Patterson v Humfrey [No 3]
[2016] WASC 369
•16 NOVEMBER 2016
PATTERSON -v- HUMFREY [No 3] [2016] WASC 369
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2016] WASC 369 | |
| Case No: | COR:134/2013 | 3 NOVEMBER 2016 | |
| Coram: | LE MIERE J | 16/11/16 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Plaintiffs' application successful in part | ||
| B | |||
| PDF Version |
| Parties: | CRAIG PATTERSON LYNDA PATTERSON RODALE NOMINEES PTY LTD BARRY HUMFREY MARY HUMFREY KENESTA PTY LTD |
Catchwords: | Costs Whether successful plaintiff should be deprived of, or pay, costs of defendant on some issues Where defendants' conduct contributed to issues Costs Indemnity costs Whether there has been improper or unreasonable conduct Turns on own facts Costs Special costs order Matter of unusual difficulty, complexity or importance Appropriate to exercise discretion Limit on hourly and daily rates should be removed Taxing officer may make allowance under item 32 of scale Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 232, s 233 Legal Practitioners (Supreme Court) (Contentious Business) Costs Determination 2012 (WA) Legal Practitioners (Supreme Court) (Contentious Business) Costs Determination 2014 (WA) Legal Practitioners (Supreme Court) (Contentious Business) Costs Determination 2016 (WA) Legal Profession Act 2008 (WA), s 280 Rules of the Supreme Court 1971 (WA), O 66 r 1 |
Case References: | Bowen v Alsanto Nominees Pty Ltd [2011] WASCA 39 (S) Certazzo v Lombardi (1975) 13 SASR 4 Patterson v Humfrey [2014] WASC 446 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
Section 232 and 233 of the Corporations Act
- First Plaintiff
LYNDA PATTERSON
Second Plaintiff
RODALE NOMINEES PTY LTD
Third Plaintiff
AND
BARRY HUMFREY
First Defendant
MARY HUMFREY
Second Defendant
KENESTA PTY LTD
Third Defendant
Catchwords:
Costs - Whether successful plaintiff should be deprived of, or pay, costs of defendant on some issues - Where defendants' conduct contributed to issues
Costs - Indemnity costs - Whether there has been improper or unreasonable conduct - Turns on own facts
Costs - Special costs order - Matter of unusual difficulty, complexity or importance - Appropriate to exercise discretion - Limit on hourly and daily rates should be removed - Taxing officer may make allowance under item 32 of scale - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 232, s 233
Legal Practitioners (Supreme Court) (Contentious Business) Costs Determination 2012 (WA)
Legal Practitioners (Supreme Court) (Contentious Business) Costs Determination 2014 (WA)
Legal Practitioners (Supreme Court) (Contentious Business) Costs Determination 2016 (WA)
Legal Profession Act 2008 (WA), s 280
Rules of the Supreme Court 1971 (WA), O 66 r 1
Result:
Plaintiffs' application successful in part
Category: B
Representation:
Counsel:
First Plaintiff : Mr M L Bennett & Mr D Banda
Second Plaintiff : Mr M L Bennett & Mr D Banda
Third Plaintiff : Mr M L Bennett & Mr D Banda
First Defendant : Mr C S Williams
Second Defendant : Mr C S Williams
Third Defendant : Mr C S Williams
Solicitors:
First Plaintiff : Bennett + Co
Second Plaintiff : Bennett + Co
Third Plaintiff : Bennett + Co
First Defendant : Solomon Brothers
Second Defendant : Solomon Brothers
Third Defendant : Solomon Brothers
Case(s) referred to in judgment(s):
Bowen v Alsanto Nominees Pty Ltd [2011] WASCA 39 (S)
Certazzo v Lombardi (1975) 13 SASR 4
Patterson v Humfrey [2014] WASC 446
- LE MIERE J:
Summary
1 On 28 November 2014 I delivered reasons for judgment in which I found that the conduct of the affairs of Skybow Pty Ltd by the first defendant, Mr Humfrey, and the third defendant, Kenesta Pty Ltd, was oppressive to, unfairly prejudicial to and unfairly discriminatory against the plaintiffs in their capacity as members of Skybow: Patterson v Humfrey [2014] WASC 446. On 23 December 2014 I made orders to give effect to my reasons for judgment. The orders included an order that the defendants have an option to purchase the shares issued by Skybow to the plaintiffs and if the defendants did not exercise their option then the plaintiffs have an option to purchase the defendants' shares. I ordered that the purchase price should be determined after an inquiry. I reserved the question of costs.
