Macquarie International Health Clinic Pty Ltd v Sydney Local Health District; Sydney Local Health District v Macquarie Health Corporation Ltd (No 12)

The Court delivered its principal judgment on damages on 10 November 2016: Macquarie International Health Clinic Pty Ltd v Sydney Local Health District; Sydney Local Health District v Macquarie Health Corporation Ltd (No 10) [2016] NSWSC 1587 (the “Principal Judgment”). Defined terms in the Principal Judgment have the same meaning in these reasons. These reasons must be read with the Principal Judgment.

In addition to giving reasons for some interlocutory decisions, this judgment is intended to resolve the remaining questions regarding the calculation for Macquarie’s damages in relation to the Hospital Site, the parties having informed the Court that the calculations regarding the Car Park Site have been able to be done to give effect to earlier reasons of the Court. These reasons also resolve Macquarie’s applications in relation to costs and a recent application to reopen by the Health District.

The Court’s conclusions may be summarised as:

It is necessary to set out the procedural history of what followed after delivery of the Principal Judgment, if only to explain why the hope of the Court, and no doubt shared by the parties, that the remaining issues could be resolved promptly in one further hearing proved to be unfounded. Without intending to be critical of anyone, the subsequent history was consistent with what had gone before, namely that new issues seemed to arise at every turn.

On 9 December 2016 a directions hearing was held after the parties had an opportunity to review the Principal Judgment. Directions were made for the parties and their experts to produce reports and otherwise endeavour to identify what issues remained outstanding for the Court’s determination. The matter was fixed for further hearing in early 2017.

On 14 February 2017 a hearing was conducted with the various experts in relation to the final calculation of damages. Five reports had been produced. The outstanding issues in relation to the Car Park Site, such as they were, were resolved with one exception. Similarly, considerable progress was able to be made by the Court making some determinations, there and then, of issues which the parties raised in relation to the Hospital Site. I indicated at the time that I did not propose to prepare separate judgments on those issues, but gave my reasons issue by issue on the transcript. It was also at this hearing that the Court was informed that the Health District would not be pressing further its Amended Statement of Claim in proceedings 2010/90340 (the “Guarantee and Indemnity Proceedings”), what was in effect its cross-claim against Macquarie and referred to as such in paragraph [646(4)] of the Principal Judgment.

While the Court was able to resolve a number of consequential issues raised by the parties, it became apparent that four additional issues would require further evidence and argument.

A further hearing was held on 9, 10 and 11 May 2017 in relation to the four additional issues. I delivered my reasons in relation to those four additional issues on 18 September 2017 (Macquarie International Health Clinic Pty Ltd v Sydney Local Health District; Sydney Local Health District v Macquarie Health Corporation Ltd (No 11) [2017] NSWSC 1249). Having answered those questions, it was certainly the Court’s expectation that the parties would be able to make the final damages calculations, such that the only outstanding issue would be costs. I was informed at that time that the calculation in relation to damages for the Car Park Site had been done (presumably subject to the Court answering the additional issues to the extent they related to the Car Park Site) and that one of Macquarie’s experts was standing by to complete the damages calculation in relation to the Hospital Site on the basis of the answers provided in the Court’s latest judgment. I listed the proceedings for the hearing of any costs applications on 20 October 2017.

The proceedings were relisted on 4 October 2017 on the application of the Health District. Among other things, Macquarie had informed the Health District that it (Macquarie) wished to make an application in relation to costs incurred between the Court of Appeal’s decision and the commencement of the damages hearing and that Macquarie also wished to make an application for a gross sum costs order. It also became apparent that the Court may be required to resolve some remaining issues between the experts in relation to the damages calculation for the Hospital Site. Finally, the parties accepted that at least identifying the final parameters of the damages calculation could impact upon the costs arguments.

Accordingly, the Court decided to split out any final damages hearing from the costs hearing. The date of 20 October 2017 that had already been fixed was converted into an occasion on which the Court would hear any arguments in relation to the final damages calculations for the Hospital Site. Directions were also made to prepare for a hearing of any costs applications on 16 and 17 November 2017.

On 20 October 2017 the Court received further evidence from the parties’ experts in relation to the damages calculation for the Hospital Site. Issues concerning the bed day rate and grossing up for taxation were able to be clarified and resolved between the parties during the course of argument without the need for formal determination by the Court. This left a debate about the methodology for calculating the mesne profits in relation to the Hospital Site. In the course of that argument, the Court requested that an additional calculation be done. Directions were made for the parties to provide further calculations and any submissions by 1 November 2017.

The further submissions referred to in the preceding paragraph resulted in a further disagreement about the application of the methodology that had apparently been agreed by the parties. Directions were made to enable that aspect of the matter to be dealt with as part of the forthcoming costs hearing.

On 16 and 17 November 2017 the Court heard additional argument in relation to the damages calculation and the first part of the argument in relation to costs. Over the Health District’s objection, the Court admitted the evidence of Macquarie’s costs expert, Mr Dudman. Reasons for that are given at paragraph [142] to [154] below. As a result of the admission of Mr Dudman’s evidence and the course of further argument, it became apparent that it was in the interests of the just, quick and cheap resolution of the costs dispute (to the extent that was going to be possible) that further work would need to be undertaken by the parties’ costs experts. Directions were made in relation to that and arrangements were made for the Court to sit on the first day of the vacation, 18 December 2017. The parties’ arguments in relation to Macquarie’s costs application were concluded on that day.

The proceedings were to take yet another, unexpected turn.

On 6 May 2019 (when, unbeknown to the parties, delivery of judgment in relation to the various outstanding issues was imminent) the solicitor for the Health District sought to have the proceedings relisted. In a subsequent letter that was provided to my associate, the reasons for that relisting were explained by the Health District’s solicitors:

The proceedings were relisted on 9 May 2019. On that occasion, Senior Counsel for the Health District handed up a document dated 9 May 2019 entitled “Outline of Submissions of the Defendant”, which included (emphasis added):

The emphasised proposition advanced in paragraph 2(a) of that outline was referred to by the parties, and now by me, as the “Threshold Issue”. I made directions for the filing of a notice of motion, evidence and submissions and fixed that motion for hearing on 21 June 2019.

In accordance with the directions I had made, the Health District filed a notice of motion on 13 May 2019 which included these prayers for relief:

On the hearing of the motion, Mr N Hutley of Senior Counsel appeared for Macquarie with Mr S Phillips and Mr S Kanagaratnam of Counsel. Mr D L Williams of Senior Counsel appeared with Mr B Kaplan of Counsel for the Health District.

Before turning to the parties’ arguments in relation to this application, it is helpful to recall what the Court decided in the Principal Judgment.

The effect of the Health District’s submission in the present application is that the description of the Health District’s case in paragraph [179] of the Principal Judgment reproduced above was at least incomplete because it failed to acknowledge or deal with the Threshold Issue as a logically anterior question. The Health District’s application requires the Court to answer two questions:

The Health District relied on an affidavit from its current solicitor on the record, Ms Karen Ingram of Clayton Utz. What follows was not in dispute.

Clayton Utz had been instructed in mid-2015 by the Health District in relation to issues concerning the private hospital that was to be built by Macquarie. However, Clayton Utz was not retained in relation to the Damages Enquiry before me. During the Damages Enquiry, up to and including a short time after delivery of the Principal Judgment, the Health District was represented by Bolzan & Dimitri Lawyers and Mr G Burton of Senior Counsel with Mr P Bruckner of Counsel.

Shortly after delivery of the Principal Judgment on 10 November 2016, Clayton Utz received instructions from the Health District to take over the conduct of the Damages Enquiry from Bolzan & Dimitri Lawyers. New counsel were also briefed, including Mr I Jackman of Senior Counsel.

At the time of delivering the Principal Judgment, a further directions hearing was fixed for 9 December 2016. On that occasion Mr Jackman SC was unavailable and Mr J Stoljar of Senior Counsel was briefed on short notice to appear for the Health District at that directions hearing. Mr Stoljar SC has had no further involvement with the matter.

Further changes occurred to the Health District’s team of counsel in connection with the various hearings that then took place during 2017.

Ms Ingram’s evidence about the events which led to the present application was:

Macquarie did not rely on any affidavit evidence in opposition to the Health District’s application. However, Macquarie did submit that it was highly relevant to the determination of the application that the Health District had not obtained evidence from any of its legal representatives who had had the actual carriage of the Damages Enquiry hearing on the question of whether the Threshold Issue had been advanced or what consideration, if any, had even been given to the Threshold Issue by those acting for the Health District at the time.

Each party provided to the Court a lever arch folder of extracts from the pleadings, submissions and transcript of the Damages Enquiry to which they made reference in support of their respective contentions.

