated.

BEACH AJA:

I agree with Mandie JA.

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[2012] VSCA 169

13 August 2012