TGM Civil Pty Ltd v Resourceco Pty Ltd (No 2) - [2008] SADC 109

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
TGM CIVIL PTY LTD v RESOURCECO PTY LTD (No 2)
[2008] SADC 109
Judgment of His Honour Judge Chivell
20 August 2008
PROCEDURE - COSTS
Order for costs on indemnity basis - difference between indemnity costs and costs on a solicitor/client basis - 6DCR264(5)(a) and (b) - "Calderbank" letter - Offer to consent to judgment pursuant to DCR41 - plaintiff's claim without merit
Costs orders against persons not parties to proceedings - exercise of discretion
District Court Act 1991 s42(1), referred to.
Vestris v Cashman (1998) 72 SASR 449; Knight v F P Special Assets Ltd (1992) 174 CLR 178; Colgate Palmolive Co and Another v Cussons Pty Ltd (1993) 118 ALR 248; Pirrotta v Citibank Ltd and Others (1998) 72 SASR 259, applied.

TGM CIVIL PTY LTD v RESOURCECO PTY LTD (No 2)
[2008] SADC 109

On 6 May 2008, I entered judgment for the defendant following the publication of my reasons for decision [2008] SADC 53.
The defendant has applied for its costs of action against the plaintiff company, and against its directors, Kirsten Jane Morbidelli and Tonino Guiliano Morbidelli personally on the following alternative bases:
1.That the defendant have its costs of the proceedings on an indemnity basis.
2.In the alternative, that the defendant have its costs of the proceedings on a solicitor-client basis.
Parties Liable to Pay Costs
Section 42(1) of the District Court Act, 1991 provides:
..... costs in any proceedings in the Civil Division will be in the discretion of the Court and may be awarded against any person (whether a party or a witness to the proceedings or not).
Kirsten Jane Morbidelli and Tonino Guiliano Morbidelli were joined as parties to the action after judgment was delivered.
Mr Slattery QC, counsel for the defendant, made it plain that his client, the defendant, did not rely on the joinder for the purpose of considering this application, however, and accepted that:
We should still meet the test of s42 and that, therefore, we should proceed today ..... as if a non‑party was being asked to pay costs.
(T3)
I indicated that I would deal with the matter on that basis.
Mr Slattery argued that both Mr & Mrs Morbidelli had a role in the commencement and maintenance of the action, and both stood to benefit personally if it was successful. He argued that during the period that the action was maintained, the plaintiff was essentially insolvent, and both of them financed the proceedings through loans to the company, or forbearance from collecting money owed to one or the other of them. Mr Morbidelli conceded as much (T423), and so did Mrs Morbidelli (T613-4).
On the evidence before me, Mr Slattery’s submission that the litigation could not have survived without the decisions of Mr & Mrs Morbidelli to financially sustain the company during that period must be accepted.
It is equally true that both Mr & Mrs Morbidelli stood to gain financially if the litigation was successful. The loans to the company could have been repaid, the debts and outstanding salaries could also have been repaid, and Mr Morbidelli’s equity in the company would have increased substantially.
Further, it is also true from that evidence that Mr & Mrs Morbidelli had a determinative role in the decisions made to continue the litigation, and, implicitly, to imprudently reject the offers of settlement made by the defendant.
