FEDERAL COURT OF AUSTRALIA

Ananda Marga Pracaraka Samgha Ltd v Tomar (No 7) [2013] FCA 863

THE COURT ORDERS THAT:

1.    The defendants pay the plaintiffs’ costs of the claim and the cross claim on a party and party basis up to 1 March 2011, and thereafter on an indemnity basis.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

introduction

1    The background to this proceeding is set out in Ananda Marga Pracaraka Samgha Ltd v Tomar (No 6) [2013] FCA 284.

2    Briefly stated, the dispute between the parties concerned the identity of the members and directors, the construction of the constitution and the control and future disposition of the first plaintiff, Ananda Marga Pracaraka Samgha Ltd (“the company”).

3    The company is a company limited by guarantee incorporated in 1986. Its principal objects include “to propagate the philosophy, the ideals and practice of Ananda Marga which is an autonomous religion, faith and social system…”. The company, although formally a party to the proceeding, did not play an active role in the litigation. See Ananda Marga Pracaraka Samgha Ltd v Tomar (No 2) [2010] FCA 1342. In these reasons, unless otherwise indicated, “the plaintiffs” refers to the second and third plaintiffs only.

4    In reasons for judgment delivered on 3 April 2013, I held that the plaintiffs had established their entitlement to relief broadly in the terms sought in their amended application dated 16 April 2012 and that the defendants’ allegations made by the further amended cross-claim dated 4 November 2011 were not established. See Ananda Marga Pracaraka Samgha Ltd v Tomar (No 6) [2013] FCA 284.

5    On 3 April 2013, I made a number of orders reflecting the reasons for judgment, but did not dismiss the defendants’ cross-claim, as it incorporated (albeit only in the prayer for relief and unsupported by specific allegations) an application under s 461(1)(k) of the Corporations Act 2011 (Cth) (“the Act”) that the company be wound up on the just and equitable ground. Although the defendants did not allege breach of duty or misfeasance, the evidence at trial disclosed a long-standing pattern of multiple contraventions of, or non-compliance with, statutory requirements, together with a lack of adequate procedures to ensure such compliance. The deficiencies and contraventions did not necessarily justify winding up of the company on the just and equitable ground. Accordingly, the determination of the application under s 461(1)(k) was deferred so that the court could receive a report by an appropriately qualified independent expert on the company’s compliance with statutory obligations from 13 December 2010 up to the present, and the steps it had taken to ensure future compliance.

whether the company should be wound up on the just and equitable ground

The Independent Expert Report

6    Greg Meredith of Ferrier Hodgson was engaged as the independent expert.

7    The report of Mr Meredith dated 9 July 2013 was filed on 10 July 2013 and tendered on 1 August 2013. Mr Meredith declared his compliance with the Guidelines for Expert Witnesses in Proceedings in the Federal Court of Australia. Mr Meredith, a Fellow of the Institute of Chartered Accounts and a partner of the firm of Ferrier Hodgson, was appropriately experienced and well qualified to assess the relevant matters. Mr Meredith opined that during the relevant period, all applicable statutory requirements had been complied with, save in several instances which he discussed in detail.

8    Mr Meredith identified two possible contraventions of ss 296 and 297 of the Act. First, there was an error resulting in an understatement of profit of a school conducted by the company, which was made by the auditor, involved no dishonesty and was capable of retrospective correction, which was in hand. Secondly, there was an erroneous omission of a contingent liability from the company’s financial reports, although it was disclosed in the financial statements of the relevant school. The error was that of a group auditor, did not involve dishonesty and was to be addressed in the company’s financial reports for 2013.

9    Mr Meredith noted that the annual directors’ reports for the financial years 2011 and 2012 did not include some disclosures that were required by s 300B of the Act.

10    Mr Meredith noted that in contravention of s 319 of the Act, the company’s audited financial reports for the financial years 2011 and 2012 were not lodged within the required four months of the end of the financial year. The company’s audited financial report for the financial year 2013 had not yet been lodged but the company intended to lodge it before the end of August 2013.

