FEDERAL COURT OF AUSTRALIA Brosnan v Katke [2016] FCA 717 File number: QUD 384 of 2012 Judge: GREENWOOD J Date of judgment: 15 June 2016 Catchwords: PRACTICE AND PROCEDURE – consideration of the disposition of the costs of the principal proceeding deferred pending publication of Orders and Reasons for Judgment by the Full Court on 12 January 2016 in an appeal by the applicants from the Orders of the primary Judge – consideration of the exercise of the discretion as to costs in light of a Calderbank offer made by the respondents to the applicants and in light of affidavit material filed by the parties Date of hearing: 15 June 2016 Date of last submissions: 21 May 2015 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 33 Solicitors for the Applicants: Mills Oakley Lawyers Solicitors for the Respondents: Johnson Winter & Slattery ORDERS QUD 384 of 2012 BETWEEN: MICHAEL BROSNAN First Applicant LEON BROSNAN Second Applicant MARY BROSNAN (and others named in the Schedule) Third Applicant AND: JEFFREY JAMES KATKE First Respondent METAGENICS AUSTRALIA PTY LTD (ACN 113 937 572) Second Respondent METAGENICS INC (and others named in the Schedule) Third Respondent JUDGE: GREENWOOD J DATE OF ORDER: 15 JUNE 2016 THE COURT ORDERS THAT: 1. The applicants pay the costs of the first to fourth respondents of and incidental to the proceeding including reserved costs, subject to Orders 2 and 3 on a party and party basis up to and including 6 January 2014 and, from 6 January 2014 on an indemnity basis. 2. The costs of the respondents of and incidental to an interlocutory application heard and determined before her Honour Justice Collier on 16 August 2013 and reserved by her Honour do not form part of the reserved costs for the purposes of Order 1 of these Orders, and as to the costs so reserved by her Honour Justice Collier, the first to fourth respondents pay the applicants' costs of and incidental to that application on a party and party basis. 3. The reserved costs of and incidental to the interlocutory application filed by the respondents on 12 September 2012 be paid by the applicants on a party and party basis subject to the consideration that in calculating the amount of such costs, those costs shall not include any costs of and incidental to the preparation and filing of the affidavit of Justin Anthony McDonnell sworn 12 September 2012. 4. Pursuant to Section 23 and Section 37P of the Federal Court of Australia Act 1976 (Cth), Rule 1.32 and Rule 1.36 of the Federal Court Rules 2011 and Order 1 of the Orders made on 23 April 2015, these Orders and the Reasons for Judgment in support of these Orders are made and published from Chambers. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GREENWOOD J: 1 On 12 March 2015 the Court pronounced final Judgment in the proceeding and ordered that the application be dismissed as against all respondents: Brosnan v Katke [2015] FCA 203; (2015) 236 FCR 567. The Court also directed (as varied by an Order made on 19 March 2015) the parties to file submissions in relation to the disposition of the costs of the proceeding which were reserved for later determination. 2 The respondents subsequently filed written submissions in support of their contentions and the applicants filed responsive submissions. 3 An appeal by the applicants from the order dismissing the application was dismissed by the Full Court on 12 January 2016 with an order that the appellants pay the respondents' costs of the appeal: Brosnan v Katke [2016] FCAFC 1; [2016] ATPR 42-515. 4 The disposition of the costs of the proceeding was held over pending the determination of the appeal and the provision of further material relevant to the question of costs. 5 The respondents in their submissions contended that the applicants ought to be ordered to pay the respondents' costs of the proceeding including all costs previously reserved and that those costs ought to be paid on a party and party basis for the period up to 16 December 2013 and on an indemnity basis on and from 17 December 2013 having regard to a Calderbank offer contained in a letter dated 17 December 2013 from the solicitors for the respondents, Johnson Winter & Slattery ("JWS") to the solicitors for the applicants, Mills Oakley lawyers ("Mills Oakley"). 6 Other alternative formulations of a costs order were proposed. 7 In their letter of 17 December 2013 the solicitors for the respondents said that the costs of the proceeding would be substantial "and already exceed $2 million". The solicitors for the respondents set out in their letter a series of criticisms of the applicants' claims and observed that, with a view to avoiding the ongoing litigation and the distraction it would cause for key executives, an offer would be made to settle the proceedings. 