The Health District’s submissions may be summarised as:

Macquarie’s submissions may be summarised as:

For the following reasons, the Court concludes that the Threshold Issue was never raised. Moreover, in the exercise of the Court’s discretion, I decline to grant the Health District leave to reopen the hearing of the Damages Enquiry to enable the Threshold Issue to be argued. It is no less a reopening of the hearing even if the Health District does not propose to adduce additional evidence and says all its arguments can be found in the various submissions already before the Court.

Before turning to an objective consideration of the Court record in these proceedings, it is necessary to make some subjective observations to dispose of the Health District’s submission or concern that the Court may have thought that the Threshold Issue had been abandoned. Insofar as the subjective awareness of the trial judge may be relevant, I record in the interests of candour that I never regarded the Threshold Issue as having been abandoned because, subjectively speaking, I never understood it to be an argument that was raised by the Health District.

That conclusion, of course, does not end the matter because it is necessary for me to consider the objective record of the hearing against the possibility that I had failed to appreciate, or had overlooked, the Threshold Issue notwithstanding that as a matter of objective fact it had been raised for determination before me. I will now set out the eight reasons why, as an objective matter, I conclude that the Threshold Issue was never raised.

First, Mr Williams SC properly conceded that nowhere in any of the written materials or transcript had the Threshold Issue ever been put to the Court in the terms, or with the potentially dispositive significance, for which the Health District now contended. He accepted that the words “threshold issue” had never been put to the Court, nor had the submission which is now described as the Threshold Issue ever been put as something that had to be decided separately and before the Court moved on to some other question.

Second, the Principal Judgment concluded:

In delivering the judgment on 10 November 2016, on which occasion Mr Burton SC appeared for the Health District and Mr Phillips of Counsel appeared for Macquarie, the following exchange occurred (emphasis added):

Both the conclusion of the Principal Judgment and what occurred at the time of its delivery support Macquarie’s submission that the Court made it clear that if any party thought something had not been properly dealt with in the Principal Judgment, they would be heard in relation to that question.

Neither at the directions hearing which next followed the delivery of the Judgment, nor at any of the subsequent hearings during 2017, did the Health District suggest that the Threshold Issue had been raised and not dealt with. If the Threshold Issue was as important and as obvious as the Health District now contends, I have absolutely no doubt that in litigation as hard fought as this, such a fundamental omission would have been raised. Quite properly, the Health District has not expressly raised as an explanation its change of legal personnel after the delivery of the Principal Judgment to explain its failure to raise the concerns which it now has in relation to the Threshold Issue. Even if it had, given the skill and experience of its new legal team, I would have given no weight to any such attempted explanation.

Third, nowhere in any of the written materials or parties’ submission is the Threshold Issue expressed as a threshold or preliminary point that was capable of disposing of the case. I accept Mr Hutley SC’s submission which I have set out in paragraph [31] above. I also accept the submission he made that if the Threshold Issue was being put in the way for which the Health District now contends, it is inconceivable that someone (including the Court itself) would not have given some attention to the possibility of a preliminary issue being posed, even if only to be disregarded.

Fourth, the Health District has not offered any explanation why it has not called any of its former legal advisers who actually had the conduct of the matter up to and including the time of the Principal Judgment to give evidence in support of its contention that the Threshold Issue was raised. While not in and of itself determinative, the fact that the Health District has not filed any such evidence or offered any explanation fortifies me in the overall conclusion which I have reached.

Fifth, during the course of final submissions, the Court sought clarification from the parties in relation to the methodology for calculating mesne profits. In order to provide context, I set out more than the critical passages (which are emphasised):

By the time of final submissions, both Mr Dubler SC and Mr Burton SC had been in this case for many years, including the original liability proceedings heard by Nicholas J. To my observation, and with great respect, their knowledge of the history of these proceedings and their clients’ cases was intimate and encyclopaedic. I accept Macquarie’s submission that, for present purposes, it is highly significant that the qualifications expressed by Mr Burton SC to my question made no reference to the Threshold Issue. I have no doubt that if the Threshold Issue was being relied upon in the way that the Health District now says it was, Mr Burton SC would either himself or after reminder from one of his team, have included in the qualifications which he gave to my answer a reminder that there was an anterior and potentially dispositive issue about which the parties were in fierce disagreement.

Sixth, Schedule A of the Principal Judgment sets out the issues identified by the parties for determination, a framework which they prepared at my request to enable the orderly disposition of the Court’s reasons. The preliminary legal issues identified were:

Had the Threshold Issue been one that was being raised in the way for which now the Health District contends, it would have been an obvious question to include in the preliminary legal issues. It was not included.

Seventh, I accept Macquarie’s submission that Macquarie’s outline of the Health District’s case (reproduced in paragraph [30(5)] above) correctly identifies that the Health District’s reliance on existing state and usage was an ultimate fallback position which became relevant only if the Court accepted that the contractual rights represented by the Hospital Lease had no value because of Macquarie’s unwillingness or inability to build the private hospital. Macquarie’s outline not only does not support, but also contradicts, the submission that the Health District had raised the Threshold Issue.

Finally, I accept Macquarie’s submission that the various pleadings, submissions and transcript passages upon which the Health District relies do not, in context, support the proposition that the Threshold Issue was raised during the hearing of the Damages Enquiry that gave rise to the Principal Judgment. The context demonstrates the opposite. I will give some examples.

The Health District submitted that it had pleaded the Threshold Issue in paragraph 7(a) of its points of response.

In Macquarie’s Fourth Further Amended Points of Claim re Damages Inquiry, Macquarie said:

By its Points of Response to Fourth Further Amended Points of Claim re Damages Inquiry, the Health District responded (emphasis added):

Even taken in isolation, I do not agree that, read fairly, paragraph 7(a) of the Health District’s response raises the Threshold Issue. In my respectful view, it also does not do so when read in context, particularly when read with paragraph 7(c) I understand from those pleadings, and I am satisfied that it was the case the Health District ran, that for Macquarie’s claim to be mesne profits known to law, it would have to take into account the various matters set out in paragraph 7(c). This was the notification of the Health District’s case that when all the relevant contingencies were taken into account, there was no loss because Macquarie would not or could not have built the private hospital.

Next, there is a certain irony that the only point at which an argument along the lines of the Threshold Issue was raised with the plaintiff appears to have been by the Court arguendo in relation to the valuation of the Hospital Lease (T5015:4-T5016:38):

Nowhere does the transcript record that line of argument was taken up by Mr Burton SC for the Health District to the effect that the Court had there put what was a fundamental and anterior argument being raised by the Health District.

The Health District also relied upon the fact that in paragraph 21.1 of its closing submissions conspectus it said:

The Health District submitted that, thereby, the Threshold Issue was “squarely put”. This part of the Health District’s closing submissions conspectus repeats or paraphrases the pleadings set out in paragraph [50] above. For the same reasons given above, I am not satisfied that the formalistic recitation of the pleading raises the Threshold Issue “squarely” or otherwise. Taken as a whole, the closing submissions conspectus provides quite a different picture. It commences with what are described as “fundamental considerations” which include (emphasis added):

After summarising the parties’ positions, the document concludes:

It then goes on to a section headed “Legal Principles” which commences by referring back to the fundamental considerations:

The subsequent analysis of the authorities includes (emphasis added):

Only at the conclusion of its legal analysis (conformably with the approach to the argument as summarised by Macquarie set out in paragraph [30(5)] above) does the conspectus record reliance on the Health District’s actual usage of the Hospital Site (emphasis added):

Nowhere in the closing submissions conspectus is there anything expressly or implicitly to the effect of the Threshold Issue. The value of the existing form and use of the Hospital Site is relied on at the end of the Health District’s chain of reasoning and not at the forefront as an anterior and potentially dispositive question.

The Health District also drew attention to paragraphs [35] and [36] of its written submissions dated 30 June 2015 concerning the calculation of mesne profits. However, again, I accept Macquarie’s submission that those paragraphs need to be read in context. They are part of a document which includes (emphasis added):

Then paragraphs [35] and [36] need to be read in their specific context:

I make four observations about the passage just quoted:

Finally, by way of example, the Health District submitted that the Threshold Issue had not only not been abandoned, but had been repeated in oral argument on day 96, referring to T5320 at lines 45-50. As with the previous examples, the context does not support that submission. The reference to “existing state or use” again comes up only at the end of the reasoning and predicated an acceptance of the proposition that Macquarie’s contractual rights and obligations were valueless or illusory.

