PT Krakatau Steel v Felix Resources Limited (No 2) - [2010] SASC 217

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
PT KRAKATAU STEEL v FELIX RESOURCES LIMITED & ORS (NO 2)
[2010] SASC 217
Judgment of The Honourable Justice White
23 July 2010
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - ORDER FOR COSTS ON INDEMNITY BASIS
PROCEDURE - COSTS - GENERAL RULE - COSTS FOLLOW THE EVENT - COSTS OF WHOLE ACTION - GENERALLY
Application by defendants for costs to be awarded on an indemnity basis - whether plaintiff should have properly known that their case was unsustainable - whether case pursued by the plaintiff was "hopeless" - by consent application determined on the basis of the parties' written submissions - application dismissed.
PT Krakatau Steel v Felix Resources & Ors [2010] SASC 170 at [135], discussed.
Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401; Colgate-Palmolive Ltd v Cussons Pty Ltd (1993) 46 FCR 225 at 232-3; Kenneally v Pouras [2007] SASC 303 at [13]; Sands v Channel Seven Adelaide Pty Ltd & Anor (No 2) [2009] SASC 365 at [6], considered.

PT KRAKATAU STEEL v FELIX RESOURCES LIMITED & ORS (NO 2)
[2010] SASC 217
Civil

WHITE J: On 9 June 2010, I delivered judgment dismissing the claim of the plaintiff (PTKS) in this action[1] and ordered that PTKS pay the defendants’ costs of action on a party/party basis. However, I granted liberty to the defendants to apply to have the costs paid on a different basis.
[1] PT Krakatau Steel v Felix Resources & Ors [2010] SASC 170.
Subsequently the defendants made an application for an order that they have the whole or part of their costs on an indemnity basis. The parties agreed that I should determine that application on the basis of their respective written submissions.
Background
In the substantive proceedings, PTKS sought to recover from the defendants the sum of US$2.5m being the amount of its contribution to a failed joint venture project (the SASE Project). It made that claim on numerous bases, including breach of contract, breach of fiduciary duty, misleading or deceptive conduct, and oppression. The full detail of the various claims is set out in the reasons delivered on 9 June 2010 (the principal reasons) and it is not necessary to repeat them.
At the heart of PTKS’s claim was the assertion that a provision (cl 11.2.5) in the Shareholders Agreement (the SHA) regulating the relationship of the first defendant (Felix), the second defendant (Ausmelt) and itself required Felix and the third defendant (SASE) to grant it access to mineral deposits from which it could extract iron ore or coal to the value of US$2.5m (together with the costs of extraction and transportation) so that it could recoup the amount of its investment in the SASE Project. It alleged that Felix and SASE had failed to comply with that obligation.
PTKS also pursued the oppression claim on other bases, alleging that Felix had misused its majority voting power in SASE to its (PTKS’) detriment; that Felix and Ausmelt had breached other contractual obligations which they owed to it; and that Felix and Ausmelt had divested assets of SASE to themselves to its detriment by engaging in a form of asset stripping.
I rejected all of PTKS’ claims.
In addition, I considered that there was a fundamental defect in PTKS’ claim insofar as it rested in cl 11.2.5 of the SHA. PTKS pursued its claims on the basis that if it had been granted access to coal deposits which were the subject of exploration licences held by Felix, or to the iron ore deposits which were subject to the exploration licences held by SASE, it would, as a matter of fact, have been able to extract iron ore or coal of sufficient value so as to be able to recoup its contribution of US$2.5m as well as the extraction and transportation costs involved. PTKS did not adduce any evidence at all to support this fundamental assumption which was implicit in its claims. However the defendants adduced evidence indicating that, even if PTKS had been granted access, it could not have extracted iron ore or coal profitably, and that any attempt by it to do so would have caused still further losses. PTKS did not dispute that evidence and did not require the expert (Mr Horn) retained by the defendants to give evidence on this topic to attend for cross‑examination.