8 The offer was expressed to be in accordance with the principles set out in Calderbank v Calderbank (1975) 3 All ER 333. 9 The offer was put in this way: In those circumstances, we have been instructed to make the following commercial offer with a view to ending all of the litigation now: 1. Our clients will consent to the proceedings being discontinued by all of the applicants on terms that there be no order as to costs as between the discontinuing applicants and the respondents; 2. This offer is only capable of acceptance in writing. 3. This offer remains open for acceptance until 14 January 2014, following which it will automatically lapse. 10 The applicants oppose any order for indemnity costs against them arising out of a failure to accept the Calderbank offer. They say that having regard to all of the circumstances at the time the offer was made and rejected, the applicants did not act unreasonably in rejecting the offer. Apart from this issue, the applicants seek an order for costs in their favour on a party and party basis of proving factual matters asserted in para 10(a) and (b) of the statement of claim to the effect that the third respondent could not proceed to an IPO on a recognised United States Securities Exchange in 2005 and remained unable to do so up to and including July 2007. They also say that they should be entitled to an order for costs in their favour concerning an interlocutory application the subject of an order by Collier J in the proceeding. 11 The Calderbank offer was the subject of a brief comment in a letter from Mills Oakley to JWS on 17 December 2013 concerning the contended quantum of the costs to that date. The Calderbank offer was rejected on 6 January 2014 by letter from Mills Oakley. 12 The question of whether the applicants acted reasonably or unreasonably in rejecting what was said to be a "commercial offer" is, in part at least, informed by an understanding of the quantum of the costs that the respondents were willing to absorb with a view to simply securing a discontinuance of the proceeding on the basis that no order as to costs would be made against the applicants. 13 With a view to obtaining some sense of the factual position at the date of the Calderbank offer and any other relevant matters, the Court made a series of directions orders on 23 April 2015 for the filing of affidavits upon which the parties would rely in support of their various contentions: Brosnan v Katke(No 2) [2015] FCA 386. 14 The respondents rely upon an affidavit of Mr Robert Jackson who is a partner of King & Wood Mallesons ("KWM"). That firm was acting as the solicitors for the respondents from 10 August 2012 to 11 October 2013 when JWS took over the conduct of the proceedings from KWM. Mr Jackson sets out the history of the proceeding and a review of the invoices issued by KWM for the provision of professional services in connection with the proceedings from 28 September 2012 to 20 December 2013. Mr Jackson says that the invoices total $1,668,433.41 comprising $1,475,328.50 in professional fees and $193,104.91 in disbursements. 15 For the period to 17 December 2013, the date of the offer, fees and disbursements amounted to $1,583,652.01. 16 Mr Jackson then explains the various categories of activities resulting in those fees. He also attaches copies of particular invoices. 17 In a further affidavit from Mr Jackson sworn 5 May 2015 he sets out at Annexure RLJ-7 a Schedule identifying each of the individuals who undertook work, their professional standing, hourly rate of charge and the total fees referable to each individual for work done. The respondents also rely upon an affidavit from Ms Deborah Vine-Hall. Ms Vine-Hall is a legal cost consultant. Ms Vine-Hall explains the various considerations (including rates of charge applicable to those persons who undertook work in the matter, by category, such as partner, solicitor, graduate etcetera) to be taken into account in identifying the calculation of party and party costs for work done up to the date of the offer, 17 December 2013. 18 Ms Vine-Hall concludes that the likely recoverable costs of the respondents to 17 December 2013 on taxation, on a party and party basis, amounts to solicitors' fees of $1,210,197.50 and disbursements of $273,237.51 amounting to recoverable party and party costs of $1,483,435.01. 19 If the party and party costs to 17 December 2013 amounted to $1,483,435.01, the offer by the respondents to absorb those costs as an element of their offer to treat the matter as at an end without an order for costs against the applicants should the applicants discontinue the proceedings, is a serious commercial concession. 