11    Mr Meredith noted that in contravention of s 250N of the Act, no annual general meeting had been held for the financial years 2011, 2012 and 2013 (which was during the course of the litigation, when an interim management regime applied).

12    Mr Meredith opined that, based on the information available to him, the company and its directors had undertaken or would undertake a number of measures that “will assist in ensuring future compliance with statutory obligations in the future.” Mr Meredith noted that the company and its directors had:

(a)    Retained an appropriately qualified person in the area of accounting;

(b)    Implemented a new accounting and financial reporting system; and

(c)    Undertaken procedures and measures that will assist in addressing identified areas of non-compliance.

13    Mr Meredith concluded:

125.    Based upon the current level of compliance with statutory reporting obligations … and the measures undertaken and planned as documented by [the company], in my view, [the company] and the directors have taken sufficient measures and procedures to ensure future compliance with statutory obligations and requirements in respect of:

(a)    The obligation to keep books and records;

(b)    Financial reports;

(c)    Directors reports;

(d)    Audit of the financial report of the company;

(e)    Timely lodging of returns; and

(f)    Meetings and the keeping of minutes.

…

140.    Based upon the current measures undertaken and those planned as documented, in my view, [the company] and the directors have taken sufficient measures and procedures that will assist in achieving an appropriate standard of governance going forward.

Consideration

14    I was satisfied that on the basis of the matters and opinions contained in Mr Meredith’s report that the non-compliances or contraventions that occurred during the relevant period were few in number, satisfactorily explained, appropriately addressed and/or not of a character which warranted winding up on the just and equitable ground. Further, the company had instituted appropriate and adequate measures in relation to staffing and training to ensure the future awareness of and compliance with the obligations of the company and its officers. I concluded that (as was common ground) there was no basis to order that the company be wound up on the just and equitable ground pursuant to s 461(1)(k) of the Act.

15    Accordingly, on 1 August 2013, I dismissed the defendants’ cross-claim and released the plaintiffs from their undertakings to the court given on 31 March 2010 and 3 December 2010.

costs

16    The defendants were wholly unsuccessful in the litigation. The plaintiffs sought that the defendants pay their costs of the claim and cross-claim on a party/party basis until 1 March 2011 and thereafter on an indemnity basis.

17    The plaintiffs submitted that there was no reason to depart from the general rule that costs follow the event.

18    The plaintiffs also submitted that the defendants should, from 1 March 2011, pay costs on an indemnity basis because:

(1)    The defendants’ case was “hopeless and without any rational prospect of success” and that a “monumental amount of money has been spent in resisting it”.

(2)    The defendants had unreasonably rejected a Calderbank offer contained in a letter of the plaintiffs’ solicitors dated 15 February 2011 to settle the proceeding on a basis that was more favourable to the defendants than the outcome of the litigation.

19    The letter of the plaintiffs’ solicitors to the defendants’ solicitors dated 15 February 2011 stated:

Without prejudice save as to costs

Dear Mr May

Ananda Marga Pracaraka Samgha Ltd & Others v Sunil Jumar Singh Tomar & Others

Federal Court of Australia proceeding no. VID 208 of 2010

We refer to our letter dated 28 January 2011 proposing settlement of our clients' costs claim arising from the Orders of Justice Dodds-Streeton on 3 December 2010. Further to that letter, we are instructed to make a proposal to settle the entire proceeding. The terms proposed by our clients are as follows:

1    Our clients pay $35,000 of your clients' legal costs.

2    Your clients agree that:

(a)    The following persons are the only current directors of Ananda Marga Pracaraka Samgha Ltd (Company):

(i) Mr Pillay;

(ii) Mr Pillai;

(iii) Ms Nayak;

(iv) Mr Tomar; and

(v) Ms Alister;

(b) The following persons are members of the Company:

(i) Mr Pillay;

(ii) Mr Pillai;

(iii) Ms Nayak;

(iv) Mr Tomar; and

(v) Ms Alister.

