Smith v Gould (No 2)

[2012] VSC 541

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

IN THE MATTER of Part IX of the Property Law Act 1958 (Vic)

No. 4269 of 2006

GEOFFREY SMITH	Plaintiff
v
ROBERT GOULD	Defendant

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JUDGE:	DIXON J
WHERE HELD:	MELBOURNE
DATE OF HEARING:	24 OCTOBER 2012
DATE OF JUDGMENT:	14 NOVEMBER 2012
CASE MAY BE CITED AS:	SMITH v GOULD (NO 2)
MEDIUM NEUTRAL CITATION:	[2012] VSC 541

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Costs – Application for an adjustment order under Part IX of the Property Law Act 1958 (Vic) - Plaintiff successful in obtaining an adjustment order – Whether in all the circumstances the plaintiff succeeded and costs should follow the event – Relevant discretionary considerations discussed.

Costs – Calderbank offer by defendant – Whether unreasonably rejected by successful plaintiff – Failure to foreshadow application for indemnity costs – Whether offeror should only recover party and party costs.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Dr P Vout	Clark Toop & Taylor
For the Defendant	Mr S Wilson QC with Mr P Herzfeld	HWL Ebsworth

HIS HONOUR:

1. On 18 October 2012, I published my reasons for judgment in this proceeding (‘the principal reasons’). An order adjusting the property interests of the parties under Part IX of the Property Law Act 1958 (Vic) was made in favour of the plaintiff. After allowance for property adjustments prior to judgment, I ordered that Mr Gould pay Mr Smith $43,011.

1. On its face, Mr Smith succeeded in the proceeding and vindicated his legal right to an adjustment of property interests from Mr Gould in his favour that was better than he had received prior to the date of judgment. For the reasons that follow, I consider this is an appropriate occasion to deprive an apparently successful party of his costs.

1. Mr Smith contended that the default position in claims under Part IX of the Act is that the costs of the proceeding lie where they fall. Mr Smith relied on Kenyon v Akeroyd (No 2),[1] but that decision does not support the proposition that the default position in claims of this sort is that costs lie where they fall. Rather, the court recognised the usual rule; that costs follow the event, but the circumstances of that proceeding warranted a different costs disposition. Moreover, as I understood his submission, Mr Smith contended that he was entitled to an order for costs, and the court should disturb the usual costs order in such cases, since he was compelled to establish the defendant’s financial position[2] and, ultimately, the court has ordered an adjustment in his favour.

   [1][2009] VSCA 168 at [6], and Morgan v Bell(No 2) [2011] VSC 393 at [9].

   [2]citing Penfold v Penfold (1980) 144 CLR 311 at 316 and 317. In this proceeding, the High Court was concerned with a different question; whether there were justifying circumstances under s 117 (2) of the Family Law Act 1975 (Cth), which does not here arise.

1. Mr Gould sought an order that Mr Smith pay his costs of and incidental to the proceeding, including reserved costs on an indemnity basis, relying principally on Mr Smith’s unreasonable refusal of settlement offers in the form of Calderbank letters.

1. I do not accept Mr Smith’s submission that the default position in claims of this sort is that the costs of the proceeding lie where they fall. While that may be the default position in family law proceedings,[3] the jurisdiction of this court to award costs is found in s 24 of the Supreme Court Act 1986. The costs of and incidental to all matters in the court are in the discretion of the court, which has full power to determine by whom and to what extent the costs are to be paid. The court exercises its powers and discretions as to costs under s 24 of the Supreme Court Act, subject to and in accordance with Order 63 of the Rules. The settled practice is that, in the absence of special circumstances, a successful litigant should receive his or her costs; costs follow the event. On occasion, and this is one, there is debate in the particular circumstances of the proceeding about the concept of ‘event’ and the notion of ‘success’.

   [3]See s 117 Family Law Act 1975 (Cth).

1. More recently, in Apostolidis v Kalenik (No 2),[4] the Court of Appeal approved of the reasoning of Beazley JA in the New South Wales Court of Appeal in Baker v Towle.[5] In Apostolidis, the Court of Appeal rejected, for applications under Part IX of the Act, two notions. First, that the starting position for the exercise of the costs discretion was that each party should bear their own costs and, second, that there is a ‘usual rule’ that costs awarded on such applications should reflect the adjusted proportion of interests in comparison with the claimed interests in the relevant property. The court rejected the notion that ‘the event’ is distinctive in the context of Part IX applications when applying the usual rule that costs follow the event. Rather, the court stated that the relevant considerations in the exercise of the court’s discretion on costs include the degree of success achieved and the circumstances of offers made to resolve the dispute, within the context of the facts and circumstances of the individual case.

