FEDERAL COURT OF AUSTRALIA

NMFM Property Pty Ltd v Citibank Ltd (No 11) [2001] FCA 480

PRACTICE AND PROCEDURE – Costs – indemnity costs – circumstances in which indemnity costs will be ordered – applicant, having paid out claims of investors in applicant’s property trust, seeking to recover contribution or indemnity from bank which financed them into the investment – applicant fails in claim and must pay bank’s costs – whether it should be ordered to do so on an indemnity basis – suggested ethical or moral delinquency of applicant – whether ethical or moral delinquency in the underlying or background facts sufficient to support order for indemnity costs or whether ethical or moral delinquency must be associated with the commencement or manner of conduct of the litigation – whether case “hopeless” – whether case “fundamentally flawed” – notice to admit facts and notice disputing facts – whether party disputing facts should be ordered to pay costs of proof of the facts disputed

Calderbank v Calderbank [1976] Fam 93 cited

Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 cited

Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354 cited

EMI Records Ltd v Ian Cameron Wallace Ltd [1983] 1 Ch 59 cited

Botany Municipal Council v Secretary, Department of the Arts, Sport, the Environment, Tourism and Territories (1992) 34 FCR 412 cited

Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 (FC) cited

Australian Guarantee Corporation Ltd v De Jager [1984] VR 483 distinguished

National Australia Bank v Petit-Breuilh (No 3) [2000] VSC 291 not followed

Harrison v Schipp [2001] NSWCA 13 followed

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 cited

Jones v Bartlett (2000) 75 ALJR 1 cited

Beswick v Beswick [1968] AC 58 cited

Concrete Constructions Pty Ltd v Government Insurance Office of New South Wales [1966] 2 NSWR 609 cited

Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 cited

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 cited

MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 cited

NMFM PROPERTY PTY LIMITED (formerly called “National Mutual Property Services (Australia) Pty Ltd”) v CITIBANK LIMITED (formerly called “Citibank Savings Limited”)

NG 765 of 1994

LINDGREN J

27 APRIL 2001

SYDNEY

THE COURT ORDERS THAT:

1.         The proceeding be stood over to 4 May 2001 at 9.30am for the making of orders for costs.

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

REASONS FOR JUDGMENT

introduction

1                     I delivered Reasons for Judgment (No 10) on 10 November 2000 and stood the proceeding over to 5 December 2000 for the making of orders.  On 5 December the proceeding was stood over to 15 December 2000 when I ordered that the application and the cross-claims be dismissed and stood the proceeding over to 23 February 2001 for a hearing on costs.

2                     Reasons for Judgment (No 10) are lengthy (1378 paragraphs and 5 annexures).  As noted in par 18 of them, the hearing occupied 72 days, 126,960 documents were computer-imaged, 56 witnesses gave evidence and the documents in evidence occupied 102 lever arch folders.  I do not propose now to summarise even the salient facts of the case.  Rather, I rely on, and assume a reading of, Reasons for Judgment (No 10).  I will use the abbreviated forms of reference which I used in that document.

3                     On 29 November 2000, Citibank’s solicitors wrote to NM’s solicitors contending that Citibank was entitled to an order that NM pay its costs on an indemnity basis in the light of these letters its solicitors had written to NM’s solicitors on 1 June 1998, 9 September 1998 and 7 December 1998.  The letter referred to those three letters as “Calderbank” letters (cf Calderbank v Calderbank [1976] Fam 93).  Each letter was, indeed, headed “without prejudice except as to costs” and made clear that it would be relied on in support of an application for indemnity costs.  Therefore I will also refer to them as Calderbank letters.  Subject to the issue noted in the next sentence, NM does not dispute that it should be ordered to pay Citibank’s costs but it does dispute that it should be ordered to pay them on an indemnity basis.  Moreover, NM submits that Citibank should be ordered to pay NM’s costs of proving the facts disputed in various notices disputing facts given to it by Citibank, to which I will refer below. 

legislation

4                     Subsections 43(1) and (2) of the Federal Court of Australia Act 1976 (Cth) (“the FCA Act”) provide, relevantly, as follows:

“43(1)¼the Court or a Judge has jurisdiction to award costs in all proceedings before the Court¼.

(1A)     ¼

(2)               Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge.”

Order 62 of the Federal Court Rules deals with “Costs”.  In the absence of a further order, where the Court makes an order for costs to be paid to a person, the order is for “taxed costs”: O 62 r 4(1).  Order 62 subr 12(1) provides, relevantly, that:

“Except as otherwise ordered in all proceedings commenced on and after the date these Rules came into operation, solicitors are, subject to these Rules, entitled to charge and be allowed the fees set forth in the Second Schedule in respect of the matters referred to in that Schedule and higher fees shall not be allowed in any case except such as are by this Order otherwise provided for.”

Order 62 r 19 provides as follows:

“On every taxation the taxing officer shall allow all such costs charges and expenses as appear to him to have been necessary or proper for the attainment of justice or for maintaining or defending the rights of a party, but, except as against the party who incurred them, costs shall not be allowed which appear to the taxing officer to have been incurred or increased:

(a)               through over-caution, negligence or misconduct;

(b)               by payment of special fees to counsel or special charges or expenses to witnesses or other persons; or

(c)                by other unusual expenses.” (my emphasis)

It is accepted, as Sheppard J observed in Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 (“Colgate-Palmolive”), that the costs for which rules 12 and 19 of Order 62 provide are on the party and party basis.

5                     In Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354 (“Degmam”), Holland J held that the Supreme Court of New South Wales had power to order that costs ordered to be paid (at 359-360):

“are to include all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred so that subject to the above exceptions [the persons to whom the costs are ordered to be paid] will be completely indemnified by the [person ordered to pay the costs] for their costs and that the amount of such costs, if not agreed, be taxed.”

His Honour located the power to make such an order in Part 52 r 6(2)(d) of the Supreme Court Rules under which the Supreme Court was empowered, where it ordered that costs be paid to any person, to order further that:

“instead of taxed costs, that person [should] be entitled to –

            (a)¼;

            (b)¼;

            (c)¼;

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

Subrules 6(1) and (2) of Part 52 of the Supreme Court Rules are identical (subject to the substitution of the word “Order” for the word “Part”) to subrules 4(1) and (2) of O 62 of this Court’s Rules.  Holland J’s formulation in Degman of the order for payment of costs on an indemnity basis was derived from that of Sir Robert Megarry V-C in EMI Records Ltd v Ian Cameron Wallace Ltd [1983] 1 Ch 59 (“EMI”).  The shorthand expression “on an indemnity basis” is now used in this Court’s Rules (see O 23 r 11(4)(d) dealing with costs where a favourable offer of compromise is not accepted) to mean, I suggest, costs on the basis so described in EMI and Degmam.  NM does not, and could not reasonably, dispute the Court’s power to order that it pay Citibank’s costs on an indemnity basis: cf Colgate-Palmolive, above; Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 (FC) (“Venture Industries”).

6                     I turn now to the rules relating to notices to admit facts and notices disputing facts.  Order 18 subr 2(1) provides that a party to a proceeding may, by notice in accordance with Form 25 served on another party, require him to admit, for the purpose of the proceeding only, the facts or documents specified in the notice.  Order 18 subr 2(2) provides that if, as to any fact or document specified in the notice to admit, the party served does not within 14 days after service, serve on the giver of the notice, a notice in accordance with Form 26 disputing the fact or document, the fact or document shall, for the purpose of the proceeding, be admitted by the party on whom the first notice was served in favour of the party who served that notice.  Order 18 subr 2(4), on which NM relies, provides:

“Where a party serves a notice disputing a fact or a document under sub-rule (2) and afterwards that fact or the authenticity of the document is proved in the proceeding, he shall, unless the Court otherwise orders, pay the cost of proof.”

Superfluously in my opinion, Order 62 rr 24 and 25 provide in similar terms for the costs consequences of, respectively, non-admission of a fact referred to in a notice disputing a fact served under O 18 r 2 and non-admission of the authenticity of a document referred to in a notice disputing the authenticity of a document served under that rule, where the fact or authenticity is proved in the proceeding.  Again, in each case, it is provided that unless the Court otherwise orders, the person serving the notice disputing must bear the costs of proof of the fact or of the authenticity of the document. 

7                     NM submits that these rules have made Citibank liable to pay NM’s costs of proving certain facts referred to in notices disputing facts served by Citibank in response to notices to admit facts served on it by NM.

outline of facts and submissions relating to citibank’s application for indemnity costs

8                     Citibank submits that NM was ethically or morally delinquent, that its case was “hopeless” and that its litigious strategy was “fundamentally flawed”.  As well, it relies on an indemnity given by NM and on the Calderbank letters written by its solicitors.  Before addressing Citibank’s submissions I will outline in chronological sequence facts related to the commencement and conduct of the proceeding on which Citibank relies.