(c) The following persons are not members of the Company:

(i) Paul Alister;

(ii) Dieter Dambiec;

(iii) Dharanendran Parthy;

(iv) Richard Pfeiffer;

(v) Luke Deacon;

(vi) Mirai Deacon;

(vii) Dayashankar Tiwari; and

(viii) Michael Towsey.

3    The resolutions of the purported General Meeting of the company on 20 March 2010 are void and of no effect.

4    Your clients will not seek, in any legal proceeding, to assert the trust alleged in paragraph 2, or the matters alleged in 7 (a) to (d) and 8 (a) to (d), of the Defendant's Amended Cross Claim.

5    The application will be discontinued, and the Cross Claim will be dismissed, with no order as to costs other than the costs which are the subject of the Orders for costs made by Dodds-Streeton J on 3 December 2010.

This offer is open for acceptance until 4 pm on Wednesday 23 February 2011 after which time it will automatically lapse.

If your clients are unsuccessful in obtaining an outcome more favourable than that proposed above our clients will seek an order that your client pay our client's costs on an indemnity basis from Wednesday 23 February 2011 in accordance with the principles applied in Flower & Hart (a firm) v White Industries (Qld) Pty Ltd [1999] FCA 773, Calderbank v Calderbank [1975] 3 All ER 333 and Cutts v Head [1984] 1 All ER 597 and applied by the Honourable Mr Justice Byrne of the Supreme Court of Victoria in the cases of Mutual Community v Lorden Holdings Pty Ltd (unrep) 28 April 1993 and John Holland Construction and Engineering Pty Ltd v Majorca Projects Pty Ltd & Anor 1 November 1998 together with the decision of the Court of Appeal in Hazeldene's Chicken Farm Pty Ltd v VWA (No.2) [2005] VSCA 298. If our clients get the benefits of such an Order, your clients will be jointly and severally liable to meet our clients' costs which are likely to be several hundred thousand dollars.

20    It was common ground that the defendants did not accept the offer in the above letter by 23 February 2011 or at all.

The plaintiffs’ submissions

21    The plaintiffs submitted that there was no evidence that the defendants had, as they claimed, pursued the litigation altruistically motivated by genuine belief that the company should be conducted in accordance with their understanding of the Ananda Marga religion. Nevertheless, such a belief, if established, would not justify departure from the ordinary rule.

22    The plaintiffs submitted that the Calderbank offer made on 15 February 2011 represented “a genuine attempt to compromise the proceeding” in which they gave up their assertion that David Tanner and Colm Largey were members, offered to pay some of the defendants’ legal costs and made no claim to their own significant legal costs already incurred.

23    The plaintiffs submitted, in that context, that the original defence relied on the validity of the meeting on 20 March 2010 which was abandoned at trial. The amended defence introduced many contentions which turned a “simple case with a defence that was so weak it was abandoned” into a “complex matter”. The plaintiffs submitted that while the pleadings were complete by late 2010 and did not substantially change prior to trial, at trial the defendants failed on a “vast number of grounds” on “dozens of bases”. Accordingly, “[p]roperly advised, the defendants should not have persisted with their defence and [cross-claim]”.

The defendants’ submissions

24    The defendants submitted that despite their failure in the litigation, they should not bear its costs, which should instead be borne by the company. Alternatively, there should be no order as to costs.

25    The defendants contended that in this case, special circumstances justified a departure from the ordinary rule because, although unsuccessful, they had pursued the litigation in good faith and not for private gain but to uphold their understanding of the principles and practice of the Ananda Marga religion, which was supported by a significant number of members of the public. There was accordingly a public interest in the outcome of the litigation which resolved significant disputes concerning the management, membership and constitution of the company and its interaction with rules and practices of Ananda Marga. Such resolution benefited the company, its officers and its members.

26    The defendants submitted that the litigation had also usefully exposed a long-standing pattern of multiple corporate contraventions and a lack of adequate procedures to ensure compliance with statutory requirements. The public interest was thus served by the judicial scrutiny entailed by the litigation, in which they served as a necessary contradictor.