   [4][2011] VSCA 329.

   [5](2008) 39 Fam LR 323. See also Separovich v Ferrao (No 2)[2011] NSWCA 346.

1. What Apostolidis directs is that the court identify, in proper context, both the events that defines the result for the litigants in the proceeding and the extent of achievement of such events, which constitutes success. The degree of success, and not merely the result, identified in the context of the facts and circumstances of the case, primarily conditions the costs discretion. The dual concepts of success/failure and event/result for the litigants in the proceeding each warrants careful consideration on every occasion that a judge exercises the discretion to award costs under s 24 of the Supreme Court Act. Mostly such matters will be persuasive.

1. So it may be that a plaintiff who obtains a nominal adjustment of property interests in the proceeding may have failed in the event, just as a plaintiff seeking substantial damages for breach of contract, who only recovers nominal damages, may have failed in the event.[6] A plaintiff who obtains a substantial adjustment, achieving the apparent event, may be unsuccessful when the event is redefined by the defendant’s settlement offer. In such a case, costs orders commonly reflect the time when the event changed. These matters, which affect a party’s exposure to liability for costs, are well established and, in my view, uncontroversial. These considerations are not, of course, decisive as the court exercises its discretion in the particular circumstances in which it arises.

   [6]see e.g. MLW Technology Pty Ltd v May (No 4) [2003] VSC 293 (29 July 2003).

1. Another important aspect of the costs discretion is the quantum of costs that may be recovered, referring particularly to the mode of taxation. I bear in mind that, absent special circumstances, the primary consideration in making a costs order is to compensate the successful party, as distinct from indemnifying it, and that the object of awarding costs is not to punish the unsuccessful party. The most common, and here relevant, reason for depriving a successful party of costs is that the result achieved at trial is less favourable than was offered by the unsuccessful party in settlement. I will later return to relevant special circumstances affecting the discretion as to the manner of taxation or assessment of costs.

1. There are other factors relevant when considering whether to deprive a successful party of costs, which, reframed into the context of contravention of the overarching obligations, now find expression in the terms of the Civil Procedure Act, 2010 (Vic).[7] It does not matter that the Civil Procedure Act only commenced operation well into the proceeding. Since at least the seminal decision of the English Court of Appeal in Ritter v Godfrey,[8] a successful party who has ‘done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation and expense’ may be denied costs. Although, Atkin LJ spoke of calculated conduct, the manner of conduct of the proceeding by the parties has always been a material consideration on costs.[9] This consideration may find voice in many different ways, as the cases show, for the opportunities in litigation for the conduct of one party to increase, or waste, the costs incurred by the other party seem limitless. A number of these considerations are now relevant.

   [7]see s 28(2) and 29 of the Act.

   [8][1920] 2 KB 47 at 60 (per Atkin LJ).

   [9]Keddie v Foxall [1955] VLR 320, 323-4 (FC).

1. The successful party may be deprived of costs in myriad ways relating to the manner of conduct of the proceeding,[10] including by contesting many issues on which it failed, by requiring the losing party to contest issues abandoned during trial, by taking unnecessarily technical points, by inappropriately prolonging the litigation,[11] by pressing a substantially exaggerated claim,[12] by causing the real issues to be obscured or unnecessary evidence to be led, or by facilitating the loss of the opportunity to expeditiously dispose of the case.[13] In some cases, an examination of the conduct of significant separate issues in the proceeding, by reference to success on the issue event, may inform the proper exercise of the discretion.[14]

   [10]compare Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 30 ACSR 20.

   [11]Forbes v Samuel [1913] 3KB 706; Lollis v Loulatzis (No. 2) [2008] VSC 35 at [29].

   [12]O’Neill v Williams (Costs) [2007] NSWSC 51.

   [13]Capolingua v Phylym Pty Ltd (1991) 5 WAR 137 at 142; Lollis v Loulatzis (No. 2) [2008] VSC 35 at [35].

   [14]see the discussion in G.E. Dal Pont, Law of Costs, Lexis Nexis, 2^nd Ed, [8.2]–[8.8].

