FEDERAL COURT OF AUSTRALIA

Valra Pty Ltd v Mag Men Holdings Pty Ltd (No 2) [2020] FCA 314

ORDERS

THE COURT ORDERS THAT:

1.    The applicant pay the respondents' costs up to 11.00 am on Thursday 2 February 2017 on a party/party basis, to be assessed if not agreed.

2.    Subject to order 4, the applicant pay the respondents' costs from 11.00 am on Thursday 2 February 2017 on an indemnity basis, to be assessed if not agreed.

3.    The applicant pay the first respondent's costs of the preliminary discovery application (WAD369 of 2014), including the first respondent's costs of compliance, on a party/party basis to be assessed if not agreed.

4.    The applicant pay the respondents' costs relating to the written submissions on the costs of the proceedings and the costs of the preliminary discovery application on a party/party basis, to be assessed if not agreed.

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

REASONS FOR JUDGMENT

BANKS-SMITH J:

1    Judgment in this matter was delivered on 20 November 2019 (Valra Pty Ltd v Mag Men Holdings Pty Ltd [2019] FCA 1897). The parties subsequently filed submissions as to costs of both the action and an application for preliminary discovery.

2    I will use the same defined terms for parties and witnesses that were used in the substantive reasons.

3    Before turning to the respective positions of the parties as to costs, there are two matters that inform that issue: first, the scope of the litigation that was pursued by Valra in contrast to the limited relief granted; and second, Valra's knowledge before commencing the proceeding that the value of its shares in MMH that it asserted were wrongly transferred was highly likely to be nominal.

Scope of the litigation

4    As noted in the reasons for decision:

[123]    The statement of claim in this matter was refined on a number of occasions, with some claims abandoned during the course of the hearing. Proposed evidence on behalf of Valra that entailed irrelevant personal attacks on family members remained in witness statements despite pre-trial conferral as to objections, and was ruled inadmissible during the hearing. The claims were at times convoluted, with some addressed towards persons or entities who are not parties to the proceedings (such as Candyfloss and SLP), and lacked clarity as to the manner in which any relief was expected to operate. Had Valra properly considered the admissibility of evidence and questions as to the appropriate parties and relief earlier in these proceedings, the proceedings would have been much simpler for everyone involved and may have enhanced the prospect of settlement. Against that backdrop, there still remain many issues in this action to be determined.

5    Prior to trial, I asked the parties to provide an agreed list of issues to be determined in the proceedings, in the hope that such course would provide a pathway through the various claims that would guide the approach to evidence and submissions. However, the plaintiff's case was a moving feast up to and during the hearing and in the end it was necessary for the Court to distil the issues, which were summarised as follows in the reasons:

The alleged breach of contract (Valibhoy Agreement) by Sofiah and Comintra by failing to cooperate as shareholders

[125]    Valra alleges that Sofiah and Comintra failed to comply with obligations under the Valibhoy Agreement in that they failed to consult and act collectively with Valra in relation to the 'extensive restructure' planned by MMH.

The alleged breach of contract (Shareholders Agreement) by MMH by use of the come along clause

[126]    Valra claims that MMH acted in breach of its fiduciary duty as an agent under cl 15.2 in executing a transfer of Valra's shares in MMH because it could not have been satisfied that the threshold conditions for the exercise of such powers were met.

[127]    Valra claims that as a result its shares should be reinstated or MMH should pay it damages.

The alleged breach of contract (Shareholders Deed) by Comintra by breach of its good faith obligation

[128]    Valra alleges that Comintra breached its duty of good faith under the Shareholders Deed by entering into the Share Sale Agreement and concealing that agreement from Valra and says that as a result it suffered loss and damage, as but for the breach it would have retained its shares in MMH.

The alleged oppression by MMH

[129]    Valra alleges that MMH's conduct was oppressive and unfairly discriminatory towards Valra within the meaning of s 232 of the Corporations Act 2001 (Cth).

[130]    The act in the conduct of MMH said to be oppressive is the transfer of Valra's shares purportedly in accordance with cl 15 (the contractual breach by MMH already pleaded).

