WARNER & WARNER - [2017] FamCA 370

FAMILY COURT OF AUSTRALIA

WARNER & WARNER

[2017] FamCA 370

FAMILY LAW – PRACTICE & PROCEDURE – Adjournment – where the applicant wife seeks an adjournment because investigations about tax issues are incomplete – where the husband opposes the adjournment – where adjournment granted based on the greater prejudice to the wife.

FAMILY LAW – PRACTICE & PROCEDURE COSTS – where the husband seeks costs of the adjournment beyond scale – where wife seeks that costs be reserved – where an order should be made beyond scale but not on an indemnity basis.

FAMILY LAW – PRACTICE & PROCEDURE COSTS – Costs stay – where the wife seeks a stay of payment of costs pending final hearing – where circumstances do not justify a stay.

Family Law Act 1975 (Cth), ss 117, 117(1), 117(2A)
Family Law Rules 2005 (Cth), sch 3

Aon Risk Services Australia Limited v Australian National University [2009] HCA 27
Colgate-Palmolive Co v Cussons Pty Limited [1993] FCA 536; (1993) 118 ALR 248
Kohan and Kohan (1993) FLC 92-340
Prantage & Prantage [2013] FamCAFC 105

APPLICANT:

Mr Warner

RESPONDENT:

Ms Warner

FILE NUMBER:

MLC

4064

2016

DATE DELIVERED:

30 May 2017

PLACE DELIVERED:

Melbourne

PLACE HEARD:

Melbourne

JUDGMENT OF:

Cronin J

HEARING DATE:

29 May 2017

REPRESENTATION

COUNSEL FOR THE APPLICANT:

Mr Kearney SC and Ms Vohra

SOLICITOR FOR THE APPLICANT:

Taussig Cherrie Fildes

COUNSEL FOR THE RESPONDENT:

Mr Bartfeld QC and Mr Werner

SOLICITOR FOR THE RESPONDENT:

Gadens Lawyers

Orders

The wife pay the husband’s costs thrown away for the hearing on 29 May 2017 fixed at $26,000.00.

Note: The form of the order is subject to the entry of the order in the Court’s records.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Warner & Warner has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

Note: This copy of the Court’s Reasons for Judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to r 17.02 Family Law Rules 2004 (Cth).

