FEDERAL COURT OF AUSTRALIA Waiviata Pty Ltd v New Millenium Publications Pty Ltd [2002] FCA 481 COSTS ‑ Indemnity basis ‑ Claim by party to proceeding that solicitor for other party should no longer act because of conflict of interest ‑ Claim dismissed ‑ Whether claim hopeless ‑ Relevance to indemnity costs of fact that solicitor not a party to proceedings ‑ Relevance of warning that indemnity costs would be sought because claim misconceived ‑ Costs order against non‑party ‑ Whether insolvency of party a requirement for such an order. Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 applied Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248 considered Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 applied Cachia v Hanes (1991) 23 NSWLR 304 cited Conrock Ltd v CSR Ltd (1990) 96 ALR 690 cited Re Wilcox; Ex party Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 applied Coshott v Learoyd [1999] FCA 276 applied NMFM Properties Pty Ltd v Citibank Ltd (No 2) (2001) 109 FCR 77 cited Wenzel v Australian Stock Exchange Ltd [2002] FCA 353 cited Knight v F P Special Assets Ltd (1992) 174 CLR 178 applied Yates v Boland [2000] FCA 1895 cited Gore v Justice Corp Pty Ltd [2002] FCA 354 cited Money Tree Management Services Pty Ltd v Deputy Commissioner of Taxation (No 2) [2000] SASC 63 approved Vestris v Cashman (1998) 72 SASR 449 cited Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406 cited WAIVIATA PTY LIMITED v NEW MILLENIUM PUBLICATIONS PTY LIMITED, DANIEL TOBIAS NISSEN, KAY THORNTON‑COHEN and NATHAN NISSEN V 1177 OF 2001 SUNDBERG J 18 APRIL 2002 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 1177 OF 2001 BETWEEN: WAIVIATA PTY LIMITED (ACN 005 577 873) APPLICANT AND: NEW MILLENIUM PUBLICATIONS PTY LIMITED (ACN 007 016 202) FIRST RESPONDENT DANIEL TOBIAS NISSEN SECOND RESPONDENT KAY THORNTON-COHEN THIRD RESPONDENT NATHAN NISSEN FOURTH RESPONDENT JUDGE: SUNDBERG J DATE OF ORDER: 18 APRIL 2002 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Norton Gledhill's costs of defending the applicant's motion notice of which was filed on 21 December 2001 be paid by the applicant on an indemnity basis, but excluding any costs that are of an unreasonable amount or were unreasonably incurred. 2. If within 14 days of the quantification of the costs in par 1 (whether by agreement or taxation) those costs have not been paid by the applicant, they shall be payable by Nicholas Martin Dower and Niche Group Pty Ltd forthwith. 3. The applicant pay Norton Gledhill's costs of the application for indemnity costs and of the motion notice of which was filed on 5 March 2002 on a party‑party basis. 4. Norton Gledhill be at liberty to tax the costs referred to in paragraphs 1 and 3 forthwith. 5. The costs referred to in paragraphs 1 and 3 be payable forthwith by the applicant upon quantification of those costs (whether by agreement or taxation). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 1177 OF 2001 BETWEEN: WAIVIATA PTY LIMITED (ACN 005 577 873) APPLICANT AND: NEW MILLENIUM PUBLICATIONS PTY LIMITED (ACN 007 016 202) FIRST RESPONDENT DANIEL TOBIAS NISSEN SECOND RESPONDENT KAY THORNTON-COHEN THIRD RESPONDENT NATHAN NISSEN FOURTH RESPONDENT JUDGE: SUNDBERG J DATE: 18 APRIL 2002 PLACE: MELBOURNE REASONS FOR JUDGMENT BACKGROUND 1 Norton Gledhill, a firm of solicitors ("the firm"), has applied for orders · that its costs of defending the conflict of interest application the subject of my judgment of 15 February 2002 be paid by the applicant on an indemnity basis, and · that Nicholas Martin Dower and Niche Group Pty Ltd, who are not parties to the proceeding, pay the firm's costs on an indemnity basis. 2 In my reasons for judgment I said: "Counsel for the applicant conceded that it was essential to his case that the law was as stated by Brooking JA in Spincode. He could not point to confidential information that is or may be relevant to the instant proceeding. Although counsel made a passing reference to the loyalty basis for intervention, it was Brooking JA's third basis upon which he fastened. Before dealing with this, I should say that counsel's approach is understandable. There is no satisfactory basis on which it could be said that the present proceeding is the same as or closely related to matters in which Mr Seyfort or Norton Gledhill had earlier been engaged. Nor do I think this is a case in which Norton Gledhill should be restrained from acting on the basis applicable to their status as officers of the Court. The present case could not be more different from Spincode." I then explained why this was so. I concluded by saying: "In Spincode, the foundation for relief based on the Court's control over its officers consisted of the threatened misuse of confidential information and breach of the solicitors' duty of loyalty. What is striking about the present case is that no misuse of confidential information is asserted, and no serious case is propounded of a breach of the solicitors' duty of loyalty. Rather reliance is placed on the Court's control over its officers. It may be that an unusual case could arise when there is no threatened misuse of confidential information and no breach of the solicitor's duty of loyalty, yet it is appropriate to grant relief, but this is not such a case." INDEMNITY COSTS 3 The firm's case for an award of indemnity costs is based on four matters (i) it claims the motion for disqualification was hopeless (ii) it claims that no client, properly advised, would have pursued the motion (iii) the firm was not a party to the proceeding (iv) the firm had warned the applicant that it would seek indemnity costs if the motion was dismissed. 