[131]    The act in the conduct of MMH said to be unfairly discriminatory is that:

(a)    Valra was wrongfully excluded from MMH's management decisions that led to the invocation of cl 15;

(b)    Valra was not given the opportunity to participate in the divestment of MMH's shares in Mega Mags;

(c)    Valra was not given the opportunity to provide funding to MMH on the same terms as other shareholders;

(d)    MMH failed to disclose the forgiveness by MMH of the loan due by Mega Mags on 21 February 2014, or to disclose that the MMH shares in Mega Mags were sold to Tactracom and Ravi;

(e)    MMH implied by the March 2014 Memorandum and the 10 March 2014 email, alternatively by silence, that the separate agreements dealing with the loans due to Comintra and SLP were not part of the extensive restructure of MMH;

(f)    MMH kept hidden the fact that Comintra and SLP had agreed to sell their shares on the terms of the Share Sale Agreement;

(g)    Vali transferred his shares to Shariff clearly in contemplation of seeking to invoke cl 15 to acquire all shares in MMH through Tactracom and was aware that Tactracom would obtain majority ownership of MMH and half ownership of Mega Mags; and

(h)    the Shareholders Deed reflected that shareholders would have a level of participation in the management of MMH and Valra was given no such reasonable opportunity.

[132]    By reason of such conduct Valra contends that its shares were transferred to Tactracom against its wishes.

6    Further, Valra sought to portray through its submissions that there was an overarching deliberate plan to deprive Valra of its shares in MMH. No such plan was established (reasons at [322]-[326]).

7    I note these matters because they indicate the breadth of the matters that the respondents and the Court were required to address in circumstances where, relevantly:

(a)    Valra sought no relief against Vali or Tactracom and they were not parties to the proceedings;

(b)    Valra conceded at trial (for the first time, to the Court's knowledge) that any damages awarded to it would be nominal;

(c)    Valra was not in a position to obtain relief by way of a re-transfer of shares in MMH to it in any event, because it did not join Tactracom (or any relevant later holder of the shares) to the proceedings; and

(d)    although Valra sought a declaration that the transfer of its shares in MMH was invalid, Valra did not establish that declaratory relief of itself was of any particular value or importance to it or of any precedential value that might assist it in future dealings.

8    Ultimately, the Court declared that MMH acted in breach of the Shareholders Deed in utilising cl 15.2 to transfer the shares owned by Valra to Tactracom. Clause 15.2 was a so-called come along clause, but it could be utilised only where shareholders were offered the same acquisition terms by the same purchaser. Although the purchase price for the shares offered to all shareholders was on its face the same, I found that by virtue of additional terms in certain agreements the terms were not relevantly the same (at [198]-[215]). The shares acquired in reliance on the operation of cl 15.2 were of no real value. Accordingly MMH was ordered to pay Valra nominal damages in the sum of $100. Valra was otherwise unsuccessful. All other claims were dismissed.

Information as to MMH's financial positon disclosed by the preliminary discovery application

9    The dispute between Valra and MMH first came before this Court by way of an application for preliminary discovery under r 7.23 of the Federal Court Rules 2011 (Cth). That application was successful in part: Valra Pty Ltd as Trustee for Abdul Rahim Valibhoy Family Trust v Mag Men Holdings Pty Ltd [2016] FCA 23 (Siopis J) (Valra v Mag Men No 1).

10    After publication of reasons in that matter, the parties filed submissions as to costs. It appears that no orders were made and so the costs of that application are also dealt with in these reasons. Further, the preliminary discovery application is relevant to the broader question of costs in the main proceedings. As noted in the primary reasons (at [330]-[332]), it was not seriously in issue at trial that as at the relevant transfer date the MMH shares were of only nominal value, and accordingly any damages that flowed from their transfer were at best nominal. This followed from the apparent insolvency of the company at that time, as foreshadowed and addressed by Siopis J in Valra v Mag Men No 1 (at [72]-[89] of those reasons). Valra was on notice from the time of Valra v Mag Men No 1 (at the latest) that the evidence as to MMH's financial position did not support a contention that the shares were of any real value. Valra evinced no evidence as to value. Valra had the opportunity to put on expert evidence as to the value of the MMH shares, chose not to put on any expert evidence and disclosed its concession as to any damages being nominal only very late in the proceedings.

