Supreme Court New South Wales Medium Neutral Citation: Australia Eastern Railroad Pty Ltd v Macquarie Specialised Asset Management Ltd (No 2) [2020] NSWSC 963 Hearing dates: 17 July 2020 Date of orders: 28 July 2020 Decision date: 28 July 2020 Jurisdiction: Equity Before: Robb J Decision: See par [54]. Catchwords: COSTS — Party/Party — Costs orders in interlocutory proceedings — where the plaintiff had established a right to an order for preliminary discovery — where the parties disagreed as to the order for costs that the Court should make — where there is no general rule in relation to orders for costs for preliminary discovery applications — where there should be no order as to costs Legislation Cited: Civil Procedure Act 2005 (NSW) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Airways Corporation of New Zealand v The Present Partners of Pricewaterhouse Coopers Legal [2002] NSWSC 521 Arnaout v Arnaout [2019] NSWSC 565 Athena Investments Holdings LLC v AJ Lucas Group Ltd [2013] NSWSC 1837 Australia Eastern Railway Pty Ltd v Macquarie Specialised Asset Management Ltd [2020] NSWSC 723 Bio Transplant Inc v Bell Potter Securities Ltd [2008] NSWSC 694 C7 Pty Ltd v Foxtel Management Pty Ltd [2001] FCA 1864 Renton v Kelly [2018] NSWSC 1377 Steffen v ANZ Banking Group [2009] NSWSC 883 Totalise Plc v The Motley Fool Ltd & Interactive Investor Ltd [2001] EMLR 29 Category: Costs Parties: Australia Eastern Railroad Pty Ltd (plaintiff) Macquarie Specialised Asset Management Ltd as trustee for the MAIF Investment Trust (first defendant) Macquarie Australian Infrastructure Management Ltd as trustee for the Macquarie Australian Infrastructure Trust 1 (second defendant) Macquarie Australian Infrastructure Management 1 Limited as trustee for the Scissor Holdings Trust (third defendant) Macquarie Australian Infrastructure Management 1 Ltd as trustee for the PGGM Ibis LP Trust (fourth defendant) Scissor Holdings Pty Ltd (fifth defendant) Macquarie Corporation Holdings Pty Ltd (sixth defendant) Representation: Counsel: D Sulan (plaintiff) C Bannan (defendants) Solicitors: Quinn Emanuel Urquhart & Sullivan (plaintiff) Herbert Smith Freehills (defendants) File Number(s): 2020 / 83948 Judgment 1. By summons filed on 16 March 2020, the plaintiff (AER) sought an order for preliminary discovery against the defendants (the Macquarie parties) under rule 5.3 (1) and (4) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR). 2. By reasons for judgment published on 11 June 2020, I found in principle that AER had established a right to an order for preliminary discovery against the Macquarie parties: see Australia Eastern Railway Pty Ltd v Macquarie Specialised Asset Management Ltd [2020] NSWSC 723. 3. In essence, I suggested that the parties should attempt to negotiate a less complex and expensive approach to the preliminary discovery of documents than AER had initially sought, and indicated that the Court would cooperate in being prepared to make bespoke procedural orders that facilitated the discovery taking place in the most cost-effective way possible. 4. The parties have now agreed as to the procedural orders that the Court should make to give effect to AER's right to preliminary discovery from the Macquarie parties. Those are orders 1 to 3 and 6, as well as Annexure A, set out at the end of these reasons. The parties advised the Court that they had refined the categories of documents initially sought in the annexure to AER's summons. 5. By order 3, the parties agree that AER should be ordered to pay the reasonable costs of the Macquarie parties of compliance with order 1, to be assessed if not agreed. 6. However, the parties disagree as to the order for costs that the Court should make in respect of AER's summons. 7. AER submits that the Court should make the following order for costs: 4 The defendants pay the costs of and occasioned by the plaintiff's summons dated 16 March 2020 forthwith, including the costs of conferral between 17 September 2019 and the date of that summons. 5 The costs referred to in order 4 above to be assessed on the ordinary basis, if not agreed. 1. Thus, AER contends that the Court should deal with its summons on the same basis as it would determine the costs of procedural applications generally, and make an order on the basis that costs follow the event. 2. However, as is recorded in the principal judgment, the parties' solicitors engaged in substantial negotiations over a period of months in order to try to agree to an arrangement whereby the Macquarie parties would provide preliminary discovery to AER. Those negotiations failed to achieve agreement. AER contends that the costs order in its favour should include the costs of this conferral process between 17 September 2019 and the date of the summons. 3. The Macquarie parties contend that the Court should make the following costs orders in respect of the AER's summons: 4. No order as to costs of the plaintiff's summons dated 16 March 2020. 