Federal Court of Australia

North Shore Property Developments Pty Ltd (in liq) v Haddad (Costs) [2025] FCA 827

ORDERS

THE COURT ORDERS THAT:

1.    The applicants pay 50 percent of the respondents’ costs as agreed or assessed.

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

REASONS FOR JUDGMENT

KENNETT J:

1    On 18 June 2025 the Court made an order dismissing the applicants’ originating application. With the respondents having indicated that they wished to be heard on the issue of costs, orders were also made for written submissions to be filed on that issue and for it to be determined on the papers. Written submissions were filed by the respondents on 2 July 2025 and by the applicants on 16 July 2025.

Background

2    The background to the proceedings is set out in the reasons published on 18 June 2025 (North Shore Property Developments Pty Ltd ACN (in liq) v Haddad (No 2) [2025] FCA 642 (the substantive reasons)). In these reasons I will use the same defined terms as were used in the substantive reasons.

3    The applicants sought a declaration that they had validly rescinded a settlement deed executed in July 2017 by the by the former liquidator of North Shore, Mr Iannuzzi, in his capacity as liquidator, together with what were described as damages to reimburse the second applicant (Ms Erskine, the current liquidator) for certain costs incurred by her. The basis for both claims was certain misrepresentations said to have been made by Mr Haddad in the course of negotiations leading to the settlement deed.

4    The settlement deed compromised a claim, asserted by Mr Iannuzzi, that four units in an apartment complex developed by North Shore had been sold to Mr Haddad’s company, 72-74 Gordon, for substantially less than their true value. Execution of the settlement deed was preceded by a conference and the provision of a bundle of documents from the respondents to Mr Iannuzzi’s firm. The alleged misrepresentations, which are discussed more fully in the substantive reasons, were in short:

(a)    the propounding of a document referred to as the Reston Appraisal, dated 2012 and expressing a real estate agent’s opinion as to the value of the units, as a genuine document (when Mr Haddad, having created the document himself, knew that it was not);

(b)    a representation made in a letter sent in June 2017 to the effect that the units were defective and Mr Haddad had rectified those defects; and

(c)    a representation made at the settlement conference that the units had significant waterproofing defects that Mr Haddad had rectified.

5    As to the first representation (referred to in the substantive reasons as the valuation representation), the applicants succeeded in establishing that Mr Haddad had created the Reston Appraisal in 2017 and sent it to Mr Iannuzzi’s staff with the intention of persuading them that a valuation had been obtained in 2012 (substantive reasons at [42]): ie, the representation that was implicit in the provision of the document was false to Mr Haddad’s knowledge. However, there was no evidence of any reliance by Mr Iannuzzi on this representation (substantive reasons at [43]).

6    The second representation (condition representation 1), as pleaded, involved a proposition that the defects in the units were so significant as to have made the prices paid for them fair. This had three related problems, each fatal to the applicants’ case: it was a statement of opinion rather than fact; it was advanced as a starting point for settlement discussions (rather than as a statement to be taken on trust); and there was no evidence of the statement having been relied upon (substantive reasons at [60]-[63]).

7    The third representation (condition representation 2) was found not to have been made in exactly the terms pleaded and, to the extent it was made, was not shown to have been false (substantive reasons at [71]). There was also no evidence that it had been relied upon by Mr Iannuzzi (substantive reasons at [72]).

Should costs follow the event?

8    The applicants submit that the respondents, despite their success, should not have their costs as a result of disentitling conduct on the part of Mr Haddad. That conduct was identified as:

(a)    fraudulently creating (and transmitting) the Reston Appraisal with the intention of persuading Mr Iannuzzi to settle the claim for a smaller amount of money than he otherwise would have;

(b)    putting the Reston Appraisal into evidence in an earlier proceeding before Yates J that was resolved adversely to the present applicants; and

(c)    maintaining in the present proceeding that the Reston Appraisal was not fraudulent, including by filing and serving an affidavit to that effect (which was ultimately not read).

9    In Oshlack v Richmond River Council [1998] HCA 11; 193 CLR 72 at [69] McHugh J said:

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.)