Further background - compromise offers

11    The proceedings commenced by originating application filed 5 July 2016.

12    On 31 January 2017 the respondents made separate compromise offers. The first offer was made by way of a 'notice of offer to compromise' in accordance with r 25.01(1) of the Federal Court Rules. It stated that the respondents offered to compromise 'this proceeding' by paying Valra the sum of $10,000 in respect of the claim, interest and costs.

13    The second offer was by way of a letter said to be in accordance with the principles of Calderbank v Calderbank [1975] 3 All ER 333, and offering to settle 'this proceeding and all related disputes' on terms that the respondents pay Valra the sum of $10,000 in full and final settlement of all claims, inclusive of interest and costs, such payment to be within seven days of execution of a settlement deed. The proceeding would be dismissed with no order as to costs and there would be no order as to the costs in relation to the preliminary discovery application. The letter addressed in some detail the nature of the claims made at that time by Valra and gave reasons why it considered that it was unreasonable for Valra to reject the offer. The letter referred to the absence of any reliable evidence to support the allegations as to the Valibhoy Agreement (as addressed in the reasons at [149]-[174]); the conflicting correspondence (as addressed in the reasons at [164]-[165]); the lack of evidence in support of the alleged breaches of the Shareholders Deed (as addressed in the reasons at [244]-[273]); and the absence of reliable evidence relating to the oppression claim (as addressed in the reasons at [275]-[321]). Relevantly, the letter noted Siopis J's reasons to the effect that the viability of MMH was entirely dependent on the support of its financiers, that its subsidiaries had incurred significant losses and that it had no other significant assets. MMH informed Valra by the letter that it would seek indemnity costs if the offer was not accepted and an order was made after trial that was not more favourable than the offer.

14    Valra did not accept either of the compromise offers.

15    The respondents also rely on a document described as an 'Undertaking in Relation to Costs' dated 26 September 2018, by which Rahim undertakes to pay the respondents' costs in the action up to the sum of $204,249.16, if Valra is ordered to pay the respondents' costs. No other information about the undertaking was provided by the parties. It is unclear whether it was intended to take effect as an undertaking to the Court or inter partes. Rahim is not a party to the proceedings.

The competing positions - cost of the proceedings

Valra (applicant)

16    Counsel for Valra (who was not counsel at trial but was retained for the purpose of the costs application) approached the question of its liability for costs in a pragmatic manner, and the issues that may have otherwise arisen have been narrowed.

17    Valra does not oppose an order that it should bear the costs of the second and third respondents. It makes no submissions as to whether or not that should be on an indemnity basis.

18    As to the costs of MMH, Valra does not oppose an order that it pay MMH's costs save for those costs that relate to the claim for breach of cl 15.2 of the Shareholders Deed (cl 15.2 costs). It says it should not be obliged to pay the cl 15.2 costs because although it was awarded only nominal damages, it also received the benefit of a declaration as to the breach. It says the purpose 'at the time of the hearing' was not to recover substantial damages and its position was vindicated by the relief that was granted.

19    Valra assesses the proportion of those costs at 25% of the overall costs of the litigation and on that basis submits that the portion of MMH's overall costs of the proceedings that should be borne by it should be limited to 75%. It makes that assessment by reference to the number of issues included in the list of issues prepared by the respondent (see [5] above), and asserts that four of those issues 'broadly relate' to the Shareholders Deed and its construction (I observe that the list of issues contained some 11 issues and comprised six pages of paragraphs, subparagraphs and sub-subparagraphs).

20    Valra resists the submission that MMH should be entitled to rely on the rejection of the compromise offers to recover all of its costs relating to the cl 15.2 costs. Valra submits that it was not unreasonable to reject the offers in circumstances where discovery continued to inform the question of the financial position of MMH and discovery was not completed until sometime in May 2017. According to an affidavit of Arif (Rahim's son and a director of Valra) filed 19 July 2018 in support of an application by Valra to amend its pleadings, Valra continued to seek discovery about the financial position of MMH at the time of the acquisition of the MMH shares and the last documents were provided on 3 November 2017.

21    Valra does not rely on any other matter in support of its submission that rejection of the offers was not unreasonable.

22    As to MMH's costs apart from the cl 15.2 costs, Valra makes no submissions as to whether or not Valra should pay those costs on an indemnity basis.