1. At common law, where a party has hindered court processes, for example, by failing to comply with court orders, failing to make proper discovery, or issuing wide or oppressive subpoenas may influence the costs discretion, now likely to be a contravention of an overarching obligation under the Civil Procedure Act. For the most part, interlocutory costs orders allocate responsibility for the failure to comply with obligations under rules of court. In the present case, it seems that on many occasions costs have been reserved. In the same genre, filing deficient documents or failing to comply with directions and other forms of procedural irregularity may deprive a successful party of costs, at least in part.

1. It is not always the case that only one party to litigation is guilty of disentitling conduct, meaning conduct that militates against exercising discretion in favour of that party. In appropriate circumstances, the proper balancing of discretionary considerations may not favour either party.[15] There is no impediment to weighing in the balance the conduct of the unsuccessful party in terms of his or her entitlement to costs.

   [15]Dal Pont, Law of Costs, ibid, at page 235, fn 234, references an unreported Tasmanian decision, where Slicer J ordered that each party pay its own costs as the matter was prolonged by the conduct of both parties – Day v Trustees of the Estate of George Adams (Dec’d) (Supreme Court of Tasmania, 17 March, 1997, unreported).

1. Five phases of this dispute warrant separate discussion of discretionary considerations affecting costs.

(a)In my principal reasons, I have found that there was a separation arrangement negotiated between the parties before proceedings were commenced, which was not fully implemented. 

(b)Mr Smith commenced the proceeding by applying for an interlocutory injunction, which was listed before the court on four occasions between February and May 2006. Mr Gould consented to an injunction, without any undertaking as to damages. Costs were reserved. At trial, Mr Smith did not establish that he was entitled to that injunction.

(c)In its interlocutory stage, the proceeding was characterised by numerous applications to associate judges. An application made in February 2007 appears to have stood as an application for directions.  I have not specifically reviewed every occasion when the matter came before the court. There appear to have been at least nine applications that related to discovery or interrogatory issues. Apart from an occasion in October 2008 when costs were ordered against Mr Gould, and an occasion in July 2010, when costs were ordered against Mr Smith, costs have been reserved. One of these applications sought an order for oral examination of Mr Gould in relation to discovery and the dismissal of this application was appealed. I will return to the costs of that application and appeal below. There were three appearances relating to two applications concerning subpoenas, on which costs were reserved. On about 20 occasions, the proceeding came before the court for directions. Often directions hearings appear to have been adjourned or common directions, such as for mediation, expert evidence, court books and like matters, were made by consent. There was nothing revealed at trial, and this was touched on in my principal reasons, that showed a deliberate, concerted effort by either party to enforce obligations, or confine issues, or facilitate the expeditious disposal of the proceeding. Two issues, mentioned in my principal reasons, illustrate my concern about the failure of the parties to identify and confine the real dispute for resolution by the court. First, Mr Gould contended, until the point was abandoned during the trial, that the date of separation of the parties was not when Mr Smith moved out of Park Street but when Mr Smith commenced his affair with Mr Singer. This introduced uncertainty about the date for assessment of the content and value of the divisible pool. Second as Mr Fettes was initially instructed in November 2010, perhaps earlier, there was ample opportunity for the parties to present valuation issues relating to the divisible pool at trial in an expeditious and principled way. That did not occur. Ultimately, Mr Smith instructed Mr Fettes to make assumptions about the basis, and source documents available, for valuing the units in Dukville. Based on the cross-examination of Mr Gould at trial, I infer that Mr Smith sought oral examination of Mr Gould shortly prior to trial principally to pursue Mr Smith’s schedule 3B, rather than a principled valuation of the units by a forensic business valuer. The opportunity for an expeditious trial, one that ought to have taken no more than about 15 sitting days was primarily lost through Mr Gould’s apparent inability to produce proper financial reports. On the one hand, Mr Gould contends that he made appropriate discovery as required of him by Mr Smith. It is now clear that he was unable to discover financial records that presented a true and fair view, or something approximating a fair representation, of the trading and financial position of Dukville, Edrob Nominees Pty Ltd Nominees Pty Ltd or the gallery business. On the other hand, Mr Smith appeared fixated on artworks and did not direct his attention to securing for a business valuer an appropriate documentary or other basis for a principled valuation, as determined by the valuer. Rather, he directed the attention of the court to a protracted quest to identify in 2012 the purchase and sale of individual artworks prior to June 2004. Consequently, interlocutory processes bore closer resemblance to the common responses of parties to failed emotional relationships that I referred to in my principal reasons than to the expected manner of discharge of the overarching obligations under the Civil Procedure Act.[16]

(d)The next relevant phase of the dispute for awarding costs is that which follows an imprudent refusal of a settlement offer more favourable to Mr Smith than he obtained at trial.

(e)Finally, there is the conduct of the trial.

[16]such as the duties under ss 20 (to cooperate in the conduct of civil proceedings), 23 (to narrow the issues in dispute), and 25 (to minimise delay).

1. I have found that the post-separation adjustment of property interests made by Mr Gould in Mr Smith’s favour before December 2006 was not just and equitable, although the extent of its insufficiency in that regard was modest. Moreover, that is a comparison of what Mr Smith received rather than what Mr Gould offered. By commencing the proceeding and prosecuting it to trial, Mr Smith has succeeded in obtaining a more favourable outcome than he received from the property adjustments that were made pursuant to the settlement arrangement that I described in the principal reasons.

1. Notwithstanding the result, I am not satisfied that Mr Smith’s conduct in the circumstances was unreasonable. The view that I formed during the trial, expressed in the principal reasons, is that Mr Gould has consistently sought to reach a fair division with Mr Smith following the breakdown of their relationship. Had Mr Gould fully implemented during 2005 the settlement arrangement negotiated in 2004, a fair adjustment of property interests between the two men may have been achieved before Mr Smith commenced proceedings. One difficulty that faced the parties then, and remains the case, is the entanglement in their affairs of others, principally Mr Singer and his entities. Mr Singer was then, and remains, in Mr Smith’s camp. Neither man grappled with the complexity of property adjustment where other entities were involved. Disputes arose because the settlement arrangement was never completed.  Two examples are the sale of 3/31 Marne Street by Mr Smith and the sale of Bather & Garden by Mr Gould.

1. The pleadings are not particularly helpful in identifying the events for which success might attract costs. My reasons for judgment make clear that the constitution and value of the divisible pool of assets was one matter that remained in contention throughout the proceeding. The second substantial contentious issue was the extent of the contributions made by Mr Smith towards the value of the divisible pool of assets. Further, as I will shortly explain, what has become clear is that for Mr Smith success in the proceeding was receiving not less that a third of a divisible pool of at least $30 million. There were sub-issues within those two broad contentions, but analysis of the issues at a micro level does not assist Mr Smith.

1. It was not unreasonable conduct on Mr Gould’s part that triggered the proceeding. Rather, Mr Smith alleged, and failed to prove, that he was entitled to a share of the Gould Smith Collection and that his contribution to the commercial success of the art gallery was significantly greater than I have found. Neither of these two issues arose in the negotiations for the separation arrangement, but each has been central to this dispute since its inception. Although Mr Smith succeeded in persuading me that he contributed to the success of Gould Galleries, I was not persuaded that his contribution was more than modest; a characterisation with which Mr Gould never cavilled.

1. So understood, it is clear that in the events as properly understood, Mr Smith has failed.

1. When Mr Smith failed to establish the existence of the Gould Smith Collection, he failed to establish that he was entitled to restrain Mr Gould from dealing with those paintings. Costs were reserved by orders of Habersberger J on 1 February 2006 and Kellam J on 16 May 2006. Mr Gould should recover the costs of and incidental to Mr Smith’s application for the injunction to be taxed as between party and party.

1. Notwithstanding that, in the result, a small adjustment in favour of Mr Smith was ordered, it is clear from my principal reasons that, significantly, both Mr Smith and Mr Gould failed to persuade me to adopt their respective contentions as to the extent and value of the divisible pool of assets. Mr Smith failed to establish the value of the divisible pool for which he contended, falling well short of it. However, I take into account that Mr Gould had not expeditiously contributed to the identification and valuation of the divisible pool. The value of Dukville’s units was substantially a matter within Mr Gould’s knowledge. From Mr Gould’s attempts to resolve the adjustment of property interests by the separation arrangement, which broadly corresponded with the adjustment that I have awarded to Mr Smith, I consider Mr Gould’s motivation was not to be unfair to Mr Smith; to deny him an appropriate adjustment to reflect his contribution to the pool. Mr Gould was motivated to avoid proper disclosure of the extent of his assets, or perhaps of his past attitude to proper disclosure to the Australian Tax Office, until it became unavoidable. The consequence of a want of proper financial accounting was to prolong trial preparation and the trial unnecessarily. I consider that the parties each failed to identify the content and value of the divisible pool and neither succeeded on that issue. Rather, costs were wasted.

1. On contributions, in both opening and closing submissions, Mr Smith contended that his contribution was substantial and he was entitled to an adjustment in his favour of 40 - 50% of the whole divisible pool. Mr Gould did not dispute that Mr Smith had contributed to some extent in the art sub-pool deserving of acknowledgment by an adjustment of interests and on the contribution issue. Mr Gould succeeded. Mr Gould’s success on this critical issue in this litigation is a persuasive factor warranting an order in his favour for part of the costs of the proceeding, beyond the costs of the injunction.

1. Evidence of some, but presumably, not all, of the negotiations to resolve the dispute were put before me. Without prejudice communications between solicitors commenced well before the institution of the proceeding. The first such offer, from Mr Gould and made in June 2005, substantially restated the settlement arrangement. Mr Gould put this offer before Mr Smith’s sale of 3/31 Marne Street. It presumed that Mr Smith was apprised of the various financial dealings between the parties, and of their respective financial positions, and was properly equipped to assess the offer. I am not in a position to assess whether in June 2005 that was a correct assertion. Mr Gould had not disclosed proper financial accounts and I do not consider unreasonable Mr Smith’s suggestion at the time that he was not sufficiently informed to evaluate the offer properly. There is no evidence that he was represented by solicitors, or in receipt of competently given legal advice, when the settlement arrangement was negotiated. There are other reasons why I do not think that Mr Smith’s refusal of the offer put by this letter assists Mr Gould on costs. It is difficult to quantify this offer precisely. My impression is that it broadly approximates the adjustment that I have ultimately determined to be appropriate. However, because it requires an indemnity by Mr Smith of Mr Gould and his entities arising out of financial dealings with Mr Singer, Mr Dunn and their entities and those are uncertain contingent liabilities for Mr Smith, it was reasonable for Mr Smith to reject this offer.

1. In December 2009, Mr Smith served an offer of compromise that Mr Gould pay him the sum of $15 million, which was rightly rejected.

1. On 11 April 2012, approximately two weeks prior to the commencement of the trial, Mr Gould served a Calderbank letter upon Mr Smith that was open for acceptance for a period of 7 days. Mr Gould offered to pay Mr Smith $1.75 million in cash plus party and party costs to the date of the letter (with some irrelevant exclusions). An alternative offer, at Mr Smith’s election, involved the transfer of Mr Gould’s interest in 3/35 and 4/35 Marne Street, South Yarra to Mr Smith and an amount in cash to make up the difference between the value of those units, after deduction of the mortgage debt, and the sum of $1.75 million. Mr Gould assessed that Mr Smith had already received assets of approximately $3.5 to $4 million from the pool, to be retained by Mr Smith if the offer was accepted.

1. Mr Smith rejected the offer asserting, as the trial was about to start, that he was not satisfied that the available pool of assets and its value had been sufficiently identified. Before examining whether this refusal was imprudent, I will note the course of the remaining negotiations, as been revealed to the court.

1. On the fourth day of the trial, Mr Smith served a Calderbank letter upon Mr Gould that proposed a basis for settlement that was substantially more favourable to Mr Smith than he achieved at trial, which can be ignored. On the fourteenth day of the trial, 11 May 2012, Mr Gould served a further Calderbank offer on Mr Smith. Although this offer was substantially more favourable to Mr Smith than the adjustment he received at trial, it was a complex offer that involved obligations that cannot be readily evaluated against the adjustment ultimately ordered. It was an offer that, classically, reflected the flexibility available to parties who seek to resolve a dispute by agreement rather than taking the judgment of the court. On 21 May 2012, Mr Smith served a further Calderbank offer upon Mr Gould that was substantially more favourable to him than the adjustment ultimately assessed, which can be ignored.

1. In Apostolidis, the Court of Appeal confirmed that in proceedings under Part IX of the Property Law Act, the factors relevant to assessing whether rejection of a Calderbank offer is unreasonable are those identified in Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2.)[17] The relevant factors include:

   [17](2005) 13 VR 435, 442 [25].

(a)       the stage of the proceeding at which the offer was received;

(b)      the time allowed to the offeree to consider the offer;

(c)       the extent of the compromise offered;

(d)      the offeree’s prospects of success, assessed as at the date of the offer;

(e)       the clarity with which the terms of the offer were expressed;

(f)whether the offer foreshadowed an application for indemnity costs in the event of the offeree’s rejecting it.

1. In my view, the offer of particular significance for resolving liability for costs was Mr Gould’s 11 April 2012 offer. To the extent that the offer permitted Mr Smith to retain property adjustments since separation and receive a further $1.75 million plus his party and party costs, the offer was expressed in clear and unambiguous terms. The value of the offer of $1.75 million plus retention of prior adjustments was approximately $4.75 million. In addition, party and party costs were offered. Although the offer remained open for a period of only 7 days, it was made 13 days prior to the commencement of the trial, about 5½ years after the proceeding was issued, and after numerous directions hearings and applications. Mr Smith’s legal team were actively engaged in trial preparation when the offer was received and there had been prior mediation. I do not consider that the time during which the offer was open for acceptance provided any impediment to a proper consideration of whether it should be accepted by Mr Smith and Mr Smith did not contend that it did.

1. Rather, Mr Smith contended that his rejection of this offer was reasonable on two bases. Firstly, he said that it overvalued the extent of the adjustments in divisible property that had already been made. Secondly, the consistent failure of Mr Gould to reveal the proper value of assets that were controlled by him, or his entities, precluded a proper evaluation of the offer.

1. I reject each of these submissions. While Mr Gould had overvalued adjustments to date, when responding to the offer, Mr Smith asserted that the true value of the adjustments to date was ‘about $3 million’. That, as I have found, was an appropriate assessment.

1. Secondly, Mr Smith asserted that the pool of assets available for distribution is in excess of $30 million. Although he contended that the total value of the divisible pool was at least 30% higher than my findings, Mr Smith’s assertion of a pool of $30 million was nevertheless a significantly more realistic assessment than the value he contended for at trial. I consider that Mr Smith and his legal advisers had a sufficiently informed view about the extent and value of the divisible pool to assess this offer.

1. Two observations can be made about that assessment and evaluation of this offer. First, on Mr Smith’s own view that he had already received approximately $3 million, the offer amounted to $4.75 million plus costs and recognition of a contribution in excess of 15% to the divisible pool. In that respect alone, the offer was more favourable to Mr Smith than he achieved at trial. Second, the offer was significantly more favourable in absolute dollar terms. The offer was in excess of 20% of the determined value of the divisible pool. On either basis, but relevantly the former, the offer was more favourable to Mr Smith than the result achieved at trial. It was a substantial compromise by Mr Gould to seek resolution of the dispute.

1. Although Mr Smith ran the trial on the basis of a significantly higher pool value and a contribution entitlement of at least 40% of the pool, the pattern that consistently emerges from the negotiations during 2012 was that Mr Smith was not inclined to settle for less than a one-third share of a pool of $30 million.

1. Bearing in mind the factors identified in Hazeldene’s Chicken Farm, it was imprudent for Mr Smith to contend either that the total value of the divisible pool would exceed $30 million or that his contribution to it would entitle him to as much as one third of the divisible pool. Mr Smith maintained both positions. Mr Smith’s rejection of the offer was based upon a more generous assessment of both the size of the pool and his contribution to it than ultimately proved to be the case. His contention that his rejection of the offer was reasonable because he was not in a position to assess it is rejected. In refusing to accept the 11 April 2012 offer, Mr Smith was imprudent.

1. The unreasonable rejection of this offer is a significant factor in the exercise of the costs discretion. It is not necessary for that conclusion that there is either misconduct associated with the rejection of the offer or a lack of merit in the way that the offeree has conducted its case. Mr Gould contended Mr Smith’s imprudent rejection of this offer entitles him to costs on an indemnity basis from 12 April 2012, the date of Mr Smith’s rejection of the offer, for three reasons.

1. Firstly, Mr Gould contended that the entirety of the proceeding would have been avoided had Mr Smith accepted the separation arrangement. Secondly, the chronology of offers that have been disclosed to the court demonstrates that Mr Smith had an unreasonable attitude towards resolution of the proceeding while conversely Mr Gould made genuine realistic attempts to resolve the dispute. Thirdly, Mr Gould has observed s 22 of the Civil Procedure Act 2010 by using reasonable endeavours to resolve the dispute by agreement but Mr Smith has not. I have considered each of these matters and for the reasons that I have already expressed these are factors that favour an award of costs in Mr Gould’s favour but I am not persuaded that, taken either alone or collectively, those contentions warrant an award of indemnity costs.

1. One further matter, relevant when considering whether to award costs on an indemnity basis for the imprudent refusal of a Calderbank offer, is whether the offer foreshadowed an application for indemnity costs in the event of its rejection. None of Mr Gould’s Calderbank offers foreshadowed that application. Rather, his solicitors suggested that costs orders ‘do not follow the traditional view that the plaintiff gets his costs if he gets any award’. Mr Gould’s solicitors also suggested, contrary to observations made by the Court of Appeal in Apostolidis, that costs might be awarded on a basis proportionate with success. In each case, Mr Gould offered to pay Mr Smith’s party and party costs. What was foreshadowed was that if the outcome at trial were less favourable than the offer, Mr Gould would be seeking payment by Mr Smith of his costs notwithstanding that the adjustment in property interests was in Mr Smith’s favour. That Mr Gould at no time foreshadowed an application for indemnity costs because of imprudent refusal to accept the offer persuasively weighs, in the circumstances of this case, against an award of costs on that basis now being made. On the balance of these considerations, I will refuse the application for costs to be taxed on an indemnity basis from 12 April 2012.

1. Each of Mr Smith and Mr Gould contributed to the unreasonable prolongation of the trial and to the high solicitor and client costs that have been unnecessarily incurred by each of them. In the first place, they agreed to focus their dispute upon establishing the stock list as at the separation date as the critical consideration for determining the value of the art sub-pool. Although proffered as an agreement between the parties that was likely to save court time, it is now clear that that objective was not, and would not ever have been, achieved.

1. The trial of the proceeding took 28 hearing days. Much time was taken up attempting to resolve issues that were founded on a misconception of proper valuation principle as I explained in my principal reasons. Of that hearing time, the examination and cross-examination of all witnesses, other than the parties, opening and closing addresses and argument on interlocutory applications were within normal parameters. The examination and cross-examination of each of Mr Smith and Mr Gould was not. In each case, it was unreasonably protracted, largely because of the approach jointly adopted by the parties to identifying the extent and value of the art sub-pool.

1. Mr Gould, in my view, must accept significant responsibility for the prolongation of the trial. The lack of proper financial records that would have enabled a principled valuation of Dukville Pty Ltd was a matter for which he bore primary responsibility. Mr Smith was trenchant in his criticism of the manner of Mr Gould’s discharge of his discovery obligations but, as I explained in my principal reasons, Mr Smith’s response to a want of proper financial discovery was misconceived. From my review of the evidence of Mr Smith and Mr Gould, I am satisfied that the trial was prolonged by at least 25% by such factors. Although I suspect that a great deal of trial preparation after 12 April 2012 was directed to schedules 3A and 3B, I am not in a position to make any specific finding about that. However, as I have said, neither party established the value of the divisible pool for which he contended.

1. It is more difficult to assess the effect of the conduct of the parties in inflating pre-trial costs beyond what would be reasonably and properly incurred in efficiently conducted litigation. The difficulty that Mr Gould faced was that Mr Smith’s claim that he contributed to the financial success of the gallery exposed the financial affairs of Edrob Nominees Pty Ltd and Dukville Pty Ltd to scrutiny. Had Mr Gould taken timely steps during 2005 or 2006 to regularise his compliance with statutory reporting obligations and produce financial records that represented a true and fair view of the financial position and dealings of those entities, the costs that might reasonably have been incurred in this litigation would have been substantially reduced. Further, the prospect of early resolution of the proceeding may have been improved. I do not place great significance on the latter prospect since Mr Smith’s consistent view about the extent of his contribution to Mr Gould’s success is likely to have remained a significant impediment to a settlement.

1. An application by Mr Smith under s 57 of the Civil Procedure Act 2010 to examine Mr Gould about his discovery prior to trial reflects the broader considerations. Dismissing the application, the associate judge noted that Mr Smith was about to file and serve his fifth affidavit of documents and Mr Gould his third affidavit of documents. The associate judge observed that the real issue in dispute in relation to discovery was the proper assessment of the pool of assets for distribution. The associate judge was satisfied that discovery of relevant documents going to the pool of assets as at June 2004 and the value of that pool had been completed, and was not satisfied that Mr Gould was failing to disclose discoverable documents or misinterpreting his discovery obligations, which matters are the touchstone for an order for an oral examination.

1. Having issued proceedings in December 2006 with the matter set down for trial in April 2012, such an application, in January 2012, was too late. If its proper purpose was to enable instructions to appropriate experts, that was not made clear and I can see no basis to accept that it was. The conduct of the trial did not suggest that the interlocutory war of attrition that characterised this proceeding, and of which this application was an example, was intended to facilitate the just, efficient, timely, and cost effective resolution of the real issues in dispute between the parties. Mr Smith’s appeal against the order of the associate judge was ultimately adjourned to the trial by which time it was of little practical use. The associate judge reserved the costs. For the purposes of the orders I will make, the costs of the application before the associate judge and the appeal to a judge are to be regarded, whether or not it is the case, as incurred before 12 April 2012.

1. Balancing all of the matters that I have identified from a broad holistic perspective, I will order that:

(a)Mr Smith pay Mr Gould’s costs of and incidental to the applications for the interlocutory injunction to be taxed as between party and party.

(b)Mr Smith pay Mr Gould’s costs of the proceeding, other than costs subject to prior costs orders and the costs of the injunction, such costs to be taxed on a party and party basis, limited to 50% of the taxed costs up to and including 12 April 2012 and thereafter limited to 75% of the taxed costs.

1. Mr Gould submitted that I should act pursuant to r 63.07(a)(iii) and order that he be entitled to a gross sum specified in the order instead of taxed costs. In Sunland Waterfront (BVI) Ltd & Anor v Prudentia Investments Pty Ltd & Ors (No 3),[18] Croft J was invited to make such an order. Although his Honour declined to do so, he did facilitate a process whereby a whole gross sum costs order might be made by the costs court referring to that court all aspects, both procedural and substantive, of that process with a view to such an order ultimately being made.

   [18][2012] VSC 399.

1. Order 63.07 of the Rules provides:

(2)Where the Court orders that costs be paid to a party, the Court may then or thereafter order that as to the whole or any part of the costs specified in the order, instead of taxed costs, that party shall be entitled to:

(i)        ...

(ii)       ...

(iii)      a gross sum specified in the order instead of taxed costs;

(iv)a sum in respect of costs to be determined in such manner as the Court directs.

Croft J appears to have proceeded under sub-rule (iv) effectively facilitating a gross sum costs order at the sum to be determined and specified by the costs court.

1. Given that I have acted under r 63.07(2)(a) and ordered that a portion of taxed costs be recovered by the defendant, there is not material before me that would enable me to specify a gross sum that reflected those proportions by an order. Mr Smith, who apparently had no notice that such an order might be sought, made no submission about it. Unlike the court in Sunland, I have no evidence before me that provides an appropriate basis to exercise a discretion under the rule and I am not persuaded that it is appropriate to do so.

1. Finally, I refused Mr Smith’s application for a stay of 28 days on the discharge of the injunction to preserve in part the subject matter of a proposed appeal for the following reasons. The injunction was first ordered by consent by Habersberger J on 1 February 2006. It affected 23 named artworks. When the order was made by consent no undertaking as to damages was given to the court. That circumstance was unexplained. Although the order of 1 February 2006 operated until further order, an order in the same terms was made by consent by Kellam J on 16 May 2006. Again, no undertaking as to damages was given to the court.

1. By his amended statement of claim, Mr Smith sought orders and declarations that he receive as part of his entitlement the same 23 works of art that were the subject of the restraint. Although pleaded, that claim was not specifically addressed at trial in  evidence or submissions. Further, counsel before me did not articulate any proposed ground of appeal that might warrant an order continuing to restrain any dealings in those particular works of art pending resolution of the appeal. Additionally, counsel was not in a position to give the usual undertaking as to damages.

1. Notwithstanding that the trial had been conducted in this way, Mr Smith contended that a large proportion of the value of the divisible pool was stored in those artworks and they were artworks of particular importance to Mr Smith, having a sentimental value beyond their commercial value. Secondly, Mr Smith contended that artworks ‘can be rolled up and put in a postpak and sent overseas’. As I have noted, the only sense in which a sentimental value in artworks was expressed by Mr Smith was in the concept of the Gould Smith Collection and at no stage did he assert any other form of sentimental attachment. Rather, it was submitted that the transfer to Mr Smith of artworks from Park Street in satisfaction of the adjustment to which he was entitled could be ordered to avoid any problems associated with the realisation of the artworks, including any liability for GST.

1. I am not satisfied that there was at trial, or now is, evidence of any risk that artworks may be rolled up in a postpak and sent overseas. In all other respects Mr Gould will be fully conscious that, should Mr Smith succeed on an appeal, he may have to account for the proceeds of any sales. In the absence of any particular ground of appeal relevant to seeking relief affecting the artworks in specie, with no evidence of irreparable harm, and without an undertaking as to damages being proffered, I am satisfied that Mr Gould is entitled to the benefits of the judgment and that the disposition with the lesser risk of injustice was to refuse a stay in relation to the discharge of the injunction.

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