The defendants delivered Mr Horn’s report to PTKS on 15 October 2009. PTKS was then given the opportunity to consider whether it wished to obtain an answering expert’s report, before the proceedings were set down for trial. By an email dated 29 October 2009, the solicitors for PTKS (Norton Rose) informed the defendants’ solicitors that PTKS “[would] not be filing any expert evidence in reply to that of Mr Horn”.
This sequence of events led the defendants to pursue the claim for indemnity costs in two alternative forms. First, they sought an order that PTKS pay the whole of the costs of both the proceedings commenced by PTKS on an indemnity basis. In the alternative, they sought an order for party/party costs up to and including 29 October 2009 and indemnity costs thereafter.
Principles Relating to Indemnity Costs
The relevant principles to be applied in relation to claims such as the present were not in issue. The usual rule is that costs are awarded on a party/party basis, but a court may order costs on some other basis if there is some special or unusual feature of the case.[2] Such features may arise from a number of different circumstances. In the present case the defendants contend that PTKS had pursued a “hopeless” case and, properly advised, should have known that it had no chance of success.[3]
[2] Colgate-Palmolive Ltd v Cussons Pty Ltd (1993) 46 FCR 225 at 232-3; Kenneally v Pouras [2007] SASC 303 at [13]; Sands v Channel Seven Adelaide Pty Ltd & Anor (No 2) [2009] SASC 365 at [6].
[3] Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401.
The Defendants’ Contentions
The defendants contend that this was not a claim which, although unsuccessful, was reasonably arguable. Instead, the defendants contend that on any objective view, PTKS should have seen that its claim was unmeritorious.
The defendants point to four features of PTKS’ case. First, they point to the fact that the entitlement which PTKS claimed cl 11.2.5 of the SHA gave to it could not, even if upheld, have been exploited economically. As already noted, PTKS did not dispute that any attempt by it to recoup its investment in the SASE Project by extracting iron ore or coal would have been productive of still further losses. Thus, the defendants submitted that there had been no point in PTKS pursuing the claim which was at the heart of its case because, even if it had succeeded, it would not have led to any monetary award in its favour (apart possibly from an award of nominal damages).
The second feature to which the defendants drew attention is related to the first. They point to the inability of PTKS during the trial to articulate how any of the causes of action upon which it relied would, if established, have resulted in the monetary relief which it claimed. In addition to Mr Horn’s undisputed evidence, the defendants submitted that PTKS had not shown any rational link between the conduct upon which it relied for the oppression claim, on the one hand, and the loss of US$2.5m on the other. There is substance in this submission. On several occasions during the final submissions, I invited counsel for PTKS to explain how success on its causes of action could result in the monetary relief which it claimed. I think it fair to say that counsel had difficulty in providing satisfactory responses. I referred to this topic in paragraph [10] of the principal reasons.
Thirdly, the defendants submit that PTKS had known, or ought reasonably to have known, of the facts which meant that its claims could not succeed. In addition to PTKS’s knowledge that the claimed entitlements under cl 11.2.5 of the SHA could not be exploited economically (because the knowledge of its President Director, Mr Bujang, should be attributed to it), PTKS either knew, or should be taken to have known, of the evidence which undermined or defeated several of its claims. The defendants also drew attention to the fact that PTKS had not attempted to adduce evidence necessary to establish one or more elements of several of its claims.
Finally, the defendants referred to what I described in the principal reasons as the “blinkered and stubborn view”[4] of PTKS’ witnesses in persisting with a claim based upon a construction of cl 11.2.5 of the SHA while ignoring the entitlements given by cll 7.3 to 7.5 of the State Agreement into which the parties had also entered on 12 March 1999.[5]
[4] PT Krakatau Steel v Felix Resources & Ors [2010] SASC 170 at [135].
[5] Ibid at [50].
