FEDERAL COURT OF AUSTRALIA COSTS - costs on an indemnity basis - requirement of special circumstances for indemnity costs - party seeking costs on an indemnity basis must come to the Court with clean hands - payment of costs of interlocutory proceedings prior to conclusion of substantive proceedings Federal Court of Australia Act 1976 (Cth) s 43 Federal Court Rules 1979 (Cth) O 62 Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 13) (Full Court (Lockhart, Lindgren and Tamberlin JJ) unreported, 17 August 1995) followed Lamesa Holdings BV v Commissioner of Taxation [1997] 74 FCR 263 followed Australian Flight Test Services Pty Ltd v Minister for Industry Science and Technology (O'Loughlin J, unreported, 26 April 1996) followed Colgate-Palmolive Co v Cussons Pty Ltd [1993] 46 FCR 225 Thunderdome Racing and Scoring Pty Ltd & Anor v Dorian Industries Pty Ltd & Anor [1992] 36 FCR 297 followed Telstra corporation ltd v first NETcOM pty ltd NG 483 of 1997 EINFELD J SYDNEY 7 MAY 1998 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 483 of 1997 BETWEEN: Telstra corporation ltd Applicant AND: first NETcOM pty ltd Respondent JUDGE: EINFELD J DATE OF ORDER: 7 May 1998 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. the respondent pay the applicant's costs of the respondent's motion of 14 July 1997 on a party/party basis. 2. the respondent pay the applicant's costs of the applicant's motion of 17 July 1997 on a party/party basis. 3. the costs referred to in Orders 1 and 2 hereof and the costs awarded by the Full Court on 2 September 1997 may be taxed forthwith and are to be paid upon the issue of the certificate of taxation. 4. there be no order as to the costs of the applicant's motion of 31 July 1997 for a Mareva injunction and for dissolution of the interlocutory injunction pronounced on 16 July 1997. 5. there be no order as to the costs of Orders 3, 3(a) or 4 of the applicant's motion of 23 September 1997 as amended. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 483 of 1997 BETWEEN: Telstra corporation ltd Applicant AND: first NETCOM pty ltd Respondent JUDGE: EINFELD J DATE: 7 MAY 1998 PLACE: SYDNEY REASONS FOR JUDGMENT By a motion dated 23 September 1997, which was subsequently amended with the Court's leave, Telstra Corporation Ltd (Telstra) sought, by Order 4, its costs of two motions brought earlier in the proceedings. The first, dated 14 July 1997, was brought by First Netcom Pty Ltd (First Netcom) and sought to set aside a subpoena issued by Telstra for production of First Netcom's financial records. The second, dated 17 July 1997, was brought by Telstra and sought security for First Netcom's undertaking as to damages, given in relation to an interlocutory injunction pronounced on 16 July 1997. I dealt with the substance of these motions in a judgment delivered ex tempore on 25 August 1997, dismissing the first and allowing the second. Two ancillary matters raised in the course of argument on that day were also dealt with, namely a motion of 31 July 1997 by Telstra for a Mareva injunction in respect of First Netcom's assets, and an application made orally by Telstra to dissolve the injunction of 16 July 1997, both of which were refused. In the course of the judgment of 25 August 1997, I stated that the costs of these four matters should be dealt with comprehensively and should include a consideration of the costs of the original application for the interlocutory injunction. Such a comprehensive consideration could not be undertaken at the time as a Full Court was due the next day to hear an expedited appeal against my judgment on the injunction and my later consequential order that First Netcom provide security for its undertaking as to damages. In a judgment delivered on 2 September 1997, the Full Court dismissed most of the appeal but dissolved the part of the injunction which prevented Telstra from discontinuing services to First Netcom and, as a consequence, set aside the order requiring First Netcom to provide security for its undertaking as to damages. As to costs, the Full Court ordered First Netcom to pay Telstra's costs of the application for leave to appeal and of the appeal and 75% of Telstra's costs in seeking interlocutory relief. On 31 October 1997 I dismissed Telstra's application (Order 3 of the motion of 23 September 1997) for those costs to be taxed and paid forthwith. It is common ground that the Full Court's costs order did not cover the costs associated with any of the applications dealt with on 25 August 1997. Telstra's position on costs, while not fully articulated in the motion of 23 September 1997, was clarified during argument. It was seeking an order that First Netcom pay its costs of the motions of 14 and 17 July 1997 on an indemnity basis or, in