FEDERAL COURT OF AUSTRALIA

Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) (No 3) [2016] FCA 40

ORDERS

IN THE MATTER OF ACTION PAINTBALL GAMES PTY LTD (IN LIQ) ACN 085 205 536

THE COURT ORDERS THAT:

1.    Pursuant to section 588FF of the Corporations Act 2001 (Cth), the defendants pay the plaintiffs the amount of $178,521.58.

2.    Pursuant to section 51A(1) of the Federal Court of Australia Act 1976 (Cth), the defendants pay the plaintiffs interest in the sum of $38,572.89, being interest for the period 20 September 2012 to 23 December 2015 and for the period 24 December 2015 to 4 February 2016 at the rate of $29.35 per day.

3.    The defendants pay the plaintiffs’ costs of the proceeding.

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

REASONS FOR JUDGMENT

GLEESON J:

1    On 22 October 2015, I published my reasons in Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) (No 2) [2015] FCA 1119 and made directions for steps to be taken to determine the final orders based on those reasons. The terms as defined in that judgment are adopted in these reasons.

2    The parties agreed that the following order should be made:

(1)    Pursuant to section 588FF of the Corporations Act 2001 (Cth), the defendants pay the plaintiffs the amount of $178,521.58.

3    The plaintiffs submitted that the following order for interest up to judgment should be made. The defendants did not dispute that this order is appropriate:

(2)    Pursuant to section 51A(1) of the Federal Court of Australia Act 1976 (Cth) (“Act”), the defendants pay the plaintiffs interest in the sum of $38,572.89, being interest for the period 20 September 2012 to 23 December 2015.

4    The parties disagree as to the appropriate order for costs. The plaintiffs seek an order that the defendants pay the plaintiffs’ costs of the proceeding, on the basis that they have been successful in the litigation and there are no special circumstances to justify departure from the usual rule that costs should follow the event. In further support of a costs order in their favour, the plaintiffs rely upon an offer to settle the proceedings on terms more favourable than the orders now agreed following the trial. That offer was made in November 2014 and was rejected by a counter-offer made in February 2015.

5    The defendants submit that the plaintiffs should pay the defendants’ costs or, alternatively, that there should be no order as to costs. The defendants contend that they had a greater measure of success than the plaintiffs, because they successfully defended the claim in respect of well over half of the 336 payments that were alleged to be unreasonable director-related transactions. As to the November 2014 settlement offer, the defendants argued that it should not affect the exercise of the Court’s discretion because the matter was not straightforward and the defendants could not be expected to have predicted the final outcome.

Legal framework

Factors affecting the broad discretion to award costs

6    Section 43 of the Act confers jurisdiction on the Court to award costs. In DSE (Holdings) Pty Ltd v InterTAN Inc [2004] FCA 1251; (2004) 51 ACSR 555, Allsop J (as his Honour then was) said at [14]:

Section 43 of [the Act] is a broad and ample power not to be read down otherwise than by judicial principle conformable with the amplitude of the power.

7    The award of costs is discretionary but generally that discretion is exercised in favour of the successful party: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 at [25]; Gray v Richards (No 2) [2014] HCA 47; (2014) 89 ALJR 113 at [2].

8    In Kazar v Kargarian [2011] FCAFC 136; (2011) 197 FCR 113 at [9], Greenwood and Rares JJ said:

The exercise of the discretion takes account of all of the contextual circumstances of the litigation and the conduct of the parties. One aspect of the award of costs is a recognition that a party has been put to expense which, taking account of the merits as ultimately found on the trial of the action, might otherwise have been avoided. That consideration does not infuse the award of costs with any sense of penalty or punishment but simply recognises the compensatory nature of an award of costs, in context and according to principle. That is why an award of costs, although involving the exercise of a discretion, generally favours the successful party.…

9    In Old v McInnes [2011] NSWCA 410 at [33], Beazley JA (as her Honour then was) cited with approval the following passage from the reasons of Hodgson JA in Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121]:

In my opinion, underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs. Costs follow the event generally because, if a plaintiff wins, the incurring of costs was the defendant’s responsibility because the plaintiff was caused to incur costs by the defendant’s failure otherwise to accord to the plaintiff that to which the plaintiff was entitled; while if a defendant wins, the defendant was caused to incur costs in resisting a claim for something to which the plaintiff was not entitled: cf Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ. Departures from the general rule that costs follow the event are broadly based on a similar approach.

