In the matter of Hermitage Engadine Pty Ltd

By Originating Process filed on 7 March 2025, the Plaintiff, Central Real Development Pty Ltd (“CRD”) brought proceedings against Duffy Kennedy Constructions Pty Ltd (“DKC”) and others, which sought leave under s 236 of the Corporations Act 2001 (Cth) to permit CRD to bring proceedings on behalf of the Sixth Defendant, Hermitage Engadine Pty Ltd (“Hermitage Engadine”) and sought and obtained interlocutory relief in respect of the exercise of powers by the Third Defendant, Messrs Gammel and Taylor, as receivers (“Receivers”) appointed to Hermitage Engadine, and to restrain further steps by DKC in respect of the appointment of a receiver or controller to Hermitage Engadine.

On 14 March 2025, DKC, Messrs Gammel and Taylor and the Fourth Defendant, Military Heights Pty Ltd filed an Interlocutory Process and Points of Cross-Claim which sought, inter alia, judgment for DKC against Hermitage Engadine in a sum exceeding $22.6 million (which has now been ordered by consent), interest and a declaration that the appointment of the Receivers as receivers and managers of the property of Hermitage Engadine on 7 March 2025 was valid, or alternatively a declaration that DKC has been entitled to appoint receivers and managers to property of Hermitage Engadine. As events developed, there was no contest as to the validity of the appointment of the receivers by DKC to Hermitage Engadine at the hearing of the proceedings.

CRD’s case subsequently developed, through several iterations, by an Amended Originating Process and Points of Claim filed on 17 March 2025 and a Further Amended Originating Process and Amended Points of Claim filed on 19 March 2025; documents were produced by the parties on notice to produce, and the hearing commenced on 25 March 2025 and continued, with interruptions while the parties altered their positions and undertook discussions over several days. On the first day of the hearing, the solicitors for DKC made an open offer (“25 March offer”) to consent to the appointment of a special purpose receiver (“SPR”) with specific responsibilities in respect of Hermitage Engadine, so as to address significant conflicts which plainly affected the Receivers in respect of important areas of their responsibilities. That offer was only left open for acceptance for a very short time, until the late afternoon on that day; it was not accepted by CRD within that time; and the Defendants declined CRD’s request to extend the time for it to accept that offer. There were, however, subsequent without prejudice discussions between the parties and efforts to document a potential settlement.

In the absence of agreement then reached between the parties, on 26 March 2025, CRD sought to amend its Further Amended Originating Process and Points of Claim to seek the appointment of an SPR, on 27 March 2025, I granted leave for that amendment and ordered CRD pay the First to Fifth Defendants’ costs thrown away by the amendment on the ordinary basis. I also then limited the interlocutory relief previously ordered by Nixon J and, by consent and without admissions, ordered more limited relief in respect of the Receivers’ performance of the Conflicted Contract Functions and Proceedings Functions (as defined in the Second Further Amended Originating Process); made further orders for evidence and the preparation of an agreed list of the issues that remained in dispute; and listed the matter for further hearing on 1 April 2025, where the hearing had not completed within the three days allocated for it.

On 1 April 2025 I heard the parties’ closing submissions, reserved judgment and also reserved liberty to apply if there were significant developments between the parties resulting in any narrowing of issues in dispute. Perhaps assisted by the further clarification of the issues in closing submissions, the parties then agreed Short Minutes of Order, which gave judgment for DKC against Hermitage Engadine, with interest; declared that DKC’s appointment of the Receivers to the property of Hermitage Engadine on 7 March 2025 was valid; and provided for the appointment of the SPR, the powers which the SPR could exercise and his funding; and also set a process for the determination of the costs of the proceedings. I made those orders by consent on the afternoon of 1 April 2025.

The question as to the costs of the proceedings remain in dispute. Perhaps unsurprisingly, given the history of the proceedings, the costs applications were supported by voluminous evidence and lengthy submissions. The First to Fifth Defendants relied on an affidavit dated 4 April 2025 of their solicitor, Mr Whitbread, who referred to the 25 March offer; the subsequent discussions between the parties; the development of the proposed consent orders and the several stages of amendment of CRD’s pleadings. A voluminous exhibit to Mr Whitbread’s affidavit exhibited correspondence, Court documents and transcripts of the proceedings. CRD in turn read the affidavit dated 14 April 2025 of its solicitor, Mr Harrison, which referred to the commencement of the proceedings; the production of documents in the course of the proceedings; the 25 March offer; subsequent correspondence and without prejudice communications between the parties; and the orders circulated and made on 1 April 2025. The affidavit was also supported by a substantial exhibit.

