McLaughlin v Dungowan Manly Pty Ltd

[2010] NSWSC 306

CITATION:	McLaughlin v Dungowan Manly Pty Limited [2010] NSWSC 306
HEARING DATE(S):	15 April 2010
JUDGMENT DATE :	20 April 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Ward J
DECISION:	1. Dungowan Manly Pty Limited pay the McLaughlins’ costs of the proceedings. 2. Mr Garratt pay the McLaughlins’ costs of the application brought by him to set aside in whole or in part the subpoena to produce which was issued by the McLaughlins on 25 May 2009 in these proceedings.
CATCHWORDS:	COSTS – multiple issues in proceedings – plaintiffs successful on some claims – principles relating to departure from general rule that costs follow the event and where apportionment of costs to reflect outcome on separate issues if appropriate – plaintiffs’ unsuccessful claims did not add substantially to length of hearing or were relevant to an understanding of other matters in issue which were argued successfully – no apportionment of costs referable to separate issues in the proceedings – DERIVATIVE PROCEEDINGS – minority shareholders’ claim for an order that company bear costs of derivative proceedings in advance of commencement of those proceedings – no order made
LEGISLATION CITED:	Civil Procedure Act 2005 (NSW) Supreme Court Rules 1970 (NSW) Uniform Civil Procedure Rules 2005 (NSW)
CATEGORY:	Separate question
CASES CITED:	Access Courier Systems Pty Limited v Hunsat Pty Limited [2009] NSWSC 507 Bowen Investments Pty Limited v TAB Corp Holdings Limited (No 2) [2008] FCAFC 107 Carpenter v Pioneer Park Pty Limited [2004] NSWSC 1007 Corbett Court Pty Limited v Quasar Constructions (NSW) Pty Limited [2008] NSWSC 1423 Cretazzo v Lombardi (1975) 13 SASR 4 Dodds Family Investments Pty Limited v Land Industries Pty Limited (1993) 26 IPR 261 Ehsman v Nutectime International [2006] NSWSC 887, at [62]; (2006) 58 ACSR 705 Elite Protective Personnel Pty Limited v Salmon (No 2) [2007] NSWCA 322 Elite Protective Personnel Pty Limited v Salmon (No 2) [2007] NSWCA 373 Fexuto v Bosnjak Holdings Pty Limited (No 3) (1998) 30 ACSR 20 Fiduciary Ltd v Morningstar Research Pty Limited [2005] NSWSC 442; (2005) 53 ACSR 732, (2005) ACLC 1100 Foyster v Foyster Holdings Pty Limited [2003] NSWSC 135; (2003) 44 ACSR 705 Hodge v TCN Channel 9 (No 2) [2006] NSWSC 1272 Hughes v Western Australian Cricket Association (1986) ATPR 40-748 James v Surf Road Nominees (No 2) [2005] NSWCA 296 Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534; (1990) 97 ALR 45 Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 Ohn v Walton (1995) 36 NSWLR 77 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72; (1998) 152 ALR 83 Pacific General Securities Limited v Soliman & Sons Pty Limited [2006] NSWSC 724 Reale v Duncan Reale [2006] NSWSC 199 Roach v Winnote Pty Limited; Leslie & Anor [2006] NSWSC 231; (2006) 57 ACSR 138 Sabah Yazgi v Permanent Custodian Limited (No 2) [2007] NSWCA 306 Short v Crawley (No 40) [2008] NSWSC 1302 Standard Commodities Pty Limited v Societe Cocinter Department Centragel [2005] NSWSC 493; (2005) 54 ACSR 496 Stena Rederi Aktiblag v Austal Ships Sales Pty Limited [2007] FCA 1141 Trade Practices Commission v Nicholas Enterprises Pty Limited (No 3) (1979) 28 ALR 201; (1979) 42 FLR 213; (1979) ATPR 40-141 Turkmani v Visvalingam (No 2) [2009] NSWCA 279 Wallersteiner v Moir (No 2) [1975] 1 QB 373 Waterman v Gerling Australia Insurance Co Limited (Costs) [2005] NSWSC 1111 Waters v PC Henderson (Aust) Pty Limited (unreported CA (NSW) Kirby P, Mahoney and Priestley JJA, 6 July 1994)
PARTIES:	Patrick David McLaughlin (First Plaintiff) Jennifer Therese McLaughlin (Second Plaintiff) Dungowan Manly Pty Limited (Defendant)
FILE NUMBER(S):	SC 258866 of 2006
COUNSEL:	S Burchett (Plaintiffs) D Priestley (Defendant)
SOLICITORS:	Turner Freeman (Plaintiffs) Pikes (Deendant)

- 6 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WARD J

TUESDAY 20 APRIL 2010

06/258866 PATRICK DAVID McLAUGHLIN v DUNGOWAN MANLY PTY LIMITED (as to costs)

JUDGMENT

1 On 16 March 2010, I published my reasons for the orders I had made on 26 February 2010 in these proceedings. I indicated at that time that I would hear submissions from Counsel as to the appropriate costs orders which should be made, having regard to my findings. On 15 April 2010, I heard those submissions and I now publish my reasons in relation to costs.

Correction of earlier orders

2 Before turning to the question of costs, I note that on 15 April 2010 I corrected, pursuant to the slip rule, order 3 of the orders I had made on 26 February 2010. That order had been based on my (incorrect) understanding that there had been a calculation made as to interest for the period from 21 March 2007 to 30 September 2009 on half of the January 2007 special levy paid by the McLaughlins and that the interest sum as calculated was $59,885.93. In fact, however, that sum itself represented 50% of the January 2007 special levy paid by the McLaughlins and it was the interest referable to that sum which remained to be calculated.