NM’s conduct related to the commencement and conduct of the proceeding

9                     On 1 December 1992 Lester Neil Potts (“Potts”) commenced proceeding NG 882 of 1992 in this Court against DJC, Jones, Ray Smith (apparently an employee of DJC), NMPS, Citibank and Permanent arising out of his having invested in accordance with the Package.

10                  Citibank moved for a striking out of the amended statement of claim on the basis of a failure to plead facts supporting the allegation that DJC, Jones and Ray Smith had acted as its agents.  On 22 February 1993, Morling J, who said his “mind ha[d] hesitated on the matter”, dismissed Citibank’s motion.

11                  By 18 March 1993, NM’s own insurer approved of a settlement with Potts.

12                  On 3 June 1993, NM’s Melbourne solicitors, Molomby & Molomby, wrote to Mr McDonald, the in-house solicitor of NM, stating, inter alia:

“As you are aware, the approach taken in particular with regard to the settlement documents with Potts, which was to be the model for other settlements have been drafted on the basis of allowing the maximum legal and moral pressure to be brought to bear on Citibank, with a view to achieving a resolution with Citibank and the professional indemnity insurers for both Jones and Kelly to a settlement mechanism which may be adopted in all bona fide claims.

The purpose of the approach taken in the settlement with Potts is being adopted as a strategic measure to achieve a simpler and structures [sic – structured?] settlement mechanism, so that in the future, and with the multiplicity of other cases, such a complex document would not be necessary.  It appears to us that the ASC does not recognise or understand fully the strategic importance of this approach, but rather seems to be taking the view that National Mutual should simply pay out the various claimants without any due cognizance of the contributory obligations of Citibank and the professional indemnity insurers for Jones and Kelly.  In our view, that attitude is unreasonable in the circumstances.” (my emphasis)

In its submissions Citibank relies on NM’s objective, revealed in this letter and in later evidence, of bringing Citibank to the negotiating table.

13                  The settlement agreement between NM and Mr Potts was dated 29 June 1993.

14                  In July 1993, following the settlement, a third amended statement of claim was prepared.  LKFM was added as seventh respondent.  The third amended statement of claim, which was filed on 18 August 1993, was prepared by, or with the approval of, NM’s solicitors, but the settlement which had been reached between NM and Potts was not disclosed to the other parties.  Accordingly, so far as Citibank knew, NMPS was, like Citibank itself, still antagonistic to Potts and at arm’s length from him.

15                  An aspect of the settlement agreement between NM and Potts was that NM would, at least for the time being, maintain Potts’ monthly mortgage payments to Citibank.  On 12 August 1993, NM’s Melbourne solicitors, Molomby & Molomby, wrote to Mr McDonald at NM in relation to payment of the settlement monies payable by NM.  They referred to a list of payments specified by Potts’ solicitors and continued:

“If you are agreeable to making these payments, we suggest that they be included with the next payment of the instalment due to Citibank, which is due at this time.  The solicitors for Potts would prefer if the cheque could be made payable for the monthly instalments either directly to their client or to themselves, as they do not wish to disclose to Citibank the direct involvement of National Mutual by producing a National Mutual cheque in payment of that account.”

Clearly, NM’s objective was that Citibank continue to be ignorant of the settlement reached between NM and Potts and of the fact that NM was no longer at arm’s length from Potts. 

16                  On 28 September 1993 NM wrote to Arthur Robinson & Hedderwicks, the solicitors for NM’s captive insurer and underwriters, advising that NM was “continuing with the Potts case in an endeavour to bring [Citibank] to the negotiating table” and that NM had written to Citibank stating that NM held Citibank 50 per cent liable for the settlement payouts involving Jones’s and Kelly’s clients.

17                  On 15 October 1993 a mediation conference was held in relation to the Potts proceeding at which NM and Citibank were represented, but still NM did not reveal that it had settled with Potts.

18                  NM also came to a settlement agreement with Jones who, unlike Kelly, had been refused indemnity by his professional indemnity insurer and who was supplying to NM “information linking Citibank and Kelly” in exchange for a release.  In November 1993 NM procured Potts to discontinue against DJC, Jones and Ray Smith.  Potts’ notice of discontinuance as against those three respondents was filed on 12 November 1993.  But by cross-claim filed shortly afterwards (on 3 December 1993), Citibank cross-claimed against them and against NMPS, Permanent, LKFM and NMAM.  In this way Citibank kept them joined as parties to the proceeding.

19                  After the filing of numerous cross-claims, defences to them and affidavits, as well as the making of various interlocutory applications, the hearing of the Potts proceeding commenced before me on 7 November 1994.  It was settled on 10 November 1994 except for Citibank’s cross-claim against DJC and Jones.  As part of the settlement, Citibank agreed to fund one third of the settlement monies payable to Potts by crediting his Citibank account with the amount in question ($67,000), and LKFM agreed to pay an equivalent amount ($67,000) to NMAM.  The agreement was expressed to be without prejudice to any cause of action which might exist or arise in relation to, or arising out of, any dealings with any person other than Potts.  (Eventually Citibank’s cross-claim against DJC and Jones was also resolved by agreement.)

20                  On 10 November 1994, the present proceeding commenced with NMPS, NMAM and NMLA as the first three applicants and the Investors as fourth applicants, suing Citibank, LKFM, Kelly, DJC, Jones and AHA as first to sixth respondents respectively.  By that time NM had settled with the Investors by paying the full amounts of their losses and taking assignments from them of their rights of action against Citibank, LKFM, Kelly, DJC and Jones.

21                  On 18 November 1994, that is, eight days after the commencement of the proceeding, Cutler Hughes & Harris (“CHH”), the solicitors for NM, wrote to Holmes & Bevan (“HB”), the solicitors for Citibank, a letter on which Citibank relies.  CHH offered on behalf of NM to settle the proceeding on the same basis as that on which the Potts proceeding had been settled, that is, payment by Citibank of one third of the amount claimed.  CHH asserted that one third was, in round terms, $2,300,000.  They suggested that the costs of each of NM and Citibank were likely to exceed $750,000 and that given “the likely outcome”, which they indicated meant that each respondent would be found liable either by way of damages or contribution to the settlement amounts already paid by NM to the Investors, it was unlikely that Citibank’s costs would be recoverable.  The letter concluded by stating that if Citibank did not accept the offer, NM would tender the letter on the question of costs and would seek indemnity costs against Citibank if Citibank was found liable to NM in a sum not less than $2,300,000.  (Citibank now submits on its own application for indemnity costs that “they who live by the sword should perish by the sword”.)

22                  On 1 November 1995 I delivered Reasons for Judgment (No 1) (reported at (1995) 132 ALR 514) in which I refused Citibank summary dismissal but struck out certain parts of NM’s statement of claim with leave for NM to amend.  In particular, I held that the assignments by the Investors to NM of their rights to recover damages or compensation against others, including Citibank, were ineffective.  This left on foot NM’s claim for contribution or indemnity under par 51(1)(c) of the LR(MP) Act and s 23B of the Wrongs Act.

23                  In 1997 NM settled with AHA.  AHA had accepted its liability to indemnify Kelly and LKFM.  NM had asserted that AHA was also liable to indemnify Jones and DJC.  As part of the settlement, AHA paid NM $6,000,000 which those parties expressly agreed was to be as to $2,232,517.45 in respect of the Kelly/non-Citibank investors, $2,175,572.25 in respect of the Jones/non-Citibank investors, and $1,591,910.30 for interest and legal costs in respect of both of those classes of investors’ claims; NM agreed to discontinue against AHA, Kelly, LKFM, Jones and DJC; and AHA agreed to assist NM in the further conduct of the proceeding and, in particular, to use its best endeavours to provide an affidavit by Kelly and Van Minnen.  NM acknowledged, however, that AHA had declined to indemnify Jones and DJC and was not able to assist NM so far as they were concerned.

24                  On 2 September 1997 CHH wrote to HB advising them of the settlement reached between NM and AHA, enclosing a copy of the deed of settlement and indicating that as a result NM would be discontinuing against all respondents except Citibank.  CHH also advised that NM’s claim against Citibank would now be for a total of $10,378,019.08 (excluding interest and costs) for the 132 Citibank Investors in relation to whose claims NM was seeking contribution from Citibank.  CHH referred to their letter of 18 November 1994 and offered to settle as against Citibank for $3,000,000.  CHH gave reasons why this represented a compromise of NM’s claims and advised that the offer would remain open for 14 days and that if it was not accepted NM would tender the letter on an application for indemnity costs.