2 The inquiry has now been concluded, the purchase price has been determined and the plaintiffs have exercised their option to purchase the defendants' shares. The plaintiffs have now applied for an order that the defendants pay the plaintiffs' costs of the action and the inquiry, that the costs of the inquiry be paid on an indemnity basis and further or alternatively that a special costs order be made that the limits imposed by the Legal Practitioners (Supreme Court) (Contentious Business) Costs Determinations for 2012, 2014 and 2016 for the action and/or for the inquiry be removed or raised.
3 The defendantsdo not oppose orders that they pay the plaintiffs' costs of the action but say that the costs should not include the costs of three specified issues and that the defendants should have the costs of those issues. The defendants do not oppose an order that they pay the plaintiffs' costs of the inquiry but oppose an order that they pay those costs on an indemnity basis. The defendants do not oppose a special costs order but say that the order should raise the limits for the items in the relevant scale of costs but not the maximum allowable hourly and daily rates and should not extend to work not covered under any item in the scale.
4 For the reasons which follow, the defendants should pay the plaintiffs' costs of the action and of the inquiry and there should be a special costs order removing the limits specified in the relevant Costs Determinations.
Costs of the action
5 The defendants say that the plaintiffs should not be awarded any costs incurred in and incidental to the following matters:
1. the preparation of the Schedule to Paragraph 29.4 of the Points of Claim and the Schedule of Loss and Damage (including amended and substituted versions thereof) ('the Unrelated Expenses Issue');
2. the claim that all expenditure concerning the Abrolhos Islands Development was unrelated to Skybow's activities and was improperly incurred (being the contention made in paragraphs 37 to 65 of the affidavit sworn by the first plaintiff on 10 February 2014 and paragraphs 34.1 and 35 of the plaintiffs' written outline of opening submissions) ('the Abrolhos Islands Issue'); and
3. the claim made in respect of the transaction involving Woolworths (paragraph 31 of the plaintiffs' Points of Claim) ('the Woolworths Issue').
- The defendants say that the plaintiffs should pay the defendants' costs of and incidental to:
1. responding to the plaintiffs' Schedule to Paragraph 29.4 of the Points of Claim and the plaintiffs' Schedules of Loss and Damage (including amended and substituted versions thereof);
2. the Abrolhos Islands Issue; and
3. the Woolworths Issue.
6 In relation to the Unrelated Expenses Issue, the defendants say that the plaintiffs' case involved a contention that Mr Humfrey had used the funds of Skybow to meet expenses that were unrelated to its activities and/or without the authority of Mr Patterson. The plaintiffs provided some particularisation of the expenses alleged to be unrelated or made without authority in the particulars to [9] of the points of claim and in separate schedules. First, the plaintiffs provided a schedule to [29.4] of the points of claim. Secondly, the plaintiffs filed a schedule of loss and damage on 21 February 2014 which was subsequently amended on 26 March 2014 and by a substituted schedule filed 11 April 2014. The original schedule to [29.4] of the points of claim was addressed by Mr Humfrey in an affidavit sworn on 6 December 2013. The affidavit identified errors in the schedule to [29.4] of points of claim which included examples of double counting. Many of the incidences of double counting were removed when the schedule of loss and damages was filed. However, that schedule still contained instances of double counting which were identified in [32] to [34] of the defendants' opening trial submissions. The subsequent amendment and then substitution of the schedule of loss and damage cured the remaining errors in instances of double counting.
7 The defendants say that had the proceedings been proceedings on pleadings, with the schedules forming part of a pleading or particulars thereof, the defendants would be entitled to their costs thrown away by reason of the various amendments. In this case, the defendants were put to the expense of dealing with allegations of unrelated or unauthorised payments, many of which included double counting or were otherwise erroneous. The defendants say they should not be required to pay the plaintiffs' costs of putting forward those allegations and should not have to bear their own costs of identifying the errors within them.
8 Order 66 r 1(3) of the Rules of the Supreme Court 1971 (WA) (RSC) provides that where a party though generally successful in the action has, by the introduction of some issue or issues on which he has failed, increase the costs the court may order such party to pay the costs of such issue or issues. What is an issue depends upon the nature of the case and the way in which it is contested. Reference is often made to the statement of Bray CJ in Certazzo v Lombardi (1975) 13 SASR 4:
… In this context 'issue' does not mean a precise issue in the technical pleading sense, but any disputed question of fact or, in my view, of law: Foster v Farquhar (1893) 1 QB 564, per Bowen LJ, as he then was, at p 570 (12).