27    The defendants submitted that the company in this case was akin to a charitable trust in which the interaction between the constitution and the rules of Ananda Marga was unclear. Further, the company’s failure to keep records or to comply with statutory obligations had led to confusion about the identity of the members. The defendants drew, in that context, analogies with Attorney General (Qld) ex rel Nye v Cathedral Church of Brisbane (1977) 136 CLR 353 (“Attorney-General (Qld) ex rel Nye”).

28    The defendants submitted that any costs order made against them should not be on an indemnity basis. They submitted that their rejection of the Calderbank offer was not unreasonable in circumstances where:

(a)    the terms of the Calderbank offer were unclear and would not have disposed of the proceeding in its entirety, as there was no reference to one of the persons whom they alleged to be members (Jake Karlyle);

(b)    the Calderbank offer contained merely negligible elements of compromise and in essence required their total capitulation. The plaintiffs’ offer to pay $35,000 in respect of the defendants’ costs was offset by the defendants’ existing liability to satisfy a considerably higher costs order in the plaintiffs’ favour. Further, the plaintiffs surrendered only their allegations that Messrs Tanner and Largey were members of the company;

(c)    the defendants’ case on the true nature of the Ananda Marga religion and its intersection with the company was not hopeless, untenable or doomed to fail;

(d)    given the stage of the litigation at the date of the Calderbank offer, important aspects of the evidence were as yet unclear; and

(e)    had the Calderbank offer been accepted, the substantial and longstanding non-compliance with statutory obligations would not have been resolved.

consideration

The Court’s power to order costs

29    Section 43 of the Federal Court Act 1976 (Cth) provides:

…

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

(3)    Without limiting the discretion of the Court or a Judge in relation to costs, the Court or Judge may do any of the following:

(a)    make an award of costs at any stage in a proceeding, whether before, during or after any hearing or trial;

(b)    make different awards of costs in relation to different parts of the proceeding;

(c)    order the parties to bear costs in specified proportions;

(d)    award a party costs in a specified sum;

(e)    award costs in favour of or against a party whether or not the party is successful in the proceeding;

(f)    order a party’s lawyer to bear costs personally;

(g)    order that costs awarded against a party are to be assessed on an indemnity basis or otherwise;

(h)    do any of the following in proceedings in relation to discovery:

(i)    order the party requesting discovery to pay in advance for some or all of the estimated costs of discovery;

(ii)    order the party requesting discovery to give security for the payment of the cost of discovery;

(iii)    make an order specifying the maximum cost that may be recovered for giving discovery or taking inspection.

…

30    It is well established that the Court has a wide discretion in relation to costs, which must, however, be exercised judicially.

No basis to depart from the usual rule that costs follow the event

31    In my opinion, in this case, there was no basis to depart from the usual rule that costs follow the event and should be borne by the unsuccessful parties.

32    Contrary to the defendants’ submissions, the present case is not relevantly analogous to Attorney-General (Qld) Ex Rel Nye. In that case, the Attorney-General, at the request of interested individuals, sought, inter alia, to restrain the respondents (the Corporation of the Lesser Chapter of the Cathedral Church of Brisbane and the Corporation of the Synod of the Diocese of Brisbane (“Synod”)) from applying for other purposes moneys donated in a public appeal to conduct a hospital, which had since become impossible to maintain on its existing site. The Synod had resolved to demolish the hospital and use funds accumulated from its operation to build a new hospital elsewhere. The Attorney-General sought, broadly speaking, declarations that the respondents held certain lands and funds on trust for the purposes of conducting a hospital thereon and an injunction restraining them from demolishing the existing hospital on the lands or using the lands or accumulated funds for any other purpose.

33    The respondents also sought declarations in relation to the same matters, including that it was no longer practicable to use the funds to carry out a trust by conducting a hospital on the relevant lands and that the funds should be applied cy pres.

34    There were potentially several trusts involved and the records of the respondents did not clearly distinguish between obligations owed in a number of different capacities. The primary judge determined that certain lands were held on a charitable trust independently of the trusts on which the respondents held property of the Church of England and Cathedral in Brisbane. His Honour in essence found in favour of the respondents and ordered the relators to pay the costs.