10    Absent disqualifying conduct, the successful party will generally obtain a costs order in its favour even where it has not succeeded on all heads of claim: Chen v Chan (No 2) [2009] VSCA 233 (“Chen”) at [10], citing Ritter v Godfrey [1920] 2 KB 47 and Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at 97-98 (McHugh J) and 124 (Kirby J).

11    A court should not be too ready to disallow costs simply because a party has failed upon an issue, unless it be quite a separate and distinct issue from the issues in respect of which it succeeded or unless there be some element of unreasonableness or inappropriate conduct in relation to that issue: Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [54]. In Elite Protective Personnel Pty Ltd v Salmon (No 2) [2007] NSWCA 373, the New South Wales Court of Appeal said, relevantly at [6]-[8]:

Where there are multiple issues in a case the Court generally does not attempt to differentiate between the issues on which the appellant was successful and those on which it failed. Unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed: Waters v P C Henderson (Aust) Pty Ltd (Court of Appeal, 6 July 1994, unreported).

As the appellants submit, the commencing position is that costs follow the event so that a successful party is entitled to costs. In relation to trials it has been said that it may be appropriate to deprive a successful party of costs or a portion of the costs if the matters upon which that party was unsuccessful took up a significant part of the trial, either by way of evidence or argument: Sabah Yazgi v Permanent Custodians Limited (No 2) [2007] NSWCA 306 (at [24]). …

Whether an order contrary to the general rule that costs follow the event should be made depends on the circumstances of the case viewed against the wide discretionary powers of the court, which powers should be liberally construed: State of New South Wales v Stanley [2007] NSWCA 330 (at [18]) per Hislop J (with whom Beazley JA and Tobias JJA agreed).

12    In Inn Leisure Industries Pty Ltd v DF McCloy Pty Ltd (No 2) (1991) 28 FCR 172 at 173 to 174, French J (as his Honour then was), cited with approval the following passage from Cretazzo v Lombardi (1975) 13 SASR 4 at 16:

The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues however doubtful which might be material to the decision of the case. There are, of course, many factors affecting the exercise of the discretion as to costs in each case including, in particular, the severability of the issues, and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues.

13    On the other hand, in Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd [1993] FCA 259 (“Dodds”), Gummow, French and Hill JJ recognised that “[g]enerally speaking, … the demands of the community for greater economy and efficiency in the conduct of litigation may properly be reflected in a qualification of the presumption that a successful party is entitled to all its costs” (at [28]). They referred with approval to the following statement of Wilcox J in Commissioner of Australian Federal Police v Razzi (No 2) [1991] FCA 267; (1991) 30 FCR 64 at 69:

But I do not think that courts should be reluctant to recognise the existence of exceptional cases. In these days of extensive court delays and high legal costs the courts should use all proper means to encourage parties to consider carefully what matters they will put in issue in their litigation. If parties come to realise that they will not necessarily recover the whole of their costs, even though they have unsuccessfully raised a discrete issue, they are likely better to consider whether the raising of that issue is a justifiable course to take.

14    At [29], the Full Court in Dodds concluded:

Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion for the trial judge. Mathematical precision is illusory and the exercise of the discretion will often depend upon matters of impression and evaluation. …

15    Similarly, in Chen, the Victorian Court of Appeal said at [10]:

Where a Court determines to make an order apportioning costs, then it does so primarily as ‘a matter of impression and evaluation,’ rather than with arithmetical precision, having considered the importance of the matters upon which the parties have been successful or unsuccessful, the time occupied and the ambit of the submissions made, as well as any other relevant matter.

(Quoting from Major Engineering Pty Ltd v Helios Electroheat Pty Ltd (No 2) [2006] VSCA 114 at [5]).

16    In Howards Storage World Pty Ltd v Haviv Holdings Pty Ltd [2010] FCAFC 5; (2010) 182 FCR 84, Gray J said at [17]:

The overriding principle that costs are in the discretion of the Court can also be expressed in terms of the negative proposition that no rule or principle should be applied mechanically in the determination of the question where costs should lie in any particular case. Attention must always be paid to the particular circumstances of the individual case. The aim is to do substantial justice in relation to costs, based on the outcomes of the various issues in the proceeding, as between the entities that are parties to that proceeding.