The Relevant Principles
In Vestris v Cashman (1998) 72 SASR 449 at p467, Lander J examined the way in which the discretion vested by s42 should be exercised. The following principles emerge:
·the circumstances in which it is just to order costs against a person who was not a party to the litigation will be rare and exceptional;
·there must be a connection between the party to the litigation and the non‑party of a kind that makes it just to order costs against the non‑party;
·it is not necessary to demonstrate improper conduct on the part of the non‑party before such an order can be made. If there has been improper conduct by the non‑party, then, of course, that is a factor relevant to the exercise of the discretion; and
·the following factors might be relevant to the exercise of the discretion:
-       whether the non‑party could have been joined as a party earlier in the proceedings and thereby obtained the protection of the rules of court;
-       whether the non‑party had any warning that an application for costs against that party would be made;
-       whether the non‑party could have applied to be joined in the proceedings and thereby had the capacity to influence the proceedings or protected itself by making an offer;
-       whether the non‑party could have terminated the proceedings if a warning had been given;
-       whether the party to the litigation can meet an order for costs and, if not, why it cannot, and whether, and if so when, that became apparent;
-       whether the moving party should have sought an order for security for costs;
-       the nature of the relationship between the party who would usually be liable for costs and the non‑party;
-       whether the non‑party has caused the proceedings;
-       whether the non‑party has funded the proceedings;
-       whether the non‑party stood to benefit from the litigation and if so, how;
-       whether the non‑party had a direct or indirect financial interest in the litigation; and
-       whether there has been any improper conduct on the part of the non‑party.
His Honour commented that none of these factors will necessarily be decisive, and an order will only be made if the justice of the case requires it. His Honour referred to a number of cases where non‑party directors/shareholders and others were made liable for costs where it was shown that they were managing the litigation. At p468, his Honour quoted a passage from Knight v F P Special Assets Ltd (1992) 174 CLR 178 per Mason CJ and Deane J at p192-193:
For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non‑party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non‑party has played an active part in the conduct of the litigation and where the non‑party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non‑party if the interest of justice require that it be made.
It seems to me that the circumstances of this case reflect quite accurately that description. Some additional factors emerge from the evidence.
Applications for Security for Costs
On two occasions the defendant sought orders that the plaintiff provide security for costs. On 30 January 2003, Master Norman refused the first application on the ground that if the plaintiff’s financial position was caused by the defendant, as it contended, then it would be unfair to prevent it from litigating the matter.
On 5 May 2006, Master Norman again refused a similar application, saying:
On its face (i.e. on the face of Mr Morbidelli’s affidavit FDN60), it is clearly arguably made out that the present situation of the plaintiff is attributable to the actions of the defendant in terminating the agreement between the parties, which is the issue for determination in the action.
(Reasons, p11)
I have read FDN60, and it sets out the financial position of the plaintiff. It does not demonstrate to me that this position was attributable to the actions of the defendant.
To the extent that the learned Master drew those inferences from his knowledge of the history of the action and the pleadings, he was misled. The documentary evidence at the trial clearly proved that it was not the defendant, but CSR, who terminated the agreement (see Exhibit D27), and the subsequent correspondence with CSR representatives indicates that Mr Morbidelli was well aware of that fact. If the learned Master had been aware of that, I doubt that he would have held that the proposition outlined above was “clearly arguable”.
I conclude that these applications for security for costs clearly put Mr & Mrs Morbidelli on notice that this defendant was holding them personally responsible for the litigation on the basis that it suspected that the plaintiff was insolvent. It is not possible for Mr & Mrs Morbidelli to now argue that they were not aware that they were personally at risk from the litigation.
Warning of Present Application
By letter, dated 23 July 2007, the defendant’s solicitors gave notice to Mr & Mrs Morbidelli of the application pursuant to s42, and gave detailed reasons in doing so. The letter was written within days of the evidence justifying the application having been elicited in cross-examination during the trial. Although Mr O'Brien, counsel for the plaintiff, submitted that this notice was belated, and that by that time his client was “locked in”, it is difficult to see how the evidence could have been elicited earlier. Mr & Mrs Morbidelli were not parties to the action, and could not have been called upon to disclose their financial position prior to being cross‑examined at the trial. In the latter application for security for costs, the affidavit evidence concerned the financial position of the plaintiff, and the learned Master specifically commented on the fact that there had not been complete disclosure of Mr & Mrs Morbidelli’s personal financial position (Reasons, p12).
