Morcom v Murone Holdings Pty Ltd and anor (Costs Judgment)
[2019] VSC 541
•16 August 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2018 00552
| PAUL MORCOM | Applicant |
| - v - | |
| MURONE HOLDINGS PTY LTD | First Respondent |
| VINCENT MURONE | Second Respondent |
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JUDGE: | Mukhtar AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13 August 2019 |
DATE OF JUDGMENT: | 16 August 2019 |
CASE MAY BE CITED AS: | Morcom v Murone Holdings Pty Ltd and anor (Costs Judgment) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 541 |
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DISCOVERY – Application for pre action discovery of documents from prospective defendants – Respondents’ prior refusal to communicate on applicant’s request for information and documents – Resultant necessity to bring application – Absence of real or evident grounds of opposition to application – Resultant prolongation and expense of application – Application granted on its merits – Costs orders in such discrete applications – Discretionary factors – Guest v Guest (No 2) [2016] VSC 76 applied – Unsuccessful respondent ordered to pay all costs.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | D Guidolin | Wisewould Mahoney |
| For the Defendant | V Morfuni QC | Dominic Esposito Solicitors & Attorneys |
HIS HONOUR:
In a judgment published on 26 June 2019, I granted the applicant’s application for pre‑action discovery of documents from a prospective defendant under r 32.05.[1] Orders were made and authenticated on 13 August 2019 requiring the respondents to make an affidavit of documents as described, and to allow inspection of them. The ambit of documents was not vast for a commercial dealing, but those orders effected an outcome that was a complete success for the applicant for the remedy as sought in his originating motion. A dispute has arisen about consequential costs orders to be made the application for which the Court heard argument on 13 August 2019.
[1]See Morcom v Murone Holdings Pty Ltd [2019] VSC 426.
Under rule 32.11(1) where relevant, the Court may make an order for the ‘costs and expenses of the applicant, of the person against who an order is made or sought … including the costs of (a) making and serving any affidavit of documents; (b) producing any document for inspection’. It is also the law that unless otherwise expressly provided by the procedural Rules the costs of and incidental to all matters in the Court ‘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] The usual adversarial ‘rule’ that guides the exercise of the Court’s discretion on costs is that the burden of costs follows the outcome. That is, the loser pays.
[2]Section 24 Supreme Court Act 1986 (Vic).
In my experience, for a straightforward and beneficent procedural tool of justice designed to avoid speculative suits, these applications for pre action discovery are becoming like mini trials and strategic exercises. That is because they are viewed as ‘invasive’. Like this application, they can be hard fought and, I would think, quite expensive. This costs judgment concerns the approach to be taken by the Court in applications seeking pre-action discovery where on the current variable state of authority it cannot be said that if an application for pre-action discovery is granted, then the usual rule is that costs follow the event.[3] However, on the facts of this case, I think such was the unreasonable or disentitling conduct of the respondents in opposition to the application, that I have decided that the plenitude of the base or ordinary rule that costs follow the result should apply to the whole of this application including the costs of making an affidavit of documents and all reserved costs along the way.
[3]See Guest v Guest (No 2) [2016] VSC 76.
As the opening part of my primary judgment explains, the origins of the prospective legal action is a share dealing between the applicant and the respondents in a private company named George Turner Customs Pty Ltd. The applicant, Paul Morcom, was a minority shareholder in that company. He had been employed at the George Turner business for over 40 years. The first respondent was the majority shareholder and the second respondent, Vincent Murone, was the sole director and shareholder of the first respondent. Mr Murone was also the sole director of George Turner Customs.
In essence, Mr Murone was negotiating a sale of the company’s two businesses to Kawasaki Australia (‘Kawasaki’) or associated entities. Mr Morcom says that Mr Murone induced him to sell his shares in the company for $250,000, telling him that is what they were worth. Mr Morcom accepted Mr Murone’s statement about the value of his shares and transferred his shares to the first respondent. Mr Morcom was subsequently given reason to believe from a reliable but unverified source (and without documented proof) that Kawasaki paid about $8 million for the acquisition, which meant that Mr Morcom’s shares were worth much more than $250,000 and more like about $628,300.