25                  On 29 October 1997 Tom McKeon, the managing director of Citibank, wrote to Mr G Tomlinson, the managing director of NM, advising that Citibank’s legal advice was that NM’s claims against Citibank were doomed to fail.  Mr McKeon suggested that Mr Tomlinson commission an independent assessment of the worth of NM’s claim against Citibank and invited Mr Tomlinson to telephone him to arrange a meeting to discuss the matter.

26                  On 6 November 1997, Mr Tomlinson replied advising that NM’s own legal advisers strongly disagreed with the proposition that NM’s claims against Citibank were “doomed to fail”.  He said that as a matter of courtesy he would telephone Mr McKeon as requested but did not think that any useful purpose would be served by a meeting.

27                  On 1 June 1998, HB wrote the first of the three Calderbank letters to CHH.  The letter referred to certain features of the evidence which, according to the letter, showed that NM could not succeed.  For example, it said that the affidavit evidence clearly showed that neither Kelly nor any other Adviser was authorised to advise the Investors on behalf of Citibank and that the detail of the Package was not made known to Citibank personnel.  The letter continued:

“Apart from Kelly’s affidavit, there is no evidence at all of any relevant dealings on the part of Citibank, apart from its routine banker/customer dealings.  Given the vast quantity of affidavit evidence to this effect filed by National Mutual itself, there can be no reasonable possibility but that Kelly will be shown at the hearing to have been at all times a thoroughly dishonest individual and his evidence will be treated accordingly.

In addition to the claim that Citibank and its officers knew of and were associated in the sale of the ‘Negative Gearing Package’, the case against Citibank is predicated upon a suggested case of “lender liability”, on the footing that Mortgage Power lending was ‘inherently dangerous’.  In the present state of Australian law, any such case is plainly unavailable as a matter of law, notwithstanding the particular facts of the case.

In addition to these considerations, the indemnity arrangements which National Mutual has now made with its own agents in settlement to its claims against them will necessarily have the effect that even if Citibank could be held to have attracted a vicarious liability for those agents’ negligent investment advice, Citibank must inevitably succeed in its Cross-Claim against those agents.  Accordingly, any right of recovery against Citibank will in the end be the subject of an obligation on the part of National Mutual to provide an indemnity in respect of that right of recovery.”

The letter stated that Citibank was unwilling to offer any money to NM to settle the proceeding.  It asserted that Citibank’s legal costs to date had run into several hundred thousands of dollars (according to affidavit evidence on the present application, the amount of Citibank’s costs incurred at that time was in fact $789,855.50 and the amount of NM’s costs incurred to that time “far exceeded” that sum), and that if the case were litigated to finality Citibank’s costs would considerably exceed $1,000,000.  The letter also pointed out that the litigation was of considerable inconvenience to Citibank and distracted its personnel from their ordinary duties (on the present application for indemnity costs there is affidavit evidence, which I accept, that the proceeding has indeed absolved considerable time and energy of Citibank staff).  The letter said that in recognition of these various factors, Citibank was prepared to settle on the basis that it bear its own costs to date (regardless of any costs orders previously made).  Under the proposal, NM would bear its own costs and be responsible for the costs of all parties other than Citibank.  HB’s letter left the offer open for 14 days and advised that if it was not accepted, Citibank would rely on the letter on an application for indemnity costs.

28                  On 24 August 1998, the hearing commenced. 

29                  On 1 September 1998, in the course of the hearing, I referred to the desirability of the parties’ applying their minds to a settlement.  I indicated that I might direct officers of Citibank and NM who had decision-making power to attend the Court, at least for a short time, to observe the progress of the proceeding and that I might encourage them to apply their minds to a settlement.  Later the same day I requested that Citibank and NM cause senior officers of theirs to attend Court at 10.15 am the following Thursday 3 September.

30                  On 2 September 1998, Mr McKeon of Citibank again wrote to Mr Tomlinson of NM.  He referred to my request that both corporations be represented in Court the following morning by a person with “decision-making power”.  The letter referred to the fact that down to that time seven witnesses had been heard “with 125 to come”.  The letter also referred to the fact that the preceding week, Mr McKeon had had Citibank’s general counsel, Mr O’Callaghan, call on NM’s general counsel, Mr LePlastrier, to suggest a non-binding mediation, but that the suggestion had been rejected.  The letter requested NM to agree to a mediation and requested Mr Tomlinson to telephone Mr McKeon.

31                  On the resumption of the hearing the following morning, Thursday 3 September, I said that I understood that there were senior representatives of both parties in attendance and I encouraged them to apply their minds to a settlement.

32                  On 9 September 1998, Deacons Graham & James (“DGJ”), now the firm of solicitors for Citibank, wrote the second Calderbank letter to CHH referring to my observations the preceding Thursday and offering NM $250,000, including costs, in settlement.  The letter said the offer was open for acceptance for 28 days.  It also made clear that if it was not accepted and Citibank succeeded, it would rely on the letter in support of an application for an order for indemnity costs.

33                  On 17 September 1998, I directed that the proceeding, in so far as it related to 23 of the Investors, be determined separately from the proceeding in so far as it related to the remaining 109 Investors.

34                  On 7 December 1998, DGJ wrote the third Calderbank letter to CHH offering NM $90,000 including costs in settlement in relation to the 23 Investors.  Again, the letter made clear that the offer was open for acceptance for 28 days and that if it were not accepted and Citibank succeeded it would rely on the letter in support of an application for indemnity costs.

Outline of Citibank’s submission that NM was an ethically and morally delinquent party, that it failed in the training and supervision of its agents and that it contravened the Companies Code, the SIC and the Law

35                  Citibank submits that a factor in favour of an award of indemnity costs is that NM is to be viewed as “an ethically or morally delinquent party”; cf Botany Municipal Council v Secretary, Department of the Arts, Sport, the Environment, Tourism and Territories (1992) 34 FCR 412 (Gummow J) (“Botany”) at 415.  In support, Citibank draws attention to many aspects of NM’s conduct.  It makes submissions along the following general lines and draws attention to the following facts:

·        As I found in par 1338 of Reasons for Judgment (No 10),

“The things said by Kelly, Jones and the other Advisers to prospective investors about the merits of the Package, the use they made of the prospectuses, the things they said about the desirability of the commercial properties that underlay the Trust, the projections of capital growth and income returns, the advantages of investing in units rather than directly in property, and the benefits of taking out insurance, were all totally in line with what the NM organisation had encouraged them to say.”

·        This finding was in accord with Citibank’s defence, yet NM did not challenge, by way of evidence, that aspect of the defence.  In pars 17 and 18 of, and Schedule A to, its defence, Citibank identified by name and office, twenty NM officers and particularised their approval of the presentation of the Package by LKFM, Kelly, DJC and Jones and their authorisation otherwise of the promotion of the Package or of aspects of it.  Citibank points out that NM did not adduce testimony from any of these officers and that none of them filed an affidavit.

·        NM did not lead evidence from anyone in its own organisation who was involved in the marketing and administration of the Package, but confined itself to the testimony of its in-house solicitor, McDonald, and, of course, Kelly.

·        The clear inference is that NM knew that its senior officers’ conduct was “indefensible”.  Citibank cites Jones v Dunkel (1959) 101 CLR 298.

·        NMAM was not entitled to make statements promoting the sale of the units otherwise than within the four corners of a registered prospectus unless the statements were made in conformity with the conditions of its Exemption dated 22 December 1989 issued on behalf of the National Companies and Securities Commission under subs 215C(2) of the Companies Code.  Yet NMAM made statements predicting future capital appreciation and income performance of the Trust without complying with those conditions, such as, a condition requiring that the statement be approved by PTA as trustee of the Trust prior to its publication, and a condition requiring a statement referring to the yield from the investment to state the basis for the calculation of the yield.

·        The approved deed relating to the units also provided (in cl 77(c)) that NMAM would not, without the approval of PTA as trustee, publish or cause to be published any document containing a statement with respect to the sale price of the units or their yield or containing any invitation to buy or subscribe for units, yet NMAM did so without seeking or obtaining PTA’s approval.

·        Senior management of NMAM encouraged the Advisers to make predictions of returns from the units, even though aware that the NCSC Policy Statement No 121 of March 1985 had established requirements that made it “almost prohibitive” (to use the language of a NMAM Training Manual) to do this even in a prospectus.  (Paragraphs 17-20 of the Policy Statement did indeed stipulate stringent conditions with which a prospectus must comply if it was to contain projections of real property values.)