the alternative, on a party/party basis. In either case it seeks an order that payment be made forthwith. If an order for immediate payment is not made, then it seeks security for any award of costs in its favour. First Netcom contended that consideration of all of these costs issues should be deferred to a later stage in the proceedings, a submission based partly on my statement on 25 August 1997 that the costs issues should be dealt with 'comprehensively'. However, by 'comprehensively', I meant that all costs issues raised in the initial interlocutory phase of proceedings, up to and including the appeal to the Full Court, should be dealt with together. As the Full Court dealt with the costs of the initial interlocutory application and the subsequent appeal, the only costs remaining which are truly a part of the initial interlocutory proceedings are the costs associated with the four issues earlier identified. There is no reason why these costs should not be resolved now that the initial interlocutory phase of proceedings is concluded. However, First Netcom rightly pointed out that if the costs of the motions of 14 and 17 July 1997 are to be dealt with, as sought in Telstra's motion of 23 September 1997, then the costs of Telstra's application for a Mareva injunction and for the dissolution of the original interlocutory injunction ought also be dealt with, as all four issues were before the Court on 25 August 1997 when the costs associated with all of them were reserved. First Netcom further submitted that if the costs matters were to be determined at this stage, there should be no order as to costs on any of the four issues as it had been successful on two points and Telstra had been successful on the other two. Telstra submitted that the application for a Mareva injunction was inextricably entwined with its motion for security for First Netcom's undertaking as to damages, as it was a defensive measure designed to protect Telstra's position should their motion for security fail. Telstra also said that no extra costs were generated by its raising either the Mareva injunction or the immediate dissolution of the original interlocutory injunction. INDEMNITY COSTS The Court's jurisdiction to awards costs arises from section 43 of the Federal Court of Australia Act 1976 (Cth) and the details are provided for in Order 62 of the Federal Court Rules 1979 (Cth). There is no doubt that these provisions not only confer on the Court a wide discretion to order costs but that an order to pay costs on an indemnity basis is within the ambit of that discretion. In Lamesa Holdings BV v Commissioner of Taxation [1997] 74 FCR 263 I considered the authorities relating to indemnity costs, and it is unnecessary to revisit them here. As noted in Lamesa, although the unfettered judicial discretion conferred by the Act and Rules cannot be reconciled with any notion of a 'usual rule' for the awarding of costs, where there is nothing unusual in the circumstances of the case, a successful party ought to expect to have its costs paid, at least on a party/party basis. As this level of payment does not provide anything like complete indemnity for the costs incurred, an award of indemnity costs can be viewed as 'akin to a penalty to be imposed for one or more particularly good reasons', some of which are outlined by Justice Sheppard in his oft-quoted judgment in Colgate-Palmolive Co v Cussons Pty Ltd [1993] 46 FCR 225 and which are set out in Lamesa at 267. The facts and history concerning First Netcom's motion to set aside Telstra's subpoena are set out in my judgment of 25 August 1997. Telstra submitted that the special circumstances justifying an order for indemnity costs on the subpoena motion were that First Netcom ignored the specific requests of both the Court and Telstra to produce information to adequately answer the subpoena and that its attempt to have it set aside was deliberately designed to obstruct the Court's inquiries. It is true that First Netcom's conduct in respect of this subpoena was, to say the least, not exemplary. Without going to the detail of the conduct, I commented on 25 August 1997: Not only am I not satisfied that First Netcom has supplied accurate and truthful information concerning its financial affairs, there seems to be reason for believing that it is deliberately attempting to obfuscate the whole issue of its financial viability at the present time. On this matter the Full Court (Lockhart, Beaumont & Hill JJ, (1997) 148 ALR 202) said at 207: .... such evidence as there was before his Honour as to the capacity of First Netcom to pay indicated that that company had a share capital of only four dollars and that in respect of the 1995 fiscal year it had a net deficiency of assets of $615,471, after