To demonstrate this conclusion, I will set out Mr Burton SC’s submissions at T5320:16-T5321:4. In doing so, I note that the transcript has incorrectly and ungrammatically divided what was, to my understanding, one sentence commencing at T5320:40, being “You can’t take a lesser value for the plaintiff than the market rental if there is some value, can’t take the actual gain to the defendant if it’s less than the market rental, but if there’s just nothing in terms of the value one looks at the asset in its existing state in usage, which as we make the point it has been offered at that.” The total passage to which I refer is (emphasis added):

By reason of the matters referred to in paragraphs [35] to [65] above, the Court concludes that the Threshold Issue was not argued or put into controversy by the Health District at the hearing which gave rise to the Principal Judgment. At that hearing, and for years before as I have already observed, the Health District had been represented by a highly competent legal team with a deep knowledge of the matter and the issues in dispute. I am satisfied that what has occurred is that the original team has now been replaced by another highly competent and dedicated team of lawyers who have spent many months going through the vast record of these proceedings with a fine tooth comb. In making that observation, I intend absolutely no criticism of the Health District or its new team of lawyers. It is understandable that they should do so in anticipation of the dispute returning again to the Court of Appeal.

The question then becomes whether, against that background, the Court should now allow the Threshold Issue to be argued. I do not propose to grant that leave. The evidence does not permit me to draw any inference as to why the Threshold Issue was not run or whether it was even thought about before or at the time of the hearing which gave rise to the Principal Judgment. However, the fact remains that the Court has concluded that the Threshold Issue was not presented to the Court for determination. To adopt the language of Mason CJ in Autodesk Inc (that passage being equally applicable to this case notwithstanding it concerned the powers of the High Court as a final court of appeal) (see paragraph [31(1)] above), the Health District has failed to demonstrate that the Court “proceeded according to some misapprehension of the facts or the relevant law and that this misapprehension cannot be attributed solely to the neglect or default of the party seeking the rehearing”. I am satisfied by reference to the objective Court record that there was no relevant misapprehension and to the extent that the Threshold Issue was not argued at the hearing, that was solely attributable to the Health District and its former legal representatives, whether it be through neglect, default or forensic decision (which of these logical possibilities it might be the Court is not in a position to determine).

I accept Macquarie’s submission that to permit reopening of the Damages Enquiry hearing to allow the Threshold Issue to be ventilated would be an archetypal example of allowing an unsuccessful litigant an opportunity to reargue their case by a back door method. Issues arising from the Principal Judgment took a further year to argue and the complexities of those arguments were to be resolved in a judgment that was imminent at the time the Health District brought this further application.

Even if the Health District were to adhere to its position that all of its arguments in support of the Threshold Issue are to be found in existing material, Macquarie would be entitled to prepare and present submissions tailored to meet an argument which the Court has found it had no reason to address during the earlier hearing. The Court would also require the assistance of oral argument in addition to written submissions. As matters stand, I have very few available dates left for a hearing this year. While arrangements could undoubtedly be made for a hearing to be held towards the end of this year, final judgement would be further delayed into next year. All of those considerations amount to prejudice to Macquarie which, in my respectful opinion, far outweighs the prejudice to the Health District of not being permitted to raise the Threshold Issue.

In any event, I have reviewed those parts of the submissions and transcripts which the Health District submits represent the totality of what it wished the Court to take into account were it to consider the Threshold Issue. Because it appears inevitable that this matter will go further, I therefore briefly record my conclusion that, if it had been necessary for me to decide the question, I would have decided the Threshold Issue against the Health District. That result is at least implicit in the conclusion I reached in relation to the application of the user principle as set out in the Principal Judgement. As I have observed in paragraph [63(3)] above, the Health District’s own submission acknowledged the fact that there were examples in the authorities of mesne profits being calculated by reference to contractual entitlements attached to the land or chattels that had been subject to trespass or detinue.

I respectfully adhere to what I said in paragraph [181] of the Principal Judgment, quoting Allsop P in Bunnings, that the law of mesne profits was to be applied in a case such as the present by reference to the “rules of compensatory damages sensibly and flexibly applied”. The cases to which I refer in the Principal Judgment deal with assets as diverse as portable theatrical switchboards, hotel rooms and storage pallets. At the level of fundamental principle, those cases demonstrate that the user principle will be applied to determine a price or hiring charge to compensate a plaintiff who has been wrongly deprived of an asset which has as one of its existing qualities a value referable to the asset’s ability to generate economic gain for that plaintiff.

As Allsop P said in Bunnings (at [177]), “if a property right has been invaded by wrongful user, the law should and does provide a remedy for the wrong, compensatory in character in the broad sense, focussing on the interference with the right in question” (emphasis added). Macquarie’s rights in this case included not only a right to occupy the Hospital Site, but also a right and obligation to build the private hospital that was inextricably bound up in Macquarie’s rights as a tenant because it was the raison d’être for Macquarie’s occupation. In my respectful opinion, it would not be sensible, flexible or realistic to ignore that in the present case the Health District’s trespass did not just exclude Macquarie from a piece of land that was going to sit there doing nothing, but in fact excluded Macquarie for 15 years from a right to occupy land which carried with it contractual rights and obligations to exploit that land for Macquarie’s economic benefit for 103 years. Just as CHEP was “entitled to be compensated according to law for the wrongful use and detention of its pallets, as potentially profit earning chattels owned by it and to which it had the immediate right to possession” (Bunnings at [169]), so too was the Hospital Site a “potentially profit earning” asset leased by Macquarie and to which it had the immediate right to possession that was negated by the Health District’s 15 year trespass.

Among the orders which I will invite the parties to bring in to give effect to the various matters dealt with in these reasons, there will be orders dismissing the Health District’s motion dated 13 May 2019 and ordering the Health District to pay Macquarie’s costs of and incidental to that motion and of the relisting of the proceedings on 9 May 2019. Those costs orders are separate from and unrelated to any other costs orders that will be made to give effect to other parts of these reasons.

By the end of the further hearings regarding the calculation of Macquarie’s damages in relation to the Hospital Site, the Court was left with three possible outcomes (inclusive of interest up to October 2017 and which I will round for convenience): $52.6 million, $59.8 million or $70.0 million. Before giving reasons in relation to which of those outcomes the Court considers is the correct assessment, I will set out the process of hearings which gave rise to those figures and give reasons for some decisions which had to be made as a part of that process.

The starting point must be when the Court was informed that it was common ground that the method of calculating mesne profits in relation to the Hospital Lease was what Mr Palassis described as a methodology akin to a Residual Land Value assessment. That exchange is set out in paragraph [42] above. As will be apparent from the first part of these reasons in relation to the Health District’s most recent application, the matter was proceeding on the basis that the value of Macquarie’s exclusion from the Hospital Site was to be determined by reference to its rights under the Hospital Lease.

Having established what was said to be the methodology as common ground, at that stage there was still dispute between the parties as to a number of the inputs to be applied to that methodology and the period of the lease to be valued. The application of the methodology was the subject of further submissions (T5035:11 – T5036.24) (emphasis added):

Insofar as Mr Palassis’ methodology is concerned, the Court was referred to Mr Palassis’ report of 9 April 2015, which included (at INQ-BD-17174):

I should also note that during the course of submissions, Macquarie disavowed reliance on option 3(a) in Mr Palassis’ methodology.

In the Principal Judgement, the Court recorded its understanding of the position between the parties:

As will be apparent from what follows, paragraph [544] became a considerable source of contention. Having had the benefit of the parties’ various submissions and a close review of the evidence, it is clear that the chapeau to the summary in paragraph [544] was not as well expressed as it should have been. Mr Palassis was not the author of the summary, which reflected the Court’s understanding of his methodology based primarily on his report and the method as explicated by Macquarie’s Senior Counsel.

Curiously, in the debates which followed about methodology, neither party sought to explain the particulars of the methodology that had apparently been agreed as common ground. Nor, in relation to this issue, did either party take up the Court’s offer, made more than once and including in paragraph [545], to make submissions if it were thought that the Court had misunderstood something amid the large number of issues that were argued. It was not until the hearing on 13 November 2017 that Mr Williams of Senior Counsel submitted in terms that paragraph [544] was not Mr Palassis’ summary. At the end of the day, the attribution of the summary is not relevant to the outcome. The experts ultimately agreed on the appropriateness of the steps in paragraph [544(1)-(5)]. The question became whether it was necessary to take the step in paragraph [544(6)] to achieve a just assessment and, as the further hearings took place, the Court’s concern was to ensure procedural fairness to the parties to ensure their respective positions on that question were able to be properly argued.

