New South Wales Supreme Court CITATION : Manildra Laboratories v Campbell [2010] NSWSC 70 HEARING DATE(S) : 5 February 2010 JURISDICTION : Equity Division Commercial List JUDGMENT OF : McDougall J at 1 EX TEMPORE JUDGMENT DATE : 5 February 2010 DECISION : I order that the second and third defendant's application for indemnity costs be dismissed. I order the second and third defendants to pay the plaintiffs' costs of that application. CATCHWORDS : COSTS – indemnity costs – whether plaintiff should have known that case was unsustainable – plaintiff not precluded from persisting with case where some, but not all, bases are unfounded – where plaintiff called opposing party as witness – where witness gave evidence unfavourable to plaintiff – whether plaintiff precluded from submitting that Court should take a view of facts on a particular point different to that given by witness – plaintiff not precluded from submitting that, upon consideration of all circumstances in evidence, Court should take a view of facts that stands against evidence of witness – applications for indemnity costs dismissed. CATEGORY : Consequential orders Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 CASES CITED : McPhilemy v Times Newspapers Ltd (No 2) [2000] 1 WLR 1732 Richards v Morgan (1863) 4 B and S 641 Manildra Laboratories Pty Limited (First Plaintiff) Honan Holdings Pty Limited (Second Plaintiff) PARTIES : John Bruce Campbell (First Defendant) The Young Roller Flour Mill Company Ltd (Second Defendant) YSF Pty Ltd (Third Defendant) Aust Asia Milling Pty Ltd (Fourth Defendant) FILE NUMBER(S) : SC 2009/298784 COUNSEL : F M Douglas QC / L T Livingston (Plaintiffs) F G Lever SC / L R Young (Second and Third Defendants) SOLICITORS : Baker & McKenzie (Plaintiffs) Bartier Perry (Second and Third Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION McDOUGALL J 5 February 2010 (ex tempore revised 5 February 2010) 298784/09 HONAN HOLDINGS PTY LIMITED & ANOR v CAMPBELL & ORS JUDGMENT 1 HIS HONOUR: This is an application by the second and third defendants (Young) for an indemnity costs order arising out of reasons that I gave on 23 September 2009, following a four day hearing that commenced on 25 August 2009 ([2009] NSWSC 987). Rather than recount the factual background and other relevant matters in these reasons, I shall assume that those to whom these reasons are directed, and those who may read them, have some familiarity with my earlier reasons. 2 Nonetheless, it is necessary to know a little bit about the issues. The first plaintiff (Manildra) alleged that the first defendant (Mr Campbell), who had been a senior employee for about 12 years up until 24 April 2009, had breached fiduciary and contractual obligations, and statutory obligations, owed by him to Manildra. That is said to have happened because, for some time before and after the termination of his employment, Mr Campbell had negotiated to buy the flour mill operated by Young. The inevitable result of a successful consummation of those negotiations would have been that Mr Campbell came into competition with Manildra. Young was joined because it was said to have induced or procured Mr Campbell's alleged breaches of fiduciary and other duties. 3 The precise case "pleaded" against the Young companies was that they had knowingly assisted Mr Campbell in what was said to be his dishonest and fraudulent design. The knowledge was said to arise in the usual four ways: actual knowledge; wilful closing of eyes; wilful and reckless failure to make enquiries; or knowledge of circumstances that would have indicated Mr Campbell's alleged wrongdoing to an honest and reasonable person. 4 The application for indemnity costs is brought on what might be called the "Fountain Meats" basis: namely, that Manildra should have realised, and had it been properly advised must have realised, that there was no factual foundation for the case that it sought to make against Young: see Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401. 5 The matters that are said to be of particular significance, in making good the Fountain Meats argument, include the following salient points: (1) On the first day of the hearing, Manildra indicated that it proposed to call in its case, and by inference to read the affidavit of, Mr Alan Murphy, who was then the principal of Young; (2) Manildra followed this course; and (3) in the course of cross-examination, Manildra's principal witness Mr Honan disavowed any belief in the dishonesty of Mr Murphy, and conceded that right up until the time the proceedings were commenced he "still didn't believe that Alan Murphy was anything other than a man of integrity and honesty" (T63.1). 6 It is not necessary to recount the evidence in detail. I did so (to the extent that I thought it necessary) in my earlier reasons. It is however desirable to note that in final submissions, the case put against Young was that the evidence could support a finding that the Young companies had knowledge of circumstances that would indicate the fact to an honest and reasonable person. In other words, the three other bases of knowledge that had been pleaded were not pressed in final submissions. If I may say so, that was entirely appropriate. 7 There were undoubtedly, on the plaintiffs' case, matters that were capable of supporting the submission that I have referred to. Those matters included, for example, the failure by Mr Murphy to make any enquiries despite the fact that he "didn't know what to do" (T92.50-93.10) and had "just a bit of conflict in [his] head" (T94.40) because in this case, unlike others, he was not dealing as principal to principal but as principal to someone whom he believed to be a subordinate. In addition, on Mr Honan's affidavit evidence, it would have been open to conclude that Mr Murphy had had a telephone conversation with Mr Honan in the course of which Mr Murphy had acknowledged, in substance, that he thought there was something fishy about the transaction. 8 The difficulty with the submission based on Mr Honan's evidence was that Mr Murphy had disagreed with that evidence in his affidavit. As I have said, the plaintiffs chose to call Mr Murphy in their case. Accordingly, it must have been recognised as unlikely that I would prefer Mr Honan to Mr Murphy to the extent of that conflict, in circumstances where of necessity the plaintiffs had not challenged Mr Murphy on this aspect of his evidence and his own counsel did not choose to do so. 9 Mr Douglas of Queen's Counsel, who appeared both at the hearing and on today's application with Mr Livingston of counsel for the plaintiffs, submitted, on the basis of observations made and cases referred to in the 7th Australian Edition of Cross on Evidence (LexisNexis Butterworths 2004) at 523 [17370], that it was nonetheless open to me (or more accurately had been open to me) in those circumstances to prefer Mr Honan's account of the conversation. That may be so as a matter of principle or theory. For example, there are 19th century cases (referred to in Cross) where a party calling a witness who is taken by surprise by the witness's evidence may show by other evidence that the witness is mistaken. The party is not in those circumstances bound by the evidence. See, for example, Richards v Morgan (1863) 4 B and S 641 at 663; 122 ER 600 at 608 per Cockburn CJ and Holroyd J respectively. 10 Their Lordships were of course talking of a traditional common law trial where a party opened his or her case and called witnesses to give oral evidence in support of it. In those circumstances, it must happen from time to time (through failure of recollection, inadequate proofing or other more malign reasons) that the witness may say something which is not favourable to the case of the party calling him or her. But the position is, I think, a little different in these days of case management and evidence by affidavit or statement. 11 It must have been clear to the plaintiffs what Mr Murphy's evidence would be (and was, once his affidavit was read). It must also have been clear to the plaintiffs that the Court would be likely to accept that evidence having regard to their decision to call Mr Murphy and the forensic consequences of that decision. Thus, I think, the situation is more akin to that described in a more recent case cited by Cross: McPhilemy v Times Newspapers Ltd (No 2) [2000] 1 WLR 1732. In that case a party, being permitted to do so by rules of Court, tendered a witness statement served by another party who had neither called the witness nor tendered the statement. The Court of Appeal held that it was not open to the tendering party, having tendered the statement, nonetheless to contend that it was false. The facts of that decision are not entirely analogous to the present facts, because in that case the witness was not, and in this case the witness was, called. But it seems to me to illustrate that the common law principle shown by the 19th century cases to which Cross refers should be considered carefully and closely before they are adapted and applied, without any modification whatsoever, to the 21st century trial context. 12 Nonetheless, in my view, it cannot be said, as a fundamental principle, that a party in the position of the plaintiffs in this case, calling an opposing party and relying in general on his affidavit, is thereby precluded absolutely from submitting that there are other circumstances in the evidence which, taken together, mean that the Court should come to a view of the facts on a particular point different to that given by the witness in question. That would be an artificial and unjustifiable constraint on the fact-finding process. The circumstance that the party calling an opposing party and reading his affidavit may be constrained from cross-examining (including as to credit) does not mean that the Court must accept every skerrick of the witness's evidence, in particular in circumstances where there is other "objective" evidence, or as it is sometimes called "hard facts", that stand against the evidence of the witness. 13 That is rather a lengthy way of saying that I do not think that the plaintiffs were precluded from putting the case against Young in the way that they did in their final submissions by the circumstance that they had called Mr Murphy as a witness in their case. It may mean (and I think it probably does mean) that the evidence that the plaintiffs relied upon to support the case of knowledge of circumstances that would suggest the truth to an honest and reasonable person should not be taken to include the evidence of Mr Honan to the extent that it was in conflict with the evidence of Mr Murphy. In other words, I think, it was probably not open to the plaintiffs to submit, in support of the fourth category case against Young, that the telephone conversation of which Mr Honan gave evidence should be accepted, over Mr Murphy's unchallenged denial, as an element of the case of constructive knowledge. 14 As will be seen from the decision in Fountain Meats and in cases which summarise and apply it, the question is in substance whether the party against whom indemnity costs are sought knew or, if properly advised, should have known that the case that it sought to make was hopeless. In this case, I think, it was a necessary consequence of the forensic decisions made by the plaintiffs that the cases of actual dishonesty and wilful or reckless closing of the eyes and ears could not succeed. But it does not follow that the fourth category case could not succeed. Nor is it appropriate to look either to my conclusions or my reasons for those conclusions and work back to say, accordingly, that the case should have been perceived to be hopeless. 15 There were other aspects of the evidence to which I was taken, in support of and against the submissions put today. I do not propose to go to those, because it does not seem to me that they tell, in a dispositive way, for or against what I have said to date. I should however note that, after Mr Murphy was called in the plaintiffs' case, the solicitors for Young wrote to the solicitors for the plaintiffs demanding in effect that the claims against Young be dismissed immediately with an order for costs on the indemnity basis. Perhaps not surprisingly, that demand was rejected. As I have said, whilst the demand might have been justified if (for example) the case against Young had been put only on one or other of the first three bases for imputing knowledge, it does not follow, in circumstances where the case put against Young included also the fourth category, that the plaintiffs should have acceded to the demand. 16 In those circumstances, I think, it is inappropriate to order the plaintiffs to pay the costs of Young on the indemnity basis. In substance, that is because I think, for the reasons that I have indicated, that the narrow case that was finally put was not so obviously hopeless that it should never have been put. Nor do I think that any different conclusion is required simply because the plaintiffs, for whatever reason, chose to call Mr Murphy in their case. 17 Although there was a submission, based on the decision to call Mr Murphy and the correspondence following that to which I have referred, that costs could be ordered from either 25 or 26 August 2009 instead of for the whole of the proceedings, there was no submission put that indemnity costs should be ordered because the case against Young was put on four bases, three of which, as must have been apparent at some stage during the proceedings (at the very latest) were hopeless. To put it another way, I do not think that a conclusion that some ways of putting the case were hopeless infects, to the degree necessary for present purposes, the decision to persist with the case against Young. 18 I turn to the question of the costs of this application. Mr Douglas submitted that I should follow the event of its outcome. Mr Lever of Senior Counsel, who appeared with Ms Young of counsel for the Young entities, submitted that the application should be regarded as an integral part of the overall proceedings, so that its costs should follow the event of the overall proceedings. 19 I dealt with the costs of the proceedings (subject to the reservation of liberty to apply for a variation of the costs orders made) in my reasons of 23 September 2009. No one has said that the orders there made - that costs should follow the event of those proceedings - was wrong. It seems to me that this is a separate application. It was made for reasons advanced in correspondence and was met by reasons in opposition. Young chose to pursue it. In my view, it is appropriate to treat it as a discrete application, although obviously enough one drawing its origin from the proceedings, so that the relevant "event" is the application and not the proceedings overall. 20 For those reasons I order that the second and third defendants' application for indemnity costs be dismissed. I order the second and third defendants to pay the plaintiffs' costs of that application. ********** 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.