3 Following submissions from Counsel on 15 April 2010 as to the appropriate rate of interest to be adopted, I formed the view that the appropriate rate would be the court rate of interest. I did so in the absence of evidence as to the commercial interest rate which would have been applicable to borrowings or investments of the McLaughlins over the relevant period. Although I was generally referred to some evidence in the substantive proceedings to the effect that an 11.5% interest rate had been treated as the rate applicable by the company for payment of outstanding levies, my recollection was that there was some inconsistent evidence in this regard (at least insofar as Mr Bartrop, who had assisted in the project, expressed the opinion that the rate of interest on outstanding levies was as required under the strata titles legislation). In any event, it did not seem to me to be necessary to revisit the issue by reference to the evidence before me at the hearing, since I was not of the view that the company rate of interest was particularly helpful on this issue.

4 The order for payment of interest (on the portion of the levy which was not refunded to the McLaughlins despite their requests) was to compensate the McLaughlins for the loss of use by them of that money over the relevant period (by way of a remedy for the oppressive conduct which I had found on the part of the company), not to claw back from the company a benefit it might have obtained from the use of those moneys. Nor did I think I could necessarily assume that the company interest rate would be the same as that pertaining to the McLaughlins’ position.

5 Accordingly, during the course of submissions I expressed my view that the court rate would be the appropriate rate and the parties then reached agreement as to the mathematical calculation of the interest so payable having regard to the applicable court rates, namely $14,769.97. I amended order 3 of the orders made on 26 February 2010 accordingly.

Costs

6 I turn then to the question of costs. Three issues were raised in this regard: first, as to the costs of the substantive proceedings; secondly, as to the costs of certain interlocutory applications on which I had ruled during the proceedings; and, thirdly, as to an application made by Counsel for the McLaughlins, Mr Burchett, for an order that the company (Dungowan Manly Pty Limited) bear the costs of the derivative proceedings which I granted leave to the McLaughlins to commence.

7 In summary, for the reasons set out below, I am of the view that the company should pay the McLaughlins’ costs of the proceedings which were before me; that Mr Garratt should pay the McLaughlins’ costs of his unsuccessful motion to set aside the subpoena served on him to produce documents in these proceedings; and that there should be no further order as to costs. I do not consider it appropriate to order at this stage that the company should bear the costs of any derivative proceedings brought by the McLaughlins in its name pursuant to the leave granted. I consider that this issue should be left to be dealt with at an appropriate time once it is clear what claims are sought to be pursued during the course of the derivative proceedings if and when commenced pursuant to the leave I have granted.

(i) Costs of the substantive proceedings

8 As to the question of costs generally, it was accepted by both parties that the court’s power to award costs pursuant to s 98(1) of the Civil Procedure Act 2005 (NSW) is discretionary, subject to the rules of court and to statute, and that the discretion is a very wide one (Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72; (1998) 152 ALR 83; Elite Protective Personnel Pty Limited v Salmon (No 2) [2007] NSWCA 322).

9 Rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) provides that, subject to Part 42, if the court makes any order as to the costs it is to order that costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs. The general rule is thus that ordinarily costs will follow the event and a successful party will be the recipient of an order for costs in its favour. An order for costs in favour of the successful party is compensatory in nature in order to reflect the vindication of its successful claim, rather than punitive (Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534; (1990) 97 ALR 45; Ohn v Walton (1995) 36 NSWLR 77).

10 Not surprisingly, the McLaughlins (who were successful in obtaining relief in these proceedings) seek an order for the payment of their costs. (It is not suggested that any such order should be other than on a party/party basis.)

11 For the defendant company, however, it is submitted by Mr Priestley that this a case in which the general rule should not be applied. Rather, it is submitted that when an analysis is made of the extent to which the McLaughlins succeeded on the multiple issues raised by them in the proceedings, the McLaughlins should bear a significant proportion (said to be at least 85%) of the costs of Dungowan Manly.

12 There are certainly cases in which, in the exercise of the court’s broad discretion in relation to costs, an apportionment of the costs as between various issues in the case (or an order other than that which would generally follow the overall outcome of the proceedings) is made.

13 In Pacific General Securities Limited v Soliman & Sons Pty Limited [2006] NSWSC 724, Brereton J (at [10]), cited Waterman v Gerling Australia Insurance Co Limited (Costs) [2005] NSWSC 1111 in which it was held (at [10]) that it might be appropriate to award costs of a separate issue where a clearly defined and separate issue (on which the otherwise successful party failed) had occupied a significant part of the trial. Similarly, in Sabah Yazgi v Permanent Custodian Limited (No 2) [2007] NSWCA 306, at [24], it was said that it may be appropriate to deprive a successful party of costs or a portion of costs if the matters upon which that party was unsuccessful took up a significant part of the trial either by way of evidence or argument.

14 In James v Surf Road Nominees (No 2) [2005] NSWCA 296, Beazley, Tobias and McColl JJA recognised (at [22]) that where there are multiple issues involved in proceedings the court is entitled to make a different costs order, noting the comments made by Mahoney JA in Waters v PC Henderson (Aust) Pty Limited (unreported CA (NSW) Kirby P, Mahoney and Priestley JJA, 6 July 1994) to the effect that where there are multiple issues the application of the general rule may involve hardship where a party succeeds on some issues but not others, particularly where the defendant succeeds on issues that occupied the bulk of the time taken by the proceedings and also noting (at [33]) the observations of Toohey J in Hughes v Western Australian Cricket Association (1986) ATPR 40-748 to similar effect.