Directions were made on 9 December 2016 for the damages calculations to be done in relation to the Car Park Site and the Hospital Site and for areas of disagreement to be identified. On that occasion Mr Stoljar of Senior Counsel appeared with Mr Elliott of Counsel as part of the new legal team for the Health District. Among the issues raised was paragraph [544] of the Principal Judgment and I made clear (at T9:9-13) that the Health District was not shut out from making further submissions in relation to it.

When the matter returned to Court on 14 February 2017, the experts had performed their calculations of the damages, said to be in accordance with the Principal Judgment but still with some differences of interpretation in relation to input and methods. Mr Coleman, in his report for Macquarie dated 20 December 2016, calculated the value of lost mesne profits of $79.5 million with Court interest of $53.5 million totalling $133 million. Mr Gower, for the Health District, had on instructions prepared two alternative calculations, being “Alternative A” and “Alternative B”. Mr Gower’s Alternative A included using three different discount rates to give damages (including interest) in relation to the Hospital Site of between $3.8 million to $11.4 million (as at 31 December 2016 and inclusive of interest). His other figure under Alternative B gave a result of $15.2 million.

In their joint accounting expert report of 8 February 2017, Messrs Coleman and Gower explained the differences in their position:

Mr Coleman’s Annexure A statement to the joint expert report set out four major areas of disagreement, one of which was:

The respective positions were also set out in their joint expert report in this way:

At the hearing on 14 February 2017, the experts including Messrs Palassis, Gower and Coleman were all present. The question of the discounting under the methodology in paragraph [544] of the Principal Judgment was dealt with as one of the list of issues raised in the joint accounting expert report (T36:39-T40:24):

Further progress regarding the calculation of the damages in relation to the Hospital Site had to abide the hearing which took place on 9, 10 and 11 May 2017 and the determination of two further specific issues. Judgment in relation to those issues was delivered on 18 September 2017. On that occasion, a hope was expressed that the final damages calculations could be submitted to the Court and the costs argument was listed for hearing on 20 October 2017.

The matter was relisted on 4 October 2017 at the request of the Health District in relation to the nature of the costs applications foreshadowed by Macquarie. At that hearing, the Court was informed that Macquarie’s expert had provided a damages calculation for the Hospital Site to the Health District and that there were “at least three problems with it” as far as the Health District was concerned. It was agreed that any remaining issues would be dealt with on the next occasion with the relevant experts present. The Court made directions for the exchange of any evidence and submissions on any remaining issues.

For the purposes of the hearing on 20 October 2017, Macquarie relied on further evidence from Mr Coleman which relevantly gave a loss including interest calculated up to 18 September 2017 of $70 million.

A new expert, Mr Owain Stone, of KordaMentha Forensic, had stepped into the role previously occupied by Mr Gower as the Health District’s expert on the question of the damages calculation. Mr Stone disputed the commerciality and reasonableness of Mr Coleman’s calculation for reasons to which I will shortly refer. His calculation of damages was premised upon his opinion that it was necessary to perform the further discounting referred to in paragraph [544(6)] of the Principal Judgment as an additional step to arrive at the correct calculation. Mr Stone’s calculation on that basis gave a damages figure (inclusive of interest) of $52.6 million.

Macquarie challenged this part of Mr Stone’s report as being an impermissible attempt to reopen the methodology question which it submitted had been resolved at the hearing on 14 February 2017. Macquarie argued that Mr Stone was attempting to raise again an argument which had been raised in February by Mr Gower and rejected by the Court. In support of that proposition Macquarie’s written submissions cited this portion of the transcript, which I reproduce again for convenience (T39:39-40:24):

At the outset of the hearing on 20 October 2017 I raised with Mr Kanagaratnam of Counsel, then appearing for Macquarie, that the extract which he had cited in his submissions appeared to be directed to the question of interest and that therefore I was not certain that it stood in the way of considering Mr Stone’s objections. As the hearing developed, this issue was not further pressed by Macquarie as a basis to resist considering Mr Stone’s opinion about the need to perform, as an additional step, the calculation referred to in paragraph [544(6)] of the Principal Judgment.

For reasons which I will set out in the next section of this judgment, during the course of the hearing on 20 October 2017 and the colloquy between the experts, counsel and the Bench, I came to the view that Mr Stone’s approach was to be preferred to Mr Coleman’s. However, before coming to a final decision on quantum, I asked Mr Stone to perform an additional calculation which ultimately produced a damages figure of $59.8 million (inclusive of interest). Directions were made for that to be done and an opportunity afforded to the parties to make submissions as to which of Mr Stone’s calculations should be preferred.

Macquarie’s costs applications had been listed for hearing on 16 and 17 November 2017. In practical terms some shorter part of that hearing was going to be given over to any final submissions on the damages question. However, the intended scope of that hearing took a slightly different turn when the matter was relisted on 13 November 2017. This was necessitated because, in addition to the submissions for which the Court had made directions, what was said to be an additional, unprompted submission from Mr Coleman dated 27 October 2017 had been served. This additional submission sought, as at least as the Health District perceived it, to agitate the argument in favour of Mr Coleman’s damages figure of $70 million.

Mr Williams SC submitted that because the Court had eliminated Mr Coleman’s approach at the hearing on 20 October 2017, the question ought not to be allowed to be reopened and Mr Coleman’s latest report should not be received insofar as it propounded the $70 million figure. In response, Mr Kanagaratnam submitted that his client had not resiled from the fundamental position it had sought to advance at the October hearing and that the question had been resolved at the hearing in February in favour of not applying, as a separate step, paragraph [544(6)] of the Principal Judgment.

After hearing the parties, I came to the view that in the interests of procedural fairness and doing justice to the parties, to the extent it was necessary to reopen the question of the methodology as to the calculation of damages in relation to the Hospital Site, that issue should be reopened so as to permit both parties an orderly opportunity to advocate for their respective calculations which were now being advanced. I did so for these reasons:

The final argument in relation to which of the damages calculations the Court should adopt took place on 17 November 2017. Mr Stone and Mr Coleman were present and Mr Coleman was asked a number of questions by Mr Williams SC. The parties then addressed the Court by reference to the damages reports and submissions that had been filed up to that point.

Macquarie contended that the correct approach was Mr Coleman’s, giving a figure of $70 million (inclusive of interest). It submitted that Mr Stone’s figure of $59 million (produced at the request of the Court) was “really a bit of a strange beast” which had “the virtue of being between 52 [million] and 70 [million] but not a lot of rationality otherwise” (T5975:3-5). Nevertheless, Macquarie submitted the $59 million figure should be adopted by the Court if the Court did not accept Mr Coleman’s calculation.

The Health District’s position was that Macquarie’s attempt to argue again for the $70 million figure should not be allowed and that it was a matter for the Court to determine which of Mr Stone’s figures should be adopted, having regard to both approaches being available and informed by the reasonableness of the overall result.

I will next set out the three options for the damages calculation in relation to the Hospital Site which were ultimately presented to the Court. As the argument proceeded by reference to paragraph [544] of the Principal Judgment, I repeat that again at this point for convenience:

By the time of the final two hearings devoted to the question of damages, Mr Coleman and Mr Stone were agreed both as to the applicability of the methodology and the mathematical outcomes of sub-paragraphs [544(1)-(5)] of the Principal Judgment. This meant that the experts were agreed that the net present value of the Hospital Site by reason of the construction and operation of the hypothetical private hospital was a positive figure of $35.356 million as at the commencement of the trespass on 17 March 2000. They also agreed on the conversion of that figure into an annual post tax notional rental which for the first year was $2.187 million. This was increased by the agreed inflation rate of 2.5% annually for the 15 years of the trespass giving a cumulative notional rental for the period $41.203 million.

I have taken all of the figures in the preceding paragraph from Mr Stone’s second report of 13 October 2017. It is at that point that their approaches diverge in ways which I will explain by setting out their respective calculations, to which I will refer to as “Coleman”, “Stone 1” and “Stone 2”.

For his part, Mr Coleman did not further discount the cumulative rental figure of $41.2 million. In other words, he did not take the step contemplated by paragraph [544(6)] of the Principal Judgment. Mr Coleman calculated Supreme Court interest on each year’s post tax notional rental up to 18 September 2017. This yielded a figure to the end of the trespass of $41.203 million for notional rental and simple interest at Supreme Court rates totalling $28.82 million, giving a total damages figure in relation to the Hospital Site of $70.022 million.

Mr Stone’s original calculation took the cumulative rental of $41.2 million and did take the step contemplated by paragraph [544(6)] of the Principal Judgment. This meant that the notional annual rental figures were again discounted by the same discount rate used earlier in the process (being 8.94% as determined by the Court in the Principal Judgment) to give the net present value of those notional annual rentals of $21.791 million. Mr Stone then calculated Supreme Court interest on that figure alone from the commencement of the trespass up to 18 September 2017 (to be comparable to Mr Coleman’s calculation) of $30.772 million, giving total damages of $52.563 million.