35    The Attorney-General and the relators appealed to the High Court. After an exhaustive analysis of the terms on which a number of relevant lands and funds were acquired and held, Jacobs J (with whom Stephen, Mason and Murphy JJ agreed) did not entirely accept the approach of the primary judge. His Honour nevertheless reached a similar conclusion on some aspects of the case. The appeal failed in certain respects, but did not wholly fail.

36    The High Court nevertheless allowed the relators’ appeal from the costs order against them.

37    Jacobs J observed (at 376-377):

There is also an appeal against the order of Stable J. that the relators pay the respondents' costs of the action. The allowance of the appeal to the extent of making the declarations proposed above does not decide matters upon which there was any issue raised by the respondents and would not itself warrant an alteration in the order for costs made by Stable J. However, the issues which were fought and determined by him were issues which needed to be determined by the Court in a contested action. If there had been no relators, the Attorney-General would have been obliged to raise for determination by the Court very many of the questions which were decided. The legal position in relation to the Pyrmont lands and the Frascati lands was not at all clear and the manner in which the Lesser Chapter failed to keep wholly separate in its accounts and other records its obligations as the corporation charged with the conduct of the affairs of the Cathedral and its obligations as trustee of the charity St Martin's Hospital added in no small measure to the lack of clarity. Moreover, the decision that it was no longer practicable to carry on St Martin's Hospital on its existing site was one which needed to be reached after the evidence for and against that conclusion had been advanced in a contested action, especially as the trustee, the Lesser Chapter, was concerned in its other corporate capacity in the decision and was therefore not able to be regarded as impartial and disinterested. The relators' action was probably the best way in which this very important question could be determined after exhaustive inquiry. In my opinion the relators ought not to have been ordered to pay the costs of the action. In the circumstances I think that the proper order for costs was that all parties have their costs out of the trust funds of the charity St Martin's Hospital.

As to the costs of the appeal, it appears to me that the appellant relators have sufficiently succeeded to be entitled to some costs but it must be borne in mind that they have failed in the most substantial grounds of their appeal. In the circumstances the proper order for costs is that one-half of the costs of the appellants and the whole of the costs of the respondents be paid out of the trust funds of the charity St Martin's Hospital.

38    In my opinion, such considerations do not assist the defendants in this case. No controversy, objectively assessed, existed independently of the defendants’ allegations which were complex, unclear and shifted in the course of the litigation.

39    Although the plaintiffs commenced the litigation, their position was essentially defensive and necessary in order to maintain the status quo in relation to the members and directors of the company. The litigation was initiated and necessitated by the defendants’ attempt to remove the plaintiffs as directors of the company and to appoint the first defendant as president, the third defendant as a director and the fourth defendant as company secretary pursuant to resolutions passed at a purported general meeting held on 20 March 2010. The meeting was convened by the first defendant, Dr Tomar, and attended in person or by proxy by the other defendants, all of whom claimed to be members of the company.

40    The plaintiffs, from the outset and consistently thereafter, denied the validity of the resolutions and the meeting on 20 March 2010 in reliance on the relevant provisions of the company’s articles and applicable statutory provisions. The plaintiffs’ statement of claim dated 11 June 2010 alleged that the resolutions at the meeting on 20 March 2010 (and hence their purported removal as directors) were invalid. The plaintiffs denied that the third to eleventh defendants were members of the company. The plaintiffs promptly obtained an injunction preserving the status quo in relation to the company’s officers and members. In April 2010, the plaintiffs also filed evidence to establish that they and other persons whose membership and/or directorship were challenged by the defendants had complied with the articles’ requirements for membership and office, and that the meeting on 20 March 2010 was not a valid meeting of the company.

41    Until the trial or shortly before it commenced, the defendants asserted the validity of meeting on 20 March 2010 and did not admit that the plaintiffs and others had complied with the articles’ requirements for membership or office-holding. Shortly before trial, they admitted those matters in relation to all persons save for Messrs Largey and Tanner.

