CATCHWORDS

     Costs - gross sum in lieu of taxation - whether appropriate to so order in a complex commercial case.

Federal Court Rules, O 62 r 4(2)

Matter No. G53 of 1991

BEACH PETROLEUM NL and CLAREMONT PETROLEUM NL v MALCOLM KEITH JOHNSON and OTHERS

VON DOUSSA J

ADELAIDE

19 MAY 1995

IN THE FEDERAL COURT OF AUSTRALIA  )

                                   )

SOUTH AUSTRALIAN DISTRICT REGISTRY )

                                   )

GENERAL DIVISION                   )   No. G53 of 1991

                                   BETWEEN:

                                  BEACH PETROLEUM NL and

                                  CLAREMONT PETROLEUM NL

                                           Applicants

                                   AND:

                                  MALCOLM KEITH JOHNSON

                                  and OTHERS

                                           Respondents

                      MINUTES OF ORDER

JUDGE MAKING ORDER           :    VON DOUSSA J.

WHERE MADE                   :    ADELAIDE

DATE OF ORDER                :    19 MAY 1995

THE COURT ORDERS THAT:

1.   The costs payable by the respondents Enterprise Gold Mines NL and Jingellic Minerals NL pursuant to the order made on 16 June 1993 be assessed as a gross sum pursuant to O 62, r 4(2) of the Federal Court Rules in the sum of $8,119,370.

2.   The costs payable by the respondent Spargos Mining NL pusuant to the order dated 16 June 1993 be assessed as a gross sum pursuant to O 62, r 4(2) of the Federal Court Rules in the amount of $5,683,559.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA  )

                                   )

SOUTH AUSTRALIAN DISTRICT REGISTRY )

                                   )

GENERAL DIVISION                   )   No. G53 of 1991

                                   BETWEEN:

                                  BEACH PETROLEUM NL and

                                  CLAREMONT PETROLEUM NL

                                           Applicants

                                   AND:

                                  MALCOLM KEITH JOHNSON

                                  and OTHERS

                                           Respondents

                    REASONS FOR JUDGMENT

Coram: von Doussa J.

Place: Adelaide

Date : 19 May 1995

     Pursuant to O 62, r 4(2)(c) the applicants seek to have gross sums fixed by order of the Court as the costs payable by three of the respondents in this action, instead of the cost orders obtained against them after judgment being subject to the usual taxation procedure.

     The judgment in the principal proceedings is reported as Beach Petroleum NL and Another v Johnson and Others (1993) 115 ALR 411.  The applicants' solicitors were first instructed to pursue causes of action against the respondents in January 1991.  The proceedings were issued on 5 July 1991.  The trial commenced on 3 July 1992 and concluded on 6 April 1993.  Judgment was delivered on 10 June 1993.  Judgment for $44.45 million was entered against each of the ten respondents including Spargos Mining NL ("Spargos"), Enterprise Gold Mines NL ("Enterprise") and Jingellic Minerals NL ("Jingellic").  On
16 June 1993 Spargos was ordered to pay the applicants' costs of the action on a party and party basis, and Jingellic and Enterprise were ordered to pay the applicants' costs on an indemnity basis.  The Court has been informed that there is a need to have the costs against these three respondents quantified as there are other proceedings on foot where the total liability of these companies arising out of the subject matter of the litigation will have to be established.  Orders for costs were also made on a number of counter claims but as the counter claims added insignificantly to the issues in the trial no separate claims have been made under those orders.

     Orders for costs were also made against the other respondents but for reasons that need not be recited the applicants do not seek to have the costs quantified by order against any respondent other than Spargos, Enterprise and Jingellic. 

     Order 62, r 4(2) relevantly provides:

     "Where the Court orders that costs be paid to any person, the Court may further order that as to the whole or any part of the costs specified in the order, instead of taxed costs, that person shall be entitled to

     (a)  ...

     (b)  ...

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

     (d)  a sum in respect of costs to be ascertained in such manner as the Court may direct." (emphasis added)

Pursuant to O 62, r 3(1) the Court may exercise its powers and discretions as to costs at any stage of the proceedings, or after the conclusion of the proceedings.  In my opinion the Court has power to make a gross sum order at this stage notwithstanding that costs orders were earlier made which envisaged taxation in the ordinary way.

     In Leary v Leary (1987) 1 All ER 261 the Court of Appeal considered an English rule of court which permitted the award of a gross sum instead of taxed costs.  The principles upon which that power should be exercised are there discussed.  The purpose of the rule is to avoid the expense, delay and aggravation involved in protracted litigation arising out of taxation.  The power is appropriate to be used in complex cases.  An order that costs be assessed as a gross sum does not envisage that any process similar to that involved in taxation should take place, but the power must be exercised judicially and after giving the parties an adequate

opportunity to make submissions on the matter (see p 265d). 