15 However, on more than one occasion, a note of caution has been sounded as to the court embarking on the exercise of apportioning costs as between particular issues in the proceedings. In the passage discussed above (extracted by the Court of Appeal in James) from Mahoney JA’s judgment in Waters, his Honour had gone on to say that:

Nevertheless, unless a particular issue or group of issues is clearly dominant or separable, it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed.

16 Similarly, in Elite Protective Personnel Pty Limited v Salmon (No 2) [2007] NSWCA 373 it was said (at [6]) that where there are multiple issues in a case the court does not generally attempt to differentiate between those issues on which a party is successful and those on which it fails:

Unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed.

17 In Hughes, where his Honour commented that a successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other party’s costs of them, Toohey J also said:

It seems to me that the only basis on which it would be appropriate to depart from the general rule that costs follow the event, by reason of the circumstance that the appellant lost what might be regarded as the dominant issue, is that the judgment is made that, had that issue been excluded then, although the dominant issue was not clearly separable, the costs incurred on the appeal would be likely to have been substantially less, perhaps because there was less at stake.

18 In James (at [35]), their Honours were of the opinion that it was preferable not to speak in terms of ‘rules’ in this context but noted that an available approach to the exercise of the court’s discretion in particular cases could be to estimate the time taken on discrete issues at the hearing and make orders accordingly.

19 More recently, in Corbett Court Pty Limited v Quasar Constructions (NSW) Pty Limited [2008] NSWSC 1423, Hammerschlag J noted that the general rule as to costs can, in the discretion of the court, be displaced in appropriate cases (referring to the relevant authorities collated by White J in Short v Crawley (No 40) [2008] NSWSC 1302, at [25]-[32]) and gave examples (at [31]) of instances where the general rule may be displaced:

Examples of instances where the general rule may be displaced include the following:

(a) a costs order in favour of a successful party can be modified to reflect its failure on particular issues even if the successful party did not act unreasonably in raising those issues: Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (Supreme Court of New South Wales, Hodgson CJ in Eq, 3 June 1998, unreported, BC9802305 at 10-11);

(b) if a party unreasonably pursues or persists with points which have no merit, such conduct will constitute a consideration relevant to the ordering of costs even in circumstances where that party is generally successful: Oshlack v Richmond River Council (1998) 193 CLR 72 at 122;

(c) conduct in relation to the matter may be discreditable to an extent warranting a party being deprived of costs: Jamal v Secretary Department of Health (1988) 14 NSWLR 252 at 271;

(d) where a litigant has succeeded only upon a portion of his claim, the circumstances may make it reasonable that he bear the expense of litigating that portion upon which he has failed: Hughes v Western Australian Cricket Association (Inc) (1986) 8 ATPR 40-748 at 48,136;

(e) where the proceedings involve multiple issues departure from the general rule may be warranted particularly where the losing party has succeeded on issues which occupied significant time. Nevertheless the application of the general rule may involve hardship where a party succeeds on some issues but fails on others particularly where the losing party succeeds on some issues. However unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed: Ritchie’s Uniform Civil Procedure NSW at [42.1.15]; Waters v PC Henderson (Australia) Pty Ltd (New South Wales Court of Appeal, 6 July 1994, unreported, BC9404952 at 5); Short v Crawley (No 40) at [27]-[28];
(f) a successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other party’s costs of them: Hughes v Western Australian Cricket Association (Inc) at 48,136.

20 Hammerschlag J went on (at [32]) to note the caution required before entertaining the approach of apportioning costs as between particular issues:

In Hughes v Western Australian Cricket Association (Inc) Toohey J (in a passage cited by White J in Short v Crawley (No 40) ) referred to what was said by Jacobs J in Cretazzo v Lombardi (1975) 13 SASR 4 at 12 in the following terms:
His Honour sounded what he described as ‘a note of cautious disapproval’ of applications to apportion costs according to the success or failure of one party or the other on the various issues of fact or law which arise in the course of a trial. His Honour commented:

But trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issues of fact or law. The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues, however doubtful, which might be material to the decision of the case. There are, of course, many factors affecting the exercise of the discretion as to costs in each case, including in particular, the severability of the issues, and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues .’ (my emphasis)

21 It has been said that the discretion to apportion costs is one to be exercised only in the most exceptional of circumstances (Trade Practices Commission v Nicholas Enterprises Pty Limited (No 3) (1979) 28 ALR 201; (1979) 42 FLR 213; (1979) ATPR 40-141) and, as noted above, in Cretazzo v Lombardi (1975) 13 SASR 4, at 12, Jacobs J recognised the need for the court to be mindful not to discourage litigants from canvassing all material issues for fear of an adverse costs order (and see Stena Rederi Aktiblag v Austal Ships Sales Pty Limited [2007] FCA 1141, at [12]).

22 The exercise of the court’s discretion as to costs ultimately requires an assessment of what is fair in all the circumstances. Mr Priestley referred to what was said in Bowen Investments Pty Limited v TAB Corp Holdings Limited (No 2) [2008] FCAFC 107 by Finkelstein and Gordon JJ in this regard (at [5]):

Costs are in the court’s discretion. Fairness should dictate how that discretion is to be exercised. So, if an issue by issue approach will produce a result that is fairer than the traditional rule, it should be applied.

citing also Hodge v TCN Channel 9 (No 2) [2006] NSWSC 1272 and Standard Commodities Pty Limited v Societe Cocinter Department Centragel [2005] NSWSC 493; (2005) 54 ACSR 496.

