FEDERAL COURT OF AUSTRALIA Kernaghan v Corrections Corporation of Australia Staff Superannuation Pty Limited (No.3 ) [2007] FCA 2018 DONALD KERNAGHAN & ORS v CORRECTIONS CORPORATION OF AUSTRALIA STAFF SUPERANNUATION PTY LTD (ACN 065 347 186), TERENCE ARTHUR LAWSON, JOHN KENNETH TWOMEY, AUSTRALIAN INTEGRATION MANAGEMENT SERVICES PTY LTD (FORMERLY CORRECTION CORPORATION OF AUSTRALIA PTY LTD (ACN 010 921 641), AND CGU INSURANCE LIMITED (ACN 004 478 317), CHUBB INSURANCE COMPANY OF AUSTRALIA PTY LTD (ACN 003 710 647) (No. 3) VID 247 OF 2002 NORTH J 4 OCTOBER 2007 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 247 OF 2002 BETWEEN: DONALD KERNAGHAN & ORS Applicant AND: CORRECTIONS CORPORATION OF AUSTRALIA STAFF SUPERANNUATION PTY LTD (ACN 065 347 186) First Respondent and First Cross-Claimant TERENCE ARTHUR LAWSON Second Respondent and Second Cross-Claimant JOHN KENNETH TWOMEY Third Respondent and Third Cross-Claimant AUSTRALIAN INTEGRATION MANAGEMENT SERVICES PTY LTD (FORMERLY CORRECTION CORPORATION OF AUSTRALIA PTY LTD (ACN 010 921 641) Fourth Respondent and Fourth Cross-Claimant CGU INSURANCE LIMITED (ACN 004 478 317) First Cross-Respondent CHUBB INSURANCE COMPANY OF AUSTRALIA PTY LTD (ACN 003 710 647) Second Cross-Respondent JUDGE: NORTH J DATE OF ORDER: 4 OCTOBER 2007 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. By 12 October 2007, the cross claimants file and serve a minute of proposed orders agreed by the parties reflecting the conclusions recorded in transcript this day. 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 VID 247 OF 2002 BETWEEN: DONALD KERNAGHAN & ORS Applicant AND: CORRECTIONS CORPORATION OF AUSTRALIA STAFF SUPERANNUATION PTY LTD (ACN 065 347 186) First Respondent and First Cross-Claimant TERENCE ARTHUR LAWSON Second Respondent and Second Cross-Claimant JOHN KENNETH TWOMEY Third Respondent and Third Cross-Claimant AUSTRALIAN INTEGRATION MANAGEMENT SERVICES PTY LTD (FORMERLY CORRECTION CORPORATION OF AUSTRALIA PTY LTD (ACN 010 921 641) Fourth Respondent and Fourth Cross-Claimant CGU INSURANCE LIMITED (ACN 004 478 317) First Cross-Respondent CHUBB INSURANCE COMPANY OF AUSTRALIA PTY LTD (ACN 003 710 647) Second Cross-Respondent JUDGE: NORTH J DATE: 4 OCTOBER 2007 PLACE: MELBOURNE REASONS FOR JUDGMENT No. 3 1 The Court delivered reasons for judgment on 6 January 2006 (Kernaghan v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2006] FCA 2), and on 11 July 2007 (Kernaghan v Corrections Corporation of Australia Staff Superannuation Pty Ltd (No 2) [2007] FCA 1040), on a number of matters arising in this litigation. The same references to the parties used in those judgments are used in these reasons. 2 On 11 July 2007, the Court ordered CCAS and CGU to prepare short minutes of orders reflecting the conclusions in those two judgments. A number of contested questions concerning interest and costs arose from the respective drafts proposed by each of the parties. The Court heard argument on these issues on 4 October 2007, and gave judgment in transcript on each issue in the course of argument. These reasons for judgment consolidate, with slight editorial changes, those decisions for the convenience of the parties. 3 The parties agreed the amount of interest payable on the amounts of $275,000, being the amount paid by CCAS in settlement of the applicants' claims and $89,009 being the costs of the applicants occasioned by CCAS' notice of objection dated 16 March 2004, both amounts for which CGU was liable to provide indemnity. 4 The remaining issues were: * The date from which interest should run on the amount of $300,000, being the reasonable costs of the applicants suing the respondents other than AIMS which CGU had contracted to indemnify; * Whether CGU should pay CCAS indemnity costs as a result of a Calderbank offer dated 7 May 2004; * Whether CGU should pay CCAS indemnity costs based on CGU's withdrawal of the non-disclosure defence; * Which party or parties should pay the costs of the proceeding for the period post 6 January 2006; and * How were the costs of CGU defending itself against AIMS to be dealt with. 5 The first issue for consideration concerned to the proper date from which interest should run on the amount of $300,000, found by the Court to be the amount to be paid by CGU in respect of the liability of the insured to pay the costs of the applicants in suing the respondents other than AIMS. The appropriate date must be determined by reference to s 57(2) of the Insurance Contracts Act 1984 (Cth), which provides: 57 Interest on claims (1) Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section. (2) The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days: (a) the day on which the payment is made; (b) the day on which the payment is sent by post to the person to whom it is payable. The section requires the Court to determine, as the commencing date for the payment of interest, the date from which it was unreasonable for CGU to have withheld payment. 