The applicable principles are well-established. It is, of course, uncontroversial that s 98 of the Civil Procedure Act 2005 (NSW) (“CPA”) confers on the Court a wide discretion with respect to costs, and the Court has discretion to determine by whom, to whom and to what extent costs are to be paid, and costs will ordinarily 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, in accordance with r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”). A successful party in proceedings has a “reasonable expectation” of being awarded costs against an unsuccessful party, unless there is good reason for that presumption to be displaced: Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [22], [134]. In Commonwealth v Gretton [2008] NSWCA 117 at [121], Hodgson JA (with whom Mason P agreed) observed that:

Section 98(1)(c) of the CPA permits the Court to order costs on an ordinary or an indemnity basis. Rule 42.2 of the UCPR provides that, unless the Court orders otherwise or the rules otherwise provide, costs payable are to be assessed on an ordinary basis. Rule 42.5 deals with an order for costs on an indemnity basis, and I will address the applicable principles below.

The First to Fifth Defendants seek costs on alternative bases, which I address below. CRD responds that there should be no further order as to the costs of the proceedings, other than the costs orders made on 19 and 27 March 2025 (the latter including the order for costs thrown away in respect of the amendment against CRD) and an order for the costs of this costs application.

First, Mr Condon, with whom Mr Koch appears for the First to Fifth Defendants, submits that, by the time the proceedings took their final form (I interpolate, only on 27 March 2025), the Second, Fourth and Fifth Defendants ceased to be necessary parties to the proceedings; the proceedings were otherwise dismissed on 1 April 2025; and those parties are entitled to an order for costs under UCPR r 42.20.

In McNamara v San [2010] NSWSC 809 at [12], Hallen AsJ (as his Honour then was) summarised the principles applicable to this rule as including that:

That summary was cited with approval by Kunc J in Spatt v Benson [2019] NSWSC 1195 at [64] and I followed it in cases including Parlby v Blair [2013] NSWSC 100 at [13]ff, Australian Unity Funds Management Ltd v NorthWest Healthcare Australia RE Ltd [2021] NSWSC 1039 at [15] ff and Davis v Certain Lloyd’s Underwriters [2022] NSWSC 131 at 9[ff].

Mr Condon also refers to my observations in Re Cabramatta King Tea Pty Ltd [2022] NSWSC 462 at [5]- [10] and submits that:

Mr Bender, with whom Mr Hughes appears for CRD, submits, and I accept, that the order made on 2 April 2025 that the proceedings be “otherwise dismissed” was directed to formal closure of the proceedings, where the relief then sought by CRD involved the appointment of the SPR and would be ordered by consent, rather than the resolution of the proceedings as between CRD on the one hand and the Second, Fourth and Fifth Defendants, who had not then sought to distinguish their position from that of DKC, on the other. I would be inclined to think that, as a matter of substance, UCPR r 42.20 has no application in that situation.

Mr Bender also submits, and I accept, that the Receivers were necessary parties to the proceedings at all times, where an order was initially sought to remove them, and subsequently to appoint an SPR in a manner that would confine their powers. I also accept that DKC was a necessary or proper party to the proceedings, where the orders sought at all times would affect the exercise of the powers of the Receivers that it had appointed. I also accept Mr Bender’s submissions that the Fourth and Fifth Defendants were at least proper parties to the proceedings and it was not unreasonable for them to have been joined to the proceedings in the relevant circumstances, where they were unitholders in a closely-held entity to which the Receivers were appointed and to which the SPR would ultimately be appointed.

Even if UCPR r 42.20 applied here, it seems to me that it was here reasonable for CRD to commence these proceedings against, inter alia, the Second, Fourth and Fifth Defendants, and then reasonable to narrow CRD’s claim to focus on the appointment of the SPR. Even after the amendment, the Second, Fourth and Fifth Defendants were at least proper parties to the proceedings so far as they had significant legal and practical interest in whether an SRD should be appointed; notably, Mr Condon made no submission when the amendment was made that they had no further role in the proceedings or that they should then be excused; instead they apparently joined in the submissions made by DKC up to the point at which consent orders were made. There is no basis to treat the position the Second, Fourth and Fifth Defendants differently from that of DKC, with whom they shared common representation and a common position at all relevant times. These are sufficient reasons to displace the starting point as to costs under UCPR r 42.20.

Second, Mr Condon submits that CRD should pay the costs thrown away of the amendment permitted on 27 March 2025 on an indemnity basis and should otherwise pay the First to Fifth Defendants’ costs of the proceedings (including the Cross-Claim) on an indemnity basis. Mr Condon submits that the Defendants have incurred costs because of CRD’s “unreasonable conduct” and an award of indemnity costs is warranted having regard to the costs wasted by CRD’s multiple amendments to its claim and its suggested “abandonment” of all of its pleaded case and affidavits.