There is considerable force in each of the matters to which the defendants referred. Reference could also be made to other matters. This was a case in which the evidence-in-chief of each witness was in the form of a written witness statement exchanged well in advance of the trial. In addition, in accordance with a pre-trial direction, the parties exchanged written openings. The defendants provided a detailed written opening of their case. PTKS’ had the advantage therefore of knowing the defendants’ evidence, and of the defendants’ legal analysis of the material, before the trial commenced.
PTKS sought, and was granted, permission to amend its statement of claim at the commencement of the trial so as to pursue additional claims. In its final submissions, PTKS acknowledged that, even if those claims had succeeded, they would have entitled it to nominal damages only. That gives rise to a concern about the purposes of the amendment.
Reference could also be made to the nature of some of the submissions made by PTKS. In doing so, I readily acknowledge the broad scope of permissible arguments available to counsel in a trial and that some submissions will invariably be more meritorious than others. However, putting it at its most favourable for PTKS, some of the submissions made on its behalf could only be described as “brave” or “adventurous”. By way of example, I refer to the submission (extracted in [322] of the principal reasons) that Felix had acquired the benefit of tax losses estimated at $36m, that Ausmelt had acquired the Demonstration Plant with an estimated value of $41m, and that PTKS had somehow been excluded from sharing in assets with those values. As I noted in [333] and [340] of the principal reasons, I found it surprising that PTKS maintained these submissions. Another example was the submission that cl 11.2.5 of the SHA obliged Felix and Ausmelt to cause SASE, upon the failure of the SASE Project, to acquire iron ore or coal which PTKS could then use to recoup its investment.
These matters in combination make this a borderline case and my mind has wavered about the appropriate result. In the end however, I am not persuaded that an order for indemnity costs is appropriate.
I accept that it is easy to be wise after the event and that the deficiencies in PTKS’ claims are probably more apparent now than they were pre-trial. A trial is a process in which the respective claims and evidence of each party are subjected to a scrutiny to an extent which is not always possible pre-trial. It is the function of a trial to expose any deficiencies in a particular case. Once exposed, the fate of the claim often becomes clear. It is natural in those circumstances to question why that position could not have been recognised earlier. However, it is appropriate to keep in mind that the retrospective view which can now be taken was not the same view of the case available to PTKS or its advisors pre-trial.
In this respect, I note that the defendants do not assert that, pre-trial, they had put PTKS on notice of the deficiencies which they perceived in its claims or that, pre-trial, they put PTKS on notice that they considered its claims to be so misconceived that an application for indemnity costs would be made if the claims were pursued. I am not suggesting that such a notice is essential before an order for indemnity costs can be made. I am mentioning it only in the context of noting the advantages which a retrospective view affords.
I also note that the defendants do not rely on any Rules of Court offer, or other pre-trial offer of settlement.
It is appropriate to take into account that the trial was conducted with reasonable efficiency by both parties and was concluded well within the original estimate of its length. I have the impression that by the time of trial PTKS itself had come to the view that its claims were weak. Although it persisted with them, it did so in an efficient way and without unnecessary protraction of the proceedings.
It is also of relevance that PTKS was in the unusual position of being able to adduce evidence from Mr Arthur, the former Managing Director and Chief Executive Officer of Felix. Mr Arthur had been the relevant mind of Felix from the inception of the SASE Project until Felix’s decision to cease further funding of the Project in June 2002. At least on its face, Mr Arthur’s evidence provided support for the claim of PTKS concerning the representations made to it during the negotiations for the SHA. As it turned out, I did not regard Mr Arthur’s evidence as altogether reliable, but that was not something which could have been known to PTKS in advance of trial.
I also agree with the PTKS submission that it is not uncommon for evidence which is destructive of, or which undermines, a party’s claim to be elicited in the cross-examination of its witnesses. It does not follow that such evidence should necessarily, or even reasonably, have been known to the party calling the witness in advance of trial.
In summary, although I consider that there is considerable merit in the submissions made by the defendants, I am not satisfied, on balance, that the present is one of those unusual cases in which an order for indemnity costs is appropriate.
I therefore decline to make either of the alternative orders sought by the defendants.