FEDERAL COURT OF AUSTRALIA

Findex Group Ltd v McKay (No 3) [2020] FCA 259

ORDERS

THE COURT ORDERS THAT:

1.    The applicants’ and the first respondent’s applications to vary Order 2 made on 18 December 2019 are dismissed.

2.    Order 2 made on 18 December 2019 is confirmed and made final.

3.    The parties are to bear their own costs on the applications referred to in Order 1 above.

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

REASONS FOR JUDGMENT

STEWART J:

Introduction

1    This judgment deals with the costs of the principal proceeding. On 18 December 2019, I made orders dismissing the proceeding. I also ordered that the applicants pay the first respondent’s costs, save that I gave the parties leave to apply to vary that costs order. The reasons for judgment are reported as Findex Group Ltd v McKay [2019] FCA 2129.

2    The applicants and the first respondent, Mr McKay, have both applied to reopen the question of costs. In approaching the question of costs on the parties’ applications, I give no weight to the fact that I previously expressed the preliminary view that the applicants should pay Mr McKay’s costs; I treat the question as open and consider the parties’ submissions accordingly.

3    The applicants apply for an order that there be no order as to costs, i.e. that in effect the parties bear their own costs.

4    Mr McKay’s application is that I make an order that the applicants are to pay his costs on a party and party basis up until 11:00am on 13 March 2017 and on an indemnity basis thereafter. The basis for that application is that Mr McKay made an offer of compromise on 9 March 2017, namely that the applicants withdraw the proceeding and the parties bear their own costs.

5    The applicants’ application should be decided before Mr McKay’s – logically the question of who is to bear the costs should be decided before the question of whether Mr McKay’s offer of compromise in March 2017 entitles him to any costs that he might be awarded on an indemnity basis.

General principles with regard to costs

6    There is no identifiable dispute between the parties as to the applicable principles.

7    Section 43(2) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) provides that except as provided by any other Act, the award of costs is in the discretion of the court. Section 43(3) provides that without limiting that discretion the court may, amongst other things, make different awards of costs in relation to different parts of a proceeding, order the parties to bear costs in specified proportions, award costs in favour of or against a party whether or not a party is successful in the proceeding and order that costs awarded against a party are to be assessed on an indemnity basis or otherwise.

8    In Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7 at [3] per Nicholas, Beach and Burley JJ, the following was said with regard to the award of costs:

The exercise of the Court’s discretion is not without principles or practices; it must be exercised judicially (Les Laboratoires Servier v Apotex Pty Ltd (2016) 247 FCR 61 at [305] per Bennett, Besanko and Beach JJ). The ordinary rule is that costs follow the event, although a successful party may be awarded less than its costs, or costs may be apportioned, based upon success on the issues (Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) (2015) 327 ALR 192; [2015] HCA 53 at [6] per French CJ, Kiefel, Nettle and Gordon JJ; Les Laboratoires Servier at [297] to [298] and [303]).

9    In Les Laboratoires Servier v Apotex Pty Ltd [2016] FCAFC 27; 247 FCR 61 at [303] it was said that the courts have been slow to order a successful party to pay the costs where it has been unsuccessful on some issues. It was also observed that in Mok v Minister for Immigration, Local Government and Ethnic Affairs (No 2) [1993] FCA 650; 47 FCR 81, Keely J was of the view (at 84D) that, without attempting to fetter the discretion, this power ought to be exercised against an applicant only where the court, on a consideration of all of the circumstances, has concluded that the raising of an issue by the applicant on which it has failed was so unreasonable that it is fair and just to make the order.

10    In Les Laboratoires at [306] it was held that the court must start from the position that the successful party is entitled to its costs and, in considering the success and failure on individual issues, the court must consider the extent to which there was a common substratum of fact in respect of issues on which the successful party succeeded and failed.