FAMILY COURT OF AUSTRALIA AT MELBOURNE

FILE NUMBER: MLC 4064 of 2016

Mr Warner

Applicant

And

Ms Warner

Respondent

REASONS FOR JUDGMENT

On 29 May 2017, Ms Warner (the wife) sought an adjournment of her application to set aside a financial agreement executed with Mr Warner (the husband) in December 2005. The adjournment was opposed by the husband.
29 May 2017 was to have been the first day of the final hearing but after hearing argument, I adjourned the proceedings to 31 July 2017 and indicated I would give written reasons for that decision. These are those reasons along with the reasons for making a costs order in favour of the husband over opposition from the wife.
It is sufficient to say that the wife’s substantive application seeks to set aside the financial agreement relying on three grounds which are in essence:
a)That to enforce the agreement would be contrary to public policy;
b)That by their conduct, the parties abandoned the agreement; and
c)That in any event, the terms of the written agreement would cause the wife and the children hardship.
Discovery in this case has been a disputed issue and its extent remains so. Earlier in May, I made orders relating to disclosure by the husband of some documents but also denied the wife’s application relating to others. The Husband’s submission is that the adjournment application was an endeavour to go behind the disclosure orders. The wife denies that but it must be acknowledged that her application was at least connected to the discovery issue.
Mr Bartfeld QC for the wife submitted that there were a number of less-significant matters that caused the wife concern about the adequacy of discovery that underpinned his application for the adjournment but it is not necessary for me to detail them here. Suffice to say, I agree with Mr Bartfeld that they are not the most important of matters and had the application been made on those alone, I would not have granted the adjournment. That is largely so because of the discrete nature of the parameters of the substantive dispute defined by the parties’ written contentions.
The substance of the wife’s application for the adjournment was that, having received the husband’s written evidence only on the Friday before the Monday starting day, a concern had arisen as to whether or not she might be liable for tax (and one might interpolate that to mean substantial tax) as a result of the activities of a specific trust.
Notwithstanding that both parties had used the same accountant throughout their relationship, Mr Bartfeld described the issue as one of suspicion for the wife whilst at the same time acknowledging that she had no idea as to whether or not there was a possibility of a problem in the future. Whilst it is said by the husband that there is no evidence presented by the wife about this speculation, it seems to me that it is that evidence that she is endeavouring now to seek.
The essence of the problem seems to be that over a number of years, the relevant trust of which the wife was not only a beneficiary but apparently also a (if not the) director of the trustee, earned substantial gross profits. As I remarked in the hearing, it was perhaps unusual that there were no distribution statements of the trusts provided in the written evidence. Whilst acknowledging that the onus lay with the wife, nothing was said about the issue by the husband other than that to which I turn in a moment. Interestingly, both parties had filed the same financial statements of this trust and no complaint had been made by the wife about the absence of any income or profit distribution statement.
Mr Bartfeld also submitted that the accounting firm responsible for the drawing of all of these taxation documents was the husband’s accountant and the wife did not have confidence in seeking advice from them. That said, she had not sought alternate advice other than from her legal practitioners. She now seeks to have an accounting professional examine the tax issue.
Over a number of years of the parties’ relationship, the relevant trust showed the gross profit in the profit and loss statement. The financial documents provided to the court also showed a balance sheet in which the wife was shown as creditor of the trust, she being owed a large sum which continued to increase until about 2015.
In a case where, in 2005, by the language of their financial agreement, the parties had agreed to keep their legal and equitable entitlements to property separate, the husband’s explanation for these trust activities was as follows:
[32]At the time, I had credit loan accounts in various companies that I owned or controlled which, if [one] arm of the business ([B Pty Ltd]) was subject to legal action, exposed me to risk.
Later in the same evidence (at [34]), the husband said that in 2009, 2010 and 2011, he and the wife entered “Deeds of Gift” with respect to these funds (presumably referring to the loan accounts referred to in [32] mentioned above) but on 29 October 2015, they entered “Deeds of Gift” under which the wife “returned” to the husband “the loans gifted… and the Unpaid Beneficiary Entitlements”. (my emphasis)
Mr Bartfeld described the 2015 period as one in which the marriage was in trouble.
In language that needs a more comprehensive explanation, the husband’s evidence about why the wife was involved in the trust at all was:
[33] To minimise the risk, the credit loan accounts and various inter-entity loan accounts were directed through (the relevant trust) and then gifted to (the wife). Non-taxable distributions (comprising discounted portion of capital gains on property sales) were also made to (the wife), creating an unpaid beneficiary entitlement in (the wife’s name). (again my emphasis)
By 2015, the trust declared an unsecured liability in its balance sheet under the heading of “Current Liabilities” as follows:
“Beneficiary loan: (the wife’s name) $9,307,079.94