·        NM adhered to its sales technique of giving the impression of predicability and uniformity of returns from the Trust, not only in the euphoric economic atmosphere of 1988 and 1989, but through the depths of the recession in 1991 and 1992 (the Trust’s unit prices fell from a high of $1.4421 at 1 July 1990 to $1.1087 at 15 December 1992).

·        NM trained the Advisers to market the units in the way in which they did, and the Advisers accepted at face value the predictions of returns they were given by NMAM, even to the extent that commonly they and their friends and relatives invested in the Trust.  NMAM wrongly informed the Advisers that the projections had been “audited” by the international accounting firm, Deloitte Haskins & Sells.

·        NMAM participated in lobbying of the Commonwealth government to legislate to “freeze” redemptions, yet gave investors and prospective investors the impression that the twelve months’ “freeze” on redemptions which eventuated was imposed on it unilaterally and unexpectedly.

·        NMAM failed in its obligations under legislation, as the holder of a dealer’s licence, to provide supervision and training of its representatives.

·        As I found in par [1332] of Reasons for Judgment (No 10),

“From December 1990 to December 1992 NM received complaints from dissatisfied investors, complaining of misleading sales techniques which NMAM representatives had used in relation to the NMAM negative gearing arrangement, and of the inappropriateness of the financial advice that they had been given.  Yet until December 1992, NM management did not question the appropriateness of their conduct.  It was only at the end of 1992 that questions began to be asked within NM.”

Outline of Citibank’s submission that NM’s case was “hopeless”

36                  Citibank submits that NM’s case was “paper thin”, substantially for the reasons given in HB’s first Calderbank letter dated 1 June 1998.  Citibank makes submissions generally along the following lines:

·        Under the SIC and the Law, the units could be lawfully sold only by the holders of “proper authorities” issued to them by NMAM as a “licensed dealer” (see Reasons for Judgment (No 10) at [1214]-[1222]).  The unlawfulness which would have inhered in the Advisers having acted as agents for Citibank when selling the units always made a finding that they acted in that capacity extremely unlikely.

·        None of the Advisers thought they were selling the Package as agents for Citibank.

·        It was clear that it would be found that the Citibank officers were not apprised of the details of the way in which the Package was being sold to the Investors and that Kelly’s testimony in this respect would be discredited or would be found not to support a finding that the officers were apprised of those details.

·        Unlike Kelly, the other Advisers were not agents of Citibank for any purpose and, accordingly, NM’s case that the conduct of those other Advisers rendered Citibank vicariously liable was even less likely to succeed. 

Outline of Citibank’s submission that NM’s case was “fundamentally flawed”

37                  Citibank submits that NM’s litigious strategy throughout was based on misconceptions.  Citibank’s submissions in this respect proceed along the following general lines:

·        Throughout, NM knew that it must not adduce evidence from its own officers, otherwise NM’s total complicity in the Advisers’ modus operandi would be exposed.  At first NM thought that by paying the Investors’ claims in full and taking assignments from them it could stand in their shoes and attack, with impunity, the Advisers and Citibank.  This strategy failed (see National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514).

·        So long as the Advisers were participating independently in the proceeding and resisting liability, the role of NM’s management would be revealed.  Accordingly, NM settled with AHA.

·        The Investors’ affidavits were “mass produced” and for this reason, were not persuasive (see Reasons for Judgment (No 10) at [868]).

·                    “Given that National Mutual had granted the agents a full indemnity and that they thenceforth did not actively resist findings of negligence and fault on their part, the claim for recovery against Citibank, their putative principal, was fundamentally flawed.

Although National Mutual submitted that the apportionment of responsibility should be one-third to National Mutual, one-third to the respective agent and one-third to Citibank; no sensible basis for this proposition was advanced.  In fact, once the agents’ active defence of the proceedings was abandoned and they were given full indemnity by National Mutual, the only rational outcome of the proceedings had to be one under which Citibank was held not liable to make any contribution.”  (Citibank’s written submissions, pars 6.13 and 6.14)

outline of facts and submissions relating to the notices to admit facts and notices disputing facts

38                  NM submits that Citibank should pay NM’s costs of proving the facts disputed in Citibank’s notices disputing facts.  NM submits that it was put to the cost of proving the facts with the result that O 18 r 2(4) of the Federal Court Rules makes Citibank liable to pay its cost of doing so unless the Court otherwise orders.  Citibank submits that this oversimplifies the position.  It submits that it is not true that NM proved all the facts referred to in the notices and, in any event, that on discretionary grounds I should order that Citibank be not liable to pay NM’s costs of proving those facts which NM did prove. 

39                  The first notice to admit facts was dated 1 October 1996.  It contained 13 paragraphs and a voluminous annexure comprising four schedules of investors.  It required Citibank to admit for the purpose of the proceeding various facts according to the category of investor in question.  The following are examples:

“1.      That it was a condition of approval by Citibank of a Mortgage Power Loan to each of the Citibank investors (being the persons listed in Schedule 6 of the Second Further Amended Statement of Claim) that, in each case, the Citibank investors grant a mortgage in favour of Citibank.

2.                  ¼

3.                  That for each of the investors listed in column 1 of Schedule 1 Penny Van Minnen (also known as Penny Huson) was identified to Citibank as the solicitor acting for the investor in relation to their proposed Mortgage Power Loan, such identification being in the Citibank discovered document in column 2 of Schedule 1”

4.¼

5.¼

6.¼

7.¼

8.¼

9.                  That in the course of approving and making the Mortgage Power Loan to each of the Investors set out in column 1 of Schedule 3 Citibank received documents referring to Dennis Jones and Dennis Jones & Company Pty Ltd as described in column 2, being the Citibank discovered documents listed in column 3

10.              That in assessing the application of the Investors listed in Schedule 4 Citibank did not know the Investor’s income.

11.¼

12.¼

13.¼”

40                  On 28 October 1996 Citibank responded with a notice disputing facts.  It disputed virtually all of the facts referred to in NM’s notice to admit.  It admitted only that the nature of a Mortgage Power loan was that a mortgage be given to Citibank and that in the standard terms and conditions of a Mortgage Power loan the expression “moneys herby secured” bore a certain meaning.

41                  NM’s second notice to admit facts was dated 30 October 1996 and its third was dated 25 November 1996.  These second and third notices reflect the addition of names of investors to the schedules which were attached to the original notice to admit of 30 October 1996.  Citibank filed and served notices disputing facts in response to both of these further notices to admit facts, to the same general effect as its original notice disputing facts dated 28 October 1996.

42                  NM gave a fourth but different kind of notice to admit facts to Citibank on 22 December 1998.  This required Citibank to admit that the interest rates Citibank charged for Mortgage Power Loans to the persons described as “investors” in the proceeding for the period from November 1988 to December 1992 were as set out in a table annexed to the notice.  The table listed, over three pages, dates of letters of offer and an interest rate in respect of each of them.  As well, the notice required Citibank to admit that a graph annexed to it was an accurate representation of those interest rates.  Separately, the notice required Citibank to admit that the interest rates charged by one or other of the NM companies or a related corporation of one or other of them for the loans made to the several persons described as “investors” in the proceeding for the same period were as set out in a second table annexed to the notice, and that those interest rates were accurately represented in a second graph also annexed to the notice.  Next, the notice required Citibank to admit that a third graph annexed represented accurately both sets of interest rates.  The notice also required Citibank to admit that the allocation prices for units in the Trust for the period mentioned were as set out in a third table annexed to the notice and that a fourth graph annexed to the notice accurately represented these allocation prices.  Finally, the notice required Citibank to admit that the amounts of commission set out in a fourth table annexed to the notice were paid by Citibank to Lance Kelly on the dates set out in that table in respect of the persons set out in the table. 

43                  There is evidence that NM has been unable to locate any notice disputing facts given by Citibank in response to this fourth notice to admit dated 22 December 1988 but there is evidence, which I accept, that Citibank did in fact give such a notice disputing.

44                  On 29 December 1988 NM gave Citibank a fifth notice to admit facts.  This notice required it to admit that the income per unit per quarter for the period March 1988 to December 1992 was as set out in a table annexed to the notice and that a graph annexed to the notice accurately represented that unit income.  Again, there is evidence that NM has not been able to locate a notice disputing facts served by Citibank in response but there is evidence, which I accept, that Citibank did give such a notice disputing.