     When this application came on for hearing I obtained the consent of the parties to have Deputy Registrar Fisher, who conducts taxations of costs in this Registry, to sit with me.  He has been able to confirm submissions made by the parties about normal practices on taxation, and about rates customarily allowed by taxing officers in this State.

     In support of the present application the applicants brought into Court 11 arch lever folders of paper comprising a 58 page affidavit of explanation and compilation of the costs sought by Mr P J Norman, an acknowledged expert in legal costs in this State, a bill of costs in taxable form for the action up to 31 August 1992, and a complex estimate of costs thereafter which included and identified all out of pocket expenses in that period.  The bill in taxable form and the estimate, which together I shall refer to as "the bill", run into 4,303 pages. As well there are about 120 pages of additional material.  In his affidavit Mr Norman explained that upon receiving instructions to draw the bill he was engaged for 8 weeks familiarising himself with the matter and sorting the solicitors' files into chronological order.  He then spent 7 weeks dictating a bill of costs in which it was necessary to separately identify those amounts sought by way of indemnity costs from those sought by way of party and party costs.  At the end of 15 weeks the bill had been drafted only to 31 August 1992 - two months into the trial.

     At this point Mr Norman and the applicants took stock of the position and realised that the task of drawing a bill for the whole action in taxable form was too great a task.  Detailed calculations were then made to estimate the costs for the balance of the trial, drawing on the bill in taxable form to 31 August 1992 as well as actual out of pocket expenses as guides to the likely quantum of the further costs.

     The matter was undoubtedly complex.  The preparation involved very extensive enquiry and search for information relating to the numerous transactions involved to piece together the international fraud alleged and proved by the applicants.  Mr Norman's affidavit goes into these matters at length.  By agreement with the client, the applicants' solicitors on file charged for solicitors and staff time at hourly rates, the rates varying according to the expertise of each person involved.  Time charging in this manner is not wholly in accordance with the scales of costs provided in the Rules of Court, but has for some years been common practice in the legal profession, particularly in commercial litigation, and is recognised and permitted in South Australia by s 42(6) of the Legal Practitioners Act 1981.  Where a court makes an order for costs on an indemnity basis against a party, the court may tax the costs so awarded according to a time cost agreement between the successful party and his solicitor unless the taxing officer considers that in all the circumstances it would be unreasonable to do so: Singleton & Anor v Macquarie Broadcasting Holdings Limited (1991) 24 NSWLR 103 at 105, 115.  In the present case the indemnity costs sought against Enterprise and Jingellic are based on time costs.

     This Court has held that a party awarded costs on an indemnity basis is entitled to all the costs he or she has incurred except those costs that are unreasonable in amount or have been unreasonably incurred: see Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401 and Ragata Developments Pty Ltd v Westpac Banking Corporation (unreported) decision of Davies J delivered on 5 March 1994.  See also Singleton & Anor v Macquarie Broadcasting Holdings Limited at 107.

     Actual disbursements have been included throughout the bill prepared by Mr Norman.  The disbursements are very high, reflecting large fees paid to expert witnesses, to overseas witnesses, for travel and accommodation, for photostatting (in excess of 2 million pages), for professional fees paid to overseas and interstate lawyers in connection with investigations and in answering subpoenas, and for counsel fees.  Counsel fees included in the table below total $1,666,897.  The fees now sought by gross sum orders are as follows:

Indemnity costs against Enterprise and Jingellic

  Disbursements    -    actual             4,772,204

  Solicitors fees  -    actual             3,718,824

                                           8,491,028

  Drawing bill (actual incl. disbursements)    286,670

Total                                      8,777,698

Party and Party Costs against Spargos

  Disbursements (actual)                        4,772,204

  Solicitors fees - scale    3,155,149

  Care and consideration

    + 45%                    1,419,817     4,574,966

  Drawing bill

     Scale fees                104,246

     Care and consideration

       + 45%                    46,911

     Disbursements               5,363       156,520

Total                                      9,503,690                                      

     In the usual case the party and party costs are significantly lower than the indemnity or actual costs.  Mr
Norman has boldly suggested that as the party and party costs computed in the bill exceed the actual costs charged (which must provide the upper limit to indemnity costs), the former proves the reasonableness of the latter.  This is fallacious.  The schedules of hourly charges applied by the applicants' solicitors in most instances significantly exceed the hourly rates in the Rules of Court scale.  If the bill as drawn truly reflected the effect of the item based scale, it would demonstrate that the item based scale, which follows the form of scales which have been traditionally used in taxations in superior courts, is well and truly outmoded.  There are many who would agree that this is so anyway, but in this case the party and party costs as calculated, in my view, exceed the indemnity costs because the actual disbursements have not been discounted at all in the party and party bill, and the allowance included for "care and consideration" is excessive by a large margin.  The need to give this litigation special attention and to cater for its urgency was dealt with by assigning a team of solicitors and counsel to the task.  As all their services are charged out in the bill, and often for many hours beyond 8 in a day, the occasion for a generous allowance for care and consideration does not arise.