This calculation was done at the request of the Court. It split out those elements of the discount rate that represent risk and the time value of money. The discount rate reflecting risk only was agreed between the parties as 6.52%. This gave a discounted cumulative notional rental figure of $34.356 million. Mr Stone then calculated Supreme Court interest on each of the annual notional post tax rentals up to 18 September 2017 as $25.438 million. This was intended to compensate for the time value of money, which component was removed from the discount rate used for this calculation. The total figure for damages in respect of the Hospital Site using this approach was $59.794 million.

Two preliminary points should be made.

First, as part of Macquarie’s submissions at this final stage, Mr Dubler SC submitted that the Court should not depart from the position said to have been reached on 14 February 2017, namely that no discounting back to the date of commencement of the trespass should occur. Mr Williams SC advanced an expanded version of the submissions which I have recorded in paragraph [97(3)] above. For the reasons set out in paragraph [93] above I do not regard the relevant issues as having been foreclosed on 14 February 2017 and hence I determined on 13 November 2017 that the issue of methodology should be reopened so each party could put their submissions in support of their respective damages calculations.

Second, as I have already noted, by this stage the parties (and their experts) agreed that paragraph [544(1)-(5)] of the Principal Judgment had captured the Residual Land Value methodology and the issue was whether the step in paragraph [544(6)] should be taken. The essential difference between the parties became whether the damages were calculated as at the commencement of the period of trespass (in which case the experts agreed that either of Mr Stone’s approaches was available) or not (Mr Coleman’s approach by reference to loss of annual notional rentals).

Macquarie’s arguments that Mr Coleman’s figure should be adopted may be summarised as:

The Health District’s arguments may be summarised as:

For the reasons which follow, Macquarie’s damages in relation to the Hospital Site should be calculated in accordance with Stone 1. My reasons may be summarised as:

It is convenient to start with some of the legal conclusions which I expressed in the Principal Judgment (emphases added):

To those observations I would add two other propositions.

First, Macquarie’s submissions referred to the Health District’s trespass as being a “continuing trespass”. As a matter of ordinary English, that description may be accepted. The trespass began on a particular day and continued for a known period of time until Macquarie’s possession of the Car Park Site and the Hospital Site was restored. However, it was not a “continuing trespass” in the way that term has a special meaning in relation to the law of trespass because this was not a case of something brought on to the land in question and wrongfully left there. I respectfully adopt what is said on this topic in Fleming’s The Law of Torts edited by C Sappideen and P Vines, 10th Ed, Law Book Co, 2011 at page 53 (citations omitted; emphasis added):

The other fundamental principle is that, as a general rule, damages for tort or contract are assessed as at the date of breach or when the cause of action arises, acknowledging the qualification expressed by Mason CJ in Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 at 355-356 that the general rule is not universal and that “it must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered” (most recently applied by the Court of Appeal in El Ali v Tritton [2019] NSWCA 111).

There are three reasons for the conclusion I have reached.

First, having regard to the principles set out above, I do not accept Macquarie’s submission that, as a matter of law, the damages ought not be discounted back to the date the trespass commenced. I understood this to be another way of submitting that damages should not be calculated as at the date the cause of action arises. This submission was put as part of Macquarie’s case that the damages should be assessed by reference to the notional annual rental “lost” such that a new cause of action arose when each annual rent was not paid. In my respectful view, Macquarie’s submission gives the analogy of an annualised notional market rental (which the parties were using by reference to the Residual Land Value methodology) a determinative role which is apt to distract from the task at hand.

By that I mean that the analogy of annual market rental is exactly that – an analogy. It is essential to bear in mind that this is not a case of a landlord being compensated for a tenant overstaying their lease. At no time did Macquarie, as a matter of fact in the “real” world, have a right to receive annual rental from the Health District (or anyone else) and the analogy should not drive the case to being characterised in law as Macquarie suing for unpaid rental. What Macquarie is being compensated for is a trespass where the land trespassed upon (the Hospital Site), the rights attached to that land by reason of the Hospital Lease and the period of that trespass are all now known.

Nor, for the reasons set out in paragraph [115] above, is there any legal significance in describing what occurred as a “continuing trespass”. As a matter of law, no new cause of action accrued to Macquarie every day of the trespass or upon a notional annual failure to pay the notional annual market rent.

It therefore follows that unless there is some compelling reason of fairness or justice to do otherwise, the general rule that damages are assessed in tort at the time the cause of action arose should be applied. There is no such compelling reason to depart from the general rule in this case. On the contrary, the Residual Land Value methodology adopted by the parties enables the Court, when the step contemplated in paragraph [544(6)] of the Principal Judgment is taken, to answer the question which is at the heart of the Damages Enquiry: what sum of money, if paid to Macquarie as at the date of the commencement of the trespass, would have adequately compensated Macquarie for the loss it suffered as a result of its exclusion for some 15 years thereafter from the Hospital Site? (In this question, I am using the word “compensate” in its colloquial meaning and am not intending to invoke the conundrum of the extent to which mesne profits can be said to be compensatory as opposed to restitutionary). All of the information required to answer this question is now available to the Court because the entire period of the trespass is now in the past. The answer to this question requires the notional annual rentals to be discounted back to the date of commencement of the trespass, which accords with the general principle as to when damages should be assessed.

Mr Coleman accepted that if damages were to be assessed as at the commencement of the trespass then Mr Stone’s approach was correct. As I will develop further below, taking this approach also answers which of Mr Stone’s two options should be adopted by the Court.

Second, and quite apart from the legal answer, I also accept Mr Stone’s evidence that the logic of the Residual Land Value methodology required the additional discount represented by the step in paragraph [544(6)] of the Principal Judgment to be done. The notional annual market rentals were the product of a discounting process. I accept Mr Stone’s criticism that simply to add them up without discounting them further would be to ignore the element of uncertainty that had been built into the process from the start and would, in effect, be to convert uncertain cash flows into certain cash flows.

Third, I also accept Mr Stone’s evidence that Mr Coleman’s methodology should not be adopted because it gives an unreasonable result. As I noted in paragraph [113] above, the enquiry into damages upon which the Court is engaged is an assessment and not a scientific calculation. An important way of checking the validity of any assessment is whether the result it produces is reasonable. Because of the complexity of the issues and the number of possible permutations, the parties had little alternative but to conduct this aspect of the proceedings in an iterative fashion with the Court being called upon to determine various integers which would then be used by the experts. The disadvantage of this approach was that the reasonableness of any outcome achieved by those integers was unable to be tested along the way. Putting the matter colloquially, there were just too many moving parts.

At this final stage, reasonableness can be tested. It cannot be a reasonable outcome of a principled assessment of damages that a trespass for 15 years of a 103 year lease gives Macquarie a greater damages figure (even without interest) than the net present value of the entire project at the commencement of the lease. It is precisely that kind of outcome which the rules of compensatory damages, sensibly and flexibly applied, would avoid producing.

In coming to the conclusion that Mr Coleman’s methodology produces an unreasonable outcome, I had not overlooked the “cross-checks for reasonableness” which he undertook, being contained in his reports of 1 September 2014 and 20 December 2016.

In his report dated 20 December 2016, Mr Coleman candidly disclosed that the cross-check in his report dated 1 September 2014 used figures that were not obtained using the methodology determined in the Principal Judgment and were pre-tax figures which were not directly comparable with the after-tax rental results set out in his later report (unless they were converted to pre-tax figures). In those circumstances I do not think the cross-checking in the 2014 report is useful to the present exercise, given that so many integers have changed.

Nor am I persuaded that the cross-check in his 20 December 2016 report is helpful. That report proceeds by reference to a net present value of the Hospital Lease of $48.6 million (whereas the figure to which Mr Coleman finally came and with which Mr Stone agreed was $39.5 million) and gave an annual after tax rental value as at March 2000 of $3.007 million ($4.295 million before tax), whereas the figure ultimately agreed for the first year of post-tax rental was $2.187 million. Furthermore, while in paragraph 42 of his 2016 report he concludes that the March 2000 rental figure was “not a commercially unreasonable result”, the comparison was really directed to lending “further support to the use of 2.5% per annum rate of rental inflation being applied to the rental value increases in conjunction with all the other assumptions to be used as set out in” the Principal Judgment.

Because of the matters referred to in the preceding paragraph, I am not satisfied that the cross-check in Mr Coleman’s 2016 report is sufficiently comparable with the position that the Court is now addressing. In any event, even if it is used only to support a submission that the rental values which he had calculated were, in his view “not a commercially unreasonable result” and the position which the parties have ultimately reached gives lower rental values, I do not think it really takes the matter any further.