45                  Finally, on 16 February 1999 Citibank gave NM a sixth notice disputing facts.  The facts disputed were that the amount paid to NMLA in respect of the policies referred to in the schedule to the notice to admit facts to which the sixth notice disputing was responding were as set out in the documents annexed to that notice and that the amounts borrowed from NMLA in respect of the policies referred to in the schedule attached to that notice to admit facts were as set out in the document annexed to that notice.  There is evidence, which I accept, that NM has searched for, but has been unable to find, a copy of its notice to admit facts dated 2 February 1999 to which Citibank’s sixth notice disputing facts was responding.  However, there is evidence, which I accept, that it was sent.

46                  There is also evidence, which I accept, that NM was put to cost and expense in amassing evidence directed to proving the matters referred to in the six notices to admit facts (and the six responding notices disputing facts) to which I have referred above.

47                  NM submits that the facts the subject of the various notices concerned uncontroversial matters, some of which have been the subject of specific findings in Reasons for Judgment (No 10), while others have been the subject of more general observations in those Reasons indicating that the facts were not in contention.  As an illustration, counsel for NM refers to par 8 of the first notice to admit facts (dated 1 October 1996) which required NM to admit:

“That the credit limit under the Mortgage Power Loan for each of the Citibank investors was, in each case, determined as a percentage of the value of the property proposed to be secured by mortgage to Citibank, as determined by a valuation carried out on behalf of Citibank.”

This fact was disputed by Citibank in par 8 of its notice disputing facts dated 28 October 1996.  The fact was, however, quite uncontroversial.

48                  Annexed to the written submissions of counsel for NM is a table setting out relevant paragraphs in the respective notices to admit facts and corresponding paragraphs in Reasons for Judgment (No 10) relating to those facts.

49                  In relation to the tables and graphs indicating interest rates, Trust unit prices and Trust quarterly income, NM again relies on evidence that it was put to considerable cost in locating, collating and presenting the primary records from which that information was derived, resulting in the tender of boxes of primary documents.  NM refers to various paragraphs of Reasons for Judgment (No 10) as showing that the facts disputed were not genuinely in dispute.  However, it seems to me that the only paragraph of those to which NM refers which could possibly show this is par 429, the final sentence of which was as follows:

“The income from the Trust in fact declined steadily from 3.27 cents per unit in September 1990 to 2.43 cents per unit in March 1992.”

50                  In sum, NM submits that it should be awarded the costs of proving each of the facts set out in the six notices to admit facts, in so far as they related to the 23 Investors the subject of the separate hearing.  As well, NM submits that Citibank’s conduct in refusing to admit the facts tells against its application for an award of indemnity costs.

51                  For its part, Citibank submits that it is only if there is a finding which demonstrates that the precise fact of which admission was sought was proved that the Court’s rule giving NM its costs of proving the fact is activated.  Citibank submits that there are not to be found findings satisfying this stringent test.  More generally, Citibank submits that since NM had to obtain the documents necessary to prove the facts referred to in its various notices to admit, it was reasonable for Citibank to require that those documents be brought to Court.  Moreover, Citibank submits that NM failed in its obligation to give discovery of some of the documents.  Finally, it acknowledges that it made concessions in relation to interest rates following a more mature consideration once the hearing had been running for some time and once the documents, which were of a complex nature, were available to it for inspection.

52                  I will address the competing submissions of the parties in relation to the notices disputing facts below in the course of addressing Citibank’s application for an order for indemnity costs generally.

reasoning

Ethical or moral delinquency, failure to train and supervise agents and contravention of the Companies Code, the SIC and the Law

53                  The discretion to award indemnity costs is a judicial one which must be exercised in accordance with principle.  But its exercise is not confined by reference to those categories of case to date in which it has been thought appropriate to make an order: Colgate-Palmolive at 223 and cases there referred to.  Moreover, it is important not to treat descriptions in past cases of circumstances in which a court has found it proper to make an order for payment of indemnity costs as if they were the language of a statute or as if they mandated the making of an order in any future case to which the same description may be literally applicable.

54                  Citibank relies on a statement made by Gummow J in Botany at 415.  His Honour there said:

“I accept that the discretion conferred by s 43 [of the FCA Act] is not so circumscribed that an order of this character [for indemnity costs] may be made only against an ethically or morally delinquent party.”

The first thing to be said is that this statement is not authority for the proposition that an order for indemnity costs must be made against a party found to have been, in any respect, “ethically or morally delinquent”. Nor did his Honour intend to suggest that the presence of ethical or moral delinquency will always afford a sufficient ground on which to make an order for indemnity costs.  His Honour was saying only that the presence of ethical or moral delinquency is not an essential condition of a valid exercise of the discretion.

55                  In the course of argument I raised with counsel for Citibank a hypothetical case in which a cause of action founded on fraud succeeded.  He seemed to accept that consistently with his submission, the discretion to order indemnity costs could always be properly exercised in such a case, even though the fraud was not in any way associated with the launching of the claim or cross-claim or the manner of conduct of the litigation by the party found to have been fraudulent.  Counsel for NM, on the other hand, submits that it is only ethical or moral delinquency of the latter kind that is relevant to the exercise of the discretion.

56                  The ordinary rule is that an award of costs is on the party and party basis, and that it is only in a special case that the discretion to depart from that rule will be properly exercised: Venture Industries at 153 per Black CJ, 158 per Cooper and Merkel JJ.  In my opinion, there is no counterpart ordinary rule that in the absence of special circumstances indemnity costs will be ordered where the losing party was guilty of ethical or moral delinquency in the antecedent facts which have given rise to the litigation.  Even in a proved case of fraud, for example, in my opinion the presumption is that a costs order against the fraudulent party will be on the party and party basis.  The conduct of a party that is relevant to the issue of indemnity costs is the party’s conduct as litigant.  But, as noted below, the knowledge that a party has, including knowledge of his or her past conduct, may be relevant to an assessment of his or her conduct as litigant.

57                  Senior counsel for Citibank submits that there have been cases where the underlying or background conduct of a party has been relied on in support of the making of an order for indemnity costs.  He referred to two cases.  In the first, Australian Guarantee Corporation Ltd v De Jager [1984] VR 483 (“AGC”), a mortgagee finance company (“AGC”) was ordered to pay the costs of a wife-mortgagor (“Mrs De Jager”) of successfully defending AGC’s action for possession.  AGC had forwarded the mortgage for registration knowing that what it assumed to be Mrs De Jager’s signature had not been attested, although it purported on the face of the document to have been.  It transpired that her signature had in fact been forged, although this had not been known to AGC.  Tadgell J held that AGC was guilty of fraud for the purposes of s 42 of the Transfer of Land Act 1958 (Vic) and therefore did not enjoy the benefit of the indefeasibility of title provided for in s 41 of that Act.  The fraud consisted of forwarding the instrument for registration with knowledge that it would falsely appear to the Registrar of Titles to satisfy the legislative requirement of attestation.  In relation to costs, Tadgell J stated (at 502):

“Upon the facts as I have found them the pursuit of the action was in my opinion a high-handed presumption.  In the end, it was conceded for AGC that Mrs De Jager’s signature was a forgery.  Having pursued the action with the knowledge¼that it had, and failed, AGC allowed itself a luxury.  The Court ought to do what I can to ensure that Mrs De Jager is not out of pocket over it.”

Citibank may be taken to submit, by analogy, that in all the circumstances, NM’s pursuit of Citibank for contribution or indemnity should be seen to be “a high-handed presumption”.

58                  In my opinion it was AGC’s conduct “as litigant” that attracted the award of indemnity costs against it.  It sought to enforce the mortgage against Mrs De Jager whose signature, it always knew, had not been attested, and therefore might or might not have been forged.  As litigant, it assumed the role of an innocent mortgagee, knowing it had something to hide and hoping it would not be found out.

59                  In the second case referred to by senior counsel for Citibank, National Australia Bank v Petit-Breuilh (No 3) [2000] VSC 291 (“Petit-Breuilh”), Balmford J thought the unconscionable conduct of the plaintiff Bank in obtaining the defendant’s signatures on a guarantee a sufficient ground on which to order the Bank to pay the defendants’ costs on an indemnity basis.  Her Honour described the Bank’s actions as “inexcusable”.  She said it was those actions that “led to” the proceeding and that there was “no reason why the defendants should not be completely indemnified for their costs”.

60                  It appears that her Honour founded the award of indemnity costs on nothing more than the bank’s antecedent conduct.  Accordingly, her Honour’s approach was inconsistent with the view that I have expressed.  But apparently the present issue was not argued and her Honour’s comments cannot be regarded as a considered opinion on the point.