excluding intangible assets of $617,886. We gave counsel for First Netcom the opportunity to seek the leave of the Court to file, even at this late stage, evidence of its financial situation. The opportunity was declined. In these circumstances in our view it would be quite wrong in principle to require Telstra to continue to perform its side of the agreement with First Netcom, when that company has neither offered to pay, paid into court or offered to secure payment, of the amounts in dispute. I do not excuse the evasiveness of First Netcom's conduct which had at least some relationship to an inadequate financial situation for the granting of credit. The Court has never countenanced a party unilaterally determining what it would or would not supply in response to a validly issued subpoena such that if considered in isolation, First Netcom's conduct may well have been sufficiently unreasonable to warrant an order for indemnity costs. However, a certain reticence on the part of First Netcom to produce intimate details of its corporate structure and financial position ought not to be surprising at the beginning of what appeared to be a bitter and protracted period of litigation with its major competitor, in response to a subpoena issued by the competitor in a newly deregulated industry. Moreover, while it is certainly true that some unreasonable conduct on the part of the party against whom indemnity costs are sought must be demonstrated, it must equally be true that the party seeking the indemnity costs must come to the Court with clean hands. I cannot say that that is probably the case here. The particular subpoena was broadranging and unnecessarily intrusive. Moreover, while I do not apportion blame, the overall conduct of the litigation was tendentious and unedifying, sometimes even a little infantile, in all likelihood, as it seemed to me, because of the actions and attitudes of both sides. In the light of these matters and considering the overall context of this dispute, I do not consider that there are sufficiently special circumstances to justify an order for indemnity costs. I therefore order First Netcom to pay Telstra's costs in relation to its motion to set aside Telstra's subpoena on a party/party basis. The arguments propounded by Telstra to justify an order for indemnity costs relate only to First Netcom's conduct in respect of the motion to set aside the subpoena. There was no further evidence of any unreasonable conduct by First Netcom in relation to the motion for security. Telstra submitted that First Netcom's conduct in respect of the subpoena and the motion to set it aside somehow equated to unreasonable and unmeritorious conduct in the context of the motion for security because, given that there was an issue as to its financial viability, First Netcom should have offered security and not forced Telstra to bring a contested motion. In my view, this argument is circular and not sustainable. There should be no order for indemnity costs on the motion for security, but I order that First Netcom pay Telstra's costs of the motion for security on a party/party basis. The application for a Mareva injunction was truly ancillary to the application for security. Telstra was seeking to ensure that if First Netcom failed in the action, there would be assets available to satisfy any damage or loss incurred because of the interlocutory injunction. In the circumstances, the application for a Mareva injunction simply accelerated the need for a decision on security and, when security was ordered, became superfluous. Similarly, the application for the immediate dissolution of the interlocutory injunction was closely associated with the application for security. Telstra asserted that First Netcom was not in a position to meet any possible liability for damages and would not provide security, and so sought the dissolution of the injunction. Instead I ordered security for the undertaking as to damages and the Full Court removed the injunction and the need for security on appeal the next day. I do not think that the bringing of these applications occasioned any significant further costs. But if further costs were incurred, it is my opinion that, in the context of the interlocutory proceedings, each party should bear its own costs of these two applications. There will therefore be no order as to these costs. FORTHWITH The stage of proceedings at which costs are to be dealt with is set in Order 62 Rule 3 of the Federal Court Rules: (1) The Court may in any proceeding exercise its powers and discretions as to costs at any stage of the proceeding or after the conclusion of the proceeding. (2) Where the Court makes an order in any proceeding for the payment of costs the Court may require that the costs