But that same balance sheet also showed “Non-Current Liabilities” including a debt to the wife of over $12million.
I have not had the benefit of hearing the evidence nor of comprehensive argument but the financial statements would seem to indicate that the loan accounts to which the husband referred (at [32] of his affidavit) relate to the $12 million but just what these “loans” were that ultimately made up the $9 million remains confusing, at least to me.
Mr Kearney SC for the husband submitted that there was no evidence of any distribution to the wife in any of the financial documents such as would give rise to a tax liability and that each of the accruing annual sums was a loan. When the evidence is examined more closely, that may very well be correct but I granted the adjournment on the basis that the wife now wants to investigate these issues. Why this was not done earlier is a matter to which I return below.
My uncertainty about Mr Kearney’s submission that these were loans not distributions relates to the husband’s descriptions of “unpaid beneficiary entitlements” as well as how the wife could make loans in the first place. As Mr Bartfeld submitted, how could she make a “loan” back to the trustee of money that had not been distributed to her? I remain unsure whether Mr Kearney’s submission addresses the husband’s evidentiary reference to the “not taxable distributions” I mentioned in [14] above.
During argument, I suggested that the parties should sort out the uncertainty by contacting the accountant notwithstanding any mistrust by the wife. That resulted in an email being provided (not tendered in evidence) that said that these amounts did not attract tax because of the discounts arising from the 50 per cent rules relating to capital gains tax. But that concept is also confusing because it suggests that there were distributions but that they were not ultimately taxable because of the relevant discounts. That may be correct and that the wife left them in the trust by way of a loan back to the trustee.
There are then some deeds which I have mentioned were executed in 2015 that do indicate that the wife then gifted the entitlements she had as a creditor of the trust, back to the husband.
During the lunch break in the hearing, the wife obtained her own taxation returns from the same accountants and indeed, no reference appears to any distributions at least by way of income in her hands.
Mr Kearney submitted that regardless of all of this, it would make little difference to the outcome of the substantive proceedings. He pointed to the wife’s own description of her entitlement if she is successful in obtaining an order under s 79 of the Act. That would only arise if the agreement was not a jurisdictional hurdle. She suggested that she should then be receiving about 12 per cent of the husband’s property (or property presumably under his control).
The difficulty with all that lies in the possibility of the Taxation Commissioner coming back at the wife later in any event. No inquiries had been made by the wife about that possibility. Mr Bartfeld submitted that if the wife had to pay a substantial portion of tax on what he described as these distributions, she would be “bankrupt” and as such the hardship provisions justifying a setting aside of the agreement would be more an issue.
Mr Kearney relied upon the absence of evidence about any tax liability and any distributions but the trust.
These matters are confusing and unclear. As the wife wanted to investigate further, my view in granting the adjournment was that she should have that opportunity so that the court might be better appraised of the correct financial position particularly because of the third ground of her application.
That then leads to the question of why this was not done before now. As Mr Kearney submitted, the wife had all of the necessary information at least in and after March 2017. He submitted that this was an example of the wife endeavouring to delay the proceedings. On what I have read and been told, I cannot find there has been deliberate obfuscation by the wife nor that this application was some form of delaying tactic as, apart from the ongoing financial obligations of the husband under interim orders (which he understandably wishes to end) and the obvious stress of litigation, the evidence does seem unclear from the perspective of both parties. Having regard to the nature of at least one of the grounds of the wife’s application, this uncertainty about not just the tax but also the correct description of distributions or loans is concerning.
It is important to return to the point earlier mentioned about the lack of investigation by the wife which was a significant plank of the husband’s opposition to the adjournment.
All of the relevant documents relating to the background of the transactions relating to this trust were disclosed by the husband in a letter from his solicitors to the wife’s solicitors in March 2017. That letter made reference to the gift issue and a deed of exclusion which removed the wife as a beneficiary of the trust. The wife therefore knew she had been a beneficiary.
The financial statements of the trust should also have been accessible by the wife not only from the husband but also from the accountant because of her former position as director of the trustee. The documents to be tendered into evidence include at least one trust minute which she is said to have signed. As I understand her position, the wife says that she signed what the husband required of her. There is, in evidence, an email between the wife and an employee of the husband relating to the trust in which the wife remarked that she did not know of the existence of the trust. Even so, by March 2017, having known of the structure that the husband was using, even if it was just somehow under her name, should have prompted her pursuing the professionals responsible for the management of the documentation.