Respondents

23    The respondents contend that they should properly be regarded as the successful parties and should be awarded their costs, having regard to the limited nature of the relief granted in contrast to the overwhelming number of claims that were unsuccessfully pursued by Valra or were abandoned. They rely on authorities to the effect that where only nominal damages are awarded, the party has obtained something of no real use and the outcome should be regarded as substantive failure in the action.

24    Further, they contend that it was unreasonable of Valra to reject the compromise offers in circumstances where Valra was aware of the financial status of MMH before issuing proceedings and knew about the lack of any credible evidence as to the alleged agreement between the brothers to vote as a block, as referred to in the Calderbank offer. The respondents rely on r 25.14(1) of the Federal Court Rules (see below) as the source of an entitlement to an indemnity costs order, as well as in accordance with Calderbank principles. They submit that the conduct of Valra (citing findings at [123] and [330]-[332] of the reasons) also supports an indemnity costs order.

25    Therefore, the issues to be addressed are:

(1)    how should the discretion to award costs be exercised where Valra succeeded on one aspect of its claim but obtained nominal damages for breach only, and otherwise was unsuccessful;

(2)    should the Court should take into account the compromise offers and their rejection, and provide for indemnity costs; and

(3)    should the conduct of Valra should be taken into account in support of an application for indemnity costs.

Principles - where successful party does not receive costs

26    Whilst the Court has a wide discretion with respect to costs under s 43 of the Federal Court of Australia Act 1976 (Cth), there are established principles guiding the Court in the exercise of its discretion. Ordinarily, in the absence of particular circumstances justifying some other order, costs will follow the event so that a successful litigant will receive its costs.

27    However, a successful party may be deprived of its costs in certain circumstances. In Queensland North Australia Pty Ltd v Takeovers Panel (No 2) [2015] FCAFC 128; (2015) 236 FCR 370 the Full Court referred to the decisions in Ruddock v Vadarlis [2001] FCA 1865; (2001) 115 FCR 229 and State of Victoria v Sportsbet Pty Ltd (No 2) [2012] FCAFC 174 with approval and said:

[11]    These decisions treat the success or failure of the relevant party as being the starting point in consideration of the question of costs. However they contemplate at least three distinct categories of situation in which a successful party might be deprived of costs, or even ordered to pay the costs of the other side. One such category is where the applicant has been only partially successful in that it has not obtained all of the relief sought. The second category is where a party has succeeded in obtaining the relief sought, but has not succeeded on all bases (factual or legal) upon which it sought such relief. Of course, it is possible that a particular outcome will fall into both categories. A third category involves consideration of the successful party's conduct of the case.

28    See also Umoona Tjutagku Health Service Aboriginal Corporation v Walsh [2019] FCAFC 32 at [41]-[46]; and Lucas Earthmovers Pty Ltd v Anglogold Ashanti Australia Limited (No 2) [2019] FCA 1864 at [16]-[19].

29    As to the third category identified in Queensland North Australia Pty Ltd (at [11]), in Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72, McHugh J said:

[69]    The traditional exceptions to the usual order as to costs focus on the conduct of the successful party which disentitles it to the beneficial exercise of the discretion. In Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd, Devlin J formulated the relevant principle as follows:

'No doubt, the ordinary rule is that, where a plaintiff has been successful, he ought not to be deprived of his costs, or, at any rate, made to pay the costs of the other side, unless he has been guilty of some sort of misconduct.'

'Misconduct' in this context means misconduct relating to the litigation, or the circumstances leading up to the litigation. Thus, the court may properly depart from the usual order as to costs when the successful party by its lax conduct effectively invites the litigation; unnecessarily protracts the proceedings; succeeds on a point not argued before a lower court; prosecutes the matter solely for the purpose of increasing the costs recoverable; or obtains relief which the unsuccessful party had already offered in settlement of the dispute.'

(footnotes omitted)

30    Guidance is also found in the decision in Motium Pty Ltd v Arrow Electronics Australia Pty Ltd [2011] WASCA 65 (S) where the Court reviewed the authorities and said:

[10]    While each case must depend upon its own facts, where it is not a primary purpose of proceedings simply to establish or vindicate some legal right but the primary purpose is to recover substantial damages, ordinarily an award of nominal damages will not entitle a party to the costs of the proceedings: see Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd [2001] WASCA 166 [9]. In such a case, the party has obtained something of no real use to them and something which, if they had known it was all that was available, they would not have brought proceedings to recover. It would be contrary to modern notions of the efficient and cost-effective use of judicial resources to enable a party to recover its costs for a pyrrhic victory, having substantively failed in the action.

