Supreme Court New South Wales Medium Neutral Citation: Noda Development Ltd v H & H Funding Pty Ltd (No 2) [2023] NSWSC 616 Hearing dates: On the papers Date of orders: 8 June 2023 Decision date: 08 June 2023 Jurisdiction: Equity - Commercial List Before: Darke J Decision: Costs orders made as set out at [41]. Catchwords: COSTS – indemnity costs – gross sum costs orders – where the plaintiff obtains judgments against defendants based on loan agreement – where loan agreement provides for costs to be paid on an indemnity basis – whether costs should be awarded on an indemnity basis – whether the award of costs on a gross sum basis is appropriate in all the circumstances – held that costs should be awarded on an indemnity basis and that gross sum costs orders should be made against defendants Legislation Cited: Civil Procedure Act 2005 (NSW), s 98(4)(c) Corporations Act 2001 (Cth), s 500(2) Cases Cited: Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 Bechara trading as Bechara and Company v Bates [2016] NSWCA 294 Charlick Trading Pty Ltd v Australian National Railways Commission [2001] FCA 629 Chow v Chow (No 2) (2015) 18 BPR 35,385; [2015] NSWSC 1348 eInduct Systems Pty Ltd v 3D Safety Services Pty Ltd (No 2) [2015] NSWCA 422 Hamod v State of New South Wales [2011] NSWCA 375 In the matter of H&H Funding Pty Ltd [2022] NSWSC 1354 In the matter of Malosi Group Pty Ltd [2021] NSWSC 801 James v Australian and New Zealand Banking Group Limited [2016] NSWSC 833 Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 Noda Development Ltd v H & H Funding Pty Ltd [2023] NSWSC 305 Pathway Investments Pty Ltd v National Australia Bank Ltd [2012] VSC 97 Stoddart (NSW) Pty Ltd v Kellyville Building Pty Ltd [2019] NSWSC 1480 Category: Costs Parties: Noda Development Ltd (Plaintiff) H & H Funding Pty Ltd (First Defendant) Rui Hu (Second Defendant) Representation: Counsel: Ms J Mee (Plaintiff) Solicitors: Miracle Legal (Plaintiff) Connor & Co Lawyers (First Defendant) File Number(s): 2020/310574 Publication restriction: None Judgment Introduction 1. On 31 March 2023, I delivered judgment in this matter in favour of the plaintiff: see Noda Development Ltd v H & H Funding Pty Ltd [2023] NSWSC 305 ("the principal judgment"). 2. The substantive proceedings concerned the default by the first defendant borrower and the second defendant guarantor on their repayment obligations under a loan agreement. The Court ordered that judgment be entered in favour of the plaintiff against the first defendant in the amount of $27,667,026.53 and against the second defendant in the amount of $27,667,026.53. Both judgments were ordered to take effect from 27 March 2023. 3. The issue which remains for determination in this matter is the question of costs as between the plaintiff and the first and second defendants. 4. In the principal judgment, I indicated my preliminary view of the appropriate orders as to costs at [55], subject to any submissions by the parties that different orders ought to be made. 5. With respect to the first defendant, I formed the view that it would be appropriate for it to pay the plaintiff's costs up to the date of its liquidation (11 September 2022) but not thereafter. Proceedings against the first defendant were stayed from that date until leave to proceed against it pursuant to s 500(2) of the Corporations Act 2001 (Cth) was granted on the date of the final hearing (27 March 2023), by which time it had filed a submitting appearance save as to costs. 6. With respect to the second defendant, I stated that there seemed to be no reason why an order should not be made that the second defendant pay the plaintiff's costs of the proceedings. 7. On 6 April 2023, I made directions for the plaintiff to serve and provide to my Associate brief submissions on costs and any affidavits in support by 28 April 2023. Directions were also made for the first and second defendants to serve and provide to my Associate any brief submissions in reply and any affidavits in support by 26 May 2023. These directions were made with a view to the issue of costs being determined on the papers. Submissions 1. By 26 May 2023, only the plaintiff had provided written submissions (dated 28 April 2023) to the Court on the issue of costs. No written submissions have been provided to the Court by any of the defendants. 2. In summary, the plaintiff submits that gross sum costs orders should be made whereby the first defendant is ordered to pay the plaintiff's costs of or incidental to the proceedings up to 11 September 2022, fixed in the amount of $225,000, and the second defendant is ordered to pay the plaintiff's costs of or incidental to the proceedings, fixed in the amount of $380,000. 3. Pausing here, I note that the plaintiff appears to have accepted that it is appropriate for the liability of the first defendant for costs to extend no further than the date of its liquidation (11 September 2022). I will take that approach, seeing no reason to depart from the view I expressed in the principal judgment. 4. The plaintiff submitted that the making of gross sum costs orders is warranted because of the likely inability of the defendants to fully satisfy the judgment debt and their costs liability. The plaintiff submitted that, in those circumstances, the making of such orders is desirable to avoid the further expense and delay involved in a costs assessment. 5. The plaintiff further submits that orders should be made for the first and second defendants to pay the plaintiff's costs of or incidental to the proceedings on an indemnity basis. This submission, stated to be made in the alternative, is put on the basis that cl 11(a) of the General Security Agreement ("the Agreement") executed by the parties expressly provides for the legal fees of the plaintiff (as the Secured Party) to be paid by the first defendant (as the Grantor) "on a full indemnity basis". By cl 16 of the Agreement, this payment obligation extends to the second defendant (as the Guarantor). 6. The plaintiff relies on the affidavit of its sole director and shareholder, Mr Huo, affirmed on 28 April 2023, and the evidence admitted in the substantive proceedings, in support of the proposed gross sum costs orders. I have read and considered the affidavit and the relevant evidence. Determination 1. The logical starting point is to consider whether costs should be awarded against the defendants on the ordinary basis or on an indemnity basis. 2. The authorities are clear that where parties have agreed to terms which "plainly and unambiguously" provide for a contractual right to indemnity costs (or costs on some other basis), the Court, whilst retaining its usual discretion as to costs, should ordinarily exercise the discretion to reflect that contractual right (see Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 at [11]-[14] per Beazley JA (as her Honour then was) and In the matter of Malosi Group Pty Ltd [2021] NSWSC 801 at [7] per Black J). 3. The relevant clauses of the Agreement plainly provide for the legal fees of the plaintiff to be paid on an indemnity basis by the defendants. This constitutes a strong discretionary factor in favour of the award of indemnity costs. In my view, it is appropriate for indemnity costs orders to be made against both defendants. 4. I turn then to consider the question of whether gross sum costs orders should be made. 5. Section 98(4)(c) of the Civil Procedure Act 2005 (NSW) ("the Act") provides that the Court may, at any time before costs are referred for assessment, make an order to the effect that the party to whom costs are to be paid is to be entitled to a specified gross sum instead of assessed costs. 6. The principles which govern the making of gross sum costs orders under s 98(4)(c) of the Act are well-established and were summarised by me in Stoddart (NSW) Pty Ltd v Kellyville Building Pty Ltd [2019] NSWSC 1480 at [23]-[26]. I adopt those principles again. 7. I am satisfied that the making of gross sum costs orders is appropriate in the circumstances. I generally accept the plaintiff's submissions in this regard. 8. The evidence indicates that, to date, neither defendant has made any payment to the plaintiff towards the satisfaction of the substantial judgment debt of $27,667,026.53 (including interest), and neither is likely to be able to satisfy the judgment debt or any liability for costs in full. In particular, it is known that the first defendant has been in liquidation since 11 September 2022. 9. I accept the plaintiff's submission that a negative inference can be drawn regarding the ability of the second defendant, a natural person, to satisfy the judgment debt and any liability for costs in full. It has been more than two years since any repayments have been made to the plaintiff (see the principal judgment at [40]-[41]). Furthermore, as deposed by Mr Huo in his 28 April 2023 affidavit, it is not known if the second defendant has any assets from which the judgment debt or any liability for costs can be satisfied. In these circumstances, the avoidance of an expensive costs assessment process (which would incur additional costs that are unlikely to be recovered by the plaintiff) is desirable. 10. I am also satisfied that the Court has the information which is necessary to arrive at a rational and reasonable assessment of the plaintiff's costs which does justice to the parties (see James v Australian and New Zealand Banking Group Limited [2016] NSWSC 833 at [17] per Ball J). 11. In his 28 April 2023 affidavit, Mr Huo has adduced evidence of the actual costs which have been incurred by the plaintiff in or incidental to the proceedings. The invoices documenting these costs are set out in an exhibit to his affidavit. 12. This evidence indicates that, since 12 December 2018, the actual costs incurred by the plaintiff in or incidental to the proceedings are $553,710.48 (excluding GST). The plaintiff's costs up to the date of the liquidation of the first defendant may be estimated as $294,736.82 (excluding GST). This estimate allocates one third of the 3 October 2022 invoice to the period up to the date of the liquidation. These amounts differ slightly from the amounts provided in the plaintiff's submissions (which do not include the correct adjustment for GST). 13. The plaintiff makes several observations in support of the proposition that the approach it has taken to estimate costs is "logical, fair and reasonable" (see Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 at 123 per von Doussa J). 14. First, the plaintiff points to the fact that the costs relate to legal costs incurred over a lengthy period of over 3 years (from 26 November 2019 to 1 April 2023) and does not include any prior period, even though the plaintiff had engaged solicitors in respect of the dispute from 12 December 2018. 15. Second, the plaintiff refers to the fact that, notwithstanding the change in its legal representation throughout the course of the proceedings, the total number of legal staff it retained remained very modest, comprising a single solicitor and a single junior counsel. 16. Third, the plaintiff points to the modest hourly rates charged by all legal representatives, comprising $280 (excluding GST) in the case of the sole solicitor retained and $325 – $350 (excluding GST) in the case of the sole junior counsel retained. 17. Fourth, the plaintiff indicates that discounts were given on several of its invoices (including those issued on 27 October 2020, 11 May 2021, 28 June 2021, 21 March 2022 and 8 May 2022). 18. Fifth, the plaintiff emphasises that the costs amounts sought do not include the recovery of the plaintiff's further costs of preparing evidence and submissions on costs. 19. I accept that the considerations outlined above establish the reasonableness and fairness of the cost estimates provided. 20. The plaintiff submits and I accept that it is appropriate to include certain costs which are incidental to the proceedings, and which were incurred prior to the commencement of the litigation (such as an invoice for solicitors' fees of $90,000 (including GST) received on 11 June 2020 for attempts to negotiate a settlement of the dispute) as part of the assessment of costs on a gross sum basis (see Chow v Chow (No 2) (2015) 18 BPR 35,385; [2015] NSWSC 1348 at [19]-[24] per Young AJA, Charlick Trading Pty Ltd v Australian National Railways Commission [2001] FCA 629 at [92] per Mansfield J and Pathway Investments Pty Ltd v National Australia Bank Ltd [2012] VSC 97 at [50] per Davies J). 21. It is well-established that the assessment of a gross sum costs order may involve "an impressionistic discount of the costs actually incurred or estimated, in order to take into account the contingencies that would be relevant in any formal costs assessment" (see Hamod v State of New South Wales [2011] NSWCA 375 at [820] per Beazley JA (as her Honour then was), with whom Giles and Whealy JJA agreed). When the Court undertakes such an assessment, it does so by way of a "broad brush" approach to determining the lump sum because "[t]o require the same or similar level of detail as in a formal costs assessment would defeat the purpose of the lump sum order" (see Bechara trading as Bechara and Company v Bates [2016] NSWCA 294 at [14] per Beazley P, Meagher and Payne JJA). 22. The plaintiff accepts that a "substantial discount" should be applied to the actual costs "in recognition of the desirability of bringing the proceedings (including costs orders) to finality promptly without the need to incur further wasted expenditure on costs assessment." 23. The gross sum cost orders proposed by the plaintiff, namely a round figure of $380,000 for the second defendant and a round figure of $225,000 for the first defendant (for the period up to 11 September 2022) are intended to give effect to a discount rate of just over 30% for the costs ordered against each defendant. However, when compared against the actual costs incurred (correctly adjusted for GST as set out above at [25]), the plaintiff's proposed gross sum cost orders entail discounts of about 31.4% for the second defendant and about 23.7% for the first defendant. This discrepancy in discounting is an artefact of the incorrectly calculated GST-exclusive figures provided by the plaintiff in its submissions. However, notwithstanding these calculation errors, the plaintiff apparently intended for the same discount rate of just over 30% to be applied in respect of each defendant. Discounting the actual costs sum of $294,736.82 for the first defendant by 31.4% would yield a round figure of about $202,000. 24. In eInduct Systems Pty Ltd v 3D Safety Services Pty Ltd (No 2) [2015] NSWCA 422, Beazley P and Basten JA observed at [10] that the willingness of an applicant for a gross sum costs order to discount the likely amount of costs recoverable on assessment is a factor which is relevant to the determination of whether such an order should be made. As their Honours explained at [15]: …Where there is a fear that the other party will be impecunious and therefore the party seeking to recover costs will be unable to recover the full amount, one might expect it to be willing to discount the amount claimed by a significant proportion. In Hamod, one party commenced with a figure well below commercial rates; the other party offered to accept 60% of its estimate of recoverable costs. In the present case, the applicant has not conceded that it may be appropriate to make two levels of discount against the actual costs paid by it to its lawyers. The proposed reduction of 15% would not cover the difference between the assessment of indemnity costs and the assessment of costs on the ordinary basis. 1. I am satisfied that a discount rate of about 31.4% for the proposed gross sum costs orders is fair and appropriate in all the circumstances, including the likely inability of the defendants to satisfy the judgment debt and any costs liability in full. 2. I also note that the plaintiff intends the proposed discounts to allow for certain costs arising out of tasks which are not strictly related to or incidental to this litigation. The plaintiff referred to costs of related Personal Property Securities Act 2009 (Cth) proceedings (see In the matter of H&H Funding Pty Ltd [2022] NSWSC 1354) and costs of related recovery actions which have not been separated from the other costs of the proceedings in relevant invoices. In his 28 April 2023 affidavit, Mr Huo deposed that these further enforcement costs (including the costs of appointing a receiver and the costs of related advice) were in a sum of over $15,000. Discounts of about 31.4% are more than sufficient to account for any potential intermixing of costs which are related to the proceedings and costs which are unrelated to the proceedings. 3. In all the circumstances, I have concluded that it is appropriate to make gross sum costs orders in respect of the costs of the proceedings, in the manner described above. Such orders are apt to bring finality to the matter and are preferable to the undertaking of a costs assessment process. 4. Accordingly, the Court orders pursuant to s 98 of the Act that: 1. the first defendant pay the plaintiff's costs of or incidental to the proceedings up to 11 September 2022, on an indemnity basis; 2. the costs payable by the first defendant be fixed on a gross sum basis in the specified amount of $202,000; 3. the second defendant pay the plaintiff's costs of or incidental to the proceedings on an indemnity basis; and 4. the costs payable by the second defendant be fixed on a gross sum basis in the specified amount of $380,000. ********** 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: 08 June 2023