61                  Following the hearing on 23 February, counsel for NM referred me to Harrison v Schipp [2001] NSWCA 13, which had been decided by the New South Wales Court of Appeal on 20 February 2001, only three days prior to the hearing before me.  Mrs Schipp succeeded before the primary Judge in obtaining an award of equitable compensation and compound interest for breach of fiduciary obligation and unconscionable dealing against an estate agent, a solicitor and their respective companies, arising out of a joint venture.  The primary Judge had awarded her costs on an indemnity basis.  His Honour had founded the exercise of his discretion on what he described as “relevant delinquency” of the defendants, which he found to exist in “the special or unusual circumstances constituted by the defendants’ unconscionable conduct and breaches of fiduciary obligation”, that is, the defendants'’ underlying or background conduct which was integral to the cause of action.

62                  But on appeal, Giles JA, with whom Handley JA and Fitzgerald JA agreed, thought that his Honour’s discretion had miscarried.  Giles JA stated as follows (at [136]-[139]):

“136.  The trial judge did not exercise his discretion by regard to the time taken by Mr Harrison in propounding false documents, or otherwise by regard to delinquency in the conduct of the proceedings.  Hagan v Waterhouse (No 2) [(1992) 34 NSWLR 400] provides no support for indemnity costs as a means of providing complete restitution, or otherwise for regard to the substantive unconscionable conduct or breach of fiduciary duty when exercising the discretion as to costs, and such regard would in my view not be correct.  The unconscionable conduct or breach of fiduciary duty leads to compensatory or other relief and costs on the normal basis, and more must be established for a special order as to costs.  In my opinion his Honour’s exercise of his discretion was on a wrong principle.

137.          The discretion must be re-exercised.  It is true that evidence of Messrs Cameron and Harrison was not accepted, indeed they were found to have given false evidence and propounded false documents.  But I do not think there was delinquency approaching that considered to justify a special order as to costs in Degmam Pty Ltd (in liquidation) v Wright (No 2), or that departure from the ordinary basis on which costs should be assessed between litigants was otherwise warranted.

138.          It was necessary that the circumstances in which Mrs Schipp came to put her money into the two properties and leave it with Messrs Cameron and Harrison be gone into, in particular with exploration of her understanding of what she was doing and the influences working upon her.  I am not satisfied that this was a case in which the appellants, properly advised, should have known that they would be found liable (Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401), or that the Court’s time and Mrs Schipp’s money were wasted on “totally frivolous and thoroughly unjustified defences” (Ballieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359 at 362), to use some of the expressions relevant in this area.

139.          Departure from the settled practice of costs on a party and party basis is discretionary, and beyond the need for a sufficient special or unusual feature in the case no fixed rule can be laid down.  Some of the matters thought to justify it are collected by Sheppard J in Colgate-Palmolive Pty Ltd v Cussons (1993) 46 FCR 225 at 233-4.  In the present case no other sufficient special or unusual feature is present.  The trial judge’s order as to costs should be set aside so far as it provided for costs on an indemnity basis.” (my emphasis)

It will be clear from what I have said above that my views are generally in accord with the approach taken by Giles JA.

63                  The size of the gap between indemnity costs and party and party costs, or, to express the matter differently, the inadequacy of party and party costs to compensate for all costs reasonable in amount and reasonably incurred, may be felt to be persuasive in favour of the making of an order for indemnity costs in cases like AGC, Petit-Breuilh and Harrison v Schipp.  It may be taken that in those cases the usual order (for party and party costs) would have left, or did leave, an individual bearing some part of costs reasonable in amount which he or she reasonably incurred in consequence of morally reprehensible behaviour by a finance company (AGC), a bank (Petit-Breuilh) or businessmen and their companies (Harrison v Schipp).  But the problem of the discrepancy between party and party costs and indemnity costs coupled with the prevailing “ordinary rule” to which I referred earlier is for a Full Court (cf Venture Industries at 153 per Black CJ) or for rule amendment to overcome.  It seems to me that the presumption which prevails in favour of party and party costs requires the Court to accept the underlying or background facts of a case as “a given” and to consider how the parties have conducted themselves subsequently as litigants, while taking into account their knowledge of past events which they carry into that role.  In any event, I would follow the New South Wales Court of Appeal in Harrison v Schipp unless I thought it clearly wrong, and I do not.

64                  There is, moreover, a danger in making the field of inquiry too broad.  While courts are sometimes required to assess conduct against a moral yardstick, the task is not necessarily a straightforward one.  Take the present case as an example.  Apparently, consistently with Citibank’s present submission, the inquiry on the issue of costs would extend to encompass all ethical and moral dimensions of both parties’ antecedent conduct.  I would be required to consider whether, from an “ethical or moral” viewpoint, Citibank should be regarded as bearing some responsibility for the Investors’ losses.  Citibank did not put itself to the cost of operating through branches.  Rather, it encouraged the introduction of customers by persons conducting other businesses, such as real estate agents and insurance salesmen.  By this method of doing business, it was able to capture the home-mortgage customers of other banks and building societies and to reap the interest profits associated with numerous Mortgage Power facilities, while bearing no legal responsibility for the selling activity of the introducers.  I mention these matters only to make the point that it should not be thought that a wide-ranging inquiry into ethical or moral delinquency in the antecedent circumstances would come to a halt at Citibank’s door or would have other well-defined limits.

65                  In accordance with the principled approach which I have outlined above, many aspects of NM’s conduct on which Citibank relies are not relevant to the present inquiry because they go to NM’s liability to the Investors, to the extent of its responsibility for the damage suffered by them and therefore to its cause of action for contribution or indemnity.  The special nature of this case as a claim for contribution or indemnity emphasises the irrelevance of those aspects: they did not, on any view, constitute unethical or moral conduct directed to Citibank, even if they constituted conduct of that description directed to the Investors.

66                  I turn now to NM’s conduct as litigant.  It seems to me important on Citibank’s application for indemnity costs not to lose sight of several matters.  First, there is the unusual nature of the present case.  It was a claim by a self confessed wrongdoer for contribution or indemnity.  To prove its right of recovery, NM necessarily led evidence of underlying or background facts establishing that its conduct had rendered it liable to the Investors.  As Citibank itself correctly submitted on the principal hearing, that liability was a matter for proof by NM, not for admission by it.

67                  Secondly, statute provides for this kind of recovery by a wrongdoer.  The “ordinary rule” that costs are on the party and party basis surely applies to this category of case: Citibank did not submit to the contrary.

68                  Thirdly, Citibank’s criticism of NM for failing to call senior officers, particularly of NMAM, is inappropriate.  Sometimes “defending the indefensible” is treated as grounds for ordering indemnity costs, but I do not accept Citibank’s submission that NM’s failure to follow that course (a course scarcely open to it in any event in view of the nature of the proceeding) somehow shows ethical or moral delinquency.

69                  Fourthly, the case raised several difficult issues of fact and law.  One was the question of “dual agency”.  Another was that of vicarious liability of Citibank as putative principal for the tortious conduct of sub-agents.  Even the “introducer-agent” dichotomy was not unarguable.  NM’s characterisation of the selling that took place as being the selling of “a package” by a person who was acting simultaneously as an agent for two principals was of the essence of its case and was not devoid of attraction, although it failed to persuade.  The point is that, giving due weight to the kind of selling activity involved which rendered NM liable to the Investors and to the nature of its claim against Citibank for contribution or indemnity, I find it difficult to characterise as ethically or morally delinquent, NM’s conduct in making and pressing that claim.

70                  Even if, contrary to the view which I expressed earlier, I thought NM’s conduct as part of the underlying or background facts relevant to the present costs issues, I would not have arrived at a different result.  Much of that conduct was already taken into account in my determination of the extent of NM’s responsibility for the loss suffered by the Investors.

71                  Special mention should be made of NM’s conduct in connection with the Potts proceeding.  That conduct preceded the commencement of this proceeding but was not part of NM’s conduct which rendered it liable to the Investors.  Its relevance to the present issue is debatable.  Assuming its relevance, however, it does not point to an award of indemnity costs in my view.  NM thought that Citibank was liable to contribute and simply employed a litigious strategy in the Potts proceeding directed to bringing it to the negotiating table.

A “hopeless” case

72                  In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, Woodward J stated in an oft-cited passage (at 401):

“I believe that it is appropriate to consider awarding ‘solicitor and client’ or ‘indemnity’ costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success.  In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law.  Such cases are, fortunately, rare.  But when they occur, the court will need to consider how it should exercise its unfettered discretion.”