be paid forthwith notwithstanding that the proceeding is not concluded. (3) An order for costs of an interlocutory proceeding shall not, unless the Court otherwise orders, entitle a party to have a bill of costs taxed until the principal proceeding in which the interlocutory order was made is concluded or further order. In Thunderdome Racing and Scoring Pty Ltd & Anor v Dorian Industries Pty Ltd & Anor [1992] 36 FCR 297, Justice Olney, referring to Order 62 Rule 3(3), stated at 312: The rule does not suggest any particular criteria by which the court should be guided in approaching such an application, and accordingly I take the view that the discretion should be exercised in favour of a party who establishes that the demands of justice require that there be a departure from what appears to be the general practice envisaged by the rule, namely, that an order for costs of an interlocutory proceeding shall not entitle a party to have a bill of costs taxed until the principal proceeding in which the interlocutory order was made is concluded. In Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 13) (Full Court (Lockhart, Lindgren and Tamberlin JJ) unreported, 17 August 1995), the costs of an interlocutory proceeding were ordered to be taxed and paid forthwith, notwithstanding that the main proceedings were not complete. In that case the main proceeding was complex and unlikely to be decided for a long time. The Court stated: It would be wrong if the successful parties do not enjoy the fruits of their order for costs for such a long time. The parties entitled to the benefit of the order for costs which this Court has made in appeals from interlocutory orders should not be deprived of that benefit until the case has been finally disposed of. In Australian Flight Test Services Pty Ltd v Minister for Industry Science and Technology (O'Loughlin J, unreported, 26 April 1996), the costs of an interlocutory application were ordered to be taxed and paid forthwith because the issues involved in the interlocutory matter were discrete and unlikely to be primary issues at trial. Unless settled out of Court, there is no doubt that the substantive proceedings in this litigation will not be finalised for some time. It is unlikely that any hearing would be concluded this year, or even early next year and, given the complexity of the case, it is equally unlikely that a judgment could be handed down for some considerable time after that. The appeal process may then be activated. If the taxation and payment of costs is delayed until the completion of the matter, Telstra will experience substantial delay in recovering monies which they have already been awarded. It should also be noted that the two motions in question addressed matters which were exclusively confined to the interlocutory phase of proceedings and which will not be issues at trial. First Netcom's motion was to set aside a subpoena and will not be revisited. Telstra's motion for security in respect of an undertaking as to damages was directly linked to the original interlocutory injunction. Both the injunction and the security ordered for the undertaking were set aside by the Full Court and cannot possibly be revisited. Both matters for which Telstra has been awarded its costs are therefore discrete. For these reasons it is my opinion that this case falls outside the usual class of cases and that it would be in the interests of justice to order that Telstra's costs of both motions be taxed and paid forthwith. I have also reconsidered the question of the payment of the costs awarded by the Full Court on 2 September 1997. In October last year I considered that it was not appropriate, at that stage, for the costs to be taxed and paid forthwith. However, given the wide discretion in Order 62 rule 3(1), a review of this position at a later stage is not precluded. In light of the prospect of a lengthy delay and the conclusion of all other aspects of the interlocutory phase of proceedings, I think it appropriate to order now that the costs awarded by the Full Court be taxed and paid forthwith. In light of this decision, there is no need to consider Telstra's applications for security in respect of either the costs awarded by the Full Court or the costs awarded in this judgment. There will be no order as to the costs associated with Orders 3, 3(a) and 4 of Telstra's motion of 23 September 1997, as amended. I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Einfeld Associate: Dated: Counsel for the Applicant: T.F. Bathurst QC and C.C. Hodgekiss Solicitor for the Applicant: Mallesons Stephen Jaques Counsel for the Respondent: S.G. Finch SC Solicitor for the Respondent: Freehill Hollingdale & Page Date of Hearing: 31 October 1997 Date of Judgment: 7 May 1998