31    Motium Pty Ltd v Arrow Electronics was applied in, for example, Romero v Farstad Shipping (Indian Pacific) Pty Ltd (No 3) [2017] FCAFC 102 at [36]-[37], [103] (where claim was primarily for substantial damages and only nominal damages were received, the appellant 'failed') and Coal Hub Pty Ltd v NSL Consolidated Ltd [No 5] [2018] WASC 326 at [34], [52]-[53] (plaintiff awarded nominal damages for breach of contract, plaintiff ordered to pay defendant's costs of proceedings).

MMH is the successful party

32    In this case, I am firmly of the view that Valra obtained no more than a pyrrhic victory with respect to only one aspect of the many claims advanced by it and at great cost to the parties.

33    It is clear from its efforts to obtain financial information about MMH via discovery that Valra was interested in seeking damages flowing from the transfer of its shares. It did not seriously contemplate relief by way of a re-transfer of the relevant shares to it and reinstatement as a shareholder: had it done so, it would have been readily apparent that the acquirer, Tactracom, should have been joined to the proceedings so that it could be heard and bound by any relevant court order. Rather, Valra's concern was to ascertain the financial position of the MMH and so consider the prospect of damages. However, it was clear from before the litigation commenced that MMH was in dire financial straits at the time of the transfer and I infer that the absence of any expert evidence as to value reflected Valra's knowledge that it was not in a position to establish that is had incurred damages, despite Rahim's clear disappointment at the manner in which the shares were transferred. Rahim was in possession of considerable information as to the financial position of MMH prior to the commencement of the proceedings. I have already noted that this was dealt with by Siopis J in Valra v Mag Men No 1. Further, as noted in the primary reasons (at [81]-[85]), Vali provided financial information to Rahim in December 2013 and February 2014 and none of that information was impugned. Rahim admitted he did not review them: that was his decision. Vali also provided financial information to Rahim during a telephone call of 13 March 2014 (at [104]-[107]).

34    There was no suggestion that Rahim had any other claims with respect to any other shares or any other companies where the operation of cl 15.2 was relevant. Therefore, there was no suggestion that the finding of a breach in this case was of any real ongoing value to Valra or Rahim. Valra did not at any point contend that there was any particular benefit to it in a mere finding of breach. I reject Valra's submission made for the purpose of this costs application that by the time of the hearing it was not pursuing damages and reject the implicit claim in that submission that a finding of breach was therefore of some independent value. The concession that any damages awarded could only be nominal was made late and was inevitable in light of the lack of expert evidence. I cannot reasonably conclude that a finding of breach and the concomitant declaration were the primary purpose for challenging the transfer of the shares. Such relief and the nominal damages that flowed do not comprise any real victory for Valra. I do not consider Valra would have brought the proceedings, incurred legal costs and assumed the risk of payment of the respondents' costs had it known that an acknowledgment of a contractual breach by MMH and an award of nominal damages was all that was available to it.

35    Having regard to the scope and complexity of the case as pursued and the narrow ground upon which relief was ultimately granted, the respondents were the successful parties in the litigation and should have their costs, including the cl 15.2 costs.

Indemnity costs

36    MMH seeks indemnity costs of the proceedings from 2 February 2017 on two bases, being either pursuant to the operation of r 25.14(1) of the Federal Court Rules or because of the non-acceptance of the Calderbank offer. Valra takes no point about any differences between the two offers (for example, the r 25 offer does not address the unresolved question of Valra's and MMH's costs of the preliminary discovery application) or the formalities of the offers, and does not assert that the offers were not genuine offers of compromise. It contends, however, that it was not unreasonable to reject the offers.

37    Rule 25.14 provides relevantly as follows:

Costs where offer not accepted

(1)    If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer:

(a)    the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and

(b)    the respondent is entitled to an order that the applicant pay the respondent's costs after that time on an indemnity basis.

(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:

(a)    before 11.00 am on the second business day after the offer was served - on a party and party basis; and

(b)    after the time mentioned in paragraph (a) - on an indemnity basis.