4 The observations of Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 400‑401 are relevant to items (i) and (ii) in par 3. His Honour said: "I believe that it is appropriate to consider awarding 'solicitor and client' or 'indemnity' costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law." In my view the motion had no chance of success, and properly advised, the applicant should have known it. No attempt was made to mount a case based on the risk of disclosure of confidential information. A passing reference was made to breach of the solicitors' duty of loyalty, but there was no evidence that the subject matter of the proceeding was the same as or closely related to matters in which Mr Seyfort or the firm had earlier been engaged. Instead, almost total reliance was placed on what Brooking JA described as the third basis upon which he upheld the restraint in Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248. But it is plain that a court's power to restrain solicitors from acting for a party on the ground that they are officers of the court is not itself a reason for making a restraining order. A court's power over its officers is merely a jurisdictional basis upon which a restraining order can be made. There must be some facts justifying the making of the order. There were none. Put shortly, the motion was made in the absence of any evidence upon which a legal practitioner could reasonably expect it to succeed. 5 Whether an order for costs on an indemnity basis should be made depends on the facts of the particular case. See for example Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233‑234. The firm was not a party to the principal proceeding. See item (iii) in par 3. The conventional rationale for the existence of the gap between party/party costs and the actual costs of a litigant is that the gap operates as an incentive to settlement. See Cachia v Hanes (1991) 23 NSWLR 304 at 318 and Colgate at 228. That rationale has no application where the entity with an entitlement to costs is a non‑party, especially a solicitor such as the firm which, having come to the view that the conflict allegations were without merit, was obliged by its fiduciary obligation to its client to continue to act for the client and thus to defend the motion. It may be, therefore, that the party‑party starting point is inapplicable in a case such as this. In an analogous context, where discovery is sought from a non‑party, the party seeking discovery is ordered to pay the "reasonable costs" of the non‑party. See Conrock Ltd v CSR Ltd (1990) 96 ALR 690. An order that reasonable costs be paid is substantially equivalent to an order for indemnity costs qualified in the usual way by verbiage such as "except insofar as they are of an unreasonable amount or were unreasonably incurred". See Re Wilcox; Ex party Venture Industries Pty Ltd (1996) 72 FCR 151 and Coshott v Learoyd [1999] FCA 276. In any event, I regard the facts that the firm is not a party to the principal proceeding, and owed fiduciary and contractual duties to its client to continue to act for it in the absence of genuine reason not to, as factors, together with the real weakness of the claim made against the firm, pointing to an indemnity award. 6 Finally, the firm warned the applicant that it would seek indemnity costs. See item (iv) in par 3. The relevance of a warning will vary according to the facts of the case. A mere statement of intention to seek indemnity costs may have little weight. On the other hand, a reasoned exposition of the weakness of an applicant's case accompanied by a warning may be entitled to weight. The warning in the present case was no mere threat. The parties' solicitors debated the alleged conflict of interest in correspondence between late November and mid December 2001. The correspondence shows that when the firm took issue with the relevance and the factual accuracy of the matters relied on by the applicant, the latter did not seek to rebut the firm's contentions or clarify the matters relied on, but simply continued to assert the existence of a conflict. In the firm's letter of 11 December 2001, after setting out in detail why it maintained there was no conflict, it said: "if there are further matters which your client says are relevant to the alleged conflict of interest, would you please advise by return. As matters currently stand, the complaints about us acting on behalf of our clients appear to us to be misconceived. Please note that should your client persist with its foreshadowed application, our clients will rely upon this letter on the question of costs including an application for indemnity costs." The applicant's solicitors' reply was that they did not accept that there was no position of conflict. They did not attempt to deal with the cogent and reasoned case made by the firm. The firm pointed this out in its letter of 13 December, and said it would consider any further factual matters the applicant relied on, and respond to them. A further request for a reaction to the matters contained in the firm's letter of 11 December was made in another letter of 13 December. The answer was merely that "we have stated from the outset of your firm's involvement in this proceeding that it is in a position of conflict of interest and ought not to be acting in the matter". The firm's letter of 11 December 2001 was part of an exchange of correspondence