As I noted in paragraph [111(3)] above, I do not accept that “commerciality” is a useful comparator when, at least as I understand it, the basis for the adoption of the Residual Land Value methodology was a recognition that it was very difficult to see how in “the real world” anyone would actually have sub-let or taken an assignment of the Hospital Lease, either for the term of the trespass or for the entire 103 year term. Rental in the context of the Residual Land Value methodology was notional. As Mr Stone said, and the Court accepts, in “the real world” rent would not be determined on an arm’s length basis by reference to the net present value of the relevant asset or project.

Finally, the reasons which I have set out above also assist in resolving which of Stone 1 or Stone 2 the Court should accept as the just assessment of Macquarie’s damages in relation to the Hospital Site. It will be recalled that Stone 1 gives damages of $21.791 million in notional rent and $30.772 million in interest, totalling $52.563 million, whereas Stone 2 gives damages of $34.356 million in notional rent and $25.438 in interest, totalling $59.794 million.

The calculation in Stone 2 was undertaken at my request as I wished to ascertain whether a more reliable outcome could be reached by reflecting the annual notional market rental aspect of the calculation by the way interest was calculated (i.e. on each year’s notional annual market rent). This involved removing the time value of money component of the discount rate of 8.94% that had otherwise been used in the Residual Land Value calculation.

Stone 1 should be preferred over Stone 2 for three reasons:

Macquarie crystallised its application for costs by filing a motion dated 19 October 2017 (the “Costs Motion”) which sought this relief:

Macquarie filed evidence which demonstrated, inter alia, that it had incurred costs in relation to the Damages Enquiry since July 2011 of approximately $8.2 million of which only approximately $160,000 remained unpaid. I shall return to the issue of the precise amount of Macquarie’s costs later in these reasons.

Macquarie also relied upon an expert report from Mr Michael Dudman. Mr Dudman was well qualified in the area of costs assessment, having been admitted as a solicitor in 1991 and having engaged exclusively and continuously in the area of legal costs since 2000. It will be recalled that Macquarie sought its costs on the indemnity basis for the period after 29 July 2014. Mr Dudman expressed the opinion that Macquarie would recover from the Health District for its reasonable costs and disbursements $6.893 million on the ordinary basis for the entire enquiry or $7.115 million on the indemnity basis from 29 July 2014.

The Health District also retained the services of a highly experienced costs consultant, Ms Deborah Vine-Hall. Ms Vine-Hall was admitted as a solicitor in 1986. After full time practice as a solicitor at Blake Dawson Waldron for three years engaged in commercial litigation, Ms Vine-Hall commenced a full time career in costs consulting in October 1989 and in which she has been continuously engaged since then. Ms Vine-Hall expressed the opinion that Macquarie’s recoverable costs on the ordinary basis would be $5.981 million or $6.446 million on the indemnity basis.

Because of what came to be referred to as the “adverse costs issue”, Mr Dudman’s and Ms Vine-Hall’s final figures are not directly comparable. The adverse costs issue arose in the following way.

The Health District accepted that the Court should order the Health District to pay, on the ordinary basis:

The Health District also agreed that, if possible, those costs should be assessed on a gross sum basis. The difficulty, according to the Health District, was that the Court should only make a gross sum costs order when it had sufficient confidence that it could arrive at an appropriate sum on the material available. The Health District submitted that the Court did not have such material available to it, focusing in particular on what it submitted were inadequacies in Mr Dudman’s report, including the adverse costs issue.

When the costs application came on for hearing before me on 16 November 2017, Mr Dudman and Ms Vine-Hall were still engaged in a conclave outside the Court. However, the adverse costs issue immediately came to the fore in an objection which Mr Williams SC took to the entirety of Mr Dudman’s report. The adverse costs issue arose because, during the course of the Damages Enquiry, a number of costs orders had been made in favour of the Health District against Macquarie, including a costs thrown away order arising from the Court granting Macquarie leave to make substantial amendments to its case on 26 September 2014 (the “Second Amendment Application”). There was no dispute between the parties that in calculating the costs to which Macquarie might be entitled against the Health District, those costs could not include the costs of work done on behalf of Macquarie in relation to matters where Macquarie had been ordered to pay the Health District’s costs.

Against this background, Mr Williams SC submitted that Mr Dudman’s report either should be rejected in its entirety as not complying with s 79 of the Evidence Act 1995 (NSW) (the “EA”) or, if it were admissible, should be excluded as unfairly prejudicial to the Health District under s 135 of the EA. Macquarie’s fundamental complaint about Mr Dudman’s report was that it lacked “transparency” because his reasoning was not fully exposed, including as to how he had dealt with the adverse costs issue.

This concern about Mr Dudman’s report had been identified by Ms Vine-Hall in her report. She took the view that she did not have enough information to determine what deductions should be made in relation to adverse costs and had therefore undertaken her calculations without taking them into account. It is for this reason (as noted in paragraph [138] above) that Ms Vine-Hall’s final figures were not comparable to Mr Dudman’s: Mr Dudman had, in terms, said he had taken account of adverse costs in his report.

It is convenient to set out how Ms Vine-Hall raised these issues in her report:

While it was common ground that in making a gross sum costs order the Court was not engaged in a costs assessment, Mr Dudman had purported to do what is common on such applications, namely what Ms Vine-Hall referred to as “an ersatz costs assessment”. The focus of the Health District’s attack on Mr Dudman’s report was Annexure E of that report, headed “Summary of Costs”. In that summary, Mr Dudman took the various fees from solicitors, counsel, experts and for disbursements set out in the totality of the invoices that had been provided to him and set out in relation to each of those persons or items his reduction from those fees on either the ordinary or indemnity basis.

In order to understand why I did not uphold the Health District’s objection to Mr Dudman’s report, it is necessary to set out at some length how he described his approach:

It is uncontroversial that in order to be admissible opinion evidence, an expert must expose his or her reasoning. In the absence of Mr Dudman’s reasoning in relation to each item being apparent, the Health District argued that it was not possible for it to test Mr Dudman’s conclusions in cross-examination or otherwise. Mr Williams SC submitted that, with the exception of the one specific invoice provided by way of example in Mr Dudman’s report, Mr Dudman had not exposed his reasoning in relation to the rest of what was contained in Annexure E to Mr Dudman’s report. Mr Williams SC accepted that in terms of admissibility, rather than weight, that difficulty would have been overcome had Mr Dudman attached to his report all of the invoices with his markings.

Mr Williams SC further submitted that once Mr Dudman’s report was excluded, the appropriate course was for the Court to dispose of Macquarie’s application by acceding to the Health District’s submission to the effect that rather than a gross sum costs order, the Court should take account of everything that had occurred (including the adverse costs issue) by ordering that the Health District pay a percentage (he submitted 80%) of Macquarie’s costs of the Damages Enquiry.

Mr Hyde, for Macquarie, submitted that Mr Dudman’s report did sufficiently expose his reasoning. The fundamental submission was that in circumstances where the Court was not engaging in an assessment of costs, it was sufficient for an expert to explain what he or she had done, give a specific example in relation to one invoice, and then express an opinion which is said to be based on the application of that same methodology to all the other invoices. It was submitted that if the Health District’s approach was correct, evidence on applications of this kind from costs experts would have to be nothing less than evidence of a full assessment, which was exactly what the gross sum costs order procedure was intended to avoid.

Section 79(1) of the EA provides:

To be admissible under s 79 of the EA, it is essential for an expert to expose his or her reasoning so that the Court can be satisfied that the expert’s opinion is wholly or substantially based on his or her specialist knowledge. I admitted Mr Dudman’s report because I was satisfied that the sections which I have set out in paragraph [146] above, when read with Schedule E, demonstrated that his opinion as to Macquarie’s likely recoverable costs on assessment was based wholly or substantially on his specialist knowledge.

In expressing this conclusion, I respectfully apply what was said by the High Court in Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588, in which the plurality said (emphasis added):

Writing separately, Heydon J (whose opinion, as Heydon JA in the New South Wales Court of Appeal in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705, is foundational in this area) said (emphasis added):

The passages which I have reproduced in paragraph [146] above clearly set out Mr Dudman’s approach and reasoning, gave an example of how that was applied to a particular invoice and then affirmed that he had taken the same approach to all the other invoices, the results of which he summarised in Annexure E. This made it clear that his ultimate opinion was wholly or substantially based on his specialist knowledge.