Mr Morcom’s application in this proceeding was uncomplicated. All he wished to obtain from the respondents was the sale figure; that is, the amount for which the George Turner Custom businesses had been sold to Kawasaki. He also wants to know how the sale was structured; that is, whether it was a sale of assets or a sale of shares or a sale structured in some other way. Such was the enquiry that it can safely be assumed such a transaction would be professionally documented.
The respondents have refused to tell him the figure. They have refused to give him any documents. They do not tell him he is wrong to believe that the sale price was $8 million. They will not tell him the price. They will not tell him anything. They do not say the documents do not exist. They do not say the information or documents are confidential or proprietary. Their position, as I assess it, was to make him prove his entitlement to such information and the documents to the Court. As I said in my judgment:
That is putting up a brick wall. I think it serves only to invite legal action. The stance there taken sets the scene for the conduct and attitude of the respondents in this application. It needs to be kept in mind that the enquiry for documentation was not coming from an outsider or someone intermeddling, but from a long‑standing employee and part-shareholder.
…
It is plain from the evidence that neither the respondents nor Kawasaki are denying the existence of the documents. No information is given. No reason is given for withholding. Nowhere in the materials is there a suggestion that the documents sought could not be produced because of confidentiality or other proprietary considerations. Nowhere is it asserted that the applicant already had the information or knew as much, or was in a position to gain the information from other sources.
Accordingly the application was filed on 3 July 2018 by originating motion. By reason of the protraction, due I think to the conduct of the respondents in a way I shall explain in this judgment, it has taken nearly a year to come to a conclusion.
In those conditions, Mr Morcom has been wholly successful in the application on the basis as stated in my primary judgment. He now seeks first, an order that the respondents pay the costs of three applications made by the respondents, within the primary proceeding, by which the respondents went on the counter-attack to obtain documents from the applicant as a means of trying to show that the applicant knew more than he was ‘letting on’. Each of those applications were dismissed. As part of the same strategic pursuit, the respondents subpoenaed the applicant’s solicitors to produce documents. I allowed the objection to that subpoena. Thirdly, Mr Morcom seeks an order that the respondents pay their own costs for making an affidavit of documents to discover the documents as sought on the application.
The respondents takes a contrary position. They contend Mr Morcom ought pay the costs of the proceeding; the costs of the various (failed) countervailing measures taken by them to obtain documents; and, their costs of preparing an affidavit of documents and allowing inspection.
In Guest v Guest (No 2)[4] I considered the state of authorities and the approach taken by State and Federal courts to costs orders on applications of this type. It is thought that orders for discovery against a prospective respondent are ‘invasive’ which I think is too strong a word, particularly as the beneficence of the rule is recognised as being in the interest of justice to avoid speculate suits. Such applications can be invasive ― who in trade or commerce wants to assist an adversary to make a decision to sue? ― but if there truly is an unwarranted invasion, the role of the Court is to curtail the ambit of documents sought or make special orders such as security for costs under rule 32.11(2).
[4][2016] VSC 76.
I take leave to repeat what was said in Guest v Guest:
The applicant accepts that the Court has a wide discretion and there is no ‘overarching rule’ regarding costs orders in applications for preliminary discovery, and that each case turns on its particular facts and circumstances. There may be no ‘overarching rule’, but, as is stated in Williams, Civil Procedure Victoria[5] in Victoria (and faithful to experience) the customary order for costs requires the applicant to pay the respondent’s costs and expenses in making discovery. If and when a proceeding is commenced in which the applicant as plaintiff relies successfully on the fruits of that discovery, then it is for the applicant to attempt to recover those costs as reasonably incurred for the purposes of the trial case depending on the conduct of the trial. That is supported by authority in this Court: the Court of Appeal in Schmidt v Won[6] and Judd J in Kallitsas v Emerson Finance Pty Ltd.[7]
…
There are authorities in various courts where judges have viewed an application for pre‑action discovery as enlivening the ordinary rule or expectation in civil litigation that costs follow the event: see for example Proctor v Kalivis (No 3);[8] and Equiti Capital Ltd v Hewson.[9] This has led to considerations whether or not in these applications the respondent has taken an ‘adversarial approach’ to the application. But, what does that mean? Of course, it is accepted in the authorities that a potential respondent in such an application should not be required to produce documents simply because an applicant asks for them. It is thought not to be adversarial for a respondent to wait for an application to be made; see the supporting evidence; and then decide to produce the documents. Then there is the situation where a respondent under the burden of some duty to a third party regards itself as being unable to hand over documents; takes a passive role in the application; but will be ready to hand over the documents if and when ordered to do so. Then comes the not uncommon situation where the respondent takes the ‘adversarial’ approach of resisting the application and fails or partially succeeds in its resistance. There are authorities that say where the application is fought and granted then costs follow the event unless the Court in its discretion thinks otherwise.[10] That is thought to have the attraction of simplicity and comity.