- In Certazzo v Lombardi Jacobs J at page 16 said that there are two things to notice about Foster v Farquhar. The first is that it was a jury trial under which there was a specific provision in relation to costs, the general discretion of the court was not being invoked. Secondly:
The plaintiff claimed damages for breach of contract under four distinct heads, in total some £394 but his verdict was for only 12 guineas, being less than half the claim under one head of damage. The three severable heads of damage, in respect of which the defendant was awarded costs, did not flow from the defendant's breach, in respect of those severable items the claim was misconceived.
To embark as a general practice upon an analysis of which party was successful on each issue, or necessarily to deprive a successful party of some portion of its costs if it has lost on a particular issue, would be likely to add further uncertainty and complexity to the outcome of litigation, derogate from the prospect of settlement, and oblige the court to hear lengthy and frequent arguments in relation to costs as an additional burden on its resources and the costs of the parties: see MacKinnon v Petersen (Unreported, NSWSC, 19 April 1989) (Cole J); Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 [67] - [68] (McHugh J). Litigation is time-consuming, expensive and burdensome enough already.
In addition, while parties should be encouraged to consider carefully what matters they put in issue, justice may not be served if by too ready a resort to deciding questions of costs according to success on particular issues, parties are dissuaded by the risks of costs from canvassing all issues which might be material to the decision in the case: [6] - [7]. (citation omitted)
10 The case before me was a corporations matter commenced by originating process. There were no pleadings. The plaintiff sought orders under s 233 of the Corporations Act 2001 (Cth) on the ground that by reason of the conduct of the defendants the affairs of Skybow were being conducted in a manner which was oppressive, or alternatively unfair and discriminatory to the interests of the plaintiffs. Section 232 of the Corporations Act sets out the grounds on which the court may make an order under s 233 but they are not elements of a cause of action; indeed there is no cause of action in a pleading sense.
11 At [59] of my reasons for judgment I said that 'at the heart of the plaintiffs' case is the allegation that Mr Humfrey misused Skybow's funds and property'. Mr Humfrey had assumed, with the consent of Mr Patterson, the management of Skybow and the maintenance of its books and records. I accepted the expert evidence of Mr Rocke that the books and records were not adequately maintained and in particular there were almost no contemporaneous documents supporting the receipt of income, supporting documents for the transactions listed in the general ledger were missing, there were incomplete records related to significant transactions and insufficient loan documents. I found that the deficiencies in maintaining the books and records of Skybow were particularly serious in circumstances where it has been shown that Mr Humfrey frequently mixed his funds and affairs with those of Skybow and breached his fiduciary duty. I found that the conduct of Mr Humfrey in failing to keep adequate financial records, particularly in relation to the dealings between Skybow and Kenesta, masked the extent of the dealings between Skybow and Kenesta and the extent to which their affairs were mixed. I found that the conduct of Mr Humfrey and Kenesta, in conducting the affairs of Skybow, was burdensome, harsh, wrongful and productive of unfair prejudice or contrary to the interests of the plaintiffs.
12 Each item of alleged unrelated or unauthorised expenditure cannot properly be regarded as giving rise to a separate issue.
13 The plaintiffs should not be disallowed their costs of the Unrelated Expenses Issue. If the plaintiff had acted unreasonably and unnecessarily added to the expense of the trial by making unjustified claims of unrelated or unauthorised expenditure then the court might properly exercise its discretion by disallowing the additional and unnecessarily incurred costs. However, that does not apply in this case. At trial counsel for the defendants submitted that there was insufficient basis for Mr Patterson's allegation of unrelated or unauthorised expenditures in the plaintiffs' original schedule of loss and damage. In my judgment I said that 'Mr Patterson has in some instances been too ready to make allegations of impropriety by Mr Humfrey without sufficient basis'. However, I went on to add that 'there was substantial justification for suspicion in relation to the conduct of the company's affairs'. As I have said, I found that there were significant inadequacies in the books and accounting records of Skybow maintained by Mr Humfrey. Mr Humfrey frequently mixed his funds and affairs with those of Skybow. Mr Patterson retained expert accountants to examine the books and records of Skybow. They had difficulty in reconciling the records and identifying unrelated or unauthorised expenditures because of the inadequacy of the books and records. In the circumstances it would not be just to deprive Mr Patterson of his costs, or to award the defendants their costs, in relation to the Unrelated Expenses Issue.