20 Having been put to recoverable party and party costs, an offer based upon a willingness to absorb those costs cannot be described as other than a genuine offer. The applicants do not expressly suggest that, at a commercial level, an offer to absorb those costs is not a genuine offer. Rather, the applicants say that the costs simply cannot be of that order of magnitude. In fact, prior to the evidence of Ms Vine-Hall being put on by the respondents, the applicants' solicitor described costs of the order of $2 million as "ludicrous" in their initial responsive letter of 17 December 2013. A great proportion of the costs incurred by the respondents to 17 December 2013 from KWM relate to disclosure: see para 5 of the affidavit of Mr Cliff sworn 21 May 2015. 21 A number of criticisms are made by the applicants of the contended fees and disbursements and particularly the recoverable party and party fees and disbursements of the respondents. 22 The first is that the Schedule identifying the individuals and their professional standing, the quantum of the fees contributed by each such individual and the gross fees attributable to each individual, fails to identify the particular work done by those individuals. Thus, it is not possible to understand whether there is substantial duplication across the field of the work done by all of those participants. Mr Jackson's Schedule RLJ-7 identifies work done by five partners, three senior associates, seven solicitors, six graduates and six paralegals plus one legal executive, one ALT manager and one ALT Information Analyst. The fees generated by work done by those individuals amounts to $1,390,547.10 to 17 December 2013. 23 The affidavit of Ms Vine-Hill identifies a methodology for assessing the recoverable party and party fees having regard to the category of the individual doing the work, the allowed rates and some sense of the tasks. However, it is not clear to me to what extent there might be work done (undertaken on instructions from the clients representing solicitor and own client costs) but which might not necessarily be only those costs "fairly and reasonably" incurred by the respondents in the "conduct of the litigation". To the extent that the respondents have sought to deploy significant resources to tasks, a proportion of the cost of those resources may not necessarily be truly costs as between "party and party". It is simply not possible to gain any detailed understanding of the precise content of the tasks giving rise to the costs identified at RLJ-7. Plainly enough, the magnitude of those costs properly warrants, first, close examination of the content of the actual work undertaken and second, a close examination of any overlapping of work undertaken by the producers deployed on the matter. The raw number seems to be very large. 24 Nevertheless I am satisfied that the costs to 17 December 2013 on a party and party basis are significant even though those costs might be significantly less than contended for as party and party costs to 17 December 2013. I have also had regard to the broader criticisms made in Mr Cliff's affidavit of 21 May 2015 and the affidavit of Mr Paul Garrett of 21 May 2015. Mr Garrett sets out a series of concerns at paras 31 to 35 of his affidavit. Plainly, these concerns need to be addressed. Ultimately, these matters must be resolved through the taxing or assessment process undertaken between the parties and the Court, or otherwise as might be agreed. 25 At the first level however, I accept that the offer contained in the letter from JWS of 17 December 2013 is to be regarded as a genuine Calderbank offer. 26 The applicants say that the election to reject the offer was not unreasonable because the field of issues in controversy were such that it was reasonable to reject the offer and press the claims before the Court notwithstanding that the applicants were unable to make those claims good. The difficulty I have with that approach is that the applicants were entirely unsuccessful in their various claims giving rise to the causes of action they relied upon in bringing the proceeding. The proceeding was dismissed and the appeal from that decision was also dismissed. The factual and legal enquiry conducted at trial demonstrated that the claims were not able to be made good. 27 The respondents were put to a body of expense that they ought not to have had to meet. The applicants were presented with an opportunity to avoid further costs being incurred by the respondents but they chose to press on. They ran the risk that they would not succeed and not obtain relief or their costs. They also put the respondents to expense in answering the claims. The applicants were entitled to have a reasonable period to consider whether the prudent course was to press on or not. Ultimately, they rejected the offer by letter dated 6 January 2014. 