38    This Court gave judgment in favour of Valra which was less favourable than the terms of the respondents' offer. Therefore, the relevant rule is r 25.14(1).

39    Rule 25.14(1) is enlivened where an offer which constitutes a genuine compromise is made: Romero v Farstad Shipping (Indian Pacific) Pty Ltd (No 4) [2017] FCA 120 at [73].

40    Whilst not expressly addressed, the parties seemed to assume that despite its express terms, the concept of whether a refusal of an offer is unreasonable is relevant to both r 25.14(1) and the Calderbank offer.

41    In Industrial Galvanizers Corporation Pty Ltd v Safe Direction Pty Ltd (No 2) [2018] FCA 1612 at [28], the Court stated that when considering r 25.14(1) of the FCR, it is not necessary to establish that the applicant acted unreasonably in not accepting the offer of compromise. The Court cites a number of cases which support the statement.

42    It is well-established that r 25.14 creates a rebuttable presumption in favour of an order for indemnity costs: see, for example, Specsavers Pty Ltd v The Optical Superstore Pty Ltd [2012] FCAFC 183; (2012) 208 FCR 78 at [21]; and Basetec Services Pty Ltd v Leighton Contractors Pty Ltd (No 8) [2017] FCA 258 at [101]. The party resisting an order for indemnity costs must prove that there is some proper reason why it should not so pay: Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 at [10]. Whether the applicant acted unreasonably in rejecting the respondent's offer of compromise may be one such factor going to whether there is some proper reason why the applicant should not pay the respondent's costs on an indemnity basis. Therefore, the concept remains relevant to the operation of r 25.14(1).

43    At minimum, the effect of the offers is that they foreclose on the risk that Valra would be obliged to pay all of the respondents' costs of the proceedings incurred to that date. The respondents offered to give up the potential benefit of receiving payment of those costs from Valra. Whilst there is no evidence as to the costs incurred by the respondents at that time, the Court can readily infer in this case that over the six month period between the commencement of proceedings and the date of the offers the respondents' legal fees would have exceeded $10,000. Accordingly, in my view, on their face the offers comprise a genuine compromise.

44    The only basis relied upon by Valra to assert that its rejection of the offers was not unreasonable is that it was seeking to obtain further financial information and that, in Arif's view, it was not at that time possible to determine the financial position of MMH. This claim, including Arif's subjective view, weighed against the reasons of Siopis J and the fact that MMH's financial accounts and those of its subsidiaries had been provided to Valra, does not persuade me that as at the date of the offers it was not unreasonable to reject them. Although it is asserted that some additional documents were provided by discovery after the date of the offers, Valra does not descend into any detail about the relevance (if any) of the additional information.

45    Finally, I note that it will often be the case that compromise offers are made early in litigation or at stages during its progress when not all information is available to the parties. The benefits of a compromise in terms of cost saving and risk management may well be lost if the parties adopt a stance that they require (in effect) all evidence relating to the proceedings or part of the proceedings in order to assess an offer. There may be circumstances where it is difficult to assess the appropriateness of a compromise offer early in proceedings, but this is not such a case. Valra already had a body of documentary evidence and accounts and the detailed reasons of Siopis J available to it from which to assess the financial position of MMH.

46    This is an example where the respondents are entitled to indemnity costs on the basis of either of the compromise offers. The amount offered considerably exceeds the amount of nominal damages awarded and I am not persuaded that rejection of the offers was not unreasonable.

47    I add that is it not necessary to resolve whether, independently of the compromise offers, the conduct of Valra was such that it should pay costs on an indemnity basis. The respondents submit only that the exercise of discretion in favour of the grant of indemnity costs orders is supported by the manner in which Valra conducted the litigation. I accept the respondents' submission on the narrow basis upon which it is put. Valra's conduct inevitably led to significant inefficiencies in the running of the case and for no real return. I expressed in the primary reasons that I do not doubt that Rahim carries a grievance as to the manner in which he perceives he was treated (at [137]). However it should have been readily apparent to Rahim that expensive and broad ranging litigation would not sate that grievance.

The preliminary discovery application

48    It is necessary to say something about the scope of the preliminary discovery application, an application brought against MMH only. According to the reasons of Siopis J, the scope of Valra's request for documents reduced after the filing of the application and then increased, so that by the time of the hearing some 51 categories of documents were sought (at [51], [58]). It is also apparent that MMH voluntarily provided various documents once the application was filed (at [56], [60]). In the end, Siopis J ordered production of only one category of documents (at [106]).