6 CCAS argued that the proper starting date was the date upon which CCAS paid to the applicants the amount of their costs agreed to in the settlement in the sum of $450,000, namely, 2 August 2004. That payment included the costs of the applicants suing AIMS, an amount which the Court subsequently found CGU was not liable to indemnify CCAS. The question is whether it was unreasonable for CGU to withhold payment from that date. CGU argued that interest on the amount of $300,000 should run from 11 July 2007 when the final liability was determined by the Court, after hearing evidence and extensive argument as to the reasonable composition of the amount. 7 At the time that CCAS made payment, CGU had access to information as to the composition of the $450,000. It had in hand the bill of costs upon which the costs were assessed. It also had knowledge of the estimate made by the Registrar on 2 March 2004 that a taxation of the bill would be approximately $440,000. CGU had been joined to the proceedings on 16 July 2003, almost a year before the payment, and knew that a claim was made against it. 8 The question becomes whether it was reasonable for CGU to withhold payment knowing that the $450,000 had been paid, but that amount included an element for which it argued it was not liable. Had CGU taken the view on 2 August 2004 that it was liable to pay some amount for the costs of the applicants suing the respondents other than AIMS, it would have been reasonable for it to have paid its best assessment of what those costs were. In fact, the position it adopted was to deny liability for a number of reasons, which included the issue of quantification, such reasons being the issues later litigated in the Court. 9 In my view, it was unreasonable for CGU to fail to make an assessment of the separate costs of the applicants suing the respondents other than AIMS, and then on the basis of an acceptance of liability, not to have made payment of its best assessment. Nonetheless, it cannot be expected that CGU necessarily would have made precisely the correct assessment at that point. That is to say, it was unreasonable for CGU to make no payment at all on 2 August 2004, but it may not have been unreasonable for CGU to have made a payment of some lesser sum than that ultimately found to be due. This reflects the inherent nature of the assessment of such costs, namely, an assessment based on an impression of the factors for which the costs are payable. 10 CCAS is entitled to interest on some sum from 2 August 2004 until 11 July 2007 which would have represented a reasonable assessment made by CGU of the circumstances which existed on 2 August 2004. The difficulty which CGU would necessarily have faced at that point, stemming from the fact that the settlement included an amount which the Court has since found it was not liable to pay, must be taken into account. 11 In all the circumstances, it seems reasonable that CGU pay interest on the sum of $200,000 from 2 August 2004 to 11 July 2007, and then on the sum of $300,000 from 11 July until the date upon which payment is made. 12 The next question for consideration is the claim by the cross-claimants to have the costs of the proceeding paid on an indemnity basis from 7 May 2004. The argument relies upon an offer made on 7 May 2004 by a letter which stated: The cross-claimants will settle their claim against the first cross-respondent upon the following terms: (a) The first cross-respondent indemnifies the cross-applicants against any liability to pay the applicants costs of the proceeding, and (b) The first cross-respondent pays the cross-applicants $425,000 including interest and costs. 13 The approach of the Court to a rejection of a Calderbank offer is not in contention. One of the considerations in determining whether to award costs on an indemnity basis, is whether the offeree failed to secure a more favourable outcome in the proceeding: Becker Group Ltd v Motion Picture Company of Australia Ltd (No 2) [2004] FCA 740. That however is not the only consideration. The mere refusal of a Calderbank offer and failure to secure a more favourable outcome does not of itself warrant an order for indemnity costs. The conduct of the offeree must be unreasonable before such an order can be made: Richfield Investments Pty Ltd v Overseas-Chinese Banking Corporation Ltd [2004] VSC 351 per Redlich J. 14 As was said in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 at [23]: The critical question is whether the rejection of the offer was unreasonable in the circumstances. 