Mr Bartfeld submitted that whilst there might be said to be “corporate” failure after March 2017, there were many things going on. Apart from the financial matters, the parties also had litigation in relation to the issues associated with their children. I made final orders with their consent on 29 May 2017 ending those issues. Mr Bartfeld observed that he only saw the husband’s material on the Friday before the hearing was due to commence. No suggestion was made, nor was there any complaint, that the husband was late in relation to that filing arrangement. Nor could there be because the filing and service of those documents was a matter in the parties’ control.
Discovery had been a very significant issue in this case as was evident from the fact that I determined a complicated dispute at the beginning of the month of May. Part of the focus of that hearing was on the relevant trust and in particular, distributions from it. One general argument of the husband in discovery was that these assets were under the control of the wife and therefore not matters for which he had a disclosure obligation. Another was that having regard to the contentions filed by both parties, they were not relevant.
Thus, for some weeks now, these financial issues have been the parties’ focus and it is puzzling why the uncertainty about the tax issue arose as late as it did. Be that as it may, it did and on balance, I consider the wife should have the opportunity to investigate it because of the possibility (even if it is remote) of significant financial consequences to her.
In contemplating whether to adjourn a case which is at the point of trial as it is here, the court has to contemplate three different positions. They are those of the respective parties but thirdly, that of the court.
In Aon Risk Services Australia Limited v Australian National University [2009] HCA 27, French CJ (reflecting the attitude of the plurality) said of the argument that justice should be the primary focus:
[30]………….. Also to be considered is the potential for loss of public confidence in the legal system which arises where a court is seen to accede to applications made without adequate explanation or justification, whether they be for adjournment, for amendments giving rise to adjournment, or for vacation of fixed trial dates resulting in the resetting of interlocutory processes.
French CJ went on to say about the waste of court resources (a subject to which I return below):
[35]It might be said that the adjournment effected by the primary judge's decision to entertain the amendment application and to allow written submissions to be filed and evidence to be put on, and the subsequent delay in his decision, rendered academic any concern about further waste of court resources or inefficiencies flowing from the amendment ultimately being allowed. It might be said that, in those circumstances, to refuse the amendment would be punitive. It is true that a punitive response to the substance of a late amendment application is not appropriate. But neither is a party to be rewarded by weighing in its favour the disruptive consequences of its own application. ……………… The further delay, in the circumstances of this case, would be such as to undermine confidence in the administration of civil justice… (my emphasis added)
Turning back to how each of the parties put their positions, the husband referred to the prejudice to him in inter alia , his ongoing financial obligations under court orders. Because of what I consider to be the relatively short period of the adjournment and an order for costs thrown away, his position is to an extent ameliorated.
The prejudice to the wife, albeit she may have contributed to her own problem, is much greater. If she is entirely unsuccessful in her substantive application, she will be bound by the financial agreement and receive $1.5 million. If there is a significant tax impost, on the assumption (and that is all it is) that if distributions were made to her of the magnitude of even $2 million per year, much of her $1.5 million entitlement would evaporate.
There is some substance to the submission of Mr Bartfeld, and which contributes to my unease, that the husband brushes aside the tax issue. As Mr Bartfeld put it, distributions of the magnitude contemplated here attracting no tax would be unusual. That is, the wife’s position was that somehow, the husband’s advisers had come up with a way of avoiding having to pay tax. Whilst that should have been investigated long before now, I consider on balance, it is a significant matter of justice that the wife, who relies on her advisers, should be allowed to undertake investigations.
The third consideration is that of the court and the public purse. Here, acknowledging what French CJ said in AON (supra), there was little inconvenience to the court because there were other matters ready to be dealt with. No prejudice is caused to any other litigants even allowing for the adjournment giving rise to two more days being set aside for the hearing because the list of cases would not enable me to get something else ready in that timeframe.
Mr Kearney submitted that if there was to be an adjournment, it should come not only with a costs order but also with orders for the discharge of the husband’s on-going financial obligations. One such obligation is the restriction on his sale of certain assets including the premises in which the wife and children are living. Because of the relatively short adjournment, the prejudice to the husband is modest particularly in the context to the delays to date some of which I acknowledge have been the problem of the Court. But there is also the question properly raised by Mr Bartfeld as to whether making such orders now would pre-empt the very question of the court’s ultimate determination. I consider the former is the basis upon which I should reject the husband’s request for orders he proposed.