23 Where it is appropriate to entertain the process of apportioning costs as between different issues in the proceedings, in general it seems that such an exercise will be carried out on a relatively broad brush basis, or as a matter of impression on the part of the trial judge.

24 In Fexuto v Bosnjak Holdings Pty Limited (No 3) (1998) 30 ACSR 20, Young J (as his Honour then was), having noted that where there were multiple issues it may be appropriate for the court to assess the costs on each issue or make a reduction in the costs which the successful party obtains because of that party’s losses on separate issues, said, 21 - 22:

Those principles are very easily stated, but are often very hard to apply. ...
The cases, however, show that it is unwise to be too technical about what is meant by ‘event’ or ‘issue’ in this context. The judgment of Thomas J in Colburt v Beard (1992) 2 QD R 67 gives abundant examples which establish this point. In particular one does not look at issues as if they were pleaders’ issues but approaches the matter with a broad brush . (my emphasis)

25 In Dodds Family Investments Pty Limited v Land Industries Pty Limited (1993) 26 IPR 261, also cited by the Court of Appeal in James (at [36]), Gummow, French and Hill JJ said (at 272):

Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion for the trial judge. Mathematical precision is illusory and the exercise of the discretion will often depend upon matters of impression and evaluation.

26 Is this a case which warrants departure from the general rule that costs follow the event? Both sides, in effect, attribute to the other side the blame for (what are no doubt significant) costs having been incurred in the proceedings.

27 Mr Priestley pointed to the pursuit by the McLaughlins of challenges in relation to issues (for example, the validity of various of the September resolutions) where nothing turned or was likely to turn thereon (say, because any invalidity had been cured by ratification in December 2006 or because the resolutions themselves were not necessary for the project to proceed, as had been noted by Barrett J when his Honour found against the McLaughlins on their first application for interlocutory injunctive relief). Mr Priestley also pointed to the failure of the McLaughlins to establish that there was oppression in the decision by the board to pursue the project (that being said to be first and foremost the thrust of the McLaughlins’ claims).

28 Mr Burchett, for his part, pointed to the refusal by the company to accept that there were limitations on its power to carry out the project by reference to the impact it had on the rights of the McLaughlins and, in particular, the failure by the company to respond to correspondence in September 2006 (CB 1097) calling for the company to explain the basis on which it contended that the project could proceed without the McLaughlins’ consent.

29 Mr Burchett submitted that, for the McLaughlins to be deprived of the usual costs order, it is necessary for the company to show that there was a clearly dominant issue upon which the McLaughlins failed, which is clearly separable and took up a significant part of the trial and without which the costs of the hearing would be likely to have been substantially less (citing Waters, Elite and Turkmani v Visvalingam (No 2) [2009] NSWCA 279).

30 Both Mr Priestley and Mr Burchett handed up written submissions in which they analysed the issues which were determined by me in the proceedings and the success which one or other side had on those issues. It is fair to say that those submissions reflected different perspectives of the outcome of the proceedings.

31 Mr Priestley submitted that, when analysing the extent to which the McLaughlins were successful in the proceedings, it should be concluded that they succeeded on allegations of invalidity in respect of only one of the four September 2006 resolutions (that being the resolution as to the compensation payable to Mr Garratt for his efforts in relation to the project); that the challenges to the December 2006 resolutions for the most part failed; that the challenges to the buy back resolutions (the subject of amendments made to the pleadings during the trial) failed; that the complaints made in relation to the striking of the special levy in January 2007 failed, both as to the allegation as to lack of power and as to the allegations of improper or collateral purpose for the striking of the levy; and that the primary case of oppression also failed.

32 It was submitted by Mr Priestley that the finding that the project impermissibly altered the McLaughlins’ rights without their consent (which led to the substantive relief obtained by the McLaughlins in the proceedings before me) was based on an affectation of rights to which (as I had noted in my reasons for judgment) little attention was given during the course of the proceedings (paras [354] and [355] of my reasons).

33 Mr Priestley submitted that the proceedings before me were first and foremost an oppression suit and that the primary case was that the conduct of the company in pursuing the project was conduct which of itself oppressed the McLaughlins as minority shareholders. In this, the McLaughlins failed ([578]-[582] of my reasons), it being only in respect of what was said to be ‘one relatively minor aspect’ of the board’s actions that there was a finding of oppression (that being the refusal to refund half of the January 2007 special levy). It was submitted that the allegation that the project was unnecessary and inappropriate (to which it is said much of the time spent in cross-examination of the various witnesses and the building evidence related) was not made out; that the challenges to the motives of the company failed; and that the remaining issue which took up the majority of time particularly in cross-examination of Mr McLaughlin and Mr Garratt (namely, the adequacy of information provided to members to vote on the resolutions) was largely decided in favour of the company.

34 Mr Priestley submitted that all of the evidence as to loss of share value was in support of an approach to damages that did not succeed because the McLaughlins did not establish what position they would have been in had the project not proceeded at all.