42    The company’s articles governing membership were cast in clear, comprehensive and unambiguous terms. The company’s memorandum contained no express provision which contradicted or qualified the articles dealing with membership.

The defendants’ case

43    The defendants’ amended defence and amended cross-claim dated 2 August 2010 (which applied at the date of the Calderbank offer) relied on the events of the 20 March 2010 meeting, alleged implied terms of the articles and memorandum and alleged breaches thereof to deny the membership and (where relevant, directorship) of the second and third plaintiffs, Arati Nayak, Mr Largey and Mr Tanner.

44    The amended defence and amended cross-claim alleged that the third to eleventh defendants were members of the company because they were members of certain committees of the company and also alleged estoppel by convention. At trial, the defendants made no cogent submissions in relation to estoppel by convention and did not establish that the relevant committees were committees of the company.

45    The amended defence and amended cross-claim alleged that according to rules and practices of Ananda Marga of which Ac Dhruvananda Avadhuta was the general secretary a follower must obey his commands and that Ananda Marga monks and nuns must obey “posting orders”.

46    The amended cross-claim alleged an implied term of the articles and memorandum that persons who were not compliant with the rules, and hence not members of Ananda Marga in good standing, should not be or remain members of the company. The amended cross-claim alternatively alleged that the memorandum and articles were, on a proper construction, to the same effect.

47    The defendants alleged that the membership and directorship of Mr Pillay and other monastic followers of Ananda Marga had terminated because they had breached an implicit condition of membership and office by failing to comply with posting orders, which deprived them of “good standing”. The defendants alleged, unclearly in my view, that lay persons (to whom posting orders did not apply) such as Mr Tanner and the third plaintiff were “supporting parties” who lost good standing because they failed to comply with a letter the general secretary posted to Mr Largey.

48    At trial, the defendants also abandoned their reliance on the meeting on 20 March 2010 and the resolutions passed at it. Dr Tomar, the sole defendant to give evidence, conceded at trial that he knew that the five persons identified by the plaintiffs were, prior to 20 March 2010, members and directors of the company; that the third to eleventh defendants were not members of the company as at 20 March 2010; and that the meeting on 20 March 2010 was not a valid members’ meeting and was convened in breach of his duty as a director.

49    At trial, the defendants were unable to formulate with precision the implied term or terms for which they contended and abandoned the relevant allegations. As stated in the reasons for judgment delivered on 3 April 2013, despite the formal abandonment, the defendants also necessarily relied on implication in relation to the alleged proper construction of the constitution and articles, in which they were unsuccessful.

50    Following their failure to accept the Calderbank offer (which lapsed on 23 February 2011) the defendants filed a further amended cross-claim which included allegations of oppression and failure of the company’s objects, claiming, inter alia, winding up on the just and equitable ground.

51    The defendants’ case changed in a number of significant respects in the course of the litigation. It was a complex and voluminous component of the litigation. While the defendants’ case was not hopeless or entirely without prospects of success, it was consistently a weak case, frequently elusive, imprecisely articulated and dependent not on one contingency but on a cascading series of difficult and often unclear legal arguments and supporting evidence, success in all of which was essential. The establishment of the defendants’ allegations about the nature of the Ananda Marga religion was merely necessary, but not sufficient, to their success in the litigation.

Whether the litigation was for the benefit of the public or the company

52    There was, in my view, no manifest lack of clarity which demanded curial resolution with the participation of a contradictor. Rather, the defendants advanced a case which was beset by a multitude of manifest and serious hurdles, many aspects of which, after rejection of the Calderbank offer, they abandoned without contest.

53    Moreover, the defendants acknowledged that the company had continued to fulfil its object of propagating the philosophy, ideals and practice of Ananda Marga and did not allege that its activities or teachings were contrary to those ideals. The defendants’ case was not that the company’s operations or services to the public breached the relevant object, but rather that continued membership of persons who did not profess allegiance to a particular Ananda Marga administration in India was inimical to it. The defendants did not dispute that a schism in Ananda Marga (which was the subject of a company resolution) had existed for some years. In such circumstances, the resolution of the issues raised in the cross-claim had no appreciable public impact or benefit.

54    The pattern of non-compliance with statutory obligations was not alleged in the pleadings but emerged incidentally from the evidence at trial. The non-compliance was long-standing and it was the duty of all directors (including the first and second defendants) to ensure that the company maintained appropriate standards of governance and compliance.

55    It was unnecessary to expose the company to prolonged, costly and divisive litigation in order to identify and address those deficiencies. Their disclosure, while opportune, is not, in my opinion, a basis, whether independently or cumulatively, for a departure from the usual rule.

56    The evidence did not permit me to determine the motivation of the defendants (save for Dr Tomar, who gave evidence) or the extent of support for their views or their engagement in the litigation. Assuming, however, that the defendants were actuated by a sincere and disinterested belief in their cause, it would not justify a departure from the usual rule.

57    In my opinion, neither the public interest nor the interests of the company were served by the complex and protracted litigation which was initiated by the actions and claims of the defendants, many of whom were ultimately found not to be members of the company and whose claims to membership lacked a sound foundation.

58    Nor, in my opinion, was there any other ground to justify a departure. The defendants conducted the litigation, which involved many obvious weaknesses and significant risks, at their peril. Neither the company (which is engaged in charitable activities and receives donations and government grants for those purposes) nor the plaintiffs (who were obliged to defend their membership and office in the company’s interests) should be subjected to the costs of the litigation.

Whether indemnity costs

59    In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401, Woodward J stated 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.

60    In Colgate Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233, Sheppard J stated that the circumstances which may warrant an award of indemnity costs included “the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions” and “an imprudent refusal of an offer to compromise”.

61    In Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298 (“Hazeldene’s Chicken Farm”) the Victorian Court of Appeal did not accept that there was a presumption that an offeree who rejects a Calderbank offer and obtains a less favourable result in the litigation should pay indemnity costs.

62    Rather, the Court of Appeal stated (at [20]):

The correct approach, in our view, is to treat the rejection of a Calderbank offer as a matter to which the Court should have regard when considering whether to order indemnity costs. As Gyles, J.A. stated in SMEC Testing Services Pty Ltd v Campbelltown City Council –

“In the end the question is whether the offeree’s failure to accept the offer, in all the circumstances, warrants departure from the ordinary rules as to costs...”

(footnotes omitted)

63    The Court of Appeal recognised that the availability of special costs where offers of compromise are rejected was underpinned by the competing policy goals of, on the one hand, encouraging settlement, and, on the other hand, avoiding the discouragement of potential litigants (at [21]-[22]).

64    The Court of Appeal considered that a test of unreasonableness (which need not be “manifest” or “plain” and would always involve matters of impression and judgment) sufficiently accommodated the competing goals (at [23]).

65    While acknowledging that it was not possible or desirable exhaustively to list all circumstances relevant to whether the rejection of a Calderbank offer was unreasonable, the Court of Appeal stated that the following matters, at least, should ordinarily be considered (at [25]):

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

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

(c)    the extent of the compromise offered;

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

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

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

66    It is usually desirable that a Calderbank offer include reasonably specific reasons as to why it should be accepted, but the Court of Appeal in Hazeldene’s Chicken Farm did not think any general rule appropriate. It agreed (at [27]) with Redlich J’s observation in Aljade & MKIC v OCBC [2004] VSC 351 (at [87]) that:

Any attempt to prescribe the reasoning which must accompany [a Calderbank] offer should be resisted. Whether there is a need for the offeror to descend to specificity as to why the offer should be accepted must depend upon a consideration of all of the circumstances existing at the time of the offer. The extent to which the weakness of a party’s position is exposed through the pleadings, affidavits and the various communications between the parties during the course of the litigation may bear upon the significance of the absence of specificity in the informal offer.