While I was therefore of the view that Mr Dudman’s report was admissible, that says nothing about its weight in circumstances where his individual workings in relation to each invoice were not available. However, in practical terms this issue was overcome, as was any possible suggestion of prejudice under s 135 of the EA, by the simple step of Macquarie offering to make Mr Dudman’s workings available to Ms Vine-Hall. In any event, I did not think there was any prejudice for the purposes of s 135 because the Health District was not foreclosed from criticising Mr Dudman’s report as a matter of weight.

Mr Dudman’s workings were made available to Ms Vine-Hall and they spent the rest of the day in conclave while the Court heard other legal argument. The next day they returned to inform me as to how much time would be required both to look at Mr Dudman’s workings and, more importantly, explore the extent to which agreement could be reached about deductions that should be made to reflect the adverse costs issue. I made directions to give effect to that process, which resulted in a joint report (to which I will return below) dated 13 December 2017, which was the subject of further argument and concurrent evidence at the hearing on 18 December 2017.

The Court has the power to make a gross sum costs order pursuant to s 98(4) of the Civil Procedure Act 2005 (NSW) (“CPA”):

There was no dispute that the relevant principles appear in the judgment of Beazley JA in Hamod v State of New South Wales [2011] NSWCA 375 (“Hamod”) (emphases added):

If I may respectfully say so, the parties correctly apprehended that this was a case where, if at all possible in a principled application of the power, it was in the interest of the parties and the public interest that Macquarie’s costs of the Damages Enquiry be dealt with by a gross sum costs order. There was uncontradicted evidence from Mr Dudman that if the costs of the Damages Enquiry were to be assessed by way of a costs assessment, the parties would jointly incur expenses of $870,000 and the process would take 56 weeks.

To adopt the language of Giles JA as quoted by Beazley JA above, while this is not a case where there is a suggestion that the Health District would not be able to meet Macquarie’s costs as assessed, there can be absolutely no doubt, given the history of this matter and without any criticism, that any costs assessment would be protracted and expensive. With no disrespect to Mr Dudman, just as every other estimate of time and costs in this matter has proved to be a significant underestimate, I am certain that any costs assessment would likely far exceed Mr Dudman’s estimate. It would become another piece of satellite litigation, which the Court should strive to avoid: South West Helicopters Pty Ltd v Stephenson (No 2) [2018] NSWCA 99 (“Helicopters”) at [53].

The neuralgic question in this case was how the adverse costs issue could be dealt with. As I will set out in greater detail below, I am satisfied on the basis of the joint report of the costs experts, taken together with the other evidence provided by them, that the Court is in a position to produce an estimate of costs which is “fair, logical and reasonable” and is able to undertake “an informed assessment of the actual costs having regard to the information before the Court” (see paragraphs [813] and [820] of Hamod set out in paragraph [158] above).

Macquarie presented its primary application as being for a gross sum costs order in relation to the Damages Enquiry, the Guarantee and Indemnity Proceedings and the L&E Proceedings. Macquarie submitted that only if the Court was not disposed to make a gross sum costs order in relation to those matters should the Court then proceed to determine Macquarie’s applications as follows:

It was less clear from Macquarie’s submissions whether, in any event, the Court should proceed to determine its application for a special costs order in relation to the Guarantee and Indemnity Proceedings. Nothing turns on this because, while I have determined that application in favour of Macquarie, I am unable to take that outcome into consideration for the purposes of the gross sum costs order because Macquarie has not provided any evidence on which the Court can conclude how much more Macquarie would receive on assessment of the Guarantee and Indemnity Proceedings on the indemnity basis rather than the ordinary basis.

Notwithstanding the approach set out in paragraph [162] above, Macquarie also submitted, with a view to increasing the amount of any gross sum costs order, that the Court should take into account the likelihood of the indemnity costs orders sought by Macquarie being successful and the likelihood of Macquarie obtaining an order for interest on the costs. For reasons which I will now set out, I do not accept that “the likelihood” of those matters should be taken into account in determining the amount of any gross sum costs order.

As a general proposition, I do not think either the likelihood of an indemnity costs order or an order for interest on costs falls within what Beazley JA had in mind in paragraph [820] of Hamod where she said “This 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”. There was some suggestion in Macquarie’s submissions that the likelihood of the matters to which it referred would be such “contingencies”. However, both an order for indemnity costs and an order for interest on costs occur outside the costs assessment process and, as such, I do not accept that they are “contingencies that will be relevant in any formal costs assessment” (emphasis added).

In relation to the likelihood of an order for indemnity costs, while recognising the breadth of matters that could logically be considered in the exercise of the Court’s discretion, I would not, as a matter of discretion, take into account the likelihood of an indemnity costs order. A party would either have to make the application or not make the application for indemnity costs. If it was to receive its costs on an indemnity basis, that would then be reflected in a higher gross sum costs order in the absence of any particular countervailing factors.

Another way of making the same point is that determining whether a party is entitled to indemnity costs is a logically anterior step to determining the amount of any gross sum costs order. While not a completely definitive answer, s 98 of the CPA (see paragraph [157] above) reflects what might be said to be a logical order of events. Section 98(1)(c) refers to the Court’s powers to award costs on the ordinary basis or the indemnity basis. The power to make a gross sum costs order comes later in s 98(4)(c).

As the case has ultimately turned out, the question of likelihood of special costs orders is academic. For reasons set out below, Macquarie is not entitled to a special costs order in relation to its costs for the Damages Enquiry. While I have taken the opposite view in relation to Macquarie’s costs of the Guarantee and Indemnity Proceedings, there is no evidence before the Court which enables me to determine by how much more Macquarie’s costs might be increased because of an entitlement to receive its costs of those proceedings on an indemnity basis as opposed to the ordinary basis.

Turning to the relevance of the likelihood of an order for interest on costs, any such likelihood is an irrelevant consideration that ought not be taken into account in exercising the discretion to order a gross sum costs order. Macquarie’s submissions recognised that an order for interest on costs is at the very least impracticable if a gross sum costs order is made. Absent some process of dissecting a gross sum costs order (which Macquarie did not invite and the Court could not, in any event, have done), once a gross sum costs order is made it is impossible to identify the starting date from which interest should run for particular costs payments.

The more fundamental difficulty in the way of taking the likelihood of an order for interest for costs into account is that the Court’s power under s 98(4)(c) of the CPA is to order costs to be paid as a specified gross sum. The subject matter of the power is costs. In my respectful view, interest on costs is not costs. So much is the case as a matter of ordinary English.

That conclusion is also consistent with the language of s 101(4) of the CPA as the parties agreed it should apply in this case (being the form of the statute from 1 June 2005 to 23 November 2015) that interest is “to be paid on any amount payable under an order for the payment of costs”. Costs and the interest on costs are two different things and are ordered under two different sections of the CPA. Accordingly, as a matter of law the possibility of an order for interest on costs is not a relevant consideration to the making of a costs order, including a gross sum costs order.

Given that conclusion, and the fact that the Court is satisfied that a gross sum costs order should be made, it is unnecessary for me to determine Macquarie’s standalone application for interest on costs and I decline to do so. I should note for completeness that if I had gone on to consider that application, the apparent conflict to which I was referred in the relevant Court of Appeal authorities has now been resolved in Helicopters at [39] - [48].

By letter dated 29 July 2014 Macquarie’s solicitors sent the Calderbank Offer to the Health District’s then solicitors:

The Health District did not accept the Calderbank Offer. Macquarie submitted that, by virtue of that non-acceptance, the Court should exercise its discretion to order that Macquarie’s costs of the Damages Enquiry should be assessed on the indemnity basis from the date of the Calderbank Offer.

The debate in relation to the Calderbank Offer was conducted against the background of two agreed matters.

First, at the time of the argument (and, indeed, as at the date of this judgment) the Court had not yet entered a final judgment amount in favour of Macquarie. However, there was and is no doubt that the amount that will be entered will be greater than $56 million. In her affidavit in support of the Costs Motion, Macquarie’s solicitor deposed that she expected an order for pre-tax damages in excess of $100 million to be made in favour of Macquarie (presumably inclusive of interest). The debate before me was conducted against the background that the bottom of the range (as at October 2017) for Macquarie’s damages in relation to the Hospital Site was Mr Stone’s figure of $52.563 million and that Mr Milou’s calculation of the damages in relation to the Car Park Site presented to the Court at the hearing on 14 February 2017 had alternative figures of approximately $30 and $31 million. For the purposes of the costs argument it was irrelevant that Mr Milou’s figures would have to undergo some further alterations having regard to subsequent decisions that the Court made. No one suggested that, for the purposes of the argument in relation to the Calderbank Offer, a damages figure of approximately $80 million (inclusive of interest) was inappropriate.