5. In the event that the plaintiff commences substantive proceedings against one or more of the defendants, costs paid in accordance with order 3 above and costs of the plaintiff's summons dated 16 March 2020 be dealt with as an expense incurred by the plaintiff in the pursuit of the substantive proceedings. 1. As I understand the Macquarie parties' position, they submit that the Court should not necessarily deal with the costs of an application for preliminary discovery in the same manner as it would treat applications for procedural orders generally. That is so, at least in a case such as the present, where the process of preliminary discovery will be very complex, time and resource consuming, and expensive. 2. For the purposes of these reasons I will assume the reader is familiar with the reasons in the primary judgment. 3. In my view, a significant feature of the present case, which is likely to make it extremely unusual, arises out of the respective positions taken by AER and the Macquarie parties in response to AER's initial request for preliminary discovery. 4. AER adopted a conventional approach of identifying categories of documents for preliminary discovery by the Macquarie parties. AER acknowledged that the process would be time consuming and expensive, and agreed to pay the Macquarie parties' costs of the process. 5. As explained at [43] of the primary judgment, AER seeks preliminary discovery from the Macquarie parties for the purpose of determining whether it should institute proceedings against those parties for the tort of wrongful interference with AER's contractual rights under a particular agreement that I called the Rights Agreement. 6. It is a fair inference that the Macquarie parties took the view that they had a good defence to any claim of that nature that AER may pursue against them, because the Macquarie parties had acted upon legal advice provided to them. The terms of that legal advice are unknown, as the Macquarie parties have not disclosed the advice and are entitled to maintain a claim for legal professional privilege in relation to the advice. The reason that the inference can be drawn is that the Macquarie parties responded to AER's request by offering to make a limited waiver on a confidential basis of their legal professional privilege in respect of the advice by providing the advice to AER. It is also a fair inference that the Macquarie parties had formed the view that, when AER was aware of the terms of the legal advice, AER would conclude that the Macquarie parties had not committed any unlawful acts, and that the prosecution of the proposed proceedings against the Macquarie parties would be futile. 7. The Macquarie parties offered to proceed provisionally in the hope that, once the terms of the legal advice were known to AER, that would avert AER making a claim against the Macquarie parties. However, the Macquarie parties agreed that, if AER was not satisfied that the legal advice that was disclosed was an effective defence to the proceedings contemplated by AER, then AER would remain free to make the formal application for preliminary discovery that it has now made. However, a term of the agreement required by the Macquarie parties was that, if AER proceeded to obtain an order for preliminary discovery, the Macquarie parties' entitlement to claim legal professional privilege in respect of the advice would be preserved. 8. The combined effect of these two contending positions is somewhat unusual. The result of the preliminary discovery sought by AER may be to persuade AER that it has reasonable prospects of succeeding in the proposed claim against the Macquarie parties. AER has no means of compelling those parties to disclose to it the terms of the legal advice upon which they acted. If AER does commence proceedings against the Macquarie parties, those parties may, at their election, at a time required by relevant case management orders, disclose the legal advice on which they acted. That disclosure will constitute a waiver of the privilege. However, the Macquarie parties expect that the disclosure will undermine AER's chances of success, and make it subject to a substantial costs order in favour of the Macquarie parties. 9. While the approach offered by the Macquarie parties had some attraction, it had drawbacks from the perspective of AER. The Macquarie parties only offered to disclose a small number of documents to AER, including the legal advice, and those documents would be chosen by the Macquarie parties. Thus, the process would put AER at risk of being persuaded that it did not have a good claim against the Macquarie parties, when that was not the case, and the false appearance was created by the fact that the choice of the documents to be disclosed would be made through the prism of the Macquarie parties' own view of the issues, and would be susceptible to mistake and misunderstanding. 10. The result of the reasonable and conscientious series of negotiations undertaken by the solicitors for the parties was an impasse that led to the filing of the summons and the delivery of the primary judgment. 11. As the Macquarie parties noted in their submissions, senior counsel for AER on the hearing acknowledged on a number of occasions that the Macquarie parties had acted reasonably from their own perspective: see T 4.7 and T 36.29. 12. As I understand the Macquarie parties' position, what underlies their submission that a special costs order should be made in the present case is that, not only will the process of giving preliminary discovery be extensive and time-consuming, but it will be a substantial drain on the resources of those parties. It is not an exercise for which full and adequate compensation will be made by means of the costs order that AER has agreed should be made in relation to the costs of the disclosure. 13. Furthermore, an order for preliminary discovery is made on the basis that there may or may not be a case that the applicant for preliminary discovery is able to pursue against the respondent. The object of the exercise is to enable the applicant to make a decision as to whether there is such a case. Consequently, the order may be made against an entirely innocent party. 14. Accordingly, the Macquarie parties submit that, notwithstanding that they have resisted the making of a preliminary discovery order, the costs of the application should be dealt with on the basis that it cannot be known at this stage whether the disclosure will establish some arguable claim against the Macquarie parties. After disclosure has been given, nothing more may happen. 15. That, according to the Macquarie parties, is the justification for the Court to make order 4 for which they contend. 16. This position is also supported by the argument that, in the special circumstances of this case, the Macquarie parties were prepared to disclose the legal advice upon which they acted, and thus waive their legal professional privilege, albeit on a qualified basis. Although both the Court and AER would have been required to accept, in the first instance, the Macquarie parties' view as to the significance of the legal advice, the approach that the Macquarie parties suggested gave rise to the possibility that complex legal proceedings might be an averted entirely. That is significant because the orders for preliminary discovery that AER has succeeded in obtaining leave it open to the risk that it will make a wrong decision to sue the Macquarie parties, and later suffer the consequence of the reliance by those parties on the legal advice. 17. Consequently, the Macquarie parties have offered to accept order 5 as proposed by them, which would permit AER, if it decided to commence proceedings against the Macquarie parties, to treat the costs of preliminary discovery and the costs of its summons as being an expense incurred in the pursuit of the substantive proceedings. 18. Depending upon the course of the substantive proceedings, the making of order 5 as proposed by the Macquarie parties would give AER the prospect of recovering its costs of the application for preliminary discovery, if it succeeded in its claim against the Macquarie parties. 19. As a subsidiary matter, the Macquarie parties submitted that if, contrary to their submission, the Court decided to make an order for the costs of the summons in favour of AER, that order should not include the costs of conferral from 17 September 2019, or any other time. The Macquarie parties submitted that the costs that AER should be entitled to receive should depend upon the assessment process. 20. Section 98(1)(a) of the Civil Procedure Act 2005 (NSW) has the effect that the costs of the application are in the discretion of the Court. 21. Rule 42.1 of the UCPR provides that "the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs". 22. In Renton v Kelly [2018] NSWSC 1377, Ward CJ in Eq dealt with the costs of an application for preliminary discovery under r 5.3 of the UCPR, where the documents sought by the applicant had been produced to him before the Court dealt with the summons. Her Honour made no order as to costs "with the intent that (without prejudice to any right that may be able later to be made in substantive proceedings in relation to the underlying dispute) that each party should bear his or its own costs of the preliminary discovery application". 23. In that case there was no hearing on the merits of the application: see [24]. The Chief Judge therefore noted at [53] that the authorities that were most relevant to the determination of the costs issue before her were those that dealt with the costs order that should be made when the parties settle the proceedings and there is no hearing on the merits. 