35 Mr Burchett nevertheless contended that the McLaughlins were in substance successful on each of the issues summarised (at [36]) in my reasons for judgment. It is said that the substantive matters in dispute were: first, the legality of the development without the McLaughlins’ consent (on which the McLaughlins undoubtedly succeeded and as a result of which they were held to be entitled to damages); secondly, the manner of pursuit of the development (ie, without proper information to members or compliance with director’s duties to the company) (in respect of which there was a finding of inadequacy of information on some aspects of the resolutions and leave was granted for a derivative suit in that regard); thirdly, as to the propriety of the buy back resolutions (as to which it is said that there was a finding of breach of the Corporations Act 2001 (Cth) without inadequate information to members, exposing the directors to a derivative suit); fourthly, as to the validity of the resolution approving the compensation package to Mr Garratt (held to be invalid); and, fifthly, the levy imposition and unequal treatment regarding it and its partial refund (the latter being held to be oppressive and remediable by way of payment of interest).

36 It was submitted by Mr Burchett that while there may have been various minor issues in the irregularities in the conduct of the company which were not deemed of themselves to warrant relief, the company had not conceded even those irregularities which were found against it; that the McLaughlins had obtained findings in their favour in that regard; and that these were all matters incidental to the determination of the substantive issues and the grant of substantive relief by way of damages and leave to bring derivative proceedings in respect of the conduct of the directors.

37 Although oppression was not found in relation to the conduct of the company in pursuing the development project itself, Mr Burchett submitted that such conduct was held to be in breach of the McLaughlins’ rights under the company’s Articles of Association and in part of the directors’ duties and, as such, was the subject of a successful claim. Similarly, as I understood his submissions, although the striking of the levy was not itself found to be oppressive, Mr Burchett argued that the levy was struck for the project which was itself in breach of the articles and suggested that, as the McLaughlins were entitled to relief from the levy which was included in the calculation of their damages, there was a measure of success in that regard as well.

38 Broadly speaking, it seems to me that the bases on which the McLaughlins challenged what had occurred in relation to the development project can be grouped into a number of categories:

first, what I will refer to as process driven challenges (raising matters such as whether the various resolutions were properly notified or properly put as special resolutions, or as to the time given in respect of the various meetings) – on which the McLaughlins had mixed success but which ultimately did not lead to any relief in the proceedings;
secondly, challenges based on the adequacy of the information given in relation to the matters the subject of the various resolutions – on which, other than in relation to the information provided in respect of Mr Garratt’s compensation and the initial buy-back resolutions, the McLaughlins also failed in their claims;
thirdly, challenges as to the power of the board or the members to take certain steps (as to the development project as a whole - on which the McLaughlins succeeded; and as to the striking of the January special levy and the issue of a forfeiture notice in relation thereto – on which the McLaughlins did not succeed);
fourthly, the claims of oppressive conduct – on which the McLaughlins succeeded only on a very limited aspect; and
finally, the claim for leave to commence proceedings in the name of the company for breach of directors’ duties – on which the McLaughlins succeeded.

39 I think it is fair to describe the primary oppression claim and the (in one sense related) allegations as to the adequacy of information provided to the McLaughlins as having dominated the hearing. Mr McLaughlin was cross-examined at length on his opposition to the project and on the information provided to him during the course of the project. Mr Garratt in turn was cross-examined at length in relation to the reasons for entry into the project and his communication with members of the company in relation to the project. Mr Bartrop was also cross-examined as to the project and the communications to members. By contrast, the time occupied in cross-examination of the builders (and the valuer) who gave evidence was much less. The process-driven challenges (though occupying much space in the pleadings and submissions, and, of necessity, in the reasons for judgment) were dealt with relatively quickly in oral submissions during the hearing.

40 However, it seems to me that there was a degree of overlap between the factual matters raised in the context of the oppression/adequacy of information claims and the allegations of breach of directors’ duties which formed the basis of the grant of leave to commence derivative proceedings. As I noted in my reasons for judgment [658], the allegations made of the company and its directors in relation to the oppression suit seemed to me squarely to raise the matters of which complaint was made in relation to breach of directors’ duties. Therefore, I am not persuaded that a number of the issues on which the company ultimately succeeded (and the McLaughlins failed) were clearly separable from those on which it failed (and the McLaughlins succeeded).

41 It seems to me, in particular, that matters relating to the conduct of the directors in presenting the September 2006 resolutions to the members, committing the company to the building works in advance of finalisation of the conditions for draw down of the finance which had been arranged for the works, handing over the property to the builder, authorising the commencement of the building works in late 2006, agreeing to the compensation to be paid to Mr Garratt (and, for that matter, the terms of the buy-back arrangements with Mr Garratt and Mr Heyworth) and presenting resolutions in relation to the compensation/buy-back arrangements without complete disclosure of matters such as Mr Garratt’s overall interest in the company, were all matters on which evidence as to the history of the project and the motivations of the directors would have been in issue whether or not the primary oppression suit had been maintained. To that extent it seems to me that a number of the issues in the proceedings were intertwined. The difficulty in identifying clearly separate or discrete issues (in the sense of issues on which evidence would not otherwise have been led and hence in the absence of which the trial would have been substantially shortened) illustrates the caution to be exercised in embarking on the course of apportioning costs between such issues (whether on a broad brush approach or otherwise).