10    His Honour was in dissent in the result, but not as to the meaning of “misconduct” in this context.

11    To broadly similar effect, in Youssef v Victoria University of Technology [2005] VSC 385 at [3], Whelan J observed:

There are circumstances in which the Court’s discretion might properly be exercised so as to deprive a successful party of its costs, or even so as to require a successful party to bear the costs of an unsuccessful party. The factors which might lead to a departure from the settled practice include the following:

1.    Conduct by the successful party which has brought about the litigation. Such conduct might include conduct inducing a belief that the opposite party had a good claim or had a valid defence.

2.    Conduct by the successful party which has resulted in unnecessary litigation or expense.

3.    Wrongful conduct by the successful party in the course of the matters with which the proceeding is concerned.

12    Mr Haddad’s fraud did not “invite” or “bring about” the litigation in the sense referred to in these extracts. Taken at face value, the Reston Appraisal tended rather to discourage litigation. Once the applicants were in possession of cogent evidence that the document was fraudulent (something which, of course, Mr Haddad did not invite), it was natural for them to consider whether they had a claim of some kind against Mr Haddad and 72-74 Gordon. However, the claim that the applicants chose to pursue required other evidence, which they did not have. Thus, neither Mr Haddad’s fraud nor the discovery of it caused the proceedings to be commenced (and it certainly did not cause the other alleged misrepresentations to be pursued).

13    Although the fraud itself is to be deplored, the Court’s discretion in relation to costs under s 43 of the Federal Court of Australia Act 1976 (Cth) is not a general power to punish past misconduct. Departures from the general rule that costs follow the event are justified by “misconduct”, not in a general sense, but rather where such misconduct has itself caused or induced the other party to incur costs in litigating.

14    The position that the respondents took in relation to the Reston Appraisal during (as opposed to before) the proceedings stands in a somewhat different position. As noted earlier, the respondents filed and served an affidavit in which Mr Haddad deposed that he did not create the Reston appraisal. Although the affidavit was not read and Mr Haddad did not give evidence, his refusal to concede the point necessitated the calling of evidence (including expert evidence) by the applicants. Mr Muriniti, whose signature appeared on the Reston Appraisal, was cross-examined to the effect that he might himself have created the document in 2017; and it was put in final submissions that the Court should not accept that Mr Muriniti was not involved in creating the document. These things were presumably done on instructions from Mr Haddad.

15    There are two points to be made about this. The first is that, while Mr Haddad was entitled to put the applicants to proof of all aspects of their case, it does not follow that he is entitled to expect a normal costs order if an aspect of the applicants’ case (a) was compelling and (b) demonstrated dishonesty on his part. The second is that it follows from the findings set out in the substantive reasons that Mr Haddad (a) swore (albeit did not ultimately rely on) an affidavit parts of which he must have known were false and (b) instructed, or at least allowed, his counsel to put propositions in cross-examination and submissions that he must have known were false. These are matters properly to be considered in the exercise of the costs discretion (as to advancing a dishonest case see, eg, Roberts-Smith v Fairfax Media Publications Pty Limited (No 45) [2023] FCA 1474 (Besanko J)).

16    Because these considerations affected only one aspect of the proceedings, (albeit an important one), the applicants’ case had significant and obvious weaknesses and the respondents ultimately prevailed, I do not accept that there should be no order as to costs. There should be an order in favour of the respondents, but with a significant discount.

Indemnity costs?

17    The respondents seek an order that the applicant pay their costs, to be assessed on an indemnity basis after 11 am on 21 August 2024. This was the second business day after the service on the applicants of an offer of compromise (the offer), pursuant to which the respondents offered to pay the applicants $100,000 (inclusive of interest and costs) to settle the proceedings.

18    Part 25 of the Federal Court Rules 2011 (Cth) (the Rules) provides for offers of compromise. The applicants accept that the offer complied with relevant requirements of that Part and that r 25.14(2) therefore applies if their refusal to accept the offer was unreasonable. Rule 25.14(2) provides as follows.

(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.

19    The applicants contend, however, that:

(a)    their failure to accept the offer was, in all the circumstances, not unreasonable; and

(b)    even if that failure was unreasonable, the Court has a power to depart from r 25.14(2) which should be exercised in this case.

20    Whether the applicants’ failure to accept the offer was “unreasonable” is to be assessed in the light of the circumstances existing at the time the offer was rejected: Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [6] (Nicholas, Yates and Beach JJ). Relevant circumstances include the stage of the proceeding when the offer was made, the clarity of the terms of the offer, the time allowed for consideration, the extent of the compromise, whether an application for indemnity costs was foreshadowed, and the offeree’s prospects of success assessed at the relevant time: Caporaso Pty Ltd v Mercato Centrale Australia Pty Ltd [2025] FCAFC 29 at [21] (Katzmann, Wheelahan and Hespe JJ). Here, the applicants point to their prospects of success, as they would have appeared at the time they rejected the offer, and the extent of compromise in the offer.

21    As to prospects of success, it is correct, as the applicants submit, that it was sufficient for them to prove that any one of the pleaded representations was made, was false to Mr Haddad’s knowledge, was intended to be relied upon and was actually relied upon. However, this in itself does not take matters very far. As at August 2024:

(a)    the deadlines for filing evidence had passed, and all of the affidavits ultimately relied upon had been filed and served;

(b)    there was no direct evidence of the falsity of the condition representations, and such evidence as there was suggested that there were in fact non-trivial problems with the building in which the units were situated (substantive reasons at [60], [69] and [71]);

(c)    in a critical respect, condition representation 1 was not a representation of fact (substantive reasons at [53]);

(d)    there was no evidence of reliance on any of the representations (in particular, no evidence from Mr Iannuzzi or any of his staff) (substantive reasons at [43] and [73]);

(e)    the condition representations were, in the circumstances of the case, very unlikely to have been simply accepted at face value (or to have been intended to be accepted at face value) (substantive reasons at [63], [72] and [74]); and

(f)    the documentary evidence pointed away from any of the representations having been relied upon (substantive reasons at [43], [59], [61], [62] and [72]).

22    In these circumstances, the applicants’ best chance of success lay in seeking to persuade the Court that the Reston appraisal was in its nature likely to have some effect on Mr Iannuzzi’s reasoning and an inference therefore arose that the documents were insufficient to rebut (cf, eg, MWH Australia Pty Ltd v Wynton Stone Australia Pty Ltd (in liquidation) [2010] VSCA 245; 31 VR 575 at [106] (Buchanan and Nettle JJA)). However, this was not a forlorn hope, notwithstanding that the Court was not ultimately persuaded. The file note setting out the reasons why Mr Iannuzzi’s staff recommended accepting the proposed settlement of his claim against the applicants could conceivably have been viewed as not having been intended as a comprehensive statement of the relevant matters.

23    For these reasons, I do not think it was unreasonable for the applicants to approach the offer on the understanding that they had a realistic chance of obtaining at least the declaratory relief that they sought.

24    As to the extent of compromise, I am not persuaded by the submission that the offer of $100,000 was in substance an invitation to capitulate. $100,000 was a meaningful sum, even though it might not have covered the applicants’ legal costs. The respondents were effectively offering to bear their own costs and make a substantial contribution to those of the applicants. From the respondents’ perspective, this could properly have been regarded as an appropriate commercial settlement given the state of the evidence.

25    On the other hand, from the applicants’ perspective, a declaration that the settlement deed had been validly rescinded (and the consequent opportunity to re-agitate the claim against Mr Haddad in relation to the sale of the units to him) was potentially worth a great deal more than $100,000. Accordingly, even though on the state of the evidence they had only a narrow and uncertain path to success, I am persuaded that it was not unreasonable for them to take the view that what was being offered was less than an appropriate settlement sum.

26    For these reasons, an entitlement to an award of indemnity costs does not arise under r 25.14(2). There is therefore no need to consider whether the discretion to dispense with that rule should be exercised.

Resolution

27    As I have rejected the basis propounded by the respondents for an award of indemnity costs, there is no need to consider how such an order would interact with my conclusion that the costs awarded to the respondents should be subject to a discount.

28    Taking into account the matters discussed above, I will order that the applicants pay 50 percent of the respondents’ costs as agreed or assessed.

Associate:

Dated:    21 July 2025