The husband sought his costs effectively thrown away which were described as senior counsel’s preparation of $33,000.00, his contracted sum of $13,200.00, junior counsel’s contracted sum of $13,200.00 and the husband’s solicitor’s costs of $6,000.00. Those sums reflect the husband’s obligations to his legal practitioners only in respect of the time up to the day of the hearing because he had contracted for them to be involved in a three day hearing. No costs were sought beyond what I have just described.
The approach to making orders for costs is governed by statute. S 117 of the Act provides that in proceedings under the Act (save in circumstances not relevant here) each party shall bear their own costs. The exception to that arises where the court considers that there are justifiable circumstances to depart from the principle in s 117(1). If a court considers that applies, before making any order, it must consider the matters in s 117(2A). Those matters include the conduct of the proceedings, eligibility for legal aid, whether someone has been wholly unsuccessful and importantly here, the respective financial circumstances of the parties.
As can be seen however, in addition to arguing for a departure from the principle in s 117(1) of the Act, Mr Kearney also argued that the husband should have his costs according to what he was to be charged for the day in court and preparation for it (as distinct from the two days thereafter for which he had also contracted with his lawyers). In that regard, he was seeking an order beyond the scale in schedule 3 to the Family Law Rules but not quite to the point of complete indemnification.
Mr Kearney drew attention to the usual authorities including Colgate-Palmolive Co v Cussons Pty Limited [1993] FCA 536; (1993) 118 ALR 248. Kohan and Kohan (1993) FLC 92-340. For a court to make an order for indemnity costs, there must be a “very great departure” from the rule that scale costs should apply. The scale is there for a reason and thus, a departure from it must be seen as anything other than the norm.
In Kohan, while acknowledging there is a discretion “in an appropriate case” to make an order for indemnity costs, the Full Court of this Court also said, at 79,605:
(I)t is fundamental to the exercise of that discretion in the Family Court that the Judge should not only understand that such an order is a very great departure from the normal standard, but also that the Judge should know what the terms of the agreement are, to what extent it exceeds the parameters set by the scale and what its likely impact will be on the financial position of each of the parties. This impact is a relevant matter to which the trial Judge should have had regard, when considering the financial circumstances of each of the parties to the proceedings under s117(2A)(a), or perhaps even more as a relevant matter under paragraph (g). The degree to which a costs agreement departs from the established norm and the actual financial significance of such a departure may itself be a reason for not ordering costs on an indemnity basis.
Whilst I did not see the relevant costs agreements, there was no dispute about them and the description of the husband’s contractual arrangements indicates their extent. Mr Bartfeld did not insist the documents be tendered. I have however seen the wife’s costs spent to date and understand that she has incurred significant legal expenses. It is clear that neither party is contemplating engaging lawyers within the range advocated by the scale and each has specifically contracted out of it. That however is not a basis for the court to turn a blind eye to what the scale provides. As the Full Court in Prantage & Prantage [2013] FamCAFC 105 observed:
[110]……. we respectfully record our disagreement with the trial Judge’s statement ….. that if one party contracts to pay fees outside the prescribed scale they can “hardly complain” if costs are awarded against them at a level in excess of the scale. We consider that a party in that position could justifiably complain since, following the direction given by the Full Court in Kohan, they should have been advised that in the event they succeeded in the litigation and obtained an order for costs they should not expect to recover costs at the level they contracted to pay (and hence conversely could not expect to pay costs above the scale) unless there are grounds for departure from the usual rule.
I am unaware of whether the husband has been so advised but in respect of an adjournment where he otherwise had a legitimate expectation that his large expenditure on costs would at least see the conclusion of what is now a long-running dispute, he was entitled to think when he contracted with his practitioners for this specific hearing, he would not have lost that large sum of money without obtaining any result.
As Murphy J observed in Prantage:
[151]……….. the Act, the Rules read as a whole, and existing authority each evidence a clear intention that a significant disparity between the level of costs provided for in Schedule 3 and the fees payable by a client to their legal practitioner militates against an award of indemnity costs or, if the circumstances otherwise warrant such an order, operates as a brake on the quantum that might otherwise be awarded.