28 I accept that the Calderbank offer results in the consequence that the applicants ought to pay the costs of the respondents of and incidental to the proceeding on an indemnity basis. The relevant date, however, from which indemnity costs arise is the date of rejection of the offer rather than the date on which the offer was made. 29 Accordingly the order for costs ought to be that the applicants pay the costs of the first to fourth respondents of and incidental to the proceeding on a party and party basis up to and including 6 January 2014 and thereafter on an indemnity basis. The reserved costs, subject to the considerations mentioned at [30], [31] and [32] of these reasons, follow that order and the quantum of the costs, in respect of the reserved costs, will be determined according to the period when the work was done. I do not accept that the finding that the third respondent could not proceed to an IPO on a recognised United States Securities Exchange in 2005 and remained unable to do so up to and including July 2007, brings about any separate order in relation to that issue. Overall, the applicants were unsuccessful in their principal contentions giving rise to the causes of action in suit notwithstanding that on the IPO listing contention a particular finding was made. That finding has to be seen in the context of the overall allegations of misleading and deceptive conduct which were not able to be made good. 30 On 16 August 2013, Collier J made an order restraining the respondents from entering the offices of Health World Ltd or accessing its servers, computers or electronic devices to retrieve, review or copy documents for the purposes of disclosure. The reserved costs the subject of the order described at [29] of these reasons should exclude those reserved costs. The applicants should have the costs of that application. 31 One of the interlocutory applications made by the respondents was an application filed on 12 September 2012. That application recited 16 possible Orders some of which were directed to striking out pleaded particulars of paras of the statement of claim while other Orders were directed to striking out those paras in their entirety, in any event. Other Orders sought the provision of particulars or further particulars of other paras of the statement of claim. Orders were made on 9 November 2012 striking out the statement of claim and giving leave to the applicants to file and serve an amended statement of claim addressing the matters referred to in the reasons for judgment published in support of the Orders: see Brosnan v Katke [2012] FCA 1249. 32 In their challenge to the statement of claim, the respondents filed and relied upon a very substantial affidavit of Mr Justin Anthony McDonnell sworn 12 September 2012 divided into two volumes consisting of 1,050 pages of which 1,046 pages represented primary documents. These documents, in the main, of course, went to questions of primary fact none of which were to be resolved on the application. Some of the documents were referred to in the context of whether a particular email could be characterised as a "particular" of a pleaded representation. In all, less than about 30 of the documents were referred to in oral or written submissions. Of course the challenge to the adequacy of the pleading of material facts is fundamentally a matter to be determined on the face of the pleading. However, it was necessary to examine up to about 30 of the documents in order to deal with the application. Nevertheless the application did not need to be supported, in order to determine the merits of it, by an affidavit of 1,050 pages. Accordingly, it seems to me that the proper course is to exclude the affidavit, its preparation and related costs from the costs of the respondents for the purposes of the Order contemplated by [29] of these reasons. 33 The orders in relation to costs will be made from Chambers in accordance with Order 1 of the Orders made on 23 April 2015. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate: Dated: 15 June 2016 SCHEDULE OF PARTIES QUD 384 of 2012 Applicants Fourth Applicant: ALAN GEE Fifth Applicant: ALAN BAWDEN GRANT Sixth Applicant: BARBARA LEE GRANT Seventh Applicant: ALAN DAVID GRANT Eighth Applicant: MICHAEL CURLEY Ninth Applicant: GRAEME JOINER Respondents Fourth Respondent: JEFFREY BLAND Fifth Respondent: HEALTH WORLD LIMITED (ACN 010 636 165)