Abrolhos Island issue
14 In relation to the Abrolhos Islands issue, the defendants say that the plaintiffs' initial case was that Skybow had entered into a joint venture with Kenesta to develop a resort at the Abrolhos Islands in which both entities held a 50% interest but that Mr Humfrey had caused Skybow to meet all of the expenses involved in the project and that this constituted oppressive conduct. However, at trial the plaintiffs contended that there was an agreement for the project to be pursued as a 50/50 joint venture between Kenesta and Skybow but that Kenesta had taken the benefit of the opportunity for itself and therefore all expenditure on the project by Skybow should be treated as unauthorised and improper. The defendants say that whilst the plaintiffs succeeded in their contention that it was agreed that the development would be a 50/50 joint venture between Kenesta and Skybow they failed in their contention that Kenesta had taken the opportunity for itself and therefore that all expenditure on the project was unauthorised and improper. The defendants say that the plaintiffs failed on the second issue which was a discrete issue that added significant time to the trial and significant expense.
15 The plaintiffs should not be deprived of their costs in relation to the Abrolhos Islands issue. The contention that Kenesta had taken the benefit of the opportunity for itself and all expenditure on the project by Skybow should be treated as unauthorised and improper is not properly to be treated as a separate issue. The issue was whether Mr Humfrey caused Skybow to pay expenses, or reimburse Kenesta for expenses, that were not incurred by or payable by Skybow. Some of those expenses, or reimbursements, related to the Abrolhos Islands development. Every item of expenditure, or reimbursement, is not properly to be regarded as a separate issue, nor is any subset of expenses or reimbursements in relation to the Abrolhos Islands development to be regarded as a separate issue.
16 Whether the plaintiffs should be deprived of part of their costs by reason of having unsuccessfully contended that Kenesta had taken the benefit of the project for itself is a matter for the exercise of the court's discretion having regard to the action as a whole. That discretion should not be exercised against the plaintiffs. In so far as costs were incurred by the plaintiffs' unsuccessful contention that Mr Humfrey had caused Kenesta to take over the benefit of the project for itself, the defendants led the plaintiffs to believe that Kenesta had done so. Mr Humfrey's conduct led to the plaintiffs asserting that Kenesta had taken over the project for its own benefit. Documents discovered by the defendants show that in his dealings with the Department of Fisheries Mr Humfrey said that the project proponent was Humfrey Land Developments, that is Kenesta. That was contrary to Mr Humfrey's statement to Mr Patterson that they would put the project in Skybow's name. Mr Humfrey provided no adequate explanation for that conduct. In the circumstances, justice is not served by depriving the plaintiffs of any part of their costs in relation to the matters relating to the Abrolhos Islands development.
Woolworths issue
17 The Woolworths issue concerned the plaintiffs' allegation that Mr Humfrey had made misleading and/or false representations to Mr Patterson in relation to a transaction involving Woolworths. The plaintiffs' claim regarding that matter failed. The defendants say it was a discrete matter which added to the length of trial and the costs of the trial.
18 I will not disallow the plaintiffs their costs in relation to the Woolworths issue. The plaintiffs failed in their claims that two payments that Skybow made to Kenesta of the amounts that Skybow have received from Fabcott were made for the purposes unrelated to Skybow's activities and/or without the authority of Mr Patterson. I also rejected the plaintiffs' claim that Mr Humfrey misled Mr and Mrs Patterson in relation to the Woolworths transaction. However, Mr Humfrey's conduct in relation to the Woolworths matters gave rise to reason to suspect that he had acted improperly. Mr Humfrey gave inconsistent explanations for the payment of $363,527 he received from Woolworths as part of the sale of the Seacrest Commercial site to the Woolworths subsidiary, Fabcott.
19 The matter must be looked at as a whole. Mr Humfrey had misused Skybow funds, had kept the books and records of the company in a way which masked the extent of the dealings between Skybow and Kenesta and the extent to which their affairs were mixed and had failed to inform Mr Patterson of how he was conducting the affairs of Skybow. The plaintiffs were left to find out in those circumstances the respects in which they had been misled and the funds of Skybow misused. They did not act unreasonably in bringing forward the specific complaints in relation to the Woolworths matter. They should not be deprived of their costs.
No indemnity costs
20 The plaintiffs say that the defendants' conduct in the course of the inquiry unreasonably delayed the conclusion of the inquiry. In addition, before the costs of preparing for and attending the hearing in relation to the development costs for the land earmarked for stage 17 were incurred, the plaintiffs proposed to the defendants that the costs be fixed at an average price of $95,000 per lot. The defendants rejected the proposal and contended on a without prejudice basis that costs should be between $104,000 to $106,000 per lot and on an open basis that would be approximately $140,000 per lot. The evidence of Mr Hayes, which was conceded by the defendants at the hearing on 29 July 2016, found that the costs of developing stage 17 was slightly over $94,000 per lot.
21 An indemnity costs order may be appropriate where there has been improper or unreasonable conduct on the part of a party. A party's conduct which unnecessarily and unreasonably prolongs a matter might justify an indemnity costs order. However, mere prolongation of a matter does not without more justify an indemnity costs order. The matter is one of degree. I am not satisfied that the defendants' conduct of the inquiry was so unreasonable as to justify an indemnity costs order.
22 I do not equate the plaintiffs' offers to agree the costs of stage 17 developments as something in the nature of a Calderbank offer. The cost of development was but one factor in the calculation of the share price. Furthermore, it is difficult to say whether the amount offered to be agreed by the plaintiffs was more or less favourable to the plaintiffs than the amount determined by the court based upon the evidence of Mr Hayes. That is because it was not known which party would purchase the shares of the other. I decline to order indemnity costs.
Special costs order
23 Section 280(2) of the Legal Profession Act 2008 (WA) provides that if the court is of the opinion that the amount of costs allowable in respect of a matter under a costs determination is inadequate because of the unusual difficulty, complexity or importance of the matter, the court may, amongst other things, fix higher limits of costs than those fixed in the determination or remove limits on costs fixed in the determination.
24 The defendants agree that the amount of costs allowable under the relevant costs determinations is inadequate because of the unusual difficulty, complexity or importance of the matter and therefore the court's discretion to fix higher limits or remove limits is enlivened. That concession is properly made. The matter, which includes the interlocutory steps, the trial and the inquiry, was one of unusual difficulty and complexity. The action to trial and the inquiry were unusually difficult because they involved an extensive and detailed forensic investigation of Skybow's financial records in circumstances where all the relevant information and documents were exclusively controlled by Mr Humfrey and his employees, the books and records were not adequately maintained and Mr Humfrey's conduct in failing to keep adequate financial records, particularly in relation to the dealings between Skybow and Kenesta, masked the extent of the dealings between Skybow and Kenesta and the extent to which their affairs were mixed. The matter involved the investigation, consideration and compilation of a large number of documents. Furthermore, the matter was complex. It is an unusual circumstance where oppression was alleged by shareholders holding 50% of the shares in the company. The forensic analysis of Skybow's books and records was complex. The issues raised in the course of the inquiry in dealing with the valuation of Skybow's shares were complex and required significant detailed consideration with experts. I am also satisfied that the amount of costs allowable in respect of the matter is inadequate because of the importance of the matter. The action and the inquiry were important to the plaintiffs. They held 50% of the shares in Skybow. Mr Humfrey and Kenesta had conducted, and continued to conduct, the affairs of Skybow to the plaintiffs' detriment and to use Skybow's funds for their own benefit while exercising exclusive control over its books and funds. Without court relief the plaintiffs' 50% interest was locked into Skybow.
25 It is appropriate to exercise my discretion to make a special costs order. The defendants did not argue otherwise. There were two issues raised by the defendants. The first is whether the hourly and daily rates should be raised. The second is whether all the limits should be raised so that allowance may be made for work not covered under any item in the scale.
26 It is appropriate to remove the limits on the hourly and daily rates allowed under the scale. The unusual difficulty, complexity and importance of the matter justifies work being done by more senior practitioners with relevant experience and expertise in corporation matters than might otherwise be reasonably required. The hourly rates to be allowed in assessing the plaintiffs' costs is a matter best left to the taxing officer. The limit on the hourly and daily rates should be removed.
27 Item 32 in the scale covers time reasonably spent by a legal practitioner on work requiring the skill of a legal practitioner but not covered by any other item or time reasonably spent by a legal practitioner or by a clerk or paralegal of a legal practitioner on work not covered by any other item. However, allowances under item 32 are only to be awarded between a law practice and its client, or if costs are awarded on an indemnity basis and not between party and party unless the court otherwise orders. In this case it is appropriate to order that the taxing officer may make allowances under item 32 if the taxing officer considers it appropriate to do so. The nature of the proceedings, including the matters in issue in the Corporations Act proceeding and in the inquiry, as well as the complexity of the matter justify such an order.
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