15 The cross-claimants argued that the offer had been bettered in the outcome, and that it was generally unreasonable for CGU to have failed to have accepted it at the time. I do not accept this argument. Paragraph (a) of the offer seeks payment for the cross-claimants' costs of the proceedings, including the costs of the applicants suing AIMS. That paragraph does not quantify the amount which CGU was being asked to pay. It fixes the process of calculation by reference to a liability which was in contest, and which, in the event, CGU has persuaded the Court to accept included a liability against which CGU had not agreed to indemnify. 16 It was reasonable, in the circumstances, for CGU to reject an offer which had that unspecified liability. The offer was not accompanied by any explanation as to the basis upon which paragraph (a) sought to visit the liability of the cross-applicants to pay AIMS' costs against CGU. In all the circumstances, I do not regard the rejection of the offer as a basis for making the unusual and special order that the cross-applicants have their costs on an indemnity basis. 17 The cross-claimants also claimed their costs of meeting CGU's non-disclosure defence on an indemnity basis. The cross-claimants argued that there were two distinctions between this case and the usual case in which a claim is abandoned. The first was that solicitors for CCAS wrote to CGU's solicitors, explaining why the non-disclosure defence was bound to fail and requesting that it be withdrawn. Second, CGU's lead witness was not shown at an early stage a letter from APRA giving CCAS a 'clean bill of health'. When the witness was later shown the letter, the defence was withdrawn. 18 I am not persuaded that the cross-claimants ought to have costs on an indemnity basis, arising from CGU's withdrawal of the non-disclosure defence. The withdrawal of the defence was part of the vicissitudes of the litigation and the conduct was not so unreasonable as to justify segregation for special treatment. 19 The next issue is whether there should be some allowance made to CGU for the period post 6 January 2006 to take into account certain arguments which, in effect, took time and were lost by the winning party. 20 CGU argued that CCAS should pay its costs incurred from 6 January 2006 to 20 March 2007 on a party/party basis. The argument rested on the contention that a significant portion of the time in that period was taken up by matters which derived from the way in which the cross-claimants conducted their case at first instance. 21 It was argued that the costs of certain arguments, which became necessary would not have been necessary, had the cross-claimants comprehensively mounted its case in the first instance. The arguments and factors which CGU argued resulted in additional costs were: (a) the argument as to whether it was open to the Court, on the evidence already adduced to infer that the settlement was reasonable; (b) the argument as to who bore the onus of proving the reasonableness of the settlement; (c) the argument as to whether leave was required for the first cross-claimant to reopen its case and to call further evidence; (d) directions hearings regarding the appropriate course to be taken by the first cross-claimant to enable the Court to determine the issues of reasonableness left open by the reasons for judgment of 6 January 2006; and (e) CCAS' application for leave to reopen its case and call further evidence to establish the reasonableness of that part of the settlement whereby the CCAS undertook to pay the applicants' costs. 22 All these matters, it was contended by CGU, would have been unnecessary had CCAS conducted its case in a more conventional way. I accept this argument. It would be unjust to impose on CGU the costs of CCAS in this period. However, I do not accept CGU's contention that CCAS should pay all of its costs incurred in this period. 