67    The failure to put the offeree on notice that indemnity costs will be sought if it achieved a less favourable result is relevant to whether rejection of a Calderbank offer is unreasonable, although in some circumstances, a warning might be inferred from the surrounding circumstances.

68    While the Calderbank offer must include a genuine element of compromise rather than a mere demand for capitulation (Westbury Holdings Kiama Pty Ltd v ASIC [2007] NSWSC 1064 at [10]), whether the offeror in substance proposes to give something away must be assessed in all the circumstances (Leichardt Municipal Council v Green [2004] NSWCA 341 at [27]). In some cases, a very small discount may represent a realistic and genuine compromise.

69    The significance of the timing of a Calderbank offer may also vary according to the circumstances. It may not be unreasonable to reject an offer made at a very early stage of the proceeding if the offeree cannot effectively assess the strength of its position prior to the filing of evidence. (Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 at [22] and McFadzean v Construction Forestry Mining and Energy Union (No 2) [2007] VSCA 313 at [9].) If, however, the necessary evidence is peculiarly within the offeree’s knowledge, such considerations may not apply (Atton v National Mutual Life Association of Australasia (No 2) [2007] NSWSC 348 at [8]).

70    The authorities recognise that the unreasonableness of rejecting a Calderbank offer is to be assessed by reference to the situation at the time it was made and not “through the prism of hindsight”. See Stipanov v Mier (No 2) [2006] VSC 424 at [12] per Hollingworth and Seven Network Ltd v News Ltd (2007) 244 ALR 374; [2007] FCA 1489 at [44].

71    In the present case, the defendants did not dispute that the letter of the plaintiffs’ solicitor dated 15 February 2011 was a Calderbank offer which was open for a sufficient time and warned them clearly that rejection could have an adverse costs consequence. Nor was it disputed that the outcome of the proceedings was “significantly more beneficial to the plaintiffs than the offer that was made”.

72    In my opinion, the defendants’ rejection of the Calderbank offer was, adjudged in the circumstances prevailing at the relevant time, unreasonable. The letter did not demand total capitulation. Rather, it offered material elements of compromise, including the payment of $35,000 towards the defendants’ costs, the value of which was not negated because they were liable to pay a greater sum under a costs order in favour of the plaintiffs. As the offer also proposed that there would be no order as to costs, it eliminated the defendants’ risk of liability for significant additional costs. The plaintiffs also gave up their claims that Messrs Largey and Tanner were members of the company, on which they ultimately succeeded.

73    While the Calderbank offer omitted any reference to Mr Karlyle, the omission, which was probably unintentional, could have been readily resolved. It was not, in any event, adverse to the defendants, who contended that Mr Karlyle was a member of the company, but were not obliged by the terms of the offer to concede the contrary.

74    Nor did the stage of the proceeding preclude the defendants from making a realistic assessment of their prospects of success. At the date of the offer, the proceeding had been on foot for nearly a year. Pleadings had been filed, served and amended. The plaintiffs had obtained an initial interlocutory injunction maintaining the status quo and a subsequent injunction restraining various defendants from, inter alia, interference with corporate assets. The plaintiffs had filed some evidence of their positive case. Although the defendants had not yet filed evidence for the trial of their cross-claim, it may be inferred that they were broadly aware of the evidence on which their allegations were based.

75    While the Calderbank offer did not state reasons for its acceptance, the plaintiffs had indicated their assessment of the defendants’ case, including in their application in June 2010 to strike out a number of paragraphs in the defendants’ affidavits.

76    The reasonableness or otherwise of rejecting a Calderbank offer must be assessed at the date on which it was made. The state of the proceeding as at the date of the Calderbank offer in this case is discussed in detail above. In my view, albeit the defendants’ case was not hopeless, it was very fragile and the prospects of success were poor.

Conclusion

77    Accordingly, in my opinion, in all the circumstances, including the rejection of the Calderbank offer, it is just that the defendants pay the plaintiffs’ costs of the claim and cross-claim on an indemnity basis from 1 March 2011.

Associate:

Dated:    27 August 2013