11    In conducting any assessment of success and failure on individual issues, it is accepted that greater latitude is given to a successful defendant than a successful plaintiff such that the principle operates more strongly against a successful plaintiff: Australian Conservation v Forestry Commission [1988] FCA 144; 81 ALR 166 at 169 (Burchett J); Griffith v ABC (No 2) [2011] NSWCA 145 at [19]-[20], [38]-[39] (per Hodgson JA, McLellan CJ at CL and Basten JA agreeing); Macquarie International v Sydney South West (No 2) [2011] NSWCA 171 at [9]-[10] (per Hodgson JA, Allsop P and Macfarlan JA agreeing).

12    The rationale for this approach was explained in Australian Conservation (at 169) as follows:

A party against whom an unsustainable claim is prosecuted is not to be forced, at his peril in respect of costs, to abandon every defence he is not sure of maintaining, and oppose to his adversary only the barrier of one hopeful argument: he is entitled to raise his earthworks at every reasonable point along the path of assault. At the same time, if he multiplies issues unreasonably, he may suffer in costs. Ultimately, the question is one of discretion and judgment.

13    The point is that it is important to recognise that the position and behaviour of a party may need to be judged in light of whether they are an applicant or a respondent and hence whether or not they were brought to court unwillingly: Evans v Sebel Furniture Ltd [2003] FCA 282 at [7] per Allsop J.

14    Any decision as to apportionment of costs on an issues basis is an evaluative decision: Australian Trade Commission v Disktravel [2000] FCA 62 at [5] per French, Kiefel and Mansfield JJ.

The applicants’ application that the parties bear their own costs

15    The applicants’ submissions in support of their application can be summarised as follows.

16    There were eight issues for determination at the trial. They are identified in the principal judgment at [9]. Six of those were determined in the applicants’ favour. The applicants ultimately failed only on the issues of whether the restraint provisions in the Shareholders Agreement were enforceable and whether Mr McKay breached s 183(1) of the Corporations Act 2001 (Cth). The latter issue took little time in the trial.

17    With respect to the principal issue on which the applicants failed, they submit that Mr McKay raised the issue only late in the piece, namely in closing submissions, and that this is relevant.

18    The applicants submit that Mr McKay’s conduct in the litigation significantly contributed to its length and to the parties’ costs and that it is only fair that the Court’s decision on costs reflects this in an appropriate way.

19    In his submissions in response to the applicants’ application, Mr McKay points out that there were causes of action pleaded and pressed by the applicants until the commencement of the trial when they were abandoned. He submits that these should also be taken into account in determining the costs.

20    Mr McKay submits that the submissions advanced by the applicants provide no sound basis to vary the preliminary order that I made.

21    In submissions in reply, the applicants say that a party’s delay in raising a decisive point until the last minute is a valid reason to deprive that party of some or all of their costs. They cite Rhodes v Tower Australia Superannuation Ltd as Trustee for Tower Superannuation Fund [2004] FCA 812 at [19], White v Overland [2001] FCA 1333 at [4] and Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 at [160]-[163] in support of that submission.

22    In Rhodes, the respondent raised what was characterised by the judge (French J) as a “preliminary” point only at the hearing. The applicant had said that had the point been raised earlier she would not have lodged the appeal. The successful respondent was deprived of its costs because much of the debate in the written and oral submissions in the appeal was wasted in light of the preliminary point that was taken and of which no prior notice had been given.

23    In White v Overland (at [4]), Allsop J stated that in the efficient and proper conduct of litigation, even civil litigation hard fought between parties, it should always be recognised that in the propounding of issues for trial the parties should take steps to ensure that all relevant parties to the dispute are cognisant of what the issues are and that any practice of “quietly leaving footprints in correspondence or directions hearings to be uncovered sometime later in an attempt to reveal that a matter was always in issue” should be firmly discouraged.

24    In Baulderstone (at [160]-[163]), Allsop P expanded on what his Honour had said in White v Overland and emphasised the duty on parties to assist the court and, in a practical way, to cooperate to bring forward the real issues in dispute. This encompasses the requirement to be clear and precise in the illumination of the issues for trial.