The applicable principles as to an order for indemnity costs are also well-established. Costs are awarded on an ordinary basis unless there are exceptional circumstances: Leichhardt Municipal Council v Green [2004] NSWCA 341. An order for indemnity costs is not made to punish an unsuccessful plaintiff for persisting with a case that fails, but to compensate a successful defendant fully for costs incurred, when the Court takes the view that it was unreasonable for the plaintiff to have subjected that party to the expenditure of costs: Hamod v New South Wales (2002) 188 ALR 659; [2002] FCAFC 97 at [20]. In Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) (2008) 65 ACSR 324; [2008] NSWSC 199, McDougall J observed (at [24]) that there must usually be some special or unusual feature to justify departure from the ordinary rule as to costs, and that delinquency is not necessary for an order for indemnity costs, but is relevant to whether it should be made. The relevant principles were also considered by the Court of Appeal in Cabport Pty Ltd v Marinchek (No 2) [2013] NSWCA 131 at [6], where the Court observed that an order for indemnity costs may be made where a party’s conduct in proceedings is plainly unreasonable or involves an element of delinquency, and by Bell CJ in Brown v Stables Perisher Management Pty Ltd (No 2) [2022] NSWSC 902. Mr Condon also refers to my summary of the principles applicable to an award of indemnity costs in Re Allscope Concrete & Pumping Pty Ltd (in liq) [2024] NSWSC 1680 at [5], in substantially the terms that I have set out above. He also gives examples of several circumstances in the case law in which orders for indemnity costs have been made.

Mr Condon also draws attention to Ghougassian v Fairfax Community Newspapers Pty Ltd [2015] NSWCA 307, and it seems to me that there is force in the observations of Emmett JA in that case (at [53]) as to the reason why indemnity costs should not automatically follow from a narrowing of arguments put in the course of a hearing:

I again note the reference to “bad arguments” is not applicable here, where the claims abandoned by CRD were not necessarily “bad arguments” without factual or legal merit, although the focus of the proceedings shifted to address the real practical difficulty of the conflict affecting the Receivers by the appointment of an SPR.

Mr Condon in turn emphasises Emmett JA’s further observation (at [57]) that:

At least three matters to which his Honour there referred are not present here. It is not apparent that CRD’s case was unwinnable, where it has not been determined, because the real issue of conflict affecting the Receivers has been addressed by the appointment of an SPR. It is not apparent that there were no prospects of success in that case, but only that the appointment of an SPR, as the parties ultimately agreed between themselves, was a more effective means to address the practical issue which existed. SRD’s change in approach is not “without explanation”, where the explanation is obvious. The advantages of the appointment of an SPR, with appropriate powers and funding, would have been apparent to all as the evidence and submissions continued at the hearing, and was addressed in the course of exchanges between Counsel and the Court.

Mr Condon also refers to Hermes Far Eastern Shining Pty Ltd v Potable Goldstrike Pty Ltd [2025] NSWSC 263, where Brereton J observed at [32] that:

That observation is also not applicable here, because, as I have pointed out above, there is no basis to think that CRD’s case was a “bad case” or “hopeless”, but only that the appointment of the SPR was a more straightforward and effective means of addressing the practical problems which existed in respect of conflicts affecting the Receivers. Second, I would also give substantial weight to the risk that parties will be discouraged from narrowing, refining or amending good as well as “bad” cases, and arguable as well as unarguable cases, in a manner that in fact promotes the just quick and cheap resolution of their resolution, if their doing so is too readily met with orders for indemnity costs against them.

Mr Condon addresses the conduct of the proceedings which I have reviewed above. I accept that, as Mr Condon points out, the Defendants were informed relatively late, on 24 March 2025, that no challenge was made to the validity of the Receiver’s appointment. Having said that, it is again not possible to say, and it is not clear that DKC seeks to say, that such a challenge could not have succeeded. The fact that it was not pursued is again consistent with refining the proceedings, in circumstances of urgency, to focus on the real issues in dispute. The evidence also indicates that the Defendants were advised of the change in that aspect of CRD’s case shortly after CRD and its legal advisers made the decision to narrow that case.

Mr Condon also submits that costs should be ordered in favour of the Defendants on an indemnity basis, because CRD had “abandon[ed]” much of its case and had “effectively capitulated”. I do not accept that submission. CRD, instead, shifted its focus from the case it originally put to an application for the appointment of an SRD, which would effectively address the real conflict of duty issues which affected the Receivers, and that promoted rather than undermined the just, quick and cheap resolution of the real issues in dispute. Whether CRD would have succeeded in the case that it originally put is not known, where that case has not been determined and should not be determined in a costs application, for the reasons identified by McHugh J in Lai Qin.