in which the firm pointed out the weakness of the applicant's case, and in a reasoned manner sought elucidation of the applicant's position. In that context the warning about indemnity costs is a matter to be added to the balance. Cf NMFM Properties Pty Ltd v Citibank Ltd (No 2) (2001) 109 FCR 77 at 98 and Wenzel v Australian Stock Exchange Ltd [2002] FCA 353. ORDER AGAINST NON‑PARTIES 7 The jurisdiction to make such orders is beyond doubt. See Knight v F P Special Assets Ltd (1992) 174 CLR 178, Yates v Boland [2000] FCA 1895 and Gore v Justice Corp Pty Ltd [2002] FCA 354. The material initially filed on the non‑party motion established a clear case for indemnity orders against Mr Dower and Niche Group Pty Ltd: the applicant was insolvent, Mr Dower played an active part in the conduct of the litigation, and he and Niche Group Pty Ltd, the holder of all the shares in the applicant, had an interest in the subject matter of the motion. See Knight at 192‑193. But affidavits later filed by the applicant's finance controller, Mr Metter, showed a more up to date and different picture. Mr Metter, a chartered accountant, expressed the view that the applicant was solvent and able to pay any costs ordered against it. He explained the circumstances that had led to the change in the applicant's financial position. 8 Knight at 192‑193 does not establish that each of the three matters referred to in par 7 is a prerequisite to the making of a costs order against a non‑party. See Gore at par 62. In Money Tree Management Services Pty Ltd v Deputy Commissioner of Taxation (No 2) [2000] SASC 63 at par 38 Doyle CJ, after referring to the decision of Lander J in Vestris v Cashman (1998) 72 SASR 449, said: "His Honour set out a number of factors to be taken into account in determining whether an order for costs against a non‑party is justifed: at 468. One such factor is whether the party who would otherwise usually be liable for costs can meet an order for costs. His Honour made it plain that none of the factors identified, including the ability of the usual party to meet the costs order, would of themselves necessarily be decisive. This approach accords with that adopted by the High Court of New Zealand: Carborundum Abrasives v BNZ (No 2) [1992] 3 NZLR 757 at 765. I would likewise adopt that approach. In many cases the fact that costs will not be met otherwise than by an order against a non‑party will strengthen the case for such an order. Nevertheless I do not consider that it is a factor to be elevated to the status of a prerequisite." I agree with the Chief Justice. See also Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation [2001] 179 ALR 406 at 414 per Callinan J. 9 Although Mr Metter's later affidavit shows a striking improvement in the applicant's financial situation, it is in some respects unsatisfactory, and does not deal with omissions from his earlier affidavits to which attention was drawn during the hearing. The accounts exhibited by Mr Metter disclose an operating profit for the year to date of $56,529, which is approximately $7,000 per month on average. Cash at bank was $77,602 some five weeks ago. But this will be much reduced, assuming it is not already reduced, by the costs of the principal litigation, the conflict motion, the obligation to provide security for costs, and the indemnity costs to be paid to the firm. The accounts include property, plant and equipment said to be worth $314,584. These items have not been identified and it does not appear what they would be worth on a sale. It is not unlikely that this figure is only reflective of book value and not their actual value. The accounts show loans to associated companies and other debtors of $373,727. The true worth of these assets is not deposed to. The accounts make no allowance for the costs of the litigation, the conflict motion or the obligation to provide security for costs. At the hearing Mr Metter's earlier affidavits were criticised for just these deficiencies. Yet no attempt is made to deal with these matters in the later affidavit,which was filed by leave in order to cure the deficiencies. Further, Mr Metter does not state the applicant's current financial position as opposed to the position as at 28 February 2002. 10 In the above circumstances I have serious doubts as to whether the applicant will be able to pay the firm's costs, and that, combined with the two other matters referred to in par 7, have led me to conclude that it is appropriate to make the orders sought against Mr Dower and Niche Group Pty Ltd. CONCLUSION 11 I will order that the applicant pay the firm's costs of the disqualification application on an indemnity basis, but excluding all costs that are of an unreasonable amount or were unreasonably incurred so that, subject to such exceptions, the firm will be completely indemnified for its costs. On the motion I will order that if within 14 days of quantification of the firm's costs of the disqualification application (whether by agreement or taxation) the applicant has not paid those costs, the costs shall be payable by the non‑parties. The firm should have its costs of the motion and of the indemnity costs issue on a party‑party basis. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg. Associate: Dated: 18 April 2002 Counsel for the Applicant: S E Marantelli Solicitors for the Applicant: Hall & Wilcox Counsel for Norton Gledhill: J B Davis Solicitors for Norton Gledhill: Norton Gledhill Date of Hearing: 5 April 2002 Date of Judgment: 18 April 2002