42 Fundamentally, the McLaughlins’ complaint was that the company had no power to enter into this development project without their consent. The company took a contrary position and asserted from the outset an ability to proceed with or without the McLaughlins’ consent. To the extent that some of the bases on which the McLaughlins challenged the conduct of the company in entering into the project did not succeed, they nevertheless either did not seem to add substantially to the time occupied in the hearing (such as the cross-examination of Mr Facioni or Mr O’Reilly as to the need for building works of some kind to be entered into or the availability of other building options, as deposed to by Mr Rickard) or were relevant in a broad sense to an understanding of the matters in issue in determining whether there was a serious question to be tried as to breach of directors’ duties. In the case of the procedural challenges, while I think there is force in the criticism that a number of those should not have been pursued as they were never likely to lead anywhere, I also think that the bulk of the costs likely to have been occasioned thereby was in the pleading stage of the proceedings (and that is likely to be reflected in the costs orders made in the company’s favour in the interlocutory proceedings).

43 Overall, I am not satisfied that this is a case in which fairness demands an apportionment of the costs referable to separate issues in the proceedings and, in saying this, I am mindful of the caution that the ultimate ends of justice may not be served if a party is dissuaded by risk of costs from canvassing all issues which may be material to the determination of the case, to paraphrase from what was said by Jacob J in Cretazzo (at 12).

44 I note that complaint was also made by Mr Priestley as to the time incurred in relation to the application made by the McLaughlins on the third day of the hearing for leave further to amend the pleadings. Mr Priestley notes that half a day was lost debating the amendments and that a separate judgment on that issue was delivered. (As to the latter, the fact that time was spent by me in preparing written reasons seems not to the point. As I made clear at the time, in order not to delay the conduct of the trial I adopted the course of making my rulings on the application orally and then providing written reasons thereafter.) I consider that the costs of the application should be treated as costs in the cause and I do not accept that the loss of half a day in debate on the amendment application, in the course of what transpired to be a six-day hearing, not including the subsequent interlocutory application in February, is such as to warrant an apportionment of costs in that regard.

45 Had I been otherwise of the view that there should be an apportionment of costs to reflect the fact that the McLaughlins had failed to establish oppression in relation to the decision by the directors to enter into the project (as opposed to their success on the issue whether the company had power to enter into the project without their consent), I would not have exercised my discretion to award any portion of the costs of that issue to the company. Rather, I would simply have reduced the costs awarded in favour of the McLaughlins by an appropriate percentage. As it is, however, it is not necessary for me to consider what that percentage reduction might have been as I do not consider this to be an appropriate case in which to depart from the general rule that costs should follow the event.

46 For completeness, I should note that there were aspects of the manner in which, outside of these proceedings, the McLaughlins had expressed their disapproval of the project (and cast aspersions on those involved in the project) which did not reflect well upon them (to which I alluded in my earlier reasons for judgment). Had matters of that kind been raised in the proceedings, then I consider that this would have been an appropriate case to consider an apportionment of costs notwithstanding the McLaughlins’ ultimate success in obtaining relief in the proceedings. However, they were not matters which directly related to the conduct of the proceedings in this Court and I do not take them into account in considering the exercise of my discretion in relation to the costs of these proceedings.

(ii) Costs of motion to set aside subpoena

47 Apart from the costs of the proceedings as a whole, Mr Burchett raised the question of costs of an application brought by notice of motion filed on 15 June 2009 by Mr Garratt to set aside a subpoena which had been served on him seeking production of documents falling within two categories - which may be summarised as, first, documents recording agreements with other shareholders of the company or the company itself relating, inter alia, to voting at meetings of the company of the payment of benefits to him or any associated company, and, secondly, documents recording any payment or benefit to him or an associated company from current or former shareholders of the company, in each case over a period from 1 January 2002. I dismissed the motion to set aside the subpoena for reasons set out in the judgment I delivered on 14 July 2009 but did narrow the scope of the subpoena to address the potential overlap with discovered documents and to exclude documents either relating to the company and third parties in relation to the physical redevelopment of the property in question or documents relating to dividend payments or payment of professional fees. At the time of my judgment on this application I reserved the costs of the motion to be dealt with at the hearing.

48 Mr Priestley submitted that there should be no order for Mr Garratt personally to bear the costs of the application. Mr Burchett seeks such an order.

49 In my view, although there was a narrowing of the scope of the subpoena, to ensure that it did not extend beyond the documents which might be of relevance to issues in the proceedings, in substance the McLaughlins were successful in resisting the application to set aside the subpoena. For Mr Garratt it had been contended that there was no legitimate forensic purpose to be served by the subpoena and that it constituted an oppressive fishing (or trawling) expedition. I disagreed. As it transpired, the extent of Mr Garratt’s interest in the company (and the non-disclosure of the extent of that interest when resolutions were put to the company for the payment of compensation to him or for the buy-back of his shares) was a matter of relevance in the determination of the McLaughlins’ claims as to the validity of certain of the resolutions passed by the members over their dissent and as to the question whether leave should be granted to commence derivative proceedings for breach of directors’ duties.

50 I consider that the McLaughlins’ costs of Mr Garratt’s unsuccessful application to set aside the subpoena should be borne by Mr Garratt personally.

(iii) Derivative proceedings

51 Finally, Mr Burchett sought what he described as the order usually made in relation to derivative proceedings, namely that the company bear the McLaughlins’ costs (as representative plaintiffs) of the derivative proceedings for which leave has been granted, relying upon Wallersteiner v Moir (No 2) [1975] 1 QB 373, at 391-392, 403; Foyster v Foyster Holdings Pty Limited [2003] NSWSC 135; (2003) 44 ACSR 705, at 13; Reale v Duncan Reale [2006] NSWSC 199, at [51]-[53]. (In that regard, I note that Foyster and Reale were both cases in which the application for such a costs order was not made in advance of a determination of the derivative suit, though in Foyster the dismissal of the application for leave to intervene was not based on the merits of the application as such and so, in that sense, was in advance of a determination on the merits.)