     Spargos, Enterprise and Jingellic have been represented  on this application by counsel, Mr Mark Rice, who appeared for Jingellic at the trial.  Since the judgment was entered, Spargos has become a subsidiary company of the applicant Beach, and certain directors of Beach have seats on the boards of Enterprise and Jingellic.  Mr Rice drew the Court's attention to these matters and acknowledged that his clients were no longer at arms' length to Beach Petroleum NL.  Nevertheless Mr Rice proceeded to make detailed and very helpful submissions which reflected searching and careful scrutiny of the bill as drawn.  Mr Rice pointed out minor errors in the bill and identified areas of the bill that in his submission required particular consideration.  He submitted that discounts should be made on a number of items, in some instances heavy discounts.

     In my opinion this is an appropriate case to exercise the power to award costs on a gross sum basis.  The bill already drawn demonstrates what could be expected anyway from the size and complexity of the matter, namely that the preparation of a bill in taxable form is an unrealistic demand which would require quite unreasonable time and expense.  It will be noted that the fees incurred by the applicants for the drawing of the bill so far, and for preparing the estimates placed before the Court, total $286,670.  The bill and accompanying documents as drawn reflect an expert application of the traditional rules for taxing costs.  The enormity and expense of the task demonstrates how inappropriate the old system of taxation is to the modern commercial world.  The expense of several hundred thousand dollars on an exercise that cannot be described as socially useful is most regrettable.  By exercising the power to fix a gross sum now the further expenditure of funds on drawing the balance of the bill will be saved.  Mr Norman in his affidavit refers to his experience in taxing bills in other large matters and suggests that if the bills in this case were the subject of a contested taxation, the taxation could extend over several months.  Court resources cannot accommodate such an exercise.

     I agree however with the submission of Mr Rice that before exercising the power to fix a gross fee, the Court should be confident that the approach taken to estimate costs is logical, fair and reasonable.  On the one hand the Court must be astute to prevent prejudice to the respondents by overestimating the costs, and on the other hand must be astute not to cause an injustice to the successful party by an arbitrary "fail safe" discount on the cost estimates submitted to the Court: Leary v Leary at 265.  Although with the benefit of hindsight it is regrettable that an application was not made by the applicants for gross sum orders before so much paperwork had been prepared, there would nevertheless have been a need to prepare substantial paperwork in the nature of schedules of disbursements, explanations of the work done, and so forth to support the amounts claimed.

     Included among the papers exhibited to Mr Norman's accounts are copies of the actual bills rendered to the applicants during the course of the matter.  There is no reason to question that these are bills rendered by solicitors to a client at arms' length, and moreover to a client which was anxious to obtain excellent legal representation, but at reasonable costs.  The applicants were in very difficult financial circumstances when the litigation was commenced, and the evidence led at trial indicates that the solicitors on file were not the only solicitors consulted by the applicants.  It is reasonable to assume that the applicants investigated the basis upon which they would be charged before reaching agreement with the solicitors on file.  The applicants are public listed companies.  Expenditure by them on legal fees would be disclosed in their accounts.  If the fees were seen as excessive by the commercial community, the directors would be exposed to the risk of criticism by the media and by shareholders. 

     The bill drawn in taxable form provides a useful cross-check as it exposes for scrutiny for the period to 31 August 1992 the items of work covered.  It enables a comparison of the scale costs with the costs assessed on a time basis.  It also demonstrates that in charging their clients the solicitors have rounded down the amounts arrived at by a strict application of hours to the relevant rates for each person concerned.

     I infer from Mr Norman's affidavit, and from information which has been given to me by Deputy Registrar Fisher, that whilst the hourly rates charged in the bill would not be regarded as outside the accepted market range for this type of litigation, they are nevertheless at the top of the range and at the limit of reasonableness.  The same may be said for the counsel fees which appear as disbursements.  The figure charged by the applicants' leading counsel is more than would normally be allowed on taxation on a solicitor and client bill in South Australia, but it is not above figures that are charged and allowed in complex cases in the eastern States.  All the details of these charges are in Mr Norman's affidavit should it become necessary to review the orders I propose to make.