The expression “where the applicant, properly advised, should have known that he had no chance of success” should not be allowed to give rise to difficulty.  It might be suggested, with the benefit of hindsight, that in every case “proper advice” would be advice in accordance with the reasons for judgment delivered by the Court.  Accordingly, it might be suggested in the present case that NM, properly advised, would have been advised in accordance with Reasons for Judgment (No 10).  Clearly, this is not what Woodward J had in mind.  On the other hand, his Honour’s expression “properly advised” was intended to introduce an objective notion: it would “set the bar too high” to insist that the party have actually known that there was no chance of success.  Of course, questions will arise in relation to sets of circumstances falling between the two extremes.  What assumed knowledge of the facts is the party’s litigious conduct to be measured against?  What factual inquiries is the party “deemed” to have made?  What level of legal advice is the party “assumed” to have had?

73                  I do not attempt to answer these general questions.

74                  In the present case, NM had settled with the Investors and sought to recover contribution from Citibank which had profited from the Package.  LKFM was the agent of both NM and Citibank.  I do not think NM should have recognised that its case that the Advisers were acting as agents for Citibank as well as for NM when they made the statements which gave rise to the Investors’ claims, was “hopeless” or “doomed to fail”.  While I rejected NM’s case in the present respect, it was arguable.  Moreover, at least one aspect of my reasoning for holding that Kelly was not acting as agent for Citibank when he promoted the Package had not been put by Citibank in the form in which I stated it.  This was that before Citibank appointed LKFM as an agent Kelly was already making statements of the kind complained of as representative of NM – see Reasons for Judgment (No 10) at [753] et seq.

75                  Again, I have considered carefully Citibank’s submissions noted in par [36] above but they do not persuade me to a different view.  For example, the fact that a finding of the agency for Citibank sought by NM would have indicated a contravention of the SIC or of the Law does not, to my mind, point as strongly against the making of such a finding as Citibank’s submissions would seem to require.  The question was one simply to be determined on the proved facts in accordance with the principles of the laws of agency.

76                  NM’s case that Citibank incurred liability to the Investors pursuant to a direct and non-delegable duty to them was likewise arguable.  That is, it was arguable, although I rejected the proposition, that Citibank had assumed the role of financial adviser and planner.

77                  The present case raised many arguable factual and legal questions which were ably contested by NM throughout.

78                  I do not think indemnity costs should be ordered on the ground that NM’s claim was hopeless.

A “fundamentally flawed” case

79                  Again I have considered carefully, but am not persuaded by, Citibank’s submissions referred to in par [37].

80                  Citibank attacks numerous aspects of NM’s litigious strategy.  As noted earlier, it seizes on references in correspondence to bringing Citibank to the negotiating table.  It also attributes to NM motivations which it deprecates.  I have some difficulties with these submissions against the background of my acceptance of the fact that NM had an arguable case for contribution and indemnity.  So far as I can see, without the benefit of hindsight, NM thought it had such a case and attempted to adopt strategies directed to advancing it in the best way available.

81                  I do not accept that NM’s case was “fundamentally flawed” in the sense of “flawed so that it was doomed to fail”.

Offers of settlement made in the Calderbank letters

82                  I turn next to the question of Citibank’s offers of settlement.  Since NM failed and is to pay Citibank’s costs, it is worse off than if it had accepted any of Citibank’s offers.  But this alone does not necessarily or even presumptively lead to an award of indemnity costs: the applicant for the award still bears the onus of establishing that the non-acceptance was imprudent or plainly unreasonable: MGIAC (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236.

83                  The first offer was that of 1 June 1998 by which Citibank, through its solicitors, HB, offered to settle on the basis simply that each party bear its own costs.  The letter asserted that the affidavit evidence of NM and Citibank showed that Kelly and the other NM agents did not seek and were not granted permission to give investment advice on behalf of Citibank, and that the particular and even the general content of the investment advice given, and therefore the detail of the Package, was not disclosed to Citibank personnel.

84                  The letter also asserted that the pleaded liability of Citibank as lender of an “inherently dangerous” financial product was unknown to Australian law.

85                  Finally, the letter asserted that the indemnity arrangement made between NM and its agents meant that even if Citibank was vicariously liable, NM would ultimately bear that liability because Citibank would succeed on its cross-claim for indemnity against those who rendered it vicariously liable and those persons were to be indemnified by NM.

86                  Generally speaking HB’s predictions in their letter were borne out (I deal below separately with the indemnity question). 

87                  No doubt where a party puts with sufficient particularity to the opposing party the reasons why the latter must fail, yet the latter does not recognise the inevitable, this will be a factor pointing to an award of indemnity costs.  But in my view HB’s letter did not satisfy these requirements. 

88                  The requirements of “sufficient particularity” and “inevitability of failure” are important.  In their absence, it would be open to parties to put their respective cases to the opposing party urging it to recognise the merit of what is put in the hope that if it ultimately finds favour with the Court, an award of indemnity costs will follow.  If this were correct, one might ask rhetorically, “Why write a letter as distinct from simply relying on the pleadings?”  In my opinion, the view could reasonably and prudently be taken by NM that what HB was putting in their letter would not ultimately prevail, particularly in view of the nature of its case as one of the selling of a “package” by a person acting simultaneously as the agent of two principals.  In these circumstances, NM was entitled to pursue its claim without running the risk of an order for indemnity costs.  The considerations advanced by HB in their letter were not so obviously correct that NM behaved imprudently or plainly unreasonably in not accepting with alacrity the small element of compromise present in the offer made.

89                  Citibank’s second offer was conveyed in a letter dated 9 September 1998 from DGJ to CHH.  This was an offer of $250,000 including costs and was in respect of all 132 Investors.  Again, with the benefit of hindsight we know that NM would have done better to have accepted that offer than to have “fought on” and that Citibank’s general resistance of NM’s claim has been vindicated.  But those circumstances alone do not attract an award of indemnity costs unless it can be said that NM should have recognised the obvious correctness of what Citibank was putting to it.  In my view it was not bound to do so.

90                  Citibank’s third and final offer was made in DGJ’s letter to CHH dated 7 December 1998.  The offer was of $90,000 including costs in settlement of the proceeding in so far as it related to the 23 Investors the subject of my order for separate determination.  The remarks which I have made in relation to the second offer apply to this one as well.

Indemnity

91                  Under the deed of settlement entered into by NM and AHA,

·        AHA paid $6,000,000 to NM;

·        NM agreed to discontinue against LKFM, Kelly, DJC, Jones and AHA;

·        NM and AHA agreed to bear their own respective costs of the proceeding and of the deed;

·        AHA agreed to provide reasonable assistance to NM in the further conduct of the proceeding and to do other things to assist NM’s cause; and (importantly)

·        by clause 14 NM agreed to indemnify AHA “and/or its insureds and/or alleged insureds” against and in respect of “any liability, demand or claim by any party against AHA or any of its insureds arising out of or in connection with” the promotion or sale of the Package by a wide range of relevant persons or the facts or issues (or both) the subject of the proceeding.  In particular, clause 15 of the deed provided in part:

“Without limiting the generality of the last preceding clause, [NM – defined in the deed to mean NMLA, NMAM and NMPS] hereby:

(a)               indemnify AHA and any of its insureds and/or alleged insureds against and in respect of any amounts howsoever arising which AHA or any of its insureds and/or alleged insureds:

(i)                 may be held liable on any cross-claim to pay to Citibank by way of contribution towards or indemnity in respect of any verdict obtained by [NM] against Citibank in the proceedings; and

(ii)               may agree to pay to Citibank, with the consent of [NM], in settlement of any cross-claim; and

(iii)             may be ordered by the Court to pay to Citibank in respect of costs incurred on the cross-claims and the proceedings; and

(iv)             may be held liable to Citibank on any other proceedings commenced by Citibank against AHA or any of its insureds and/or alleged insureds arising out of or in any way connected with the facts and/or issues that are the subject of the proceedings¼.”

92                  As I noted in Reasons for Judgment (No 10) (at [14]), it was after the deed of settlement was entered into that NM ceased to sue the respondents other than Citibank and the defences to Citibank’s cross-claims ceased to make positive allegations against NM and, in substance, simply did not admit Citibank’s liability to NM, while making positive allegations against Citibank.

93                  As I also noted in Reasons for Judgment (No 10) (at [15]), NM’s legal representatives appeared for Kelly and Jones as, respectively, second and fourth cross-respondents to Citibank’s cross-claim and as cross-claimants against Citibank on cross-claims of their own for contribution or indemnity.  Although the K/J Associates were independently represented, NM paid their costs of defending Citibank’s cross-claim.  As I observed there:

“In sum, as a result of the deed of settlement¼, NM [stood] behind the Adviser cross-respondents to Citibank’s cross-claim and would not [have welcomed] a result according to which it succeeded against Citibank if Citibank succeeded in its claim for full indemnity on its cross-claim against them.”