52 In Wallersteiner v Moir, Denning LJ (at 391) said that “the minority shareholder [there bringing an action for the benefit of the company], being an agent acting on behalf of the company is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency. It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris”. In Fexuto, Young J referred to this as the general principle that a minority shareholder bringing an action on behalf of the company should not be left out of pocket (at 25).

53 In Reale, Austin J (considering an application for costs of derivative proceedings after those proceedings had been determined – unlike here where the application is in advance of the commencement, let alone determination, of such proceedings) referred to the approach of Buckley LJ in Wallersteiner (at 403) and considered that approach to be applicable to a derivative action brought by leave granted under s 237 of the Act. His Honour said, at [51] – [53]:

Senior counsel for Ms Reale submitted that she should be indemnified by Duncan Reale Company in respect of the costs of the derivative proceeding, by analogy with a trustee who has obtained judicial advice - given that Hamilton J found, when granting leave, that the bringing of the derivative proceeding was in the best interests of Duncan Reale Company. Senior counsel referred to Wallersteiner v Moir (No 2) [1975] 1 QB 373, a decision of the English Court of Appeal concerning a derivative action brought on behalf of a company under the principles of the general law, rather than any statutory regime. There Buckley LJ said that in the normal course in such a proceeding, the company should be ordered to pay the costs of the shareholder who prosecutes the action on its behalf, if the shareholder is acting in good faith and on reasonable grounds (at 403; see also at 392 per Lord Denning MR).
I do not disagree with his Lordship's approach, as applied to a derivative action brought by a minority shareholder to assert the rights of a company which has some breadth of shareholding. But here the company is the parent company in a group which holds the matrimonial assets of Mr Duncan and Ms Reale, who are the true protagonists in the litigation, and it is owned by them. To afford Ms Reale a right indemnity enforceable against the company's assets merely on the ground that she has acted reasonably and in the company's best interests, would be to run the risk of achieving an unjust result as between husband and wife, given that recovery against the company's assets is, substantially, a partial recovery against the other spouse's assets. In my opinion it is preferable, in such circumstances, to make costs orders having effect only as between the spouses.
Observations similar to those of Buckley LJ but directed to the Australian statutory provisions were made by Barrett J in Foyster v Foyster Holdings Pty Ltd (2003) 44 ACSR 705, at [13]. They are distinguishable from the facts of the present case on the same basis.

54 In Foyster, Barrett J was considering an application for costs under s 242 of the Act and Part 52A r 6(2) of the Supreme Court Rules 1970 (NSW) by a party whose application for leave to commence derivative proceedings had been dismissed (without the merits of that application for leave having been tested). His Honour noted that had the parties who were seeking costs orders on the application before him been successful in their s 237 application (which had become unnecessary with the resignation from the company’s deadlocked board of another company director, which freed up the company to proceed without the need for a representative) “and had thereby been constituted the representatives through whom the [company] defended the litigation initiated by the plaintiff, their costs of achieving the representative status might have been regarded in the same way as the [company’s] costs” (at [14]).

55 Mr Priestley noted, however, that the context in which Barrett J had used the expression “ordinary course” in Foyster was that of a member ‘compelled’ to resort to s 237 to defend in the company’s name an action which the company itself could not defend because of a deadlocked board (there, the deadlock being not as to whether the company should defend the litigation but which firm of solicitors should be appointed to represent the company for that purpose). This emerges from his Honour’s comments at [13]:

I must say that I find it difficult to see why a plaintiff who chooses to pursue litigation against a corporate defendant which happens to have a deadlocked board of directors should be expected to bear costs occasioned by that dislocation and by the need for statutory processes to be invoked within and in relation to the corporate defendant to enable that defendant to make decisions necessary to defend the proceedings. In the ordinary course, one would expect that a member or officer compelled to resort to s 237 to ensure that a defendant company was represented in proceedings should be protected, as to costs, by the company itself or by parties privy to the circumstances giving rise to the need for the s 237 application. Such a member or officer becomes, after all, the surrogate of the normal corporate decision makers whose decision has not been forthcoming.

56 Mr Priestley contended that it is premature for me to make any such order at this stage – where, though the conditions in s 237 have been found to be satisfied, there is no draft pleading to hand and how any such case might be framed is not known. Mr Priestley submitted that “in light of the extravagant allegations which the [McLaughlins] have unsuccessfully made and pursued to date”, if they were to be indemnified in advance for their costs they might make claims of a kind, and conduct their proceedings in such a manner, that justice was not done and the interests of the company and other shareholders were compromised. It was submitted that the question of costs should be left for the judge hearing any such action and preferably after the merits of the claims are assessed.

57 Further, it was submitted that it is likely, if a derivative proceeding were to be brought, that the company would seek that the McLaughlins indemnify the company for any costs in the derivative suit – at least if, of all the shareholders, it is only the McLaughlins (who own less than 5% of the shares in the company) who wish to pursue the proceedings. It was submitted by Mr Priestley that this would be appropriate to protect other shareholders of the company (or at least those who do not support the McLaughlins’ complaint against the directors) from the costs of the claim and from any adverse costs orders (at least until any such claim is upheld). I consider there to be force in that submission.

58 In oral submissions, Mr Burchett drew my attention to the judgment of Brereton J in Access Courier Systems Pty Limited v Hunsat Pty Limited [2009] NSWSC 507. There, his Honour, when considering who should bear the costs of prosecuting a statutory derivative action in the first instance, observed that the issue before him was finally balanced. Ultimately, his Honour considered that as the plaintiff company (to whom leave was given to bring and conduct derivative claims on behalf of another company – Hunsat Pty Limited) sought to bring the proceedings for the benefit of its shareholders as well as for the benefit of Hunsat’s shareholders, and the plaintiff company’s financial status was such that there would be a very substantial risk that any costs for which it might ultimately be found liable would not be recovered if paid in the meantime, then the plaintiff company’s own shareholders ought to be prepared to make themselves responsible for any adverse costs order, by analogy with the rule that applied in security for costs applications.

59 In Access Courier, Brereton J ordered (at [3]) that the plaintiff company pay, bear and indemnify Hunsat from and against all costs charges and expenses of and incidental to the bringing of the proceedings on its behalf, except insofar as the court might in the future otherwise direct or allow, but made his orders conditional on the filing of a written undertaking to the court by someone whom I infer was a principal of the plaintiff company to be responsible for payment of any adverse costs made against Hunsat in the proceedings.

60 Thus Mr Priestley contended that the requirement that the McLaughlins indemnify the company for any adverse costs order would accord with the approach of Brereton J in Access Courier, and with the approach of his Honour in Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859, at [60]. Reliance was also placed on the approach of Austin J in Ehsman v Nutectime International [2006] NSWSC 887, at [62]; (2006) 58 ACSR 705 and Fiduciary Ltd v Morningstar Research Pty Limited [2005] NSWSC 442, at [56]; (2005) 53 ACSR 732, at 744-745; (2005) ACLC 1100; and that of Barrett J in Carpenter v Pioneer Park Pty Limited [2004] NSWSC 1007, at [45]; (2004) 211 ALR 457, at 470 and Roach v Winnote Pty Limited; Leslie & Anor [2006] NSWSC 231, at [29]; (2006) 57 ACSR 138.

61 In Roach, Barrett J, after referring to the concerns expressed in a number of cases under Part 2F.1A that there be a measure of protection against the financial costs of participation in proceedings which a court was prepared to allow another party to undertake on their behalf by way of derivative proceedings and drawing on the analysis contained in a research report then recently published by Professor Ian Ramsay and Mr Benjamin Saunders in relation to the statutory derivative action, said (at [29]):

It is thus clear that courts are concerned in some cases to ensure that the person granted leave under s 237 should bear, either wholly or in part, the burden of the company’s costs in relation to the proceedings in which that person is to represent the company. Measures of that kind are intended to protect the company’s financial resources and are merely part of the domestic arrangements within the company as to the basis on which the person concerned will be permitted to act for it.

62 No undertakings were proffered by the McLaughlins in the present case (though I accept that nor were any such undertakings sought). In the circumstances I consider that any application for an order that the company bear the costs of prosecuting the derivative proceedings in the first instance should await (at the very least) the formulation of any claim which the McLaughlins might seek to bring consequent upon the grant of the leave under s 237. At that time the question (which was not ventilated before me) can be considered as to whether it is in the best interests of the company to seek an indemnity from the McLaughlins (or to seek undertakings from them to indemnify the company) against any adverse costs order which might be made against it in the (yet to be constituted) derivative proceedings which they have sought and obtained leave to commence against the company’s directors.

63 In saying this, I note that the McLaughlins have already had a substantial measure of success in relation to the breach of contract established in the present proceedings. Whether, in those circumstances, they wish to pursue the grant of leave to commence derivative proceedings against the directors of the company will (at least insofar as they are seeking to recover damages for breach of directors’ duties for their own benefit as well as for other shareholders of the company) no doubt depend upon a consideration of what loss, if any, it is likely that they can establish the company has suffered by reason of any one or more of the breaches of duty which may be alleged (assuming those breaches can be proven). (Mr Priestley referred, by way of example in this regard, to the possibility that no loss was occasioned, even if there had been a wrong, in relation to the circumstances in which the company was committed to the project without finance already being in place, since finance was in fact ultimately procured.)

64 I am also concerned that the conduct of the proceedings to date by the McLaughlins might fairly be said to be based on an approach to the effect that every point which could possibly be raised was seemingly raised, irrespective of whether it was likely to result in any substantive relief (and I refer in this regard to the continuation of the claims based on the validity of some of the September resolutions even after having the benefit of the observations made by Barrett J at an interlocutory stage in relation thereto). I do not consider that it would be in the best interests of the company for it to be committed in advance to bearing the costs of prosecuting the derivative action if, by so doing, this was perceived as giving carte blanche to the McLaughlins to raise every grievance they may have with the manner in which the directors have acted in this project regardless of what relief might be able to be claimed in that regard.

65 Therefore, it seems to me to be best for the question of who should bear the costs at first instance to be deferred until such time as proceedings have been commenced or at least until such time as an application can be made with the benefit of a settled pleading, such that the judge hearing such an application will then be in a position better to assess what is in the best interests of the company in that regard.

Orders

66 Accordingly, in addition to the orders I made in these proceedings on 26 February 2010 as amended on 15 April 2010, I now make the following orders which will finally dispose of the proceedings before me:

1. Dungowan Manly Pty Limited pay the McLaughlins’ costs of the proceedings.

2. Mr Garratt pay the McLaughlins’ costs of the application brought by him to set aside in whole or in part the subpoena to produce which was issued by the McLaughlins on 25 May 2009 in these proceedings.

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