FEDERAL COURT OF AUSTRALIA Gloucester Shire Council v Fitch Ratings, Inc (No 3) [2017] FCA 553 File number(s): NSD 995 of 2014 Judge(s): WIGNEY J Date of judgment: 22 May 2017 Catchwords: COSTS – application for summary dismissal or for pleading to be struck out – competing application for leave to amend pleading – where applicants granted leave to amend – where respondents were unsuccessful on both applications – where applicants conceded they should pay the respondents' costs "thrown away" by reason of the amendment – whether costs should follow the event – where amendment application sought an indulgence of the Court – whether respondent acted unreasonably in opposing the amendment application Cases cited: Gillion Pty Limited (Trustee) v Wet Fix Holdings Pty Limited (No 2) [2016] FCA 1483 Gloucester Shire Council v Fitch (No 2) [2017] FCA 248 His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand v The Macedonian Orthodox Community Church St Petka Incorporated (No. 2) [2007] NSWCA 142 O'Keefe Nominees Pty Ltd v BP Australia Ltd (No. 2) (1995) 55 FCR 591 Stanley v Layne Christensen Company [2006] WASCA 56 Date of hearing: Determined on the papers Date of last submissions: 30 March 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 29 Counsel for the Applicant: Mr C Withers Solicitor for the Applicant: Squire Patton Boggs Counsel for the Respondent: Mr T G R Parker SC Solicitor for the Respondent: Maddocks ORDERS NSD 995 of 2014 BETWEEN: GLOUCESTER SHIRE COUNCIL ABN 39 690 038 002 First Applicant DIVISION CCMF LIMITED ABN 29 113 941 343 Second Applicant AND: FITCH RATINGS, INC (A COMPANY INCORPORATED IN DELAWARE, USA) First Respondent DERIVATIVE FITCH, INC (A COMPANY INCORPORATED IN DELAWARE, USA) Second Respondent FITCH RATINGS, LTD (A COMPANY INCORPORATED IN THE UNITED KINGDOM) (and another named in the Schedule) Third Respondent JUDGE: WIGNEY J DATE OF ORDER: 22 MAY 2017 THE COURT ORDERS THAT: 1. The applicants pay the respondents' costs thrown away as a result of the applicants being granted leave to file the Further Amended Statement of Claim. 2. The costs of and associated with the respondents' amended interlocutory application dated August 2016 and the applicants' interlocutory applications dated 14 July 2016 and 1 September 2016 be the respondents' costs in the cause. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT WIGNEY J: 1 On 16 March 2017, I made orders disposing of interlocutory applications filed by both the applicant, Gloucester Shire Council, and the respondent, Fitch Ratings, Inc. Fitch had applied to have the proceedings summarily dismissed, or alternatively to strike out Gloucester's existing pleading, which had already been amended once before. That application was met by an application by Gloucester for leave to further amend its pleading. Gloucester effectively conceded that its existing pleading was deficient or defective, or at least it did not seek to defend it. After a hearing that spanned four days, I granted leave to Gloucester to further amend its pleading and dismissed Fitch's summary dismissal or strike out application. The remaining issue is who should bear the costs of the lengthy hearing, Gloucester having conceded that it should pay Fitch's costs "thrown away" by reason of the amendment. 2 Gloucester contended that, as the successful party in relation to the interlocutory applications, a costs order should be made in its favour. In its submission, there is no reason to depart from the "ordinary rule" that costs follow the event. It also relied on the relevant chronology of the competing applications, and on the approach taken by Fitch in response to the amendment application. 3 It is unnecessary to repeat that chronology here. It is set out at length in the substantive judgment: see Gloucester Shire Council v Fitch (No 2) [2017] FCA 248 at [6]-[15], [207]-[213]. Suffice it to say that the parties exchanged correspondence in November 2015 concerning the pleading. In that correspondence, Fitch contended that there were deficiencies in the pleading, in particular in respect of the pleaded allegations concerning reliance and causation. Fitch foreshadowed an application for summary dismissal. In response, Gloucester rejected the contention that the pleading was deficient and asked Fitch to identify the basis of the summary dismissal application. As it turned out, the deficiencies asserted by Fitch in this correspondence were somewhat wide of the mark. At the very least, they differed from the deficiencies that ultimately became the focus of the summary dismissal application. That said, Gloucester's defence of the pleading in the correspondence was even further wide of the mark. Gloucester, or at least its lawyers, appeared to completely miss the point. In any event, some four months later, supposedly without warning, Fitch filed its application for summary dismissal. 4 Gloucester's initial response to the summary dismissal application was to defend the existing pleading and attempt to bolster it, by seeking the production of documents which were expected to support what was said to be an indirect causation case. It served a notice to produce on Fitch, and obtained leave to issue a subpoena to the Commonwealth Bank. Fitch unsuccessfully applied to set aside the notice to produce and subpoena. It is readily apparent, however, that the documents that were obtained by Gloucester in answer to the notice to produce and subpoena did not support the foreshadowed indirect causation case. 5 Gloucester then changed tack. It foreshadowed applying for leave to amend its pleading. Even then, despite orders being made directing Gloucester to file any such application by 4 July 2016, an interlocutory application annexing a proposed amended pleading was not filed until 14 July 2017. 6 At the first case management hearing following the filing of Gloucester's amendment application, Fitch fired a pre-emptive shot across the bow. It indicated that it would be submitting that Gloucester's proposed amended pleading did not cure the defect in the existing pleading. Gloucester appeared to take Fitch's foreshadowed submissions in that regard on board. It prepared a further iteration of the proposed amended pleading and, somewhat confusingly, filed a further interlocutory application dated 1 September 2016 which sought to amend its initial originating application so that it referred to the new iteration of the proposed amended pleading. 7 Gloucester also filed, and in due course relied on, lengthy affidavits from its solicitor, and voluminous supporting documentary evidence, which provided a chronology of the proceedings. The ostensible purpose of the solicitor's evidence was to seek to explain the apparent delays, both in the commencement of the proceeding and the making of the amendment application. 8 Needless to say, Fitch pressed its summary dismissal application and strenuously opposed Gloucester's amendment application. Indeed, strenuously is perhaps an understatement. Gloucester's solicitor was subjected to vigorous cross-examination over two days. Fitch ultimately submitted that much of the solicitor's evidence should not be believed and that the delays had not been adequately explained. Fitch submitted, on that basis, that the amendment application should be refused on discretionary grounds and that the proceeding should be summarily dismissed. 9 But the adequacy of the solicitor's evidence and the discretionary considerations were not the only issues raised by Fitch in opposition to the amendment application. Fitch advanced detailed arguments in support of the proposition that the proposed amended pleading did not cure the conceded deficiency in the existing pleading. It submitted that the amendment application should be refused because it was futile: the amended pleading would be liable to be struck out, or the proceeding dismissed, in any event. On the final day of the hearing, no doubt in response to exchanges that occurred in the course of the parties' oral submissions, Gloucester produced a third and final iteration of the proposed amended pleading. Gloucester submitted that the final iteration was created "by way of clarification only". That submission was and is somewhat doubtful. But even if it be so, as explained in the substantive judgment, there could be little doubt that the clarification was necessary. 10 While Gloucester did not say so in terms, the general tenor of its submissions on costs was that Fitch acted unreasonably in opposing the amendment application. It pointed out that the "vast majority" of the hearing was occupied by Fitch's cross-examination of Gloucester's solicitor and its argument that the amendment application should be refused on discretionary grounds. That was despite the fact that Fitch was unable to point to any specific prejudice arising from the amendment. As for Fitch's opposition based on the proposition that the proposed amended pleading did not cure the deficiencies identified in the existing pleading, Gloucester submitted that it was immaterial that the final iteration of the pleading only emerged on the last day of the hearing. That was because it was readily apparent that Fitch would have opposed the amendment application even if that iteration of the pleading had emerged on or before the first day of the hearing. 11 Fitch, on the other hand, contended that Gloucester should be ordered to pay its costs of and incidental to both its summary dismissal application, and Gloucester's amendment application, despite the fact that Fitch was the unsuccessful party in respect of both applications. In relation to the summary dismissal application, Fitch submitted that it was clear from the substantive judgment that its application would have succeeded but for Gloucester's successful amendment application. As such, the summary dismissal application was, at least in substance, a successful challenge to the existing pleading. As for Gloucester's amendment application, Fitch submitted that because Gloucester sought an indulgence from the Court, it should pay the costs of the application, even though it was successful. That was so, in Fitch's submission, because Fitch did not act unreasonably in opposing the amendment application. 12 There is considerable merit in Fitch's submissions. 13 The general rule that costs follow the event does not necessarily apply to every interlocutory step in a proceeding, but rather is directed to a consideration of the litigation as a whole: Gillion Pty Limited (Trustee) v Wet Fix Holdings Pty Limited (No 2) [2016] FCA 1483 at [4]; O'Keefe Nominees Pty Ltd v BP Australia Ltd (No. 2) (1995) 55 FCR 591 at 598B-C. It is not necessarily just that the costs of an interlocutory application should follow the result of that interlocutory application. Rather, at least in some cases, the costs of an interlocutory application should be determined by the result of the principal litigation of which the interlocutory application forms but a part: O'Keefe Nominees at 598G. A more appropriate costs order may be that the costs of the application be the applicant's or the respondent's costs in the cause, particularly where the interlocutory application occurs at a stage where the Court is not in a position to adjudicate on the ultimate outcome of the proceeding: His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand v The Macedonian Orthodox Community Church St Petka Incorporated (No. 2) [2007] NSWCA 142 at [21]. 14 Consideration must also be given to two other so-called "normal" or "general" rules that apply in the case of certain interlocutory applications. Those rules are: first, that where a party is seeking an indulgence of the Court, that party will generally be required to pay the costs of the application, including costs thrown away, and will not normally receive the costs of that application; and second, that where a contested application, even for an indulgence, is found to have been unnecessary because a party acting reasonably would have consented to appropriate orders, the party who has caused the costs to be unnecessarily incurred will not obtain its costs merely because the application was for an indulgence: Stanley v Layne Christensen Company [2006] WASCA 56 at [52]. 15 There can be no doubt that, in applying for leave to further amend its pleading, Gloucester was seeking the Court's indulgence. The key question in resolving the question of costs, then, is whether Fitch acted unreasonably in opposing the application. Would a party, acting reasonably, have consented to Gloucester's amendment application? 16 In my view, the answer to that question is "no". It was not unreasonable in all the circumstances for Fitch to have opposed Gloucester's amendment application. 17 Gloucester's amendment application raised two issues. The first issue was whether the proposed amendment cured the identified deficiency in the existing pleading. Did the proposed amended pleading raise a case which was at least reasonably arguable or had reasonable prospects of success? If the answer to that question was "yes", the second issue was whether leave to amend should nonetheless be refused on discretionary grounds. 18 Neither of those two issues was easy to resolve. It was not unreasonable for Fitch to seek to persuade the Court that the preferable answer to each of the questions was "no". 19 In relation to the first issue, the viability of the proposed amended pleading, it effectively took Gloucester three attempts to produce a draft pleading that satisfactorily cured the defect in the existing pleading. It is unnecessary, and indeed undesirable, to discuss again the nature of the defect in the existing pleading, or the amendments that were ultimately held to cure that defect. Those matters were discussed at length in the substantive judgment. Suffice it to say that Gloucester's pleaded reliance case in the existing pleading contained a fairly obvious chronological flaw: Gloucester alleged that it relied on Fitch's rating of the Palladin notes when it agreed to acquire the notes, which was before the date that the rating was assigned. 20 The amended pleading cured that flaw in two ways. First, Gloucester alleged that its agreement to acquire the notes was conditional on the assignment of the expected rating by Fitch. Gloucester alleged that, when the expected rating was in due course assigned, it relied on, or was induced by, Fitch's assignment of the rating in completing the acquisition and paying for the notes. But for the satisfaction of the condition, it would not have completed the acquisition. Second, the amended pleading raised a new and somewhat novel non-reliance based case. Gloucester alleged, in effect, that the issue of the Palladin notes would not have gone ahead if Fitch had not assigned the expected rating. If followed that, but for the rating, Gloucester would not have, because it could not have, acquired the notes and suffered the eventual financial loss. 21 While it is now relatively easy to summarise the effect of the amendments, the proposed amended pleading was by no means clear and comprehensible. The proposed amended pleading was, in many respects, awkwardly and clumsily drafted, and required explanation by lengthy exposition. Fitch made detailed submissions concerning the viability of both the new reliance case based on the allegation that the agreement to acquire was conditional, and the new non-reliance based case. Those submissions exposed some issues with the proposed pleading which, as adverted to earlier, ultimately led to Gloucester putting forward a further iteration of the proposed amended pleading on the last day of the hearing. Even if, as Gloucester submitted, the final iteration of the pleading simply clarified some aspects of the earlier iterations, the fact that it took Gloucester three attempts to produce a viable pleading reveals that Fitch's opposition to the amendment application was not unreasonable. While many of Fitch's arguments concerning the proposed amended pleading were highly technical, and were ultimately unsuccessful, they could not fairly be characterised as being unreasonable or untenable. 22 As for the second issue, the discretionary considerations, this was by no means an ordinary amendment application. Indeed, the facts and circumstances were quite exceptional. It is again unnecessary to rehearse the facts and circumstances in great detail. It is sufficient to say that the proceeding was commenced on what was effectively the last day before the action would have been statute barred. Even then, some considerable time elapsed before Fitch was served with the originating application and pleading. A further considerable period elapsed before Gloucester applied to amend the pleading. 23 Gloucester relied on affidavit evidence from its solicitor to explain these significant delays. That evidence, when tested in cross-examination, turned out to be far from satisfactory. It appeared that the potential claim against Fitch had not been investigated with diligence or dispatch and that, once commenced, the proceeding was not prosecuted expeditiously. It was also readily apparent that the pleading was hurriedly drafted at the last minute, and in circumstances where insufficient care and attention was given to certain important aspects of the pleaded case, including the reliance case that was ultimately accepted to be flawed. 24 The cross-examination of Gloucester's solicitor turned out to be very lengthy. That was, however, due in part to the fact that at times her evidence in cross-examination was non-responsive, argumentative, vague and in some cases not entirely plausible. In all the circumstances, it could not be said that the lengthy cross-examination was unwarranted or unnecessary. At the very least the cross-examination exposed a number of flaws in the solicitor's explanation of the delays and conduct of the proceeding. 25 Ultimately, despite the deficiencies in aspects of the solicitor's evidence, it was held that the discretionary considerations weighed in favour of permitting Gloucester to amend its pleading. It does not follow, however, that it was unreasonable for Fitch to test the solicitor's evidence, or to submit that the discretionary considerations weighed against permitting the amendment. While it may be correct, as Gloucester submitted, that one of the compelling considerations in favour of permitting the amendment was that Fitch had not demonstrated any specific prejudice arising from the amendment, that was not the only relevant consideration. 26 In all the circumstances, I do not consider that it would be just to order Fitch to pay Gloucester's costs of the two interlocutory applications, even though Gloucester was ultimately the successful party in both applications. Gloucester was only successful in defeating Fitch's summary dismissal application because it was successful in seeking an indulgence from the Court, in the form of leave to further amend. Fitch did not act unreasonably in opposing the amendment application. 27 In my view, the appropriate and just order is that the costs of and associated with the two interlocutory applications should be Fitch's costs in the cause. The interlocutory applications should be treated as part of the costs of the whole litigation. If Gloucester is ultimately successful in the litigation as a whole, it will not be able to recover its costs relating to the interlocutory applications, but nor will it be obliged to pay Fitch's costs. If, on the other hand, Fitch successfully defends the substantive proceedings, it should be able to recover its costs of and associated with the interlocutory applications. 28 In all the circumstances, I do not consider that it would be appropriate for Gloucester to recover its costs of the amendment application, even if it is ultimately successful in the litigation. That is primarily because of the somewhat unsatisfactory conduct of the litigation by Gloucester which was revealed by the cross-examination of Gloucester's solicitor. Had sufficient care and attention been given to the pleading in the first place, it may not have been necessary for Gloucester to seek the Court's indulgence to permit the amendment. 29 As noted earlier, it is common ground that Fitch is entitled to its costs thrown away as a result of the amendment. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wigney. Associate: Dated: 22 May 2017 SCHEDULE OF PARTIES NSD 995 of 2014 Respondents Fourth Respondent: DERIVATIVE FITCH LTD (A COMPANY INCORPORATED IN THE UNITED KINGDOM)