25    I do not regard the applicants’ submission with regard to the late raising of the point on which Mr McKay was ultimately successful to count against him in so far as the costs are concerned. There are a number of considerations that lead me to this conclusion.

26    First, the point with regard to the unreasonableness of the restraint is not a preliminary point in the sense referred to in Rhodes. Whilst ultimately it was decisive, it is not a point that if taken clearly and distinctly at the outset would have been amenable to separate determination. The determination of that point arose from, and required, essentially the same substratum of facts as all or most of the rest of the case including the suite of contracts and their interrelationship, the nature of the business and what was known to the parties at the time that the Shareholders Agreement was concluded.

27    Second, the defence originally filed by Mr McKay pleaded (at [10.c.i]) that the restraint of trade relied on by the applicants was “unduly restrictive and onerous in protecting any legitimate business interest of the second applicant”. That pleading was maintained in the amended defence that was filed later. It is the point that was ultimately upheld. The point was raised from the outset.

28    In his opening submissions, Mr McKay noted that the applicants had accepted that they bear the onus of proving that the restraint provision is reasonable. That acceptance was correct. So, whilst the specific basis upon which I decided that the restraint provision was unreasonable and unenforceable, namely that it was too broad with respect to the conduct that is restrained with reference to the people and entities whose conduct is caught by the restraint, was not articulated on behalf of Mr McKay until closing submissions, substantively the point of unreasonableness was always alive on the pleadings.

29    Thus, although the contention might have been more clearly and precisely put on behalf of Mr McKay at an earlier stage, I do not consider him (or his representatives) to have been in breach of any duty to the Court in that respect. That arises, in particular, from the fact that there is nothing to suggest that there was anything deliberate in the conduct on his side of the case in seeking to gain some advantage from not more clearly articulating the point at an earlier stage. This is not a case of Mr McKay having left “footprints” in the sense discussed and deplored in White v Overland and Baulderstone.

30    Third, there is nothing to suggest that the applicants would or might have abandoned the case and thus saved costs if the issue had been more precisely raised at an earlier stage. It is difficult to see why the precise basis for the point having been raised late makes any difference. The applicants do not say that the case would have been conducted any differently. That the applicants would not have abandoned the case is confirmed by the fact that they have appealed the judgment on the point in issue.

31    With regard to the applicants’ submission that they were successful on six of the eight issues that went to trial, there are a few points to bear in mind.

32    First, and as pointed out on behalf of Mr McKay, the applicants themselves abandoned several claims at the commencement of the trial. Whilst the applicants should be applauded for narrowing the issues and not pursuing claims that were unsustainable or unnecessary, it also cannot be ignored when it comes to assessing whether there should be some apportionment of costs that it was only at the commencement of the hearing that causes of action were abandoned and that the costs of responding to those causes of action, including in the preparation of pleadings and evidence, were wasted.

33    Those causes of action included breach of cl. 5.4 of the Share Sale Agreement (second further amended statement of claim (SFASOC) [9B]-[9C]), breach of the confidentiality obligations in cl. 21 of the Shareholders Agreement (SFASOC [11]), and that Mr McKay “interfered with the Business” (SFASOC [13(d)]). These were not insubstantial causes of action.

34    Second, and as already indicated above, the issue that was ultimately decisive rested on essentially the same substratum of facts as all or most of the other issues.

35    Third, the issue on which Mr McKay was successful was a significant and difficult issue in the case. Leaving aside the 50 or so introductory paragraphs to the judgment, it will be observed that nearly half of the remainder of the judgment was dedicated to the issue of whether the restraint provisions are enforceable.

36    Fourth, whilst other defences or points taken by Mr McKay were ultimately found to be unmeritorious, none was clearly unreasonable or hopeless. It is true that Mr McKay’s contention that he was not personally a party to the Shareholders Agreement is not one that I found difficult to decide against him, I nevertheless bear in mind the authorities that I have referred to above with regard to the greater latitude that is shown to a respondent who is regarded as being entitled to take whatever defence might reasonably be taken.

37    In the circumstances, I do not see any reason to depart from the usual rule that a successful respondent is entitled to its costs. In my view, an evaluative assessment of the circumstances leads to the conclusion that fairness and justice is best served by the applicants paying Mr McKay’s costs of the proceeding. I would thus dismiss the applicants’ application to reopen the preliminary costs order.

The principles with regard to offers of compromise

38    Rule 25.01 of the Federal Court Rules 2011 (Cth) (FCR) provides that a party may make an offer to compromise by serving a notice in accordance with Form 45 on another party. Such an offer may be made at any time before judgment is given (r 25.05(1)). An offer is open to be accepted within the time stated in the notice which must not be less than 14 days after the offer has been made (r 25.08 (1)).

39    In terms of r 25.14(2), if an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant’s proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent’s costs before 11:00am on the second business day after the offer was served, on a party and party basis, and thereafter on an indemnity basis.

40    Rule 25.14(2) requires an investigation into whether an applicant has unreasonably failed to accept the offer before a respondent is entitled to indemnity costs after the offer was served: Commissioner of Taxation v Crown Insurance Services Ltd (No 2) [2012] FCAFC 182 at [31]. This is a broad ranging inquiry that is not restricted to consideration of the extent or quantum of the compromise offered: Anchorage Capital Partners Pty Ltd v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [8].

41    The question of the unreasonableness of the rejection of the offer is to be made without the benefit of hindsight: Erskine as liquidator of North Shore Property Developments Pty Ltd (in liq) v 72-74 Gordon Crescent Lane Cove Pty Ltd (No 2) [2019] FCAFC 73 at [7].

42    In Anchorage Capital, the Court accepted (at [7]) that a court considering a submission that the rejection of an offer of compromise was unreasonable should ordinarily have regard to matters that include the stage of the proceeding at which the offer was received, the extent of the compromise offered, the offerees’ prospects of success assessed as at the date of the offer, and the clarity with which the terms of the offer were expressed.

Mr McKay’s application for indemnity costs

The facts

43    The proceeding was commenced on 26 August 2016. The statement of claim filed on that day pleaded reliance on the restraint of trade provision on which the applicants ultimately failed.

44    On 8 September 2016, Mr McKay’s solicitor filed a notice of appearance and sent a three-page letter to the applicants’ solicitor raising various criticisms of the statement of claim and asserting that the claims made in it were baseless and without merit and would be resisted.

45    On 9 September 2016, the matter was referred to mediation. That was apparently conducted in October 2016.

46    On 16 September 2016, Mr McKay’s solicitor sent another three-page letter to the applicants’ solicitor raising further criticisms of the statement of claim.

47    In February 2017, the applicants amended their originating application and statement of claim.

48    On 9 March 2017, Mr McKay’s solicitor served by email a notice by which Mr McKay offered to compromise the proceeding on the basis that the applicants’ claims be dismissed and that the parties bear their own costs to the date of acceptance. The offer was stated to be open for acceptance for a period of 14 days after service and was expressly made in accordance with r 25.01 of the FCR.

49    The offer was accompanied by a letter which asserted, amongst other things, that the applicants’ claims “are ill-conceived and unlikely to be upheld”. It was said that there was no good reason why Mr McKay should continue to incur significant legal fees in responding to the claims and the applicants were urged to give the notice of offer of compromise careful consideration.

50    The letter accompanying the offer of compromise, and the previous letters from Mr McKay’s solicitor identified above, did not contend that the restraint provision that the applicants relied on was unreasonable and for that reason unenforceable.

51    Less than three hours after the offer of compromise was transmitted to the applicants’ solicitor, the applicants’ solicitor replied rejecting the assertion that the applicants’ claims were ill-conceived and unlikely to be upheld and stating that the applicants were more than willing to have the court determine their claims. Although the offer was not expressly rejected, the assertions in the letter were inconsistent with any possibility of acceptance of the offer and the letter can thus be taken to be a rejection of the offer. In any event, no attempt was subsequently made to accept the offer, or to engage with the other issues raised in the covering letter.

52    On 10 March 2017, Mr McKay’s solicitor responded by email letter to the correspondence of the previous day from the applicant’s solicitor. Various issues in criticism of the applicants’ case were raised.

53    Later that day, the applicants’ solicitor replied in brief terms saying that he understood the comments that Mr McKay’s solicitor continued to make in correspondence but that he did not agree with them.

54    It is only thereafter that further particulars were provided to the statement of claim and some time after that that a defence was filed on 9 May 2017. Further particulars to the defence were provided on 24 July 2017, and discovery was given by Mr McKay on 19 September 2017. Mr McKay’s evidence was filed on 30 April 2018.

Consideration

55    The applicants submit that there is no evidence to support Mr McKay’s assertion that the offer of compromise involved Mr McKay making a concession as to significant costs incurred in the litigation up to that time.

56    That submission can be broken down into two components. The first is the question of whether the offer involved a real compromise in the sense that there was a real concession with regard to significant costs given the early time at which it was made. The second is whether any costs that were incurred up until that time on behalf of the respondents were incurred by Mr McKay as opposed to by the second respondent, Vandaman Pty Ltd.

57    Although, as indicated, by the time of the offer of compromise a mediation had already taken place from which one can infer that some legal costs had been incurred, there is no evidence as to the significance of the concession that was made with regard to costs. Some letters had been written for which the respondents’ solicitor no doubt charged one or other or both of his clients. The contents of those letters do not evidence a particularly in-depth or astute engagement with the merits of the case. For the most part they raise procedural and technical objections and other obfuscation, and they make unhelpful assertions such as that the claims are baseless or frivolous and vexatious. Moreover, as I have indicated, they do not raise the point on which Mr McKay was ultimately successful.

58    At the time of the offer of compromise, further particulars had not yet been furnished to the amended statement of claim, no defence had been prepared, no discovery had taken place, no evidence had been served and submissions had not been prepared.

59    In the circumstances, although the offer of compromise inevitably entailed some concession with regard to costs, it cannot be said with any confidence that that concession was particularly significant.

60    With regard to the second component, I do not regard it as significant that it has not been established whether the costs in question were those of Mr McKay or of Vandaman. Those parties were jointly represented and the significance of their costs at that stage can be assessed together. Offers of compromise were served on behalf of both Mr McKay and Vandaman. Ultimately on taxation Mr McKay will have to establish what liability he bore for costs, but that is not relevant at this stage of the inquiry.

61    Given the early stage at which the offer of compromise was made, and that the letters written on behalf of Mr McKay at that stage had not identified the point on which he was ultimately successful but rather raised a variety of tendentious matters, I do not regard the applicants’ rejection of the offer of compromise as unreasonable. I have taken into account how quickly the offer was rejected. In circumstances where a failed mediation had recently taken place between the parties, there had been the correspondence to which I referred and, as I have found, the offer of compromise did not on its face entail any significant concession by Mr McKay, it is not particularly remarkable that the offer of compromise was able to be rejected so quickly.

62    Thus, in weighing all the relevant circumstances, including the quantum of the compromise offered, I am not persuaded that the rejection of the offer was unreasonable. In the circumstances, Mr McKay is not entitled to indemnity costs. His application to reopen the preliminary costs order should accordingly be dismissed.

Conclusion

63    In the result, the preliminary order with regard to costs should stand. That is to say, the applicants are to pay Mr McKay’s costs of the proceeding.

64    Insofar as the present costs applications are concerned, the parties should bear their own costs. Each side has been unsuccessful in its application, and I do not see any reason why those costs should be costs in the proceeding.

Associate:

Dated:    5 March 2020