94                  Citibank submits that in view of the indemnity given by NM in the deed, it was wasteful for it to have prosecuted its claim since:

·        it was inevitable that Citibank would succeed on its cross-claim against the Advisers for indemnity in respect of the hypothesised vicarious liability incurred by Citibank as a result of their conduct; and

·        it was equally certain under the terms of the deed of settlement that NM would have to bear that liability ultimately.

95                  In response, NM relies on the fact that the deed of settlement was entered into, not between NM and the Advisers, but between NM and AHA.  Accordingly, so NM submits, not being parties to the deed, the Advisers were not in a position to enforce the indemnity given in it by NM.  Accordingly, counsel for NM submits that the indemnity given in the deed could be activated only if Citibank succeeded against AHA in its cross-claim brought in reliance on s 6 of the LR(MP) Act (the “statutory charge provision”). 

96                  Since I concluded that Citibank did not incur liability to the Investors, its cross-claim against AHA fell away.  I summarised AHA’s defences to Citibank’s cross-claim in pars [132] and [133] of Reasons for Judgment (No 10) and will not repeat that summary here.  On the hearing of the substantive proceeding detailed submissions were made on behalf of AHA as to why it was not liable on that cross-claim which, for the reason mentioned, I did not have to consider.  Citibank has not disputed, on the present hearing, that AHA had an arguable defence to the cross-claim brought against it under s 6 of the LR(MP) Act.

97                  But Citibank relies on the contractual indemnity given by NM in the deed of settlement.  In response to the “privity point” argued by counsel for NM, on 26 February 2001, following the hearing on 23 February 2001, senior counsel for Citibank wrote to my Associate referring to s 36C of the Conveyancing Act 1919 (NSW) and s 56 of the Property Law Act 1958 (Vic) and the discussion of the counterpart s 11 of the Property Law 1969 (WA) in Jones v Bartlett (2000) 75 ALJR 1.  Counsel for NM responded by objecting to the taking of this course after the conclusion of the hearing without leave of the Court.  As well, he made a short written submission in response.

98                  I agree with counsel for NM that the making of the supplementary submission required leave, even though the letter did no more than refer me to the two statutory provisions and the case mentioned. 

99                  The first thing to be said is that NM’s arguable case that Citibank was liable to the Investors under a direct and non-delegable duty of care would not have given rise to a liability of the Advisers to indemnify Citibank and therefore could not, even arguably, have activated the indemnity given by NM in the deed of settlement.

100               In relation to NM’s case that Citibank was vicariously liable to the Investors, it suffices to say that it is well established that the statutory provisions referred to have a limited operation and do not overcome the privity of contract problem: see Beswick v Beswick [1968] AC 58 (decided on the United Kingdom predecessor of the Australian provisions, s 56 of the Law of Property Act 1925 (UK)); Concrete Constructions Pty Ltd v Government Insurance Office of New South Wales [1966] 2 NSWR 609 at 620-621; Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 12.  Neither those provisions nor the exception to the privity doctrine recognised in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 is available because the deed of settlement does not purport to be a contract made with the Advisers: it purports to be a contract with AHA alone.  Jones v Bartlett is against, rather than for, the suggestion that the Advisers were entitled to enforce the indemnity under the New South Wales and Victorian statutory provisions: see Gaudron J at [67]-[74], Gummow and Hayne JJ at [142] and McHugh J (agreeing with Gummow and Hayne JJ) at [99].  (Subsection 11(2) of the Western Australian Act has no counterpart in the New South Wales and Victorian provisions which are comparable to the Western Australian subs 11(1) alone.)

101               In the result, it seems that the contractual indemnity given by NM would not have been activated by a mere finding that the Advisers were liable to indemnify Citibank.  The existence of that indemnity does not support the making of an order for indemnity costs.

Notices disputing facts

102               I turn lastly to Citibank’s various notices disputing facts.  As noted earlier, the facts of which admission was sought were numerous and varied.  The submissions made on the present application have not distinguished between them, although annexure “A” to NM’s written submissions identifies paragraphs in Reasons for Judgment (No 10) where it is said there are findings in respect of some of the Investors of some of the facts of which admission was sought.

103               For Citibank to make the admissions sought would have involved a great amount of work.

104               The first notice to admit sought admission of 13 facts in relation to various groupings of the 132 Investors.  For example, by par 3, Citibank was called upon to admit that for each of the 91 Investors listed in column 1 of Schedule 1 annexed to the notice, Van Minnen was identified to Citibank as the Investor’s solicitor in the Citibank discovered document specified in column 2 of Schedule 1 against the Investor’s name.  The case proceeded to hearing in respect of only 23 of the 132 Investors.  In Schedule A to his written submissions, counsel for NM says that I found the fact of which admission was sought in the cases of six of the 23 Investors and he identifies the paragraphs in Reasons for Judgment (No 10) where I am said to have done so.  I have read the six paragraphs identified by counsel and accept that I did so.

105               But what of the remaining 85 Investors listed in Schedule 1?  For all I know, the fact could not have been proved in their cases.  Even as to the six, the fact assumed no importance in Reasons for Judgment (No 10).  And, most importantly, the documents on which NM relied and to which the admission sought by NM referred would have had to be at Court in any event.  NM could have handed up Schedule 1 in so far as it related to the 23 Investors as an “aid” which summarised the relevant Citibank discovered documents.

106               Other paragraphs in the notices to admit would have been more troublesome for Citibank to deal with.  For example, consider pars 10-13 of the first notice to admit which were as follows:

“10.    That in assessing the application of the Investors listed in Schedule 4 Citibank did not know the Investor’s income.

11.              That in assessing the applications of the Investors in column 1 of Schedule 5 Citibank believed the Investor’s income was, in each case, the amount specified in column 2.

12.              That in assessing the applications of the Investors in column 1 of Schedule 6 Citibank believed the Investor’s occupation was, in each case, as described in column 2.

13.              That in assessing the applications of the Investors in column 1 of Schedule 7 the purpose of the Mortgage Power Loan, or a purpose of it, was identified to Citibank to be to the effect ‘for investment in National Mutual Property Trust’, such identification being in the Citibank discovered document in column 2”

107               Questions arise as to whether it was reasonable for NM to seek the admission of these facts and whether it was reasonable for Citibank to dispute them.  In some instances, such as those related to interest rates charged by NM, it would have been unreasonable for NM to require Citibank to admit the facts, at least unless NM first produced to Citibank NM’s documents clearly establishing the facts.  In one case, that relating to interest rates charged by Citibank, perhaps Citibank could have made the admission without great cost.

108               As I said, neither party dealt, one by one, with the categories of facts in question or furnished evidence dealing with them separately.  The only evidence before me is evidence of the giving of the notices to admit facts and notices disputing facts.  As well, I have, of course, Reasons for Judgment (No 10).

109               I have read all the paragraphs in the various notices.  In many instances, documents evidencing the facts in question would be before the Court in any event.  Generally speaking, the facts of which admission was sought assumed no importance in Reasons for Judgment (No 10).  The margin between indemnity costs and party and party costs for the performance of that work was always going to be sizeable.  Citibank was contending throughout that NM would fail.  The rule provisions appear to have been activated in respect of a very small fraction of the total number of instances in respect of which the admission was sought (for example, in the case of par 3 of the first notice, 6 out of 91).

110               In all the circumstances I think that Citibank acted reasonably in not admitting the facts, except perhaps in relation to one or two of them.  An order in NM’s favour in respect of those one or two would be of so little significance in the total picture that I do not think a special order is warranted.

conclusion

111               NM should pay Citibank’s costs on the usual party and party basis and there should be no special order in relation to the proof of facts referred to in the respective notices disputing facts.

112               I will order that Citibank not be required to pay the costs of proof of any of the facts referred to in any of its notices disputing facts.

113               On Citibank’s application for indemnity costs and NM’s application for costs in relation to the disputation of facts, each party has had some success.  Citibank’s submissions in support of its application for indemnity costs were lengthy while NM’s successful submissions in reply were short.  NM’s submissions in support of its application for costs in relation to the disputed facts were short and Citibank’s successful submissions in response were also short.

114               Either each party should be left to bear its own costs or the balance slightly favours NM.  Justice will be done if there is no order for costs except in relation to Citibank’s submission made without leave after the hearing and Citibank is ordered to pay NM’s costs, on the usual party and party basis, of responding to that submission.

115               Costs orders also remain to be made in relation to the various cross-claims which were previously dismissed.  For this reason I will stand over the proceeding to a date on which I expect the parties to hand up short minutes of orders reflecting the present Reasons for Judgment and disposing of all outstanding questions of costs.

Associate:

Dated:              27 April 2001