49    The principles relevant to the award of costs on preliminary discovery applications are summarised by Burley J in Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd (No 1) [2019] FCA 657:

[25]    Unsurprisingly, many single judge decisions consider the award of costs in applications for preliminary discovery. Without overcomplicating the analysis, which ultimately involves the exercise of the discretion conferred by s 43(2) of the FCA Act, the following propositions may be observed in relation to the making of such an award:

(1)    The jurisdiction to order preliminary discovery is an extraordinary one since an order for preliminary discovery involves an invasion of the prospective respondent's private affairs in order to determine whether or not a case can properly be brought against the prospective respondent; J & A Vaughan Super Pty Ltd v Becton Property Group Limited [2013] FCA 340 at [17] (Kenny J); C7 Pty Ltd v Foxtel Management Pty Ltd [2001] FCA 1864 at [50] (Gyles J).

(2)    In considering where the balance lies in ordering costs, the exceptional nature of the jurisdiction is a matter to be taken into consideration and is a matter that may mean that a wholly successful prospective applicant is not entitled to an order for costs; ObjectiVision Pty Ltd v Visionsearch Pty Ltd (No 3) [2015] FCA 304 at [23] (Perry J); Cobankara v Australia and New Zealand Banking Group Ltd [2017] FCA 419 at [20] (Mortimer J).

(3)    In Cappuccio v Australia & New Zealand Banking Group Ltd [1999] FCA 1188, a case where an application for preliminary discovery was resolved by consent, Burchett J at [3] considered that the appropriateness of the costs order:

… depends very much on the consequences of the discovery obtained. If the applicant for preliminary discovery uncovers enough to enable that applicant to bring proceedings which are successful, there may be much to be said for the proposition that the costs of the preliminary discovery should form part of the costs of the action. On the other hand, if the applicant proceeds, brings an action, fails, and is ordered to pay the costs of that action, there seems every reason why, generally speaking, the costs of the preliminary discovery should be included in the costs payable to the respondent.

(4)    Following this approach, in a number of cases where a prospective applicant has been successful in procuring orders for preliminary discovery, courts have found it appropriate to order that the payment of costs be deferred to see whether the outcome of the production of documents yields the commencement of substantive proceedings (usually within a specified period of time following the preliminary discovery proceedings). When that has occurred, then the award of costs has been left to the decision-maker in the substantive proceedings; Cappuccio at [3] - [5]; SmithKline Beecham plc v Alphapharm Pty Ltd [2001] FCA 271 at [32] (Finkelstein J); E D Oates Pty Ltd v Edgar Edmondson Imports [2012] FCA 356 at [59] (Kenny J); Gearhart United Pty Ltd v Omni Oil Technologies (Asia) SDN BHD (No 2) [2010] FCA 558 at [24] (Besanko J); Procter v Kalivis (No 3) [2010] FCA 1194; Aristocrat Technologies Australia Pty Limited v Ainsworth Game Technology Limited (No 2) [2019] FCA 511 at [10] - [11] (Yates J).

(5)    In other cases, the view has been expressed that the costs outcome should be determined at the time the outcome of the preliminary discovery application has been determined. It is a discrete issue and should not be deferred to an uncertain time; C7 Pty Ltd at [50]; Steffen v ANZ Banking Group [2009] NSWSC 883 at [31] (McDougall J); ObjectiVision at [17] - [21].

(6)    Where an order for costs has not been deferred, some authorities indicate that the costs balance should favour the payment of costs by the prospective applicant. This is because there is no obligation on a prospective respondent to respond to requests for information, and a prospective respondent is entitled to remain passive and consequently put a prospective applicant to proof in preliminary discovery hearings: Glencore International AG v Selwyn Mines Limited [2005] FCA 801; 223 ALR 238 [15] (Lindgren J); C7 Pty Ltd at [50]; Vaughan Super at [18]; Procter at [17].

(7)    However, where the prospective respondent takes an adversarial approach to the application, it exposes itself to an order for costs; Steffen at [32] - [33]; ObjectiVision at [23] - [24]; Dallas Buyers Club LLC v iiNet Limited (No 3) [2015] FCA 422; 327 ALR 695 at [3] (Perram J). In these cases, the courts have preferred not to defer the making of costs orders.