Second, the parties were in agreement that the exercise of the Court’s jurisdiction to award indemnity costs turned on whether Macquarie could satisfy the Court that it was unreasonable for the Health District not to have accepted the Calderbank Offer.

Macquarie referred the Court to, and I respectfully adopt, the summary of principles in relation to such offers in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 per Basten JA (with whom McColl and Campbell JA agreed):

The Health District did not suggest that the Calderbank Offer was not a genuine offer. The parties joined issue about whether it was unreasonable for the Health District not to have accepted the Calderbank Offer.

Macquarie submitted that it was unreasonable for the Health District to have rejected the Calderbank Offer because:

The Health District submitted that, notwithstanding that Macquarie had done better in the final result than the amount offered in the Calderbank Offer, the Court should not award indemnity costs for these reasons:

The Court accepts the Health District’s submissions as to why indemnity costs should not be ordered, notwithstanding the Calderbank Offer. The Court’s acceptance of those arguments may be reduced to two, independent reasons. However, the force of each of those reasons depends upon understanding the case with which the Health District was confronted as at the date of the Calderbank Offer.

At that time, Macquarie’s claim was for loss of profits or mesne profits in relation to the Car Park Site, and for loss of profits in relation to the Hospital Site. Macquarie’s claims for loss of profits were met with the adamantine demurrer that loss of profits was not a head of damages known to the law of trespass. Having regard to the authorities, many of which were ultimately traversed in the Principal Judgment, the Health District had every reason to think that its legal answer to the loss of profits case was very strong. I would go so far as to presume that Macquarie recognised the strength of that demurrer in making the Second Amendment Application.

It is a well-recognised principle that the Court will not award indemnity costs for non-acceptance of a settlement offer if the successful party’s case changed significantly between the date of the offer and the case on which the party ultimately succeeds: see, for example, South Eastern Sydney Area Health Service v King [2006] NSWCA 2 at [85] per Hunt AJA (with whom Mason P and McColl JA agreed).

On 26 September 2014 (a month or so after the Calderbank Offer expired), the Court gave leave to Macquarie to make significant amendments to its case pursuant to the Second Amendment Application. Those amendments included what I referred to then (and will again now) as the “mesne profits amendment”, which I described in my judgment giving reasons for allowing the various amendments (Macquarie International Health Clinic Pty Ltd v Sydney Local Health District; Sydney Local Health District v Macquarie Health Corporation Ltd (No 6) [2014] NSWSC 1549):

From a juridical point of view, the mesne profits amendment was a very significant change to Macquarie’s case. Two short examples will suffice. First, at least at the level of principle, it deprived the Health District of a strongly arguable demurrer (see paragraph [183] above). Second, it gave Macquarie an arguable basis (which the Court ultimately upheld) for contending that all of the negative counterfactuals upon which the Health District sought to rely (and which would have been open to it to meet Macquarie’s loss of profits case) were not available as a matter of law.

The Court is satisfied that, notwithstanding that much of the evidence which the Court heard before the Second Amendment Application remained relevant, the case on which Macquarie succeeded was materially different to the case which Macquarie was propounding at the time of the Calderbank Offer. Putting it another way, while costs may follow the event, the event on which Macquarie succeeded was not the event confronting the Health District in July 2014. In accordance with the authority to which I have referred in paragraph [184] above and in the exercise of the Court’s discretion, Macquarie’s change in case disentitles it from what otherwise might have been the exercise of the Court’s discretion to award indemnity costs in its favour.

Even if Macquarie’s case had not changed, the Court would have refused its application for indemnity costs in relation to the Calderbank Offer for a second reason, being that the Calderbank Offer made no attempt to explain how the $56 million settlement figure had been calculated. The importance of the presence or absence of such an explanation will vary from case to case. In some cases it may be unnecessary to give any explanation, for example where the figure may be tied to some obvious piece of information well known to both parties. However, in other cases, of which this is one, an explanation of the basis of an offer may be essential to enable the offeree to give it reasonable consideration.

In the “Plaintiff’s Opening Outline of Issues of Fact and Law” dated 5 February 2014 (“Macquarie’s Opening Outline”) on which Macquarie originally opened the Damages Enquiry, Macquarie’s primary case in relation to damages for the Hospital Site was put (at paragraph 7) “in the range of $170 million to $250 million”. In relation to the Car Park Site, Macquarie’s primary case was said to be (at paragraph 12) that “it is entitled to its lost profits for the period in question plus Court interest to judgment, calculated by Mr Milou and Mr Coleman at $72,609,234”. In those circumstances, only a few months later and without explanation, I am not satisfied that the Calderbank Offer gave, in its terms, a reasonable basis or opportunity to the Health District to consider whether to accept it or not. Having been told in February that Macquarie’s total claim was up to $320 million, what was the Health District to make of an unexplained offer of $56 million only some five months later? The Health District could have asked rhetorically why not $100 million or $10 million? The Court is satisfied that in the circumstances of this complex and unusual case, the Health District’s failure to accept the Calderbank Offer was not unreasonable because the Calderbank Offer did not give the Health District a reasoned basis upon which to consider it.

For these two, independent reasons, Macquarie’s application for indemnity costs from the date of the Calderbank Offer is refused.

The Guarantee and Indemnity Proceedings were briefly opened during the parties’ opening addresses. Reference was also made to them in their written opening outlines.

Macquarie’s opening outline devoted six pages and nine numbered issues to maters arising from the Guarantee and Indemnity Proceedings. Macquarie raised defences of res judicata, Anshun estoppel and limitation issues. Macquarie’s principal answer set out in Macquarie’s Opening Outline was that the Health District had no evidence to support the claim which the Health District said was worth “in excess of $130 million”:

The Health District devoted only the final paragraph of its written outline of opening submissions dated 4 February 2014 to the Guarantee and Indemnity Proceedings (which it referred to as the “cognate proceedings”):

Thereafter, the hundred or so hearing days of the Damages Enquiry passed without either party referring to the Guarantee and Indemnity Proceedings. Each party dealt with them in their closing written submissions and invited me to deal with the claim on the papers. In the Principal Judgment I said:

I made directions of the kind foreshadowed in paragraph [598]. This led to the Health District’s new solicitors writing to Macquarie’s solicitors on 3 February 2017 to bring the “in excess of 130 million dollars” claim to an end in two, short sentences:

Macquarie submitted that it followed from the Health District having “abandoned” the Guarantee and Indemnity Proceedings that Macquarie should have its costs of those proceedings on the indemnity basis. The Health District accepted that it should pay Macquarie’s costs of the proceedings on the ordinary basis, but submitted that there was no reason why the Court should exercise its discretion to order indemnity costs. To do so, the Health District argued, would be to punish it for having made an entirely responsible decision as a litigant observing its obligations under s 56 of the CPA.

I accept the Health District’s submission as far as it goes. It would have been open to the Health District to discontinue the Guarantee and Indemnity Proceedings (whether by leave or by consent). In the absence of an order otherwise or agreement, the Health District would have had to pay Macquarie’s costs of the discontinued proceedings (see UCPR Part 42, r 42.19(2)). That outcome under the Rules does not automatically bring about an order for indemnity costs. Under the Rules and the general law, something more is required before the Court will make an order for indemnity costs.

There was no dispute between the parties that, in order to enliven the Court’s discretion to make an order for indemnity costs, considerations of the kind recorded by Sheppard J in Colgate-Palmolive Company v Cussons Pty Ltd [1993] 46 FCA 536; (1993) 46 FCR 225 at 233-234 would have to be present:

Macquarie submitted that it should have been obvious to the Health District that the Guarantee and Indemnity Proceedings were hopeless, at the very least for complete want of expert evidence. To consider the present application the parties invited me to reread the closing written submissions on Issue 47. I have done so. While they are slightly longer than the opening written submissions on this topic, they are to the same effect. The criticism in Macquarie’s Opening Outline that I have reproduced in paragraph [192] above remained just as valid at the end of the hearing as it was at the start.

At all times before me the Health District has been advised by highly competent lawyers. I am satisfied that it ought to have been obvious to them at the outset of the hearing, and for some considerable time before the hearing began given the need to prepare complex expert evidence, that the Health District did not have the evidence to support the Guarantee and Indemnity Proceedings. It is that circumstance, analogous to some of those referred to by Sheppard J, which in this case enlivens the Court’s discretion to make an order for indemnity costs.

The Health District has offered no persuasive reason why that discretion should not be exercised. No question of punishing the Health District for making a responsible decision by abandoning the proceedings arises. Rather, the fact that the Health District, by its legal advisers, ought to have known well before the commencement of the hearing that it did not have evidