AKS Investments Pty Ltd & Anor v National Australia Bank & Anor (No 2) [2012] QSC 282

SUPREME COURT OF QUEENSLAND CITATION: AKS Investments Pty Ltd & Anor v National Australia Bank & Anor (No 2) [2012] QSC 282 PARTIES: AKS INVESTMENTS PTY LTD (ACN 078 821 173) AS TRUSTEE FOR THE SMITH FAMILY TRUST (first plaintiff) and AKS INVESTMENTS PTY LTD (ACN 078 821 173) AS TRUSTEE FOR THE GEORGIE SMITH TRUST (second plaintiff) v NATIONAL AUSTRALIA BANK (ACN 004 044 937) (first defendant) and ADAM GAZAL (second defendant) FILE NO: BS8242 of 2009 DIVISION: Trial Division PROCEEDING: Claim ORIGINATING COURT: Supreme Court of Queensland DELIVERED ON: 20 September 2012 DELIVERED AT: Brisbane HEARING DATE: Written submissions JUDGE: Applegarth J ORDERS: 1. The first plaintiff pay the costs of the first defendant and the costs of the second defendant of and incidental to the proceedings (including reserved costs if any) to be assessed: (a) on the standard basis up to and including 13 July 2010; (b) on the indemnity basis thereafter. 2. There be no order as to the parties’ costs of and incidental to the counterclaim. 3. The sum of $460,000 paid into court as security for the defendants’ costs be paid out to the first defendant, together with accretions, if any. CATCHWORDS: PROCEDURE – COSTS – INDEMNITY COSTS – where first plaintiff’s claim for substantial damages dismissed, second plaintiff’s claim discontinued and first defendant’s counterclaim dismissed – where defendants twice offered to -- 1 of 9 -- 2 compromise prior to trial – where first plaintiff’s claim in part based on contrived evidence – whether circumstances warrant an order for indemnity costs – whether imprudent refusal of an offer to compromise Uniform Civil Procedure Rules 1999 (Qld), r 681 Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, cited Di Carlo v Dubois [2002] QCA 225, cited Emanuel Management Pty Ltd (in liquidation) v Foster’s Brewing Group Ltd [2003] QSC 299, cited Hazeldene’s Chicken Farm Pty Ltd v Victorian Work Cover Authority (No 2) (2005) 13 VR 435, cited Rosniak v Government Insurance Office (1997) 41 NSWLR 608, cited Smits v Tabone [2007] QCA 337, cited Thiess Pty Ltd v FLSMIDTH Minerals Pty Ltd (No 2) [2010] QSC 120, cited Todrelll Pty Ltd v Finch [2007] QSC 386, cited Watson v Foxman (1995) 49 NSWLR 315, cited Westpac v Commissioner of State Revenue [2004] QSC 019, cited COUNSEL: R G Bain QC with P D Tucker and P A Ahern for the plaintiffs L F Kelly SC with A M Pomerenke for the defendants SOLICITORS: Merthyr Law for the plaintiffs Minter Ellison for the defendants [1] Three issues arise in relation to costs. The first is whether the first plaintiff (“AKS”) should be ordered to pay the defendants’ costs of successfully defending its proceeding against them on the indemnity basis. The second is the appropriate order for costs of and incidental to the counterclaim. The third is whether the sum of $460,000 which was paid into Court as security for the defendants’ costs, together with accretions, should be paid out to the first defendant (“NAB”). Indemnity costs [2] The defendants seek an order that AKS pay their costs of and incidental to the proceedings, including the costs of NAB’s counterclaim, on the indemnity basis. [3] The principles governing the awarding of indemnity costs have been stated often. Some formulations, such as a requirement that there be “some evidence of unreasonable conduct, albeit that it need not rise as high as vexation”1 have been criticised as being inexact.2 It is well-established that the discretion to award indemnity costs requires much more than persistence in a weak case. There must be something about the facts and circumstances “beyond the demerit of a party’s case, 1 Rosniak v Government Insurance Office (1997) 41 NSWLR 608 at 616. 2 Todrelll Pty Ltd v Finch [2007] QSC 386 at [4]. -- 2 of 9 -- 3 as reflected in the outcome, before such an order is warranted.”3 The circumstances in which the discretion to award indemnity costs may be exercised are discussed in leading authorities such as Colgate-Palmolive Company v Cussons Pty Ltd,4 which has been followed in cases such as Di Carlo v Dubois5 and Smits v Tabone.6 [4] The frequently cited judgment of Sheppard J in Colgate-Palmolive Company v Cussons Pty Ltd7 is authority for the proposition that the circumstances which may be considered to warrant the exercise of the discretion to award costs on the indemnity basis include: the fact that proceedings were commenced or continued in wilful disregard of known facts; the making of groundless allegations; misconduct in the conduct of proceedings that causes loss of time to the Court and to other parties; an imprudent refusal of an offer to compromise. [5] The defendants submit that this case falls squarely within a number of the recognised categories that call for an award of indemnity costs. These are: advancing a false and deliberately concocted case which depended upon deliberately false testimony; persisting in what AKS, through Mr Smith, knew to be a hopeless case; persisting in wilful disregard of the known facts; the imprudent refusal of an offer of compromise, especially given that AKS should have appreciated that it had no worthwhile prospect of success. [6] AKS submits that, although the judgment contained criticisms of Mr Smith, the findings were not grave enough to warrant an award of indemnity costs. AKS adduced both documentary and oral evidence in support of its claims, and its case was not “plainly untenable”. As to its refusal of offers to compromise, the critical question is whether that refusal was unreasonable.8 It submits that its conduct, in rejecting two offers of compromise based upon a belief about its prospects of success, cannot be said to have been unreasonable so as to justify the award of indemnity costs. 3 Thiess Pty Ltd v FLSMIDTH Minerals Pty Ltd (No 2) [2010] QSC 120 at [4] following Anderson v Aon Risk Services Australia Ltd [2004] QSC 180 at [2]. 4 (1993) 46 FCR 225. 5 [2002] QCA 225. 6 [2007] QCA 337. 7 Supra. 8 Westpac v Commissioner of State Revenue [2004] QSC 019. -- 3 of 9 -- 4 AKS’ case and its persistence in it [7] The defendants rely upon my findings that Mr Smith contrived both the $56M claim and the claim in which he persisted.9 They also rely upon my findings that by February 2008 Mr Smith had embarked upon a process of reinventing events,10 and reconstructed history to convert an expectation that a $20M facility would be established into a contrived case that the bank had represented that a $20M facility would be established once the Westpac securities were transferred to it.11 Reference is made in this regard to the finding that Mr Smith’s resort to the Ulliana letter shows that he knew at all material times that he did not have such a $20M facility.12 The defendants also point to findings that Mr Smith contrived his evidence about an alleged conversation on 10 December 2007 in order to win the proceedings and in order to fill a gap in AKS’ case.13 Finally, they rely upon my adverse finding that Mr Smith invented evidence that Mr Gazal had made a confession of wrongdoing and said that he wanted to “get things off his chest” on 12 March 2008, when no such statement was made and there was no confession of wrongdoing. [8] It is possible that Mr Smith knew that the $10M claim was one that relied upon false evidence, and he knew this from its inception. Such a conclusion is supported by his preparedness to bring the bogus claim for $56M. However, it is also possible that in commencing the $10M claim Mr Smith had a subjective belief that the facility limit had been increased to $20M, and that he formed such a belief in early 2008 through a process of reconstructing history. Such a process of reconstructing conversations and events, influenced by perceptions or self-interest, is a common feature of litigation.14 I decline to find that at the time AKS commenced the $10M claim it, through Mr Smith, knew the claim was hopeless. However, on any objective assessment, the claim faced numerous obstacles. These include the circumstances under which Mr Smith resorted to the Ulliana letter. AKS’ case was not supported by the vast majority of documents.15 At least by the time of disclosure of documents, AKS should have appreciated that it had very poor prospects of success. Its case depended upon acceptance of Mr Smith’s evidence. His evidence was not supported in most respects by contemporaneous documents and, in fact, undermined by the absence of documents when one would have expected them to exist if Mr Smith’s evidence was to be believed. That position, alone, may not justify awarding indemnity costs. It amounted to persisting in a very weak case. The matter, however, takes on a different character when regard is had to the steps resorted to by Mr Smith on behalf of AKS to fill a gap in AKS’ case and also to improve its prospects by contrived evidence that Mr Gazal said on 12 March 2008 that he “wanted to get things off his chest” and proceeded to make a confession of wrongdoing. [9] The conduct of AKS’ case in that regard, with Mr Smith contriving evidence in relation to conversations that did not take place, was reprehensible. It was irresponsible conduct which justifies costs being ordered on the indemnity basis. It involved AKS persisting in a case which it knew depended upon false evidence. 9 AKS Investments Pty Ltd & Anor v National Australia Bank & Anor [2012] QSC 223 at [124], [128]. 10 Ibid [112]. 11 Ibid [182]. 12 Ibid [105]. 13 Ibid [75], [76], [79] and [183](b). 14 Watson v Foxman (1995) 49 NSWLR 315 at 318-319. 15 Ibid [147] – [150]. -- 4 of 9 -- 5 [10] I conclude that AKS’ irresponsible conduct of the proceedings, and its reprehensible conduct in contriving a case based upon the alleged conversations on 10 December 2007 and 12 March 2008 warrant an order for indemnity costs. Settlement offers [11] As to the offers of settlement, the principles relating to an imprudent refusal of offers of compromise have been considered in this and other courts. As I observed in Fick v Groves (No 2),16 the making of an offer to settle which offers a substantial benefit to a plaintiff who ultimately fails at trial does not necessarily entitle the defendant making the offer to indemnity costs. In some cases, offers of compromise are made in circumstances in which the plaintiff is not in a position to properly assess the strength of the defendant’s case. In considering the submission that the rejection of a Calderbank offer was unreasonable, a court should ordinarily have regard at least to the following matters: (a) the stage of the proceeding at which the offer was received; (b) the time allowed to the offeree to consider the offer; (c) the extent of the compromise offered; (d) the offeree’s prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; (f) whether the offer foreshadowed an application for an indemnity costs order in the event of the offeree’s rejecting it. The unreasonable refusal of an offer of compromise is, by itself, a proper ground for the award of indemnity costs.17 [12] In respect of a formal offer to settle under the Rules that is made by a defendant to a plaintiff that is wholly unsuccessful, I respectfully adopt the approach discussed by Chesterman J (as his Honour then was) in Emanuel Management Pty Ltd (in liquidation) v Foster’s Brewing Group Ltd.18 [13] The first offer to settle was made on 15 September 2009, less than seven weeks after the proceeding had been commenced. It was made 11 days after the original defence was filed. Disclosure had not been provided. It was in the form of a Calderbank letter which outlined reasons why each head of loss then claimed would fail. It was made in order to avoid incurring further costs. The defendants offered to settle on the basis that the plaintiffs’ claim and NAB’s counterclaim each be dismissed and that the parties bear their own costs of and incidental to the proceeding. The offer remained open until 4 pm Friday, 25 September 2009. The letter advised that in the event the offer was not accepted and AKS failed to recover a judgment which was substantially better than the offer, the defendants’ costs would be sought on an indemnity basis. 16 [2010] QSC 182 at [31]. 17 Hazeldene’s Chicken Farm Pty Ltd v Victorian Work Cover Authority (No 2) (2005) 13 VR 435 at 442 [28]; see for example Paroz v Paroz [2010] QSC 157 at [62]. 18 [2003] QSC 299 at [35]-[41]. See also Sultana Investments Pty Ltd v Cellcom Pty Ltd (No 2) (2009) 2 Qd R 287; Velvet Glove Holdings Pty Ltd v Mount Isa Mines [2011] QCA 312 at [105]. -- 5 of 9 -- 6 [14] AKS submits that it cannot be said to be unreasonable for it to have awaited disclosure. In due course, and after mediation, the second plaintiff’s claim for $56M was discontinued, with no order as to costs. [15] I am not persuaded that AKS’ refusal to accept the Calderbank offer of 15 September 2009, of itself, justifies an award of indemnity costs. AKS’ prospects of success in relation to the $56M claim, assessed as at the date of the offer, were very poor. Its prospects of success in relation to the $10M claim, assessed at the date of the offer and without disclosure having taken place, were poor. However, its $10M claim was not completely untenable. [16] The second offer was a formal offer made on 6 February 2012. The defendants offered to pay AKS $1M within 14 days of acceptance of the offer. It also offered to pay AKS’ costs of and incidental to the proceeding on a standard basis. This was a reasonable offer. By the time it was made AKS’ case was one which lacked any substantial support in documents, was undermined by numerous contemporaneous documents and depended, for its success, upon evidence which was contrived by Mr Smith. AKS acted unreasonably in pursuing the proceedings in the face of strong evidence showing the strength of the defendants’ case and in reliance upon contrived evidence. Its refusal to accept the second offer was unreasonable and imprudent. It exposed the defendants to incurring substantial additional costs for which they were not fully protected by way of security for costs. AKS’ imprudent failure to accept the second offer is itself a ground to order indemnity costs, at least after the date the offer was made. From what date should indemnity costs be awarded? [17] The defendants have made out a case for an order for indemnity costs. The issue is whether the discretion should be exercised by ordering AKS to pay their costs on an indemnity basis from a date later than the inception of the claim. It would be possible to exercise my discretion by awarding costs on an indemnity basis from the commencement of proceedings which then included the bogus $56M claim, or from a date relatively early in the proceedings, such as when disclosure of documents permitted AKS to appreciate that it had no worthwhile prospect of success. Another date is when AKS amended its statement of claim to introduce the alleged conversation of 10 December 2007. This amendment was made on 13 July 2010. [18] The fact that the proceedings were commenced with the inclusion of a bogus claim for $56M might justify an order that indemnity costs be ordered from the inception of the proceedings. The bringing of such a claim without any proper basis and in the knowledge that the relevant shares were not worth $56M constituted reprehensible conduct by AKS. It was conduct that was calculated to exert maximum pressure on, and cause maximum embarrassment to, the defendants. It was apt to cause distress to the second defendant, as was AKS’ reprehensible conduct in alleging that he had made a confession in order to “get things off his chest”. Still, the $56M claim was discontinued, and AKS should not be punished for having belatedly recognised how untenable that claim was in circumstances in which the parties were prepared to settle that aspect of the claim on the basis that it would be discontinued, with no order as to costs. [19] Although it would be open to me to order indemnity costs from the commencement of the proceedings, or shortly after it was commenced, I have decided to order -- 6 of 9 -- 7 indemnity costs after 13 July 2010. This was the date upon which AKS’ claim was amended to rely upon the alleged conversation of 10 December 2007. Certainly by that date, if not much earlier, AKS was persisting in a $10M claim which had no proper basis, and was still persisting with a bogus claim for $56M. By that time Mr Smith had resorted to contriving evidence about the conversation that allegedly occurred on 10 December 2007. AKS was persisting in a claim which found no real support in the large number of documents which were disclosed and became exhibits. [20] Another factor in deciding that indemnity costs should be assessed only after 13 July 2010 relates to the resolution of the costs of the counterclaim. I will exercise my discretion on costs so as to avoid there being two assessments of costs. I might have ordered indemnity costs be assessed from a date earlier than 13 July 2010. However, I will order indemnity costs to be assessed after that date having regard to the matters that I have addressed, and also my determination that an appropriate order for costs in respect of the counterclaim is that there be no order as to costs. Costs of the counterclaim [21] The defendants submit that the award of indemnity costs should include the costs of NAB’s counterclaim, which was precipitated by “AKS’ false and concocted claim”. NAB submits that the counterclaim was only brought against the possibility that Mr Smith might subjectively have believed that the facility limit was or should have been $20M rather than $10M. It submits that it became evident during Mr Smith’s cross-examination that this was not a realistic possibility and, accordingly, it was not necessary for NAB to address its counterclaim further. In any event, it submits that it would be unjust for NAB to bear the costs of a counterclaim that was precipitated by AKS’ false stance, and which became unnecessary once that false stance was exposed in the witness box. [22] In response, AKS submits that NAB was not in a position to succeed on its counterclaim and the summaries of evidence filed on 10 October 2011, some five months before the trial, did not contain evidence that supported it. Accordingly, AKS submits that it must have been apparent to NAB, months before trial, that it could not and would not sustain the factual allegations pleaded in the counterclaim. As a result, it submits that costs should follow the event, so that NAB should pay its costs of and incidental to the counterclaim, on the standard basis. [23] NAB did not persist in its counterclaim, and if it had intended to persist in its counterclaim one might have expected evidence in support of it to be in its summaries of evidence. With the dismissal of the counterclaim, the starting point is that costs follow the event unless the Court orders otherwise.19 I accept that the counterclaim was brought against the possibility that Mr Smith might subjectively have believed that the facility limit was or should have been $20M rather than $10M. Further, the occasion to bring the counterclaim only arose because AKS brought and persisted in a bogus claim for $56M and a claim for $10M which was persisted in on the basis of false and contrived evidence. [24] Viewed in isolation, an appropriate order for costs might have been to order NAB to pay AKS’ costs of and incidental to the counterclaim after the date upon which 19 Uniform Civil Procedure Rules 1999, r 681(1). -- 7 of 9 -- 8 NAB decided not to persist with the counterclaim. This would have the disadvantage of requiring two separate assessments of costs. The counterclaim occupied no time at the trial and it appears that the parties did not prepare for it to be litigated at trial. Taking into account the fact that the counterclaim was occasioned in the circumstances that I have discussed, and having regard to the benefit of having only one order for costs, if possible, I consider that the appropriate resolution is to order that there be no order as to the costs of the counterclaim. I have taken AKS’ success in having the counterclaim dismissed into account in arriving at a date after which it should be ordered to pay costs on an indemnity basis. Payment out of Court [25] According to an affidavit filed on behalf of the defendants, to 28 June 2012, the defendants’ solicitor and own client costs in the matter total $1,682,492.20 (including GST). Of this sum $797,595.47 are outlays, $732,024.42 are solicitors’ fees and $152,872.31 is GST. Some of these costs cannot be recovered by the defendants because they are the subject of a previous consent order. However, the affidavit of Mr O’Brien explains that, even allowing for such costs, it is still likely that the defendants’ costs assessed on the standard basis will exceed the amount paid into Court by way of security for costs. On that basis, the defendants submit that they ought to be entitled to payment out of the security forthwith. In circumstances in which a substantial part of the defendants’ costs are to be assessed on the indemnity basis, there is an even stronger case to be made for this. [26] AKS submits that there is no explanation as to why the defendants require the security sum to be paid out of Court now, before the parties have even commenced the costs assessment process. There is no suggestion, for example, that the defendants require those monies in order to pay their legal expenses. However, I think the explanation as to why the defendants seek payment out of Court is apparent from Mr O’Brien’s affidavit. The fact that the defendants do not require those monies in order to pay their legal expenses does not alter the fact that they have incurred very substantial costs which are likely to be assessed far in excess of the amount paid into court by way of security. [27] Although a precise determination of the amount to which the defendants are entitled must await the process of assessment, the interests of justice will be served if the defendants now have access to the security sum paid into Court. The process of assessment may take some substantial time and the accretions to the sum paid into Court may not match the loss suffered by NAB not having use of the sum during that period. [28] In circumstances in which AKS does not mount any substantial argument that an assessment of the costs which I have ordered is likely to be less than the security amount, the appropriate course is to order that the security sum be paid out of Court. Conclusion and Orders [29] I have decided to order indemnity costs because AKS’ conduct in relation to the proceedings was reprehensible. It commenced proceedings that had no worthwhile prospect of success, persisted for a substantial time with a bogus claim for $56M, and thereafter persisted with the balance of its claim without a proper basis. AKS attempted to fill a gap in its case and to improve its case by resorting to contrived -- 8 of 9 -- 9 evidence about conversations that did not in fact occur. Such conduct is reprehensible. [30] On 29 August 2012 I ordered that the first plaintiff’s proceeding be dismissed, and that the counterclaim be dismissed. I did not make any order as to costs that day. Accordingly, the additional orders will be: 1. The first plaintiff pay the costs of the first defendant and the costs of the second defendant of and incidental to the proceedings (including reserved costs if any) to be assessed: (a) on the standard basis up to and including 13 July 2010; (b) on the indemnity basis thereafter. 2. There be no order as to the parties’ costs of and incidental to the counterclaim. 3. The sum of $460,000 paid into court as security for the defendants’ costs be paid out to the first defendant, together with accretions, if any. -- 9 of 9 --