[26]    It is true to say, as has been observed in some of the authorities to date, that there has been no uniform approach to the award of costs in relation to preliminary discovery applications. However, an emerging thread is that where a prospective respondent takes an adversarial approach to the application, it may be required to bear some or all of the costs in the event that the prospective applicant is successful. The rationale behind that approach may be explained by the extraordinary nature of the preliminary discovery jurisdiction, which is intended to facilitate the making of sensible decisions concerning the commencement of proceedings, before proceedings have been formulated. Accordingly, whilst an adversarial approach is not prohibited, it is to be discouraged. Preliminary discovery is not a process by which potential parties are to open up new fronts for litigation warfare, but a procedure by which the efficient conduct of litigation is promoted; [Pfizer Ireland Pharmaceuticals v Samsung Biopis AU Pty Ltd [2017] FCAFC 193] [2], [4] (Allsop CJ), [119] (Perram J).

50    Valra contends that there should be no order as to MMH's costs of complying with the preliminary discovery order. It says this follows because Valra was partially successful in the main proceedings. It says that MMH should pay its (Valra's) costs of the preliminary discovery application because the application was partially successful and some documents were produced as a result. It asserts that MMH adopted an adversarial approach to the preliminary discovery application and so ought to bear the costs occasioned by that approach.

51    MMH contends that it was not unreasonable to defend the preliminary discovery application, and its stance was vindicated by the fact that, of the numerous categories claimed, the Court only granted an order with respect to one. It also points to the fact that it voluntarily produced documents after the application commenced and prior to the contested discovery hearing.

52    MMH submits that Valra should pay its cost of the preliminary discovery application, including the costs of compliance.

53    The appropriate order is that Valra pay MMH's costs of the preliminary discovery application, including its costs of complying with the order of Siopis J made 29 January 2016. I have formed this view taking into account the following matters:

(1)    the determination of the costs of the preliminary discovery was deferred in this case, and I am able to consider the issue against the backdrop of the outcome of the main proceedings;

(2)    contrary to its submission, Valra did not enjoy any real success in the main proceedings (for the reasons detailed above);

(3)    there is no reason that the outcome of the preliminary discovery application should not follow the outcome of the main proceedings;

(4)    Valra's success in the preliminary discovery application was very limited;

(5)    on the face of Siopis J's reasons, there is nothing in the conduct of MMH that suggests it should bear its own costs or pay any of MMH's costs: it voluntarily provided some documents and successfully defended a very broad-ranging claim for discovery; and

(6)    if the applicant proceeds, brings an action, fails, and is ordered to pay the costs of that action, 'there seems every reason why, generally speaking, the costs of the preliminary discovery should be included in the costs payable to the respondent': Cappuccio v Australia & New Zealand Banking Group Ltd [1999] FCA 1188 at [3] (Burchett J) as cited by Burley J in Pfizer Ireland Pharmaceuticals.

Orders

54    It follows that orders should be made to the following effect:

(1)    Valra pay the respondents' costs up to 11.00 am on Thursday 2 February 2017 on a party/party basis, to be assessed if not agree (that being two business days after service of the compromise offers);

(2)    Valra pay the respondents' costs from 11.00 am on Thursday 2 February 2017 on an indemnity basis, to be assessed if not agreed;

(3)    Valra pay MMH's costs of the preliminary discovery application, including MMH's costs of compliance, on a party/party basis to be assessed if not agreed.

55    Further, Valra should pay the respondents' costs relating to this costs determination but on a party/party basis only, as those costs should follow the event. I am not satisfied they should be paid on an indemnity basis.

56    Finally, the respondents sought an order against Rahim personally such that he would pay costs in accordance with the undertaking referred to at [15] above. Valra did not refer to the undertaking in its submissions. I am not satisfied, without more, that there is sufficient clarity as to the nature or circumstances of the undertaking and therefore I do not consider it appropriate to make an order binding Rahim. If that is a matter that the respondents seek to pursue, they may contact my Chambers and I will hear the parties further. That does not affect Valra's obligation to meet the respondents' costs in accordance with these reasons.

Associate:

Dated:    12 March 2020