Mr Bender responds that:

Mr Bender also refers to the application of the principles in Lai Qin and submits that:

Mr Bender rightly points out that the Defendants did not respond to the allegations made by CRD of conflict of duty affecting the Receivers in its Points of Claim, or initially propose the appointment of an SPR in their Defence. To the contrary, the Defendants’ position was initially that they did not admit the fact of that conflict, which underpins the consent position that was ultimately reached as to the appointment of the SPR. Their offer of the appointment of an SPR was only subsequently made by the 25 March offer and the Points of Defence to CRD’s Amended Points of Claim filed on 27 March 2025 then accepted that an SPR should be appointed. Mr Bender also submits, and I accept, that the 25 March offer was not reasonably capable of acceptance where, inter alia, it significantly limited the funding available to the SPR and would have thereby undermined the utility of his or her appointment. Mr Bender also submits, and I accept, that an assessment of the amendments made in the proceedings, to narrow and focus issues, should also recognise that the proceedings involved issues of real commercial urgency and that the hearing proceedings from its commencement to final orders in less than a month. I accept that, as a practical matter, parties are placed under increased pressure and have less leisure to reflect on the claims made in proceedings, where those proceedings are conducted with urgency.

I do not accept that the basis for an indemnity costs order is established. First, the usual order for costs thrown away by the relevant amendments was previously made, and that order is in the ordinary course sufficient to protect the Defendants against the costs of the amendment. Second, it seems to me that the amendment made by CRD to seek the appointment of the SPR promoted the just, quick and cheap resolution of the real issues in dispute, so far as there was, as all parties ultimately accepted, a real conflict of duty and duty, or duty and interest, affecting the Receivers in dealing with significant contractual matters between Hermitage Engadine and DKC. That conflict could arguably have been addressed, as CRD originally sought to do, by CRD obtaining an order permitting it to pay out the financing on which DKC relied for the appointment of the Receivers; but it could equally, and more effectively, be addressed by the appointment of an SPR to deal with the matters as to which the Receivers were conflicted. That possibility was recognised in submissions during the hearing; it was recognised by the 25 March offer, although that offer was undermined by a limit to the costs that could be incurred by the SPR that would have significantly undermined the performance of its role; and it was ultimately recognised by the amendment made by CRD of its claims and the consent orders which followed that amendment.

I recognise that Mr Condon also puts that CRD could have put a narrower case from the commencement of the hearing, and that hearing would ultimately have been shorter and the affidavit evidence and tendered documents would have been less extensive. Equally, of course, the Defendants could have made the offer of the appointment of an SPR before the commencement of the proceedings and, when they made the 25 March offer, they could have done so in a way that allowed funding for the SPR, rather than propose the appointment of an SPR which would likely not be sufficiently funded for its role. It seems to me that, here, the amendment made by CRD was made reasonably rather than unreasonably, in an effort to promote the just, quick and cheap resolution of the real issues in the proceedings, and that is inconsistent with the order for indemnity costs that the Defendants seek. The 25 March offer, or CRD’s not accepting it, does not support an order for indemnity costs, where it was undermined by the lack of adequate funding for the SPR to which I have referred above, and by the very short time that was allowed for its acceptance and the refusal of an extension of that time. I acknowledge that “without prejudice” settlement discussions followed, but they do not take matters further where their content is properly not disclosed.

Alternatively, Mr Condon submits that CRD should otherwise pay the First to Fifth Defendants’ costs of the proceedings (including the Cross-Claim) on an indemnity or alternatively an ordinary basis. The basis for that order is not established where the matters to which I have referred above have the consequence that the order for costs thrown away by the amendment, made on an ordinary basis, sufficiently addresses the several Defendants’ position.

CRD in turn seeks the costs of this costs application against the Defendants, also on an indemnity basis. I had foreshadowed, in the course of submissions, the possibility that I might make such an order, where there seems to me to be a developing and unfortunate trend to making applications for costs where proceedings have been resolved by consent orders without a determination on the merits and the exceptions in Lai Qin are not satisfied, and making applications for indemnity costs where there is little or no evidence of unreasonable conduct that would support the application. On balance, I have concluded that the several Defendants’ application for indemnity costs was unsuccessful, rather than unreasonably made, and does not support an order for indemnity costs against them. It also seems to me that, where I have made no further order as to the costs of the proceedings generally, justice will here be served by my making no order as to the costs of the costs application.

For these reasons, I make the following order: