Pesec v Consolidated Builders Ltd (No 5)
[2021] ACTSC 225
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Pesec v Consolidated Builders Ltd (No 5) |
Citation: | [2021] ACTSC 225 |
Hearing Date: | 3 September 2021 |
DecisionDate: | 9 September 2021 |
Before: | McWilliam AJ |
Decision: | See [55] |
Catchwords: | PRACTICE AND PROCEDURE – COSTS – application to vary costs order made in relation to preliminary discovery proceedings – whether unreasonable conduct in failing to discover documents – whether correspondence of a company director revealed financial information that was not discovered – whether inference able to be drawn that defendant failed to comply with obligations to discover documents |
Legislation Cited: | Corporations Act 2001 (Cth) ss 236, 237 Court Procedures Rules 2006 (ACT) rr 674, 651, 1835 |
Cases Cited: | Ebos Group Pty Ltd v Team Medical Supplies Pty Ltd (No 3) [2012] FCA 48; 199 FCR 533 ED Oates Pty Ltd v Edgar Edmondson Imports [2012] FCA 356 The Queen v Barbaro (1992) 106 FLR 387 |
Parties: | Anthony Pesec ( Plaintiff) Consolidated Builders Limited ( Defendant) |
Representation: | Counsel R Markham ( Plaintiff) M O’Meara SC ( Defendant) |
| Solicitors Adero Law ( Plaintiff) Clayton Utz ( Defendant) | |
File Number: | SC 179 of 2020 |
McWilliam AJ:
The proceeding before the Court is the latest in a series of disputes between the plaintiff, Mr Anthony Pesec, and the defendant, Consolidated Builders Ltd (CBL). It concerns an attempt by the plaintiff to revisit liability for the legal costs of a dispute that was litigated more than two years ago and have since been assessed.
On 5 June 2019, I determined an application for preliminary discovery brought by the plaintiff: Pesec v Consolidated Builders Ltd [2019] ACTSC 142 (Pesec (No 1)). Orders were made for preliminary discovery by CBL of certain documents, in the following terms (emphasis added):
(1) Upon the undertaking of the plaintiff that the documents and the information in them will not be used for any purpose other than the investigation and consideration of the potential causes of action in respect of which the discovery has been obtained and will only be disclosed to the plaintiff, his legal advisers and any experts retained in connection with that purpose, the defendant is to discover the following documents:
(a) Any resolution or minute recording the grant of each of Options 1-11 as defined in the application dated 12 April 2019, or the exercise of an Option by the Board of Directors of Consolidated BuildersLimited (Board).
(b) Any accountancy report or other financial information considered by the Board relating to the Option in question, including but not limited to:
(i) Any valuation, or advice as to valuation, of the share price of Consolidated BuildersLimited for the purposes of a share buy-back;
(ii) Any valuation, or advice as to valuation, of the share price of the defendant for the purposes of the grant of share Options 1-11;
(iii) Any valuation, or advice as to valuation, of Consolidated BuildersLimited with reference to the net asset position of that company, or any other method of company valuation.
(c) In respect of each financial year where an Option was granted or exercised:
(a) A copy of the managing director’s employment contract;
(b) Any statement of total remuneration or group certificate for the managing director (in that capacity); and
(c) Any position description or document otherwise outlining the roles and responsibilities of the managing director.
The emphasised words in the orders are the concern of the present dispute.
At the time judgment in Pesec No 1 was delivered, I ordered that the plaintiff pay the defendant’s reasonable costs of complying with the preliminary discovery that had been ordered.
That order was subject to a condition, being that such costs…
…abide by any further order made in subsequent proceedings, on any cause of action alleged to have arisen out of the information contained in the documents in respect of which preliminary discovery has been ordered.
The costs of the application for preliminary discovery itself required separate consideration and were the subject of a further hearing. That resulted in a judgment delivered on 17 June 2019: Pesec v Consolidated Builders Limited (No 2) [2019] ACTSC 157 (Pesec (No 2)). The orders made in Pesec (No 2) were as follows (emphasis added):
(1) The plaintiff is to pay 75% of the defendant’s costs of the application.
(2) The costs referred to in Order 1 are to abide by any further order made in subsequent proceedings, on any cause of action alleged to have arisen out of the information contained in the documents in respect of which preliminary discovery has been ordered.
Order 1 is emphasised because that is the order that the plaintiff now seeks to set aside.
The costs the subject of the orders in Pesec (No 1) and Pesec (No 2) have since been assessed, with a costs certificate issued on 27 July 2021 in the amount of $132,052.32. That figure includes the costs of assessment and represents 75% of CBL’s party/party costs.
Following completion of the preliminary discovery process, Mr Pesec then brought proceedings seeking leave to bring a derivative action on behalf of CBL, pursuant to ss 236 and 237 of the Corporations Act 2001 (Cth). The application was dismissed on 13 April 2021, with reasons subsequently delivered on 28 May 2021: see Pesec v Consolidated Builders Ltd (No 3) [2021] ACTSC 105 (Pesec (No 3)).
10. The parties were again given the opportunity to be heard on costs. Following submissions and a further hearing, on 19 August 2021, I ordered the plaintiff to pay 75 per cent of the defendant’s costs of the application seeking leave to bring a derivative action: see Pesec v Consolidated Builders Ltd (No 4) [2021] ACTSC 188 (Pesec (No 4)).
11. The reasons that follow assume some knowledge of what occurred in these previous proceedings. In brief, the substantive dispute concerned the conduct of the Board of Directors of CBL (the Board) in relation to the approval of a Deed of Option to Acquire Shares (Option Deed) that was executed on 14 April 2015: see Pesec (No 3) at [48]. As seen from the terms of the orders in Pesec (No 1), part of the documents sought through preliminary discovery related to documents that were considered by the Board when they approved the Option Deed.
The present application
12. By application filed 12 July 2021, the plaintiff seeks to set aside Order 1 of the orders made on 17 June 2019 in Pesec (No 2), set out above at [6]. The plaintiff seeks an order that CBL pay the plaintiff’s party/party costs of the preliminary discovery proceedings.
13. The application also seeks that CBL pay the plaintiff’s party/party costs of the present application.
14. The plaintiff’s complaint arises out of a document provided to him during the hearing of the derivative action proceedings that were the subject of judgment in Pesec (No 3).
15. It was an email dated 18 June 2019 sent by Mr Noel McCann, a director of CBL, to one of the solicitors representing CBL in the derivative action proceedings. It came to the plaintiff’s attention because it was part of the briefing material to one of the experts who gave evidence in the derivative action proceedings. The plaintiff had issued a subpoena to the expert and had then been provided with the email as part of the documents produced.
16. In the email, the director spoke about “information” that the Board had relied upon in forming a view about an option to purchase shares, which the Board had approved in April 2015 and which was the heart of the dispute between the plaintiff and CBL: see Pesec (No 3) at [47]-[53].
17. The words of the email sent by Mr McCann are critical to the plaintiff’s present complaint moving him to apply to set aside a historical costs order. The context to the email appears to be an email sent by the solicitors for CBL shortly after Pesec (No 1) was delivered.Mr McCann appears to have been responding to a request by the solicitors for documents that fell into the categories of preliminary discovery that had been ordered. The relevant parts of the email are as follows (punctuation as per the original):
The committee also discussed at length point 2, page 2 of [the solicitor’s] email in the context of “Any document…… or other financial information considered by the Board relating to the Option in question…”
In this regard the committee discussed the fundamentals of the CBL Board’s market knowledge having regard to;
CBL was a shareholder and investor in Canberra Investment Corporation until CIC was the target of an off market takeover by Peets in 2013. As a shareholder at all Times the CBL Board was aware of the value of the shares, the assets of the company, the net asset backing value and dividend outcomes. The board was also aware of CIC executive staff remunerations. The board discussed these factors a number of times during my time on the CBL board including whether we would be forced to sell our shares to Peet.
…
Some CBL board members are long term shareholder/investors in Village Building Company and remain so today. As with CIC the same factors were and are known and discussed from time to time by the CBL board. The same comments would apply to this.
Board members are also shareholders of public trading companies.
The committee’s point in raising the above is that the CBL board is aware of its competitors in the context of their assets, performance, share value, net asset backing and executive salaries. The CBL board is also alive to how the share market operates and responds to internal and external factors impacting share value and executive salaries.
…
18. One of the solicitors for CBL responded to Mr McCann by email the following day. She asked him:
Were financial statement issued by CIC. If so, and subject to mark’s views, we could provide the relevant historical statements of CIC – perhaps for 2 financial years prior to the issue of options to [the managing director]. If you do have these, can you organise for them to be sent through. Alternatively, we can try and access them from ASIC records, although given the Company is now deregistered that may be difficult. How were you aware of the CIC executive staff remuneration? The Managing Director’s remuneration would potentially have been disclosed in the financial statements. We can check this. How do you have information on the remaining executives?
19. The reference to Mark was a reference to Mr Mark Waller, solicitor on the record for the defendant. From the contents of this email exchange, the plaintiff has inferred that both CBL and its solicitors were aware of a significant amount of material discoverable pursuant to the orders for preliminary discovery made in Pesec (No 1). Further, such material was not provided to the plaintiff.
20. The submission of the plaintiff was that the directors “must have considered some financial information as to the market value of the defendant’s shares, and what would have constituted reasonable remuneration for a managing director in this context”.
21. Other complaints raised by the plaintiff include the conduct of CBL in initially producing a redacted version of the resolution of the Board. The plaintiff did receive the unredacted version prior to hearing, but he contends that the resolution should have been produced in its unredacted form from the outset, and the failure to do so constitutes a non-compliance.
22. The final aspect of the plaintiff’s complaint concerns a number of share trades in CBL prior to the Board’s approval of the Option Deed. The plaintiff submits that when Mr John Harris, a solicitor, shareholder in CBL and member of a committee of inquiry (see Pesec (No 3) at [20]), gave evidence during the hearing, he referred to the fact that the Board had taken into account a number of share trades when determining the share price of the shares the subject of the Option Deed.
23. The plaintiff submits that the trades must have been “financial information considered by the Board” and the failure to provide this information was a failure to comply with the preliminary discovery orders.
The Court’s power to vary a costs order that has been entered and assessed in different proceedings
24. The nature of the power being exercised is important for a number of reasons. Under r 1835(6) of the Court Procedures Rules 2006 (ACT) (Rules), the issuing of a registrar’s certificate of assessment for costs itself operates as an order of the Court. The plaintiff did not seek that the costs certificate be similarly set aside (the application was filed before the certificate was issued), but I have assumed that such relief was also sought.
25. In addition, the application was brought in proceedings SC 179 of 2020, which concerned the plaintiff’s application for leave to bring derivative proceedings. However, the costs order that was the subject of this application was made in a different proceeding, being SC 181 of 2019. The costs order that the plaintiff now seeks to set aside concerns the costs of an application that was previously heard and determined. The plaintiff does not seek to disturb the costs of discovering the documents following that application. The basis for the Court’s intervention was thus not entirely clear.
26. In written submissions, the plaintiff relied on three sources of power to revisit a costs order previously made and subsequently assessed in different proceedings.
27. The first was Order 2 of the orders in Pesec (No 2), set out at [6] of these reasons. Such reliance was misplaced. As submitted by CBL, in the event that there is a subsequent determination of substantive issues, the costs of a preliminary discovery application commonly fall to be decided in accordance with the latter determination of those issues. Examples include: Ebos Group Pty Ltd v Team Medical Supplies Pty Ltd (No 3) [2012] FCA 48; 199 FCR 533 per Katzmann J at [120] and ED Oates Pty Ltd v Edgar Edmondson Imports [2012] FCA 356 per Kenny J at [59].
28. The rationale behind such an order was to take account of the fact that preliminary discovery is a compulsory process occurring in advance of substantive proceedings. At the time when the costs of a preliminary discovery action are ordered, the ultimate merit of the substantive proceedings has not been litigated.
29. As a consequence, if a plaintiff then commences proceedings (as he did) and is successful, there may have been an order that costs followed the event. Ordinarily, those costs would include the costs of any discovery that occurred during the proceeding. However, where preliminary discovery has taken place, documents have been discovered in advance of the proceeding commencing. Assuming that the documents produced in advance were also relevant to that substantive proceeding, it would be unfair to make a successful plaintiff pay for a defendant’s discovery costs simply because they occurred at an earlier point in time. It would be similarly unfair to make the plaintiff compensate a defendant for the costs of defending an application for preliminary discovery when, as events transpired, the discovery was appropriate and contributed to the plaintiff’s success.
30. However, that was not the case here. The plaintiff was unsuccessful on the application that he subsequently brought. Further, the order made in Pesec (No 4) was that the plaintiff pay 75% of CBL’s costs of the derivative action. Through that order, the plaintiff obtained the same costs order that was made on the preliminary discovery application.
31. Accordingly, even if the plaintiff was taken to have achieved a measure of success in the subsequent derivative action proceedings, so that Order 2 of the orders made in Pesec (No 2) had some effect, in light of the same costs order subsequently being made in Pesec (No 4), no different result followed. There was thus no warrant for varying the costs orders made in the preliminary discovery application. I am not satisfied that Order 2 provides an available source of power for revisiting the earlier costs orders made.
32. Separately, the plaintiff relied on two other sources of power as alternative means of revisiting the costs order made in an earlier proceeding. Both appear to be based on a degree of unreasonable conduct on the part of CBL in complying with its discovery obligations.
33. The first was what I took to be a reference to the power of the court to control abuse of its own process as part of its inherent jurisdiction, with the power to award costs being ancillary to the power to control abuse of process: The Queen v Barbaro (1992) 106 FLR 387 at 389-390. Although the plaintiff expressed that principle in shorthand as simply costs being within the inherent jurisdiction of the Court, it is important to remember that there was no inherent power to order costs at common law, so that the general source of the power must be found in legislation: see Quach v Butt [2017] ACTCA 4 per Refshauge J at [90]-[91].
34. The second was that Order 1 of the orders made in Pesec (No 2) was itself an interim order, and therefore subject to further order of the Court. It was submitted that the final order must be dealt with in the subsequent proceedings “to achieve certainty between the parties”. The plaintiff relied on the following extract from Massouras v Kone Elevators Pty Ltd (No 2) [2020] ACTSC 181 (Massouras) at [53]:
[Where a party] knowingly withholds information likely to be significant in the just resolution of a dispute, and as a consequence another party is put to increased inconvenience and expense, the party withholding the information may well be called to account to the other party in costs.
35. Consistent with the principle, the plaintiff drew attention to rr 674(1) and (4) of the Rules, to the effect that a party must pay any costs incurred by another party due to the first party’s failure, without reasonable excuse, to disclose a document that the party is required to disclose under Part 2.8 of the Rules, dealing with disclosure processes. This includes r 651 of the Rules, which is the relevant rule governing preliminary discovery.
36. There are also difficulties with the two alternative sources of power relied upon by the plaintiff. In each case, the conduct relied upon is the same – namely the withholding of documents that were required to be discovered.
37. Whether the plaintiff is relying on the inherent power of the Court or a similar power separately identified in the Rules and in the principle referred to in Massouras, the link is missing between the alleged conduct and the order sought to be set aside. The mere fact that a court may have inherent power or power under the Rules to call another party to account by a subsequent order relating to costs does not equate to a power to revisit any earlier costs order made that has some connection to the discovery process.
38. Costs are compensatory. The earlier costs order in Pesec (No 2) related to the costs of the application for preliminary discovery. None of the conduct discussed below concerns CBL’s conduct in defending the application for preliminary discovery. The plaintiff’s grievance is directed to a later point in time – being CBL’s asserted non-compliance with the discovery orders that were made.
39. That may give rise to questions about whether the Court should make a further costs order as a result of any non-compliance, and in that regard, the plaintiff would need to address the consequences of the non-compliance, such as being put to increased inconvenience and expense.
40. However, it is difficult to see how subsequent non-compliance with orders for production of documents (if established) could give rise to a right to overturn an earlier costs order made where those costs related solely to an application that had been determined substantially in CBL’s favour.
Should the Court overturn the costs orders made in Pesec (No 2)?
41. I have passed over the difficulties outlined above concerning the source of the Court’s power and dealt with the substance of the complaint.
42. The words of the email set out at [17] above do not disclose any non-compliance by CBL with the orders for discovery set out at [2] above.
43. The problem is that Mr McCann in his email has misquoted the requirements of the order made in Pesec (No 1) and it appears that the plaintiff has made a similar error. The order required the production of documents, including any “accountancy report or other financial information considered by the Board relating to the Option in question”. Mr McCann appears to have read the terms of the order as requiring disclosure of “other financial information” that was in the minds of the directors, and has attempted to explain other financial information that fell into that category.
44. The solicitor’s response is focused on the obtaining of documents, but it is directed to documents that may have supported or evidenced the information that was in the minds of those on the Board. Again, that is different to a document that was considered by the Board relating to the options to be approved by the Board. To the extent that directors on the Board had knowledge of other competitors in the market, and their share prices, asset values and what they were paying their managing directors, if that information was not in a document that was considered by the Board, it was not a document that was required to be produced.
45. The plaintiff has drawn an inference that there were other documents that should have been produced. However, at best, the email discloses that there was other financial information brought to the table by various directors on the Board when making the decision they made in relation to the Option Deed. I am not persuaded there was any failure to disclose documents or any non-compliance with the orders for preliminary discovery made in Pesec (No 1).
46. The same reasoning applies to the complaint about share trades. The fact that financial information was taken into account by the Board, which was additional to the documents that were produced on discovery, does not of itself mean that there were additional documents that should have been disclosed.
47. As to the complaint about a failure to fully disclose the contents of the resolution by the Board, the explanation by CBL is that the redactions were made initially so as to redact material that did not fall within the scope of the preliminary discovery orders. On 31 July 2020, once it became clear that the focus of the plaintiff’s enquiry was on the remuneration paid to the managing director, an unredacted version of the minute was supplied. That was 7 days after the plaintiff filed his amended application for leave to commence a derivative proceeding. In the circumstances explained, the late production of an unredacted document does not constituted any unreasonable conduct on the part of CBL.
48. Even if the above reasoning is in error, as a matter of discretion I would not have considered it appropriate for the Court to intervene and disturb an earlier costs order, for three reasons.
49. The first is that there was a delay in seeking to revisit the costs order, and the delay operates against the plaintiff here, particularly where an assessment of those costs has occurred (with all the expense that such process entails): Graham v Aluma-Lite Pty Ltd (New South Wales Court of Appeal), Mason P, Priestley and Cole JJA, 25 March 1997, now with a medium neutral citation of [1997] NSWCA 129.
50. The second is that the orders that were the subject of the preliminary discovery application related to the production of documents relevant to a number of options that were granted (described in the orders set out above as Options 1-11), spanning a period greater than that with which the application to commence a derivative action was concerned. The plaintiff’s application for leave to commence a derivative proceeding that was the subject of determination in Pesec (No 3) related to a subset of those options, being options 7-11, which were granted in April 2015. If, contrary to what I have found, unreasonableness had been established, it was limited to compliance concerning that subset of documents. The conduct did not infect the totality of CBL’s compliance with its preliminary discovery obligations. A more appropriate course would have been to raise the matter during the substantive hearing and deal with it by application for further discovery with associated costs consequences at that point. Given that the hearing was not completed for a number of months after the plaintiff had cause for concern about the email exchange discussed above, it cannot be said that the plaintiff was somehow deprived of the opportunity to take that course.
51. The third and perhaps most persuasive reason for declining to exercise any discretionary power to overturn a costs order previously made is that any lack of production had no significance at trial whatsoever. The plaintiff succeeded in Pesec (No 3) on the very issue that was the cause of him seeking production of documents dealing with the financial information considered by the Board of CBL in approving the option set out in the Option Deed. He established that there was a serious question to be tried. Specifically, I found that it was arguable whether the options set out in the Option Deed constituted part of the managing director’s objectively reasonable renumeration: see Pesec (No 3) at [69]-[73]. Further, I accepted there was a fairly arguable case as to whether the conduct of the directors who approved that Option Deed complied with their statutory and fiduciary obligations: see Pesec (No 3) at [96]-[97].
52. The additional financial information, said by Mr McCann to have formed part of the knowledge in the minds of the directors when they approved what they perceived to be the remuneration of CBL’s managing director, related to remuneration paid to managing directors of other companies. If, contrary to what I have found, such documents existed and should have been produced, it is questionable whether those documents would have had any bearing on the course of the subsequent proceeding, including the cost of proving the issue on which the plaintiff succeeded.
Conclusion and Orders
53. For the above reasons, there is no basis to revisit the costs orders made in Pesec (No 2).
54. At the request of the defendant, I will hear the parties as to the costs of this application.
55. The orders of the Court are as follows:
1. The application is dismissed.
2. The defendant is to file and serve any submission on costs of the application, limited to 2 pages, on or before 16 September 2021.
3. The plaintiff is to file and serve any reply submission, limited to 2 pages, on or before 23 September 2021.
4. Unless either party seeks a further oral hearing, by notification of such an intention in the written submissions filed, the issue of costs of the application filed 12 July 2021 is to be determined on the papers.
| I certify that the preceding fifty-five [55] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Associate Justice McWilliam. Associate: Dominic Page Date: 09 September 2021 |
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