17    The defendants cited Hogan v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No 2) [2006] NSWSC 74 at [40] as authority for the proposition that, where each party has had substantial success, the Court may make no order as to costs. In that case, two notices of motion seeking interest on costs were heard together. Each party had a measure of success with respect to the relief claimed in the plaintiff’s motion, while the defendants substantially succeeded on their motion. The case is illustrative of the breadth of the Court’s discretion, but does not support any particular outcome in this case.

Offers to settle proceeding on more favourable terms

18    A Calderbank offer is an informal offer made on terms expressed to be without prejudice save as to costs. One purpose of such an offer is to influence the costs discretion if the offer is not accepted: McKay v Commissioner of Main Roads (No 7) [2011] WASC 223; (2011) 185 LGERA 118 (“McKay”) at [144] and [174]. A Calderbank offer may be used to support an application for indemnity costs, or an order that the offeree pay the offeror’s costs on a party-party basis: McKay at [100].

19    Although a Calderbank offer may be made inclusive of costs, it may be difficult to determine the reasonableness of an offeree’s refusal to accept such an offer because it requires the offeree to make an assessment about the offeror’s costs, in order to determine the amount of the offer attributable to the substantive claim: Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97 (“Smallacombe”). Thus, in Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322, McColl JA concluded at [115] that Smallacombe provides sound reasons to discourage offerors from drafting Calderbank letters on an “all-in” basis.

Extent of the parties’ success in the proceeding

20    The plaintiffs have been partially successful in their claim. The amount claimed was $501,497.68 excluding interest and costs. The amount of the judgment represents approximately 36% of the amount claimed.

21    The defendants submitted that their own success should be measured by the fact that 228 of the 336 payments (or about 68% of the payments) were not found to have been unreasonable director-related transactions.

22    Although the claim was for recovery of 336 payments made over several years, the payments were made to one entity (Perpetual Limited) in respect of two loan contracts entered into on the same occasion, being the completion of the purchase of Lot 22. In that way, the claim was based on the same matrix of facts although, on my analysis, the outcome depended on the changing financial position of Action Paintball over time.

23    As the submissions made on behalf of the defendants acknowledged, there was no additional time spent at the hearing dealing with individual payments.

24    In my view, the plaintiffs have had a substantial degree of success in their claim by obtaining judgment for a significant monetary sum, albeit that this sum is much less than the amount claimed. Although the plaintiffs might have confined their claim to a portion of the payments made to Perpetual Limited, in my view, they did not act unreasonably in extending the claim to cover all payments during the four years ending on the relation-back day on the basis of s 588FE(6A)(b).

25    The defendants’ partially successful defence of the plaintiffs’ claim did not produce an order in the defendants’ favour. The relevant “event”, to which the general rule that costs follow the event applies, is the judgment in the plaintiffs’ favour. There are no special circumstances about the manner in which the proceeding was conducted which would justify a departure from the general rule and, in my view, the defendants’ partially successful defence does not justify depriving the plaintiffs of their costs.

26    In those circumstances, in my view, the general rule that costs follow the event applies to produce the result that the plaintiffs should have a costs order in their favour.

27    I also accept that the plaintiffs’ November 2014 offer supports the exercise of the discretion to award costs in the plaintiffs’ favour. The defendants did not suggest that the offer was not more favourable than the amount awarded in the plaintiffs’ favour. The trial lasted four days and, having regard to the scope of the issues addressed in the judgment, I do not doubt that the offer was more favourable to the defendants than the ultimate outcome of the litigation. While the result of the litigation might have been hard for the defendants to predict, in my view, it was not difficult for them to appreciate the risk of a less favourable outcome if the offer was not accepted. On any reasonable view, in deciding not to accept the offer, the defendants accepted the risk of a less favourable outcome, including the risk of a consequential adverse costs order.

Conclusion

28    The plaintiffs are entitled to interest pursuant to s 51A(1) of the Act in the amount and at the rate proposed by them. The defendants should pay the plaintiffs’ costs of the proceeding.

Associate:

Dated:    4 February 2016