[5]Vol 1 at [32.11.0].
[6](1998) 3 VR 435, 459 (CA) (per Ormiston J).
[7][2008] VSC 180.
[8][2010] FCA 1194 [17].
[9][2015]NSWSC 1388 [14].
[10]See Equiti Capital, above, [14].
I then added this:
There are cases where other judges have made orders following the Federal Court example of Finkelstein J in 2001 in SmithKline Beecham PLC v Alphapharm Pty Ltd[11] to transplant, as it were, the respondents’ costs of the pre-trial discovery to being costs in any substantive proceeding brought within a certain time subsequently. To that effect, the applicant relied on a decision in this Court of Zammit AsJ (as her Honour then was) in DC Payments Pty Ltd v Ardon.[12] But in that case, her Honour did no more than accede to such an order as sought by the applicant and not opposed by the respondent.
A justification for such a contingent order is a notion based broadly in aid of the pursuit of justice, that is, to reduce the financial burden on an applicant who should not be disadvantaged by incurring substantial costs of the alleged wrongdoer before the case is even started. But as against that, a respondent is put to immediate labours and expense, sometimes substantial, all to aid an applicant to decide whether or not to sue the respondent. In the field of trusts, there is the additional consideration that if a beneficiary asks for accounts or for information, the trustees are entitled to be paid by the beneficiary for the cost of supplying the accounts or information and if they choose, may require payment in advance.[13]
There are numerous cases where judges (including other Federal Court judges) have expressed resistance to contingent costs orders in pre action discovery cases: see for example the well-known C7 Pty Ltd v Foxtel Management Pty Ltd case;[14] Steffen v ANZ Banking Group[15] and J & A Vaughan Super Pty Ltd v Becton Property Group Ltd.[16] For my part I would follow the approach taken by Kenny J in the last of those cases and adopt the view that it is desirable that the disposition of costs not be dependent on some uncertain future event or to await completion of the substantive trial. That is because the jurisdiction to order preliminary discovery is an extraordinary one; the application is discrete and on principle ought be dealt with discretely; and it is unfair for the respondent to be out of pocket. I prefer the thinking, in the Victorian cases I have already cited, that it is a matter for the applicant to attempt to claim compensation for such predetermined costs in any trial commenced depending on the outcome of that case and the utility of the documents previously obtained.
[11](2001) FCA 271 (Finkelstein J).
[12][2013] VSC 277 [66].
[13]See Jacobs’ Law of Trusts in Australia, 7th ed. [1714].
[14][2001] FCA 1864 [50].
[15][2009] NSWSC 883 [31].
[16][2013] FCA 340.
My conclusion was this:
I take leave to doubt that these applications ought attract the ordinary adversarial rule that costs follow the event; or at least I think great care ought be taken before reflexively applying such a rule. The ordinary rule of costs following the event has its established place in the context of proceedings as already commenced where adversarial conditions and rules are pre-engaged and court applications, whether brought or resisted, carry with them the known prospects and disincentive of an adverse costs order to the losing party. If applications for pre-action discovery are widely regarded as discrete or extraordinary and pre-nascent to the filing of adversarial proceedings, then that is a reasonable basis for doubting whether it is apposite to adopt the ordinary rule in instituted proceedings that costs follow the event. Yet, I can see a policy view that in a pre-action discovery application a customary order that an applicant pay the respondent’s costs anyway will only motivate or influence respondents to oppose the application regardless of grounds with the comfort of knowing that the applicant will pay its costs for the effort. That is why attention has to turn to asking whether a respondent acted unreasonably or justifiably in not giving the discovery.
