FEDERAL COURT OF AUSTRALIA

Hill v Forteng Pty Ltd (No. 2) [2019] FCA 82

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiff pay the defendants’ costs of the proceeding prior to 18 July 2018 on a party and party basis.

2.    The plaintiff pay the defendants’ costs of the proceeding from 18 July 2018 on an indemnity basis.

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

REASONS FOR JUDGMENT

O’CALLAGHAN J:

1    In this proceeding, the plaintiff sought a declaration that the defendants engaged in oppressive conduct under the Corporations Act 2001 (Cth) (the Corporations Act) and related relief, as well as damages for breach of his employment contract. On 5 October 2018, I delivered my reasons on the substantive claims and ordered, among other things, that the applicant’s primary claims under the Corporations Act and for breach of contract be dismissed and that the share valuation dispute between the parties be remitted to the share valuation expert Mr Johnson (the expert) for redetermination: Hill v Forteng Pty Ltd [2018] FCA 1501 (the primary decision). This decision deals with the question of costs, and should be read in conjunction with the primary decision.

2    On 21 December 2018, the court received a copy of the expert’s re-determination. The outcome of the re-determination was that the value of Mr Hill’s shares in the company increased from $18,638 to $22,770.

The findings in the primary decision

3    The facts and issues in dispute are set out in detail in the primary decision. In summary, Mr Hill, who was a director of the first defendant (the company) along with the other defendants, alleged two acts of wrongdoing:

(1)    First, that the defendants had agreed to repay salary and superannuation in the amount of $154,876.63 (plus interest of $14,780.81) to Mr Hill that had been withheld by the company in 2013 to keep the company afloat and did not make that repayment. This, Mr Hill contended, comprised both a breach of Mr Hill’s contract of employment and gave him an entitlement to relief under s 233(1) of the Corporations Act for oppressive conduct (the employment dispute).

(2)    Secondly, that, when Mr Hill resigned as a director and employee of the company and his shares were purchased from him in the manner set out in the shareholders deed, the independent expert made two “manifest errors” so that the valuation was not binding.

4    My findings regarding the two alleged acts of wrongdoing were, in summary:

(1)    The company and the directors never agreed that the withheld salary and superannuation from 2013 would be repaid by way of arrears. Instead, the company and directors orally varied their employment contracts, with the provision of consideration, such that the directors agreed temporarily to forfeit the amounts that were withheld. Thus, there was no breach of contract and no oppression.

(2)    The expert’s valuation contained two manifest errors so that it is not binding upon the parties. I accordingly ordered that the expert re-determine the valuation.

Costs principles

5    The principles governing costs are well established. The awarding of costs is at the discretion of the court and may be awarded with respect to different parts of the proceeding or in specified proportions: s 43 of the Federal Court of Australia Act 1976 (Cth). “Usually, in the exercise of this discretion, it is ordered that the costs should follow the event”: Plaintiff M76/2013 v Minister for Immigration, Multicultural Affairs and Citizenship (2013) 251 CLR 322, 393 at [241]; Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7 at [3]. The court must use its discretion “in a way that best promotes the overarching purpose of the civil procedure provisions of the FCA Act and Rules” (Specsavers Pty Ltd v Optical Superstore Pty Ltd (No 4) [2012] FCA 652 at [25]).

6    As Keifel and Keane JJ have said “[i]n some cases the ‘event’ may be contestable, especially where separate issues have fallen in different ways”: Plaintiff M76/2013 v Minister for Immigration, Multicultural Affairs and Citizenship (2013) 251 CLR 322, 393 at [241].

Parties’ submissions

7    The parties filed written submissions on the question of costs and I will determine the dispute about the question on the papers.

8    The plaintiff has already filed a notice of appeal in this matter which, relevantly, included an order seeking the stay of an execution of any costs orders made. The plaintiff submitted that no order should be made as to costs and that issue be dealt with by the Full Court. In the alternative, the plaintiff submits that costs be ordered in favour of the plaintiff on a party party basis as “the substantive legal argument involving the most time and expert witnesses in the proceeding was won by the plaintiff”. A further alternative submission is that each party bear their own costs given “each party … succeeded on one of the two issues in the proceeding.”

9    Finally, the plaintiff submitted that, to the extent that the defendants seek to rely on their Calderbank offers, to which I turn below, “it should not weigh in favour of a special costs order because it cannot be said that it was unreasonably refused.” This, the plaintiff submitted, was because the offer was to resolve the entire proceeding, which included an issue on which the plaintiff was ultimately successful.