     The starting point for fixing the gross fee for indemnity costs must be the charges rendered to the applicants by their solicitors.  But as Mr Norman acknowledges in his affidavit, however carefully a complex bill is drawn there are likely to be items taxed off.  Mr Rice has detected some items that have been included in error.  Even though there is no statutory obligation on a judge to discount figures provided by the successful party on a "fail safe" basis, it is acknowledged in Leary v Leary at 265 that there may well be occasions on which a judge will make such a discount.  In my opinion this is a case where there should be discount both on the indemnity costs and on the party and party costs.  I was left with the impression at times during the trial that in an effort to ensure the very best presentation of their case, leaving no stone unturned in the investigation for evidence, the applicants had erred on the side of excessiveness.  Whilst this is merely an impression, one not explored instance by instance with the applicants or their advisers, I think I should take it into account in fixing a gross sum.  Where there is excessive use of legal services even on an indemnity costs order the excessive services should be excluded: EMI Records Ltd v Ian Cameron Wallace Ltd (1983) Ch 59 at 72 per Megarry VC. 

     Mr Rice in his submissions points to a number of areas where, he contends, there is a risk of inclusion of excessive items, especially in relation to expenses in connection with witnesses, travel and accommodation, and to fees paid to overseas and interstate lawyers who conducted investigations and answered subpoenas.  Further, Mr Rice contends that there is a risk of error in the method of estimation used for the period after 1 September 1992.  In addition to these areas of "risk" he has identified a number of items which he contends should be excluded altogether.  I agree with him that the expenses included for the cost of providing independent legal advice to witnesses on matters that arose whilst they were giving evidence should not be allowed at all even as an item of indemnity cost.  I also agree with Mr Rice that under the indemnity costs order the drawing of the bill of costs should not exceed the scale rate.  Whatever may have been the justification in the respondents' conduct for making the indemnity costs orders to the point of judgment, that conduct has no bearing beyond the point of judgment when it comes to taxing the costs.  Moreover, I think the application to have costs fixed by gross sum orders should have been made earlier than it was, based on the accounts actually rendered to the appellants as the matter progressed.  Even though it would have been necessary to compile additional information to support the claim, the expenses incurred by the applicants would have been less.

     The gross sums can only be fixed broadly having regard to the information before the Court.  I have gone through the summaries to the bill, and considered the submissions of the parties.  I have made various estimates of the effect of the broad deductions that Mr Rice submits should be made both to the claims for indemnity costs and the claim for party and party costs.  I have considered the methods of cross-checking the total claim suggested by Mr Rice.  I have also sought the assistance of Deputy Registrar Fisher in reaching my conclusions. 

     I have reached the conclusion that the concerns identified by Mr Rice, which in the main I share, and the exclusion of the items which should be excluded entirely, will be appropriately accommodated by reducing the sum of $8,777,698 claimed by 7½% to give a gross fee sum of $8,119,370 for indemnity costs.  That will be the sum fixed as a gross sum payable by Enterprise and Jingellic.

     On the party and party costs the various broad adjustments and deductions suggested by Mr Rice produce a range of overall figures from about $5.5 million to $5.8 million.  Again, the gross fee fixed must be assessed broadly.  I consider that if the gross fee for indemnity costs is reduced by a further 30%, an appropriate figure for party and party costs will be achieved, namely $5,683,559.

     These broad discounts have been arrived at having regard separately to the various categories of disbursement and solicitors' costs.  In some areas I do not think any deduction would be appropriate, in others I consider there is a risk of error which requires reduction in the amounts sought, and in some areas I think items should be excluded altogether.  The discounts I propose have regard to all these matters. 

     There will be orders that the costs payable by Enterprise and Jingellic pursuant to the order made on 16 June 1993 be assessed as a gross sum pursuant to O 62, r 4(2) in the amount of $8,119,370; and that the costs payable by the respondent Spargos pursuant to the order dated 16 June 1993 be likewise assessed in the amount of $5,683,559.

     The minutes of order lodged in support of the application request that the question of costs payable by the other respondents to the action be reserved.  It is inappropriate to make such an order.  On 16 June 1993 it was ordered that the other respondents pay the applicants' costs of the action.  Should it become necessary to quantify those costs it will be necessary for the applicants to make an application, and to serve it on the appropriate representative of the respondent

or respondents concerned, to consider whether an order should be made under O 63, r 4(2).

                             I certify that this and the

                             preceding pages are a true

                             copy of the Reasons for

                             Judgment of Justice von Doussa

                             Associate:

                             Dated:

Counsel for the applicants   : Mr P J Norman

Solicitor for the applicants: Piper Alderman

Counsel for the respondents  : Mr M N Rice

Solicitor for the respondents     : Thomsons

Date of hearing              : 12 May 1995