[152]Section 117(1) is important in that respect. Indemnity costs are confined to “an exceedingly rare situation” ……………. in jurisdictions where “the usual rule” is that a successful party receives an order for costs (i.e. “costs follow the event”). They might, then, be seen to be more so in this jurisdiction where the “usual rule” is that “each party ... shall bear his or her own costs” (s 117(1)). The comments by this Court in Kohan that indemnity costs are “a very great departure” from the “normal standard” should be seen in that context. That, it should be observed, is not a fetter on this Court’s discretion to award costs or indemnity costs if justice so requires it (see Oshlack v Richmond River Council[1993] HCA 11; (1998) 193 CLR 72, at 134 (particularly subpar [3]), per Kirby J). Rather it recognises that an order for indemnity costs, has a particular context in this jurisdiction.
Thus, the end result is that the court must be conscious of the clear principle in s 117(1) but also recognise that it must strive for a just outcome on the costs issue. For the reasons that follow, I consider that an award of costs other than the scale, but not indemnity costs, is appropriate.
Mr Bartfeld succinctly put the wife’s position on the basis that any issue of costs should be reserved. Perhaps in circumstances where there was a strong argument that the husband may have contributed to the wife’s dilemma, a reservation might be fair because a different position might appear at trial. Here, the only matter I consider relevant is that the wife did not investigate that which she should have and there was time for her to do so. Nothing I can find warrants criticism of the husband to date about that matter. The additional difficulty in reserving costs is also that a subsequent judge has to contemplate whether the circumstances immediately apparent to me now were such as to justify an order being made if the reserved costs are later pursued.
Mr Bartfeld submitted that reservation of costs was appropriate because:
·The husband has absolute control;
·There was a lot going on after March 2017;
·The wife’s financial position is substantially inferior to that of the husband.
Whilst it will ultimately be a matter of determination whether or not the husband has the absolute control described by Mr Bartfeld, I consider the more significant point is that which I earlier mentioned about the wife’s entitlement to access to documents. I accept that there was a lot going on after March but investigation is what professionals do. In respect of the wife’s financial position, I have little doubt there is a substantial difference with that of the husband but that alone does not justify a refusal of the husband’s costs. To do otherwise would enable litigants to conduct proceedings without concern for the wealthier litigant’s costs. In addition, the wife has engaged not just solicitors but senior counsel and two counsel. I therefore take into account that she has significant costs as well. Her financial statement shows that she has currently over $200,000 in savings.
In my view, the lack of investigation giving rise to the adjournment is a justifying circumstance to depart from the principle in s 117(1). Taking into account the matters mentioned which I consider adequately address the matters in s 117(2A) of the Act, an order should be made.
Costs are discretionary and it would be expensive, time-consuming and stressful for the parties to attend an assessment of costs. In my view, this is a case where the exercise of discretion, as well as justice, requires a determination now. I consider the scale costs do not adequately do justice to the husband because of his expectation of a conclusion. Whilst the husband is in a much stronger financial position than the wife, she is not impecunious nor will she be unless the tax debt she is concerned about crystallises. I take into account that the husband has contracted well beyond the scale and he also anticipated that this case would take three days. Those contractual obligations are apparently to be met and exceed what Mr Kearney sought. In my view that justifies a view that the husband should not be out of pocket significantly because of the wife’s unpreparedness.
Allowing some preparation time because of the complexity of the argument, the scale costs for two counsel (which I consider reasonable) and at least one day for a solicitor would take the costs to somewhere near $18,000.00. In my view, an order of that nature would not do justice to the husband on the basis that he has contracted in good faith with every reasonable expectation that the matter would proceed. True it is that some of the preparation time will be re-used because I have endeavoured to keep the same counsel involved but on any view, some preparation and rehashing of the concepts will be required and the husband will be expected to pay for that.
For the reasons mentioned, indemnity costs ought not be granted but neither is the scale just for this particular case. I consider that somewhere in between is appropriate. I find that figure to be $26,000.00 which takes into account both some preparation and a hearing day for all three of the husband’s legal practitioners.
The wife sought that any such order should be stayed until the final determination. Whilst that might normally be appropriate, there are two reasons here why it is not. First, although it is said that the wife still has costs of her own to pay relating to “work in progress”, her financial statement sworn 26 May 2017 showed no debt. I conclude therefore that she has paid all of her significant legal costs to date. Secondly, she has $260,000 in savings. There is no justification therefore to require the husband to wait for the contribution towards his costs.
Other orders have been elsewhere made for the mention of the matter for management purposes.

I certify that the preceding fifty eight (58) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Cronin delivered on 30 May 2017.

Associate:

Date: 30 May 2017