10    The defendants seek their costs on an indemnity basis or, alternatively, on a party party basis as, on their submission, “the plaintiff was…unsuccessful with respect to the claims made save for an insignificant part of his case in terms of the overall value of the claims made”. The defendants claim that the employment dispute, in which they were successful, was the majority of the plaintiff’s case by reference to both the quantum claimed as well as the level of preparation required by both parties. In seeking their costs on an indemnity basis, the defendants rely on five things: (1) the value of the relief granted to the plaintiff was significantly disproportionate to the costs of the proceeding; (2) the outcome of the share valuation dispute entitled to the plaintiff to less than 5% of the damages claimed; (3) the employment dispute consumed more of the court’s and parties’ time in this matter; (4) the plaintiff unreasonably rejected two Calderbank offers made in 2018 and did not obtain a judgment that is more favourable than the terms of either offer; and (5) the plaintiff conducted himself unreasonably in the proceeding inconsistently with the overarching purpose of the Federal Court of Australia Act 1976 (Cth).

11    The defendants submitted that the court could alternatively make a variety of costs orders including an order that the plaintiff pay the defendants 90% of their costs of the whole proceeding on an indemnity or on a party party basis (to account for the small amount of damages awarded).

12    Alternately, the defendants submitted that any award of costs for the plaintiff in respect of the share valuation dispute should be capped, pursuant to r 40.08 of the Federal Court Rules 2011 (Cth), to account for: the small quantum of damages awarded; the likelihood that the costs incurred in the litigation were disproportionate; and the fact that the plaintiff failed to act consistently with the overarching purpose.

Consideration

13    I shall deal first with the plaintiff’s request that I not make any costs order. The plaintiff points to no authority or legal principle that would support the unusual step of making no costs order at first instance. The fact that it would, as the plaintiff argues, “unnecessarily create an order to appeal from” cannot possibly justify declining to make a costs order.

14    The conclusion that the defendants were ultimately the successful party in this case is inescapable. Mr Hill claimed $154,876.63, plus further damages in his employment dispute claim, in which he was unsuccessful. Mr Hill’s only success was in relation to the share valuation dispute which, following the re-determination, valued his shares at an extra $4,132. That sum is insignificant when compared to the amount he otherwise claimed and when considered in the context of the costs of the litigation as a whole. Further, I do not accept the plaintiff’s contention that the “substantive legal argument involving the most time and expert witnesses in the proceeding was won by the plaintiff”. In any event, given the disparity between the two amounts referred to above, the time spent at trial on matters going to the two respective issues is of little consequence in this case. It is therefore the defendants, and not the plaintiff, who have a prima facie entitlement to their costs.

15    The plaintiff submits that, given that each party succeeded on one issue, each party should bear their own costs. I do not agree. Nor will I make any orders separating the costs of the two issues. It is clear from the pleadings, the trial itself and from the primary decision that the share valuation dispute was a subsidiary issue that paled in comparison to the employment dispute. The plaintiff must have known that the share valuation dispute was a minor facet of his own pleaded case. In any event, I do not consider that the issue on which the defendants failed was of “sufficient significance in proportion to the whole case to warrant a special order to deprive that party of the costs of that issue”: BHP Billiton Iron Ore Pty Ltd v National Competition Council (No 2) [2007] FCA 557 at [23].

16    The next issue is whether the defendants should recover their costs on an indemnity basis. In my view, the defendants are entitled to their costs on an indemnity basis because the plaintiff acted unreasonably and imprudently in not accepting either of two offers made by the defendants in accordance with the Calderbank principles, the first for $30,000 and the second for $40,000 – both sums far in excess of the $4,132 sum by which the plaintiff “improved” his position after a trial occupying three days. The two Calderbank letters were as follows.

17    The first letter was dated 18 July 2018:

…As you are aware, we act for all defendants in this matter.

In an attempt to settle this matter without it proceeding further and on a purely commercial basis, we are instructed to make an offer in full and final settlement of this matter in the following terms:

1.    Forteng Pty Ltd (FortEng) pays Mr Andrew Hill (Mr Hill) a total amount of $30,000 comprised of:

a.    $7,020.00 for Mr Hill’s oppressive conduct claim in respect of the alleged manifest error 1 (as set out in the expert report of Mr Robert Ruddick (Mr Ruddick) annexed to the affidavit of Mr Robert John Ruddick dated 5 June 2018) calculated as follows:

$14.26 (being the value of each share in FortEng as calculated by Mr Ruddick) x 1,800 (being the number of shares formerly held by Mr Hill) less $18,648.00 (being, the amount already paid to Mr Hill already paid to Mr Hill for the purchase of his shares by the remaining FortEng shareholders); and

b.    $22,980.00 for Mr Hill’s legal costs.

2.    Mr Hill wholly discontinues Federal Court proceeding number TAD16/2017 (Proceeding) against all defendants with no order as to costs; and

3.    the parties enter into a suitable deed of settlement containing a release in favour of all defendants in this matter with respect to the subject matter of the Proceeding.

The offer remains open for your acceptance until 5:00pm on Wednesday, 25 July 2018.

This letter is served in accordance with the principles commencing with Calderbank v Calderbank [1976] 3 All ER 333 and applied in Cutts v Head [1984] Ch 290 and since adopted in Australia – see Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435.

…

18    The second letter was dated 12 September 2018 – five days before the trial started:

…As you are aware, we act for all defendants in this matter.