23 One way to approach the matter would be to seek to isolate those parts of the costs which related to activities which would have been unnecessary had the trial been conducted in a more efficient way. An alternative approach would be to start from the proposition that CGU pay the costs of the cross-claimants for this period, but that those costs be reduced by a percentage to reflect the additional costs caused by the way the cross-claimants ran the case, in a way which was to the prejudice of CGU. 24 The advantage of the second approach is that it obviates any future need for a Registrar to attempt to segregate particular arguments and value them for costs purposes. This exercise would seem to be almost an impossible task, because of the way, as in any trial, the arguments were intertwined. This second approach would seem to provide a practical solution. Consequently, I raised with the parties the possibility of a percentage reduction of the costs payable by CGU for this period, and proposed that the percentage should be in the region of 20 per cent. 25 Counsel for CGU was content with the process, but argued that the proper percentage reduction should be 50 per cent. This was based on an assessment of the time taken in Court, and in preparation for the hearing of the additional arguments. Counsel for the cross-claimants initially argued against the starting point, namely, that the Court should conclude that there were additional costs incurred from which CGU should be relieved. He nonetheless accepted that, if it was appropriate to proceed upon the basis of a percentage reduction, he was content with the 20 per cent proposed by the Court. 26 Without descending to a minute dissection of the costs incurred, and relying upon my recollection of the events which occurred in that period, I am clearly of the view that the 50 per cent proposed by CGU would be an excessive reduction. On the other hand, I am persuaded that something little more then 20 per cent is probably justified and consider that a 30 percent reduction is appropriate. In the circumstances, therefore, CGU should pay the costs of the cross-claimants, for the period from 6 January 2006, on a party/party basis, but reduced by 30 per cent. 27 The final issue for consideration is as to the liability of the fourth cross-claimant, AIMS, to pay the costs of CGU in view of the fact that AIMS was unsuccessful in the proceeding. It appears common ground that AIMS should pay CGU's costs which relate to the case brought specifically and solely by AIMS against it. It is therefore appropriate to order that AIMS pay CGU's costs of, firstly, the question of whether it was insured by CGU and, secondly, the apportionment issue pleaded in [34] to [39] of the second further amended cross-claim dated 13 September 2005. These costs should be paid on a party to party basis. 28 The more contentious issue relates to the costs of CGU defending the proceeding on issues which were common to all the cross-claimants, including AIMS. CGU proposed the broad order that AIMS pay the cost of and incidental to the proceeding against CGU on a party-party basis including common costs. CGU contended that the common costs could be attributed by an experienced costs consultant. Counsel for the cross-claimants argued that, absent a specific order dealing with common costs, AIMS might be unjustly burdened with all the common costs. Counsel initially contended that AIMS should not pay any of the common costs because they represented costs of the arguments that needed to be put by CGU. 29 I was not attracted by either extreme and proposed that a percentage of the common costs be attributed to AIMS for payment. Counsel for the cross-claimants contended that AIMS should pay no more than 25 per cent of the common costs reflecting, as he put it, more fairly the nature of the participation and consequences of the litigation. Counsel for CGU argued that AIMS should pay CGU 50 per cent of the common costs. This was on an analysis that the cross-claimants fell into, essentially, two camps; one represented by CCAS and Twomey and Lawson and, on the other hand, AIMS. Perhaps there were three camps but it was not appropriate to treat Lawson, Twomey, AIMS and CCAS separately. 30 It is, I think, reasonable to see the claimants as falling into three distinct sets of parties. I would make some allowance for the fact that AIMS had a slightly less prominent role in the entirety of the proceedings, and in the end regard 30 per cent as an appropriate proportion of the common costs which should be borne by AIMS. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North. Associate: Dated: 15 February 2008 Counsel for the cross-claimants: Mr J B Davis Solicitor for the cross-claimants: Norton Gledhill Counsel for the first cross-respondent: Mr P Murdoch QC with Ms E Brimer Solicitor for the first cross-respondent: Deacons Date of Hearing: 4 October 2007 Date of Judgment: 4 October 2007