Earlier Joinder
I do not see how it would have been possible to apply to join Mr & Mrs Morbidelli as parties to the action earlier than was done. From the position of the defendant, where there were no counterclaims or third party proceedings, there were no grounds for doing so.
Choice to Terminate
The passages in the evidence of Mr & Mrs Morbidelli referred to above make it clear that they both agreed to institute and continue the proceedings, to fund the proceedings, and they would have derived a direct financial benefit if the proceedings had been successful. It was their joint decision to reject the offers of settlement made by the defendant. In doing so, they were acting as if they were parties to the proceedings and could have chosen to terminate them at any stage.
Mr O'Brien submitted that, particularly in relation to Kirsten Morbidelli, it would not be just to order her to pay costs because she did not control the plaintiff, she did not take part in the discussions between Mr Morbidelli and Mr Brown, and had no independent knowledge of the relevant facts.
In my view, that submission is a little disingenuous. Mrs Morbidelli financed the litigation to the tune of several hundred thousand dollars, and the litigation would not have been possible if she had not. To that extent she was in control. Further, if she chose to blindly accept her husband’s word for what happened, in the face of clearly contradictory objective evidence, then it is just that she should be personally liable for the costs of the action.
Similarly, the submission that she was in “no different a position than (was) any other creditor of TGM Civil” is disingenuous. The other creditors were not consciously financing the litigation.
Conclusion
For all of the above reasons, I conclude that it is just and equitable to order that, pursuant to s42 of the District Court Act, the award of costs in favour of the defendant be against the plaintiff, TGM Civil Pty Ltd, Tonino Guiliano Morbidelli and Kirsten Jane Morbidelli.
Costs on an Indemnity Basis
Mr Slattery based his argument that the discretion should be exercised to grant indemnity costs based upon three factors:
·the exceptional nature of the proceedings;
·the “Calderbank letter” to the plaintiff’s solicitors, dated 18 December 2006; and
·the Rule 40 offer, dated 25 June 2007.
The Nature of the Proceedings
The proceedings were issued in 2002. Since then, there have been protracted interlocutory proceedings, including applications for security for costs, applications to strike out pleadings, and various other matters. Unfortunately, this process did not result in a cohesive and well‑structured set of pleadings, from the plaintiff’s point of view, as I observed on several occasions in the judgment.
In very brief summary, the plaintiff’s claims were ultimately in contract, misrepresentation, and estoppel. The plaintiff was unsuccessful at all levels. After 1 July 1999, no contract between the plaintiff and the defendant was proved, no misrepresentations were proved, no estoppel was established. Even if there had been a contract, no breach of it by the defendant was proved. Even if a breach was proved, no damage arising from the breach was proved.
Effectively, the plaintiff’s case was held to have been based upon a complete misunderstanding by Mr Morbidelli, the managing director and sole shareholder of the plaintiff, of the relationships between various parties involved. In other respects, Mr Morbidelli’s evidence was not preferred to that of witnesses for the defendant.
Mr Slattery described the plaintiff’s case, accurately in my judgment, as “doomed from the start”.
The “Calderbank Letter”
This letter, dated 18 December 2006, from the defendant’s solicitors to the plaintiff’s solicitors is relevant in two ways.
Firstly, the letter put the plaintiff on notice about the defects in its case. In part, it reads:
On our instructions, the allegations made by your client are not only misguided, but inherently unlikely. On our instructions, your client should, at least, have been put on enquiry and sought clarification and confirmation in writing before proceeding to rely on such representations (as alleged and which are denied) to its detriment.
The letter then went on to draw the plaintiff’s attention to the difficulties it faced in proving damage as well.
In relation to both liability and quantum, the defendant’s solicitors’ predictions proved correct. In my view, if an appropriate advice on evidence was taken prior to the trial, the plaintiff’s claim had no reasonable prospect of success.
Secondly, the letter conveyed a “risks” offer to pay $125,000 inclusive of costs and interest. The offer remained open for 14 days. The author wrote:
This letter is prepared by reference to the principles of Calderbank v Calderbank [1975] 3 All ER 333, and District Court Rule 40.
The letter gave notice that if the offer was not accepted, then an offer would be filed pursuant to DCR41. Clearly, this was a slip. The relevant Rule, in the 1987 Rules, was Rule 40.
The letter does not explicitly state that if the offer was refused, the defendant would claim indemnity costs in the event that the defendant was ultimately more successful. However, Mr Slattery argued that such a notice was inherent from the reference to the Calderbank case, since that case notoriously involved a claim for indemnity costs. I accept that.
The DCR40 Offer
By notice dated 25 June 2007, the defendant filed an offer to consent to judgment pursuant to DCR40 to pay to the plaintiff $98,959.93 inclusive of interest plus costs of the action to be agreed or taxed. No doubt the offer was expressed differently than that in the Calderbank letter because of the decision of Judge Lunn, in Waller and Waller v Flinders Medical Centre and Burns (No 4) (2004) 233 LSJS 438, that an offer inclusive of costs did not comply with DCR41. Having regard to what had transpired since the action commenced, this was a much more generous offer than that contained in the Calderbank letter.
The trial commenced on 16 July 2007.
The Relevant Principles
In Colgate Palmolive Co and Another v Cussons Pty Ltd (1993) 118 ALR 248, Sheppard J undertook an extensive survey of the law relating to costs. At p256-7, His Honour wrote:
It seems to me that the following principles or guidelines can be distilled out of the authorities to which I have referred:
1.The problem arises in adversary litigation, ie litigation as between parties at arm’s length. Different considerations apply where parties may be found to be entitled to the payment of their costs out of a fund or assets being administered by or under the control of a trustee, liquidator, receiver or person in a like position, eg a government agency or statutory authority.
2.The ordinary rule is that, where the court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis. In this court the provisions of O 62, rr 12 and 19, and the Second Schedule to the rules will apply to the taxation. In many cases the result will be that the amount recovered by the successful party under the Order will fall short of (in many cases well short of) a complete indemnity.
3.This has been the settled practice for centuries in England. It is a practice which is entrenched in Australia. Either legislation (perhaps in the form of an amendment to rules of court) or a decision of an intermediate Court of Appeal or of the High Court would be required to alter it. No doubt any consideration of whether there should be any change in the practice would require the resolution of the competing considerations mentioned by Devlin LJ in Berry v British Transport Commission and Handley JA in Cachia v Hanes on the one hand and by Rogers J in Qantas on the other. The relevant passages from the respective judgments have been earlier referred to.
4.In consequence of the settled practice which exists, the court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here on in England. The tests have been variously put. The Court of Appeal in Andrews v Barnes (39 Ch D at 141) said the court had a general and discretionary power to award costs as between solicitor and client “as and when the justice of the case might so require”. Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v Preston ([1982] 1 All ER at 58) namely, there should be some special or unusual feature in the case to justify the court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or departure from the usual rule. But as French J said (at 8) in Tetijo: “the categories in which the discretion may be exercised are not closed”. Davies J expressed (at 6) similar views in Ragata.
5.Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J‑Corp); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Kent (SC(NSW)(CA), 27 Sept 1993, unreported) and an award of costs on an indemnity basis against a contemnor (eg Megarry V‑C in EMI Records). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.
6.It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice.

Mr Slattery argued that two of the factors referred to in paragraph 5 quoted above are applicable here, namely that the proceedings were commenced or continued “in wilful disregard of known facts or clearly established law”, and that there has been an “imprudent refusal of an offer to compromise”.
As to the first factor, at p255 of Colgate Palmolive Sheppard J quoted French J (as he then was) in J‑Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers - Western Australia Branch and Others (1992) 111 ALR 377 as follows:
Although there is said to be a presumption in such cases that the action was commenced or continued for some ulterior motive or in wilful disregard of known facts or clearly established law, it is not a necessary condition of the power to award such costs that a collateral purpose or some species of fraud be established. It is sufficient, in my opinion, to enliven the discretion to award such (indemnity) costs that, for whatever reason, a party persists in what should on proper consideration be seen to be a hopeless case.
In Pirrotta v Citibank Ltd and Others (1998) 72 SASR 259, Debelle J described the divergence of judicial views in Australia to the significance of a Calderbank letter (p264):
Decisions in Australian courts on the effect of an offer in a Calderbank letter fall into two broad groups. Decisions in the first group hold that the letter can be taken into account for the purpose of determining whether a special order should be made displacing the ordinary rule that costs will follow the event and will be taxed on a party and party basis. The second group go further and hold that there should be a prima facie presumption that the party rejecting the offer should pay the costs of the other party on an indemnity basis from the date of the making of the offer.
His Honour concluded, at p267:
Fourthly, until the matter is fully argued, I think the approach should be that the writing of a Calderbank letter should be one of the factors, albeit a significant factor, to be weighed by a court when considering whether to order indemnity costs. I do not think that the complexity of litigation standing alone should necessarily preclude the operation of the rule. The rule is designed to promote settlement of both complex and straightforward litigation and the court will have regard to all relevant circumstances in determining whether the penalty rule as to costs should apply.
These principles are now enshrined in 6DCR263(3) which states:
In exercising its discretion, the Court may (subject to any other relevant rule) have regard to any offer to consent to judgment or other attempt to settle the action or an issue involved in the action.
Mr O'Brien argued that it is only in exceptional cases that costs should be awarded on an indemnity basis. He submitted that the plaintiff failed simply because Mr Morbidelli’s evidence was not preferred to that of Mr Brown, the principal witness for the defendant.
This submission overlooks, in my opinion, the following factors:
·as was pointed out in the Calderbank letter, Mr Morbidelli’s evidence was inherently unlikely and did not accord with much of the objective evidence such as the written agreement between the defendant and CSR;
·on the basis of the plaintiff’s own documentation, it was not the defendant, but CSR, who terminated the relationship between the plaintiff and CSR, the alleged breach of contract; and
·on the basis of the plaintiff’s own documentation, it could not prove damage.
In my opinion, the commencement and continuation of these proceedings was unreasonable, and the rejection of the defendant’s offer to settle was extremely imprudent. This was, to use the words of French J, a hopeless case. To that extent, I accept Mr Slattery’s submission that the proceedings were exceptional.
In those circumstances, it is appropriate to depart from the general rule that the unsuccessful party should pay costs on a party‑party basis.
The defendant has sought costs on an “indemnity” basis, rather than as between solicitor and client.
Rules 6DCR264(5)(a) and (b) define these two concepts as:
·solicitor/client costs means that “the party will be fully reimbursed for costs reasonably incurred by the party in the conduct of the litigation”; and
·indemnity costs means that “the party will be fully reimbursed for costs incurred by the party in the conduct of the litigation except to the extent that the party liable for the costs shows them to have been unreasonably incurred”.
The learned author of Lunn, “Civil Procedure in South Australia”, at [6R263.5.50], suggests that the two concepts are now the same. That appears to be true, except that the onus of persuading the Master that a particular item of costs was reasonably incurred falls upon the moving party in the case of solicitor/client costs, and on the party liable to pay in the case of indemnity costs. In this case, having regard to the way the case was conducted, in my view, the onus of persuasion should be on the plaintiff.
Conclusion
In all the circumstances, I award the entire costs of the action in favour of the defendant on an indemnity basis. It is appropriate that this order applies to the entire costs of the action, rather than from a date which arises from the Calderbank letter on the Rule 40 offer, because the proceedings were exceptional, in the way I have described, from the start. I would have exercised my discretion in this way even if neither of these subsequent steps were taken by the defendant.