In an attempt to settle this matter without it proceeding further and on a purely commercial basis, we are instructed to make an offer in full and final settlement of this matter in the following terms:

1.    Forteng Pty Ltd (FortEng) pays Mr Andrew Hill (Mr Hill) a total amount of $40,000 inclusive of costs;

2.    Mr Hill wholly discontinues Federal Court proceeding number TAD16/2017 (Proceeding) against all defendants with no order as to costs; and

3.    The parties enter into a suitable deed of settlement containing a release in favour of all defendants in this matter with respect to the subject matter of the Proceeding.

The offer remains open for your acceptance until 5:00pm on Friday, 14 September 2018.

This letter is served in accordance with the principles commencing with Calderbank v Calderbank [1976] 3 All ER 333 and applied in Cutts v Head [1984] Ch 290 and since adopted in Australia – see Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435.

…

19    The principles governing whether the making of a Calderbank offer justifies the award of costs on an indemnity basis from the date of rejection are well established. See, by way of example, Black v Lipovac (1998) 217 ALR 386 at 432-3.

20    As Tracey J said in Kiefel v State of Victoria [2014] FCA 411 at [37]-[40]:

Any Calderbank offer must be “couched in such terms as enable the offeree to make a carefully considered comparison between the offer made and the ultimate relief it is seeking in all its aspects”: see Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [24] (per Goldberg J). Where a Calderbank offer includes a provision relating to costs it is necessary for the offeror to isolate “the term as to costs in a way which is clear and capable of proper assessment independently of the principal claim …”: see Perry v Comcare (2006) 150 FCR 319 at 334 (Greenwood J). Offers which are expressed to be “inclusive of costs” or “all up” have been held to be insufficiently precise: see, for example, Smallacombe v Lockyer Investment Company Pty Ltd (1993) 42 FCR 97 at 102 (Spender J). On the other hand an offer, such as the present, which proposes that each party bear its own costs or that a particular sum be paid “plus costs” have been accepted as proper offers: see, for example, Cutts v Head [1984] Ch 290 at 299 (Oliver LJ); Alpine Hardwoods at 125.

Once a viable offer is made and it is not accepted by the offeree the offeror who seeks indemnity costs bears the onus of establishing that the offeree’s refusal or non-acceptance was unreasonable or imprudent. The reasonableness of the refusal or non-acceptance must be determined in the light of the circumstances that existed at the time that the rejection or failure to accept occurred.

In GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 201 ALR 55 at 63-4 Finn J said that:

“The reasonableness of the rejection of an offer is to be considered in light of the circumstances which existed at the time of the rejection. And, relevant in that consideration are the terms of the offer and the circumstances of the litigation, ‘including the time at which the offer is made and the understanding of the parties as to the strengths and weaknesses of their respective cases’”.

The authorities support the proposition that restraint is to be exercised in awarding costs on an indemnity basis. In particular, such orders should not be made for a punitive purpose. In Hamod v New South Wales (2002) 188 ALR 659 at 665 Gray J (with whom other members of the Court agreed) cautioned that:

“Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.”

21    In my view, the plaintiff acted unreasonably and imprudently in not accepting the first Calderbank offer (and if it matters, the second one). By failing to accept the offer and pressing on, he ran the risk that he would be unsuccessful and then face the need to accept responsibility not only for his own solicitor’s costs but also for the costs incurred by the defendants – and he chose to accept the risk that the Calderbank principles might, after the trial, operate to his detriment: cf IFTC Broking Services Ltd v Commissioner of Taxation (2010) 268 ALR 1 at 6. Accordingly, the plaintiff should pay costs on an indemnity basis, from 18 July 2018, and on a party party basis before that date.

22    The defendants also submitted that indemnity costs should be awarded since the commencement of the proceeding on the basis that the plaintiff conducted his case in a manner antithetical to his obligation to facilitate the quick, efficient and just resolution of the dispute. By way of summary, the defendants pointed to the following conduct:

(1)    the plaintiff consistently changed the way he put his case in respect of the employment dispute, including upon the filing of written submissions;

(2)    the plaintiff put the defendants to the expense of preparing for matters that were, at various stages of the proceeding, either abandoned or conceded;

(3)    the plaintiff consistently missed court deadlines for filing and service of documents, at one stage requiring an urgent case management hearing;

(4)    the plaintiff failed to advise that he did not wish to cross examine a witness who had flown to Tasmania to attend the hearing; and

(5)    the plaintiff failed to respond to the first Calderbank offer.

23    While this conduct is not to be condoned, I do not consider it to be sufficient to warrant an order of indemnity costs prior to 18 July 2018.

24    Accordingly, I will order that:

(1)    The plaintiff pay the defendants’ costs of the proceeding prior to 18 July 2018 on a party and party basis, to be taxed in the absence of agreement.

(2)    The plaintiff pay the defendants’ costs of the proceeding from 18 July 2018 on an indemnity basis, to be taxed in the absence of agreement.

Associate:

Dated:    6 February 2019

SCHEDULE OF PARTIES