It comes to this. On the current variable state of authority, it cannot be said that when an application for pre-action discovery is granted, then the usual rule is that costs of the application follow the event. So much depends on the case. The application is discrete, and depending on the circumstances, an applicant can and I would think ought be liable to pay a respondent’s costs of a successful application if there was a genuine dispute and the respondent did not act unreasonably in refusing to give discovery otherwise than by being ordered to do so by a court.
Applying those considerations, I have come to the firm view that the respondents have engaged in what I shall call ‘disentitling conduct’ in the conduct of the application. They have not shown there is a genuine dispute. My judgment is that they have acted unreasonably, and manifestly so, in refusing to give discovery otherwise and by being ordered to do so by a court. In my assessment, for reasons not apparently attributable to any conduct by the applicant, the respondents have from beginning to end set on a course of attack and tactical moves which had the effect of protracting the application. Ultimately, the respondents did not adduce any evidence to undermine the basis upon which the applicant was putting its case under r 32.05. The respondents’ case got no higher than inviting me to simply not believe the applicant when he said he did not know the sale price, without putting up any evidence affording a ground for me forming such a conclusion, particularly as the applicant’s evidence was completely untested.
I think it would be unjust for any respondent in an application for pre-action discovery to fight ineffectively an application at great expense believing that the ‘invasive’ nature of the rule gave an expectation that a Court will require the successful applicant to pay for the opposition.
To demonstrate the ‘disentitling conduct’, I need to revisit the history and procedural events in the case. As some of this is already exposed in my judgment I shall set out the events in the following summarised form:
(a) In May 2018, the applicant’s solicitors sent a reasonable letter to the respondents explaining the applicant’s position that he was lead to believe that the business was sold for approximately $3 million, but that information had been received that it was sold for $8 million, and if true, that meant the respondents had procured a sale of the applicant’s shares for a substantial undervalue. The letter asked for details of the sale of the business to Kawasaki and asked for production of the sale agreement, the share transfer between the applicant and respondents, and any documents showing payments received under the sale agreement.
(b) A similar request was made to Kawasaki, being careful to state that the applicant was not making any allegation of wrongdoing against Kawasaki.
(c) The response from the respondents’ solicitors was ‘our clients denies all the matters asserted by your client … our clients will not be entering into any further communications in relation to this matter’.
(d) Kawasaki would not volunteer any information.
(e) That situation led to the filing of the originating motion in July 2018, with a supporting affidavit filed by the applicant’s solicitor explaining why he could not responsibly commence proceedings without the information and documents sought.
(f) The respondents went on the counter–attack. Their first move was to file a Notice to Produce,[17] requiring the applicant’s solicitor to produce all documents referred to in the supporting affidavit by the instructing solicitors and, and all written instructions provided by the applicant to his solicitors concerning the contents of the solicitor’s affidavit.
[17]Dated 23 August 2018.
(g) That notice to produce was not served until 27 August; but before then, on 24 August 2018 the matter came before the Court on the first return of the summons on the originating motion. On that day, the respondents asked the applicant to produce for inspection certain financial statements that had been provided to him after the acquisition of the business by Kawasaki. This was part of a pursuit to try and show that the applicant had sufficient information from which to deduce the purchase price for himself without necessity for the Court’s intervention on this application. On that day, orders were made for the filing of affidavit materials to deal with the principal application. The Court ordered the applicant, without controversy, to produce financial statements in his possession which he did on 13 September 2018.
(h) After the notice to produce was served much correspondence followed. At this stage the respondents had still not filed their responding affidavits on the application to put forward their case on the application, but were preoccupied with pursuing their notice to produce. The applicant’s position was that the notice to produce was not legitimate and the source of information of the applicant’s affidavit was stated in the affidavit and therefore the notice to produce served no forensic purpose. More significantly, by letter, the applicant’s solicitors offered the respondents an opportunity to dispose of the application by either openly informing the applicant how much the business was sold for and whether it was by transfer of assets or sale of shares, or, to produce the documents sought under the motion. This offer was put forward in order to avoid further hearing and to dispose of the controversy. It is not strictly a Calderbank offer but in my view it was a definite, and a reasonable, and an easily performable way to end the dispute.
(i) The respondents did not respond. They have not provided the sales figure. Pausing there, if the respondents had simply given the figure it would have relieved them from having to provide any documents and it would then have been a matter for the applicant to decide whether or not to commence proceedings based on that information.
(j) The next move by the respondents was to file a summons in effect to enforce the notice to produce. This was a confused application. It had sought inspection of documents as identified in the notice to produce, and inspection of documents that were previously ordered by the Court to be produced by the applicant (the financial statements) and which had been produced. Yet, the summons also asked for discharge of the Court’s orders on 24 August.
(k) The next move was to serve a subpoena on the applicant’s solicitor Mr Chris Stakis under order 42A to produce documents to the Prothonotary. That is, a subpoena to produce documents before the return of the respondents’ summons filed on 8 November 2018. That was met with a notice of objection to the subpoena by Mr Stakis.
(l) Pausing there, one can readily see before the respondents had even filed any affidavit on the substantive question on the proceeding, they had issued three interlocutory moves all designed to see what documents the applicant had. That is, this whole proceeding under r 32.05 was to obtain documents from the respondents. The respondents at the outset were counterattacking by seeking documents by coercive process held by the applicant to try and show or I think ‘fish’ to see what information the applicant had to try and show that he knew the sales figure anyway. The respondents still had not filed their affidavits on the application. If they had their own evidence that the applicant knew the figure or if they had evidence from which a Court could be asked to infer that the applicant knew the figure, the respondents were not putting it forward.
(m)On 29 November 2018, I set aside the respondents’ notice to produce. I also dismissed their summons. I allowed Mr Stakis’ objection to the subpoena. I did so, in essence, on the ground that some of the requests were misconceived; the documents sought had already been produced; the documents sought were already the subject of a court order which had been satisfied; there was sworn evidence that some of the documents sought did not exist or were in the possession of the respondents or Kawasaki. Avoiding the unedifying details, in essence the Court’s view was that these applications were not being pursued for a legitimate forensic purpose but were a fishing exercise, looking in fact to get discovery of documents and, were an abuse of process. I saw fit to remark as transcribed:
I have never come across a case where such a root and branch attack has occurred on the applicant’s material before even proceeding to produce material in opposition … The respondents have done themselves no credit by so early in the life of this dispute in, I think, a very high‑handed way … denying everything asserted by the applicant and saying ‘Our clients will not be entering into any further communications in relation to this matter’. … That disposes the Court to think that a mentality has been installed in the respondents to take a hard‑nosed attitude towards the application that is now before the Court. … Already, I can conclude for future purposes that the applicant has done all it can do to obtain the documents but was met with an unexplained and firm denial … [18]
[18]Transcript 29 November 2018.
That brings me to the hearing of the application proper on 11 April 2019. As is recorded on the face of an order dated 11 April 2019, the respondents sought to rely upon two affidavits in opposition to the application. Those affidavits were filed egregiously out of time. Counsel for the applicant, with justification I think, objected to the unexplained late filing of the affidavits and their admissibility. If the Court was to refuse to receive the affidavits on the ground that they were filed out of time, I was bound to give the solicitor for the respondents, Mr Matthew Thomson (one of the deponents) an opportunity to explain the late filing of material. I informed the parties that I would allow cross‑examination of any evidence given by him. This was met with an announcement by senior counsel for the respondents that the two affidavits sought to be relied upon in opposition to the application would be withdrawn.
Thus, the plain fact is this application proceeded as unopposed. There was no evidence on which the respondents relied. Even to the point of closing submissions, the case put on behalf of the respondents was remarkable. It was based on a proposition that on applications of this nature, the applicant must place before the Court all the evidence available to it relevant to the sufficiency of the information possessed in order to enable the decision whether to commence the proceeding, and the applicant must not hold back any information.[19] As my judgment states, the submission was that it ‘beggars belief’ that the applicant did not know the sale price given his involvement in the company. In other words, I was being asked not to believe the applicant’s uncontradicted evidence. If the respondents’ position was that the applicant did know more than he was ‘letting on’ then one would have expected the respondents to give evidence showing actually or circumstantially what information the applicant was exposed to about the sale price. Their final position seemed to be that the application was disqualified because the applicant could have made further enquiries. But, the evidence shows the enquiries that were made were those who would know the facts, namely Mr Murone and Kawasaki. In both cases, he was met with a brick wall.
[19]See Glencore International AG v Selwin Mines Limited (2005) FCA 801, [15].
As my judgment shows, the filing of these proceedings was, I think, entirely justifiable. The grounds of Mr Morcom’s belief that he may have a cause of action were objectively apparent. The enquiries made on his behalf were reasonable. The scope of documentation was modest. And above all, these were enquiries coming not from a stranger or an intermeddler, but from an ex‑shareholder and longstanding employee. Worst of all, after the passage of this case with interlocutory skirmishes have become protracted all at the hands of the respondents, the most the respondents could do was to produce two affidavits which they then withdrew and proceeded to defend the application on the grounds that a judge should not believe the applicant and to cast aspersions on the applicant without any evidentiary basis for doing so.
I ought not deplore the conduct of the respondents. It is sufficient to say that in my view an account of the way the case has been conducted shows that they were responsible for the protraction of this case. Ultimately, and along the way, they could not show there was a genuine dispute about discovery of these documents. Rather, the stratagem or the modus operandi was simply to try and discredit the applicant by the use of interlocutory process (all of which were dismissed) and then simply assert I should not believe Mr Morcom. All this in the context of the applicant’s solicitor being willing to end the application if the price for the sale was stated in open Court.
Those special circumstances come to inform the exercise of discretion on costs and why it is I have described the respondents as having engaged in ‘disentitling conduct’. Although, as I was urged by Mr Morfuni, I should also consider the conduct of the applicant, I can see nothing in the conduct of the case from which to conclude the applicant has done something or omitted to do something which has led to the unnecessary creation or accumulation of costs or to show some concealment which led the respondents to take the various steps that they did. Every step of the way, the applicant was fending off arrows from the respondents and looking to advance the matter so that a hearing on the merits could be conducted. When the hearing was conducted, it effectively proceeded as unopposed and the grant of the application was made on grounds that were clearly established.
This case is dictated by special circumstances in a field of unfettered discretion. Costs orders are not meant to be punitive but are meant to be compensatory. In my judgment, there was no genuine dispute or no genuine grounds upon which the respondents were going to contest this case. I think it unjust to make an order requiring the applicant to pay the costs of the application. This is a case where I think costs should follow the event. Likewise, given the offer in October 2018 by the applicant to be content with the mere statement of the sales figure so as to relieve the respondents of having to provide any documents, I think it reasonable that the applicant also be relieved of having to pay for the costs of the preparation of any affidavit of documents. Until the very end in this application, counsel for the applicant, Mr Guidolin, in a plain unequivocal and unaffected way repeated the applicant’s willingness to deal with the application by the respondents simply stating in open court what the sales figure was without the necessity to provide any documents. The respondents simply would not do so. By that conduct, I think it unjust to expect now the applicant to pay the respondents costs of preparing the documents. Faithful to the above conclusions, in my view costs should follow the event on the notice to produce, the respondents’ summons filed 8 November 2018, and the order 42A subpoena. They were all dismissed essentially on the grounds of being an abuse of process.
For those reasons, in addition to the orders already pronounced, I will make a separate order that:
1.The respondents shall pay the applicant’s costs of and incidental to the proceeding, including all reserved costs and:
(a) the respondents’ summons dated 8 November 2018;
(b)the applicant’s objection to the notice to produce dated 23 August 2018 filed by the respondents; and
(c)the applicant’s objection to the order 42A subpoena filed 8 November 2018 by the respondents and addressed to Mr Chris Stakis
on the standard basis to be taxed in default of agreement.
That leaves the question of costs incurred on the hearing of the costs dispute on 13 August 2019. The respondents have been unsuccessful on that question too. In my view, consonant with the other costs orders I have made, the respondents cannot resist an order for costs of the costs hearing.
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