24. However, I respectfully follow the observations made by the Chief Judge at [56]: "While r 42.1 of the UCPR provides that the general rule is for costs to follow the event, the authorities referred to by the plaintiffs make clear (and the plaintiffs accept) that there is no conventional or usual rule applicable to preliminary discovery applications, which applications depend on the facts of the relevant case…" 25. Ward CJ in Eq accepted the submission by the plaintiffs in expressing that conclusion: [14] The plaintiffs accept there is no fixed rule or necessary "starting position" in relation to costs in a preliminary discovery application, referring to what was said by Kenny J in J & A Vaughan Super Pty Ltd v Becton Property Group Ltd [2013] FCA 340 (at [16]–[18]); by Perry J in ObjectiVision Pty Ltd v Visionsearch Pty Ltd (No 3) [2015] FCA 304 at [13]; and by Mukhtar AsJ in Guest v Guest (No 2) [2016] VSC 76 at [19]; as well as to the approach adopted in this Court by Slattery J in Gooley v Breda Pty Ltd (No 2) [2017] NSWSC 1505 (Gooley). In Gooley, Slattery J dealt with competing claims for costs following a fully contested application for preliminary discovery and ordered the defendants to pay 85% of the plaintiffs' costs of the proceedings. In making that order, his Honour had regard (see at [6]; [9]) to the adversarial nature of those proceedings and to the plaintiffs' substantial success in obtaining the relief they had sought. 1. AER relied upon a number of authorities wherein the court had ordered the respondent who resisted the application for preliminary discovery to pay some or all of the costs because the respondent had unsuccessfully resisted the application in an "adversarial" manner. 2. Simpson J (as her Honour then was) made such an order in Airways Corporation of New Zealand v The Present Partners of Pricewaterhouse Coopers Legal [2002] NSWSC 521. That was a case involving an application for preliminary discovery to determine the identity of a person who had published material that the plaintiff claimed was defamatory. It transpired that the person was an employee of the defendants and the defendants' computers had been used for the purpose of the transmission of the allegedly defamatory emails. As her Honour said at [10]: "…The defendants had persistently refused to cooperate. They defended the application on two bases that were not in the result sustained. It would have been a simple matter for them to have provided the plaintiffs with the information the plaintiffs sought, and which the defendants ultimately yielded. In my opinion, the defendants must live with the consequences of their decision to defend the proceedings". 3. Simpson J declined to follow the observation made by the English Court of Appeal in Totalise Plc v The Motley Fool Ltd & Interactive Investor Ltd [2001] EMLR 29 to the effect that the Court will not ordinarily make a costs order on a preliminary discovery application where "the party required to make the disclosure had a genuine doubt that the person seeking the disclosure was entitled to it". Her Honour's decision to order the defendants to pay the costs of the application was based upon her view of the defendants' conduct in resisting the application. 4. McDougall J followed Simpson J's decision in Steffen v ANZ Banking Group [2009] NSWSC 883 (Steffen). His Honour concluded at [34]: "In my view, it is correct to say that ANZ conducted these proceedings in an adversarial fashion. It took every point that was fairly open. It is not to be criticised for doing so. However, having done so, it must live with the consequences; including as to costs". Further, his Honour said at [36]: "To my mind, one can infer from this that ANZ was prepared, notwithstanding its professed concern to maintain the confidentiality of its customers' documents, to produce those documents, although pursuant to a consent order; but was concerned to avoid producing its own documents". 5. In Athena Investments Holdings LLC v AJ Lucas Group Ltd [2013] NSWSC 1837, at [68], I expressed an inclination to follow Steffen but deferred ruling on the costs of the application as the parties had not been given an opportunity to make submissions on the issue. 6. Slattery J followed a similar course in Gooley v Breda Pty Ltd (No 2) [2017] NSWSC 1505, saying at [6]: "… This matter was never conducted by the defendants as just a case of putting the plaintiffs to proof. The option existed of handing over the documents requested. Instead, every available argument was deployed against the application. The costs incurred were substantially the result of that active opposition. This is a preliminary discovery case where a costs order should be made. 7. That there are cases where the Court should approach the question of the costs of an application for preliminary discovery on a different basis was recognised by McDougall J in Steffen, where his Honour noted at [30] that, in Bio Transplant Inc v Bell Potter Securities Ltd [2008] NSWSC 694, Barrett J (as his Honour then was) held that the plaintiff should pay the defendant's costs, as the defendant had done no more than, in a practical or commercial sense, it was required to do to protect the interests of third parties and that, subject to this, it had "cooperated to the maximum extent practicable". 8. In Arnaout v Arnaout [2019] NSWSC 565, Lindsay J made the following observations concerning the costs order that was appropriate, following the success of an application for preliminary discovery under r 5.3 of the UCPR: [71] The jurisdiction to make an order for preliminary discovery under UCPR rule 5.3, although perhaps not correctly described as exceptional, is unique in the sense that it does not fit neatly in the mould of ordinary adversary civil litigation. [72] It may be that, preliminary discovery having been given, the plaintiff decides not to institute any proceedings against the defendants notwithstanding his present contemplation that proceedings might be commenced. It might also be that these preliminary discovery proceedings, when viewed in retrospect, appear as stage one of further litigation between the parties. [73] It is, in my opinion, desirable that there be an order for costs in these preliminary discovery proceedings which has immediate, not a contingent, effect. [74] Although the parties have debated whether it is appropriate to characterise these preliminary discovery proceedings as "adversarial" to the extent that they have been opposed by the defendants, I am not comfortable with such a characterisation as a determinant of costs orders. [75] It is not entirely correct to say that the plaintiff has obtained in orders for preliminary discovery "an indulgence". That it is because UCPR rule 5.3 provides, subject to an exercise of discretion, an entitlement if certain elements are made out. Nevertheless, there is something in the nature of an "indulgence" that is sought by a plaintiff who seeks to obtain preliminary discovery against parties against whom he may or may not bring subsequent proceedings. [76] In deciding whether or not to make an order departing from the scheme of UCPR rule 42.1, relevant factors are whether it was reasonable for the defendants to oppose the plaintiff's application for preliminary discovery, and whether they acted reasonably in the conduct of their opposition. [77] In my assessment the defendants in these proceedings did act reasonably in their opposition to the plaintiff's application for preliminary discovery; reasonably in their decision to oppose it and reasonably in their conduct of their opposition. [78] In my opinion, the proper order in these proceedings, subject to one qualification, is that the plaintiff pay the costs of the defendants on the ordinary basis. [79] The qualification is this. If the plaintiff does, in the fullness of time, commence substantive proceedings against the defendants, or either of them, it should be open to the plaintiff in those proceedings to apply to the Court, to the extent that any application may be necessary, for orders recognising that costs payable in these preliminary discovery proceedings should be dealt with as an expense necessarily incurred by the plaintiff in pursuit of what, by that stage, will have become the substantive proceedings. [80] It is for that reason that, in making an order that the plaintiff pay the defendant's costs of the second further amended summons I have formally reserved such, if any, entitlements the plaintiff may have to claim the costs payable by him pursuant to the current orders as an expense recoverable as costs in any future proceedings. 1. Thus, Lindsay J made an order that the plaintiff pay the defendant's costs of the application, but reserved the right of the plaintiff, as Ward CJ in Eq did in Renton v Kelly, to seek an order recovering those costs in any future proceedings that may be commenced. 2. AER relied upon the judgment of McDougall J in Steffen at [31], where his Honour, following the approach of Gyles J in C7 Pty Ltd v Foxtel Management Pty Ltd [2001] FCA 1864 at [50], said that he was doubtful of the merit of an approach to costs which makes them depend on the initiation and outcome of litigation following preliminary discovery. McDougall J said: "…an application for preliminary discovery should be regarded as a discrete application, and that the costs incurred in it should not 'await some indefinite future event'". 3. In a similar fashion to the costs order made by Ward CJ in Eq in Renton v Kelly that is set out above, the costs order for which the Macquarie parties contend will not depend on some future event, being the initiation and outcome of litigation following preliminary discovery. The operative costs order would be order 4, whereby no order for the parties' costs will be made. This position is not affected by the possibility that AER may be awarded the costs of the preliminary discovery application in some future proceedings against the Macquarie parties following the provision of the preliminary discovery. 4. It may be noted that the terms of order 5, as offered by the Macquarie parties, are more favourable to AER than the equivalent order made in Renton v Kelly. In that case, the order that there be no order as to costs was without prejudice to the applicant's entitlement to claim that the costs order made in his favour in later proceedings should include his costs of the application for preliminary discovery. Order 5 in the present case would have the effect of making the costs of the present application AER's costs of any substantive proceedings. 5. In the light of the background set out above, and after considering the range of outcomes reached in the authorities that I have discussed, I have concluded that in this case the proper costs orders to make are those proposed by the Macquarie parties. 6. In the manner that I have explained, the Macquarie parties offered a special solution to AER's request for preliminary discovery that involved the conditional waiver of those parties' entitlement to claim legal professional privilege over the legal advice upon which they acted. There has been no suggestion that the approach offered by the Macquarie parties was not a genuine attempt to satisfy AER that it had no reasonable claims against the Macquarie parties. It remains a real possibility that the acceptance by AER of the Macquarie parties' offer may have been the most satisfactory and effective response to AER's request. As noted, the Macquarie parties' proposal did not preclude AER from making an application for preliminary discovery, if it did not consider that the effect of the documents provided to it by the Macquarie parties was sufficiently conclusive. 7. Although the Macquarie parties unsuccessfully resisted AER's application for preliminary discovery at the hearing, that was primarily on the basis that the most efficient and cost-effective course was for AER to accept the Macquarie parties' proposal. Those parties did not mount an intractable opposition to AER's application. 8. This is not a case where the subject documents of AER's application for preliminary discovery were readily at hand, so that they could have simply been provided to AER by the Macquarie parties. The exercise that the order for preliminary discovery will impose upon the Macquarie parties is a relatively substantial one. As I have observed above, it is probable that the Macquarie parties will suffer a compliance burden, as a result of the necessary diversion in resources that will be necessary to give the preliminary discovery. 9. In the circumstances, I consider that the Macquarie parties have at all times acted reasonably in undertaking the conferral process and in putting AER to proof of its claim – which succeeded on balance as it has happened – that the making of an immediate order for preliminary discovery was preferable to AER being required to accept the alternative course genuinely proposed by the Macquarie parties. 10. Perhaps recognising the reality that they did oppose the application, the Macquarie parties have not sought an order that AER pay their costs, but have proposed the intermediate outcome that the parties be required in the first instance to pay their own costs of the application. The Macquarie parties have recognised that, if the result of the preliminary discovery is that AER commences proceedings against them that are ultimately successful, then AER should be able to add the costs of this application to its costs of the future proceedings. 11. The Court orders that: Discovery 1. By 17 August 2020, the defendants are to serve on the plaintiff in accordance with Uniform Civil Procedure Rules 2005 (NSW) r 21.3 a verified list of all documents and things which are or have been in any of the defendants' possession, custody or control responding to the categories of documents at Annexure A to these orders. 2. By 24 August 2020, the defendants make the documents and things in the verified list referred to in order 1 available for inspection. 3. The plaintiff pay the reasonable costs of compliance with order 1, to be assessed if not agreed. Costs 1. There be no order as to the costs of the plaintiff's summons dated 16 March 2020, with the intent that each party should bear its own costs of the preliminary discovery application. 2. In the event that the plaintiff commences substantive proceedings against one or more of the defendants, costs paid in accordance with order 3 above and the costs of the plaintiff's summons dated 16 March 2020 be dealt with as an expense incurred by the plaintiff in the pursuit of the substantive proceedings. 3. Liberty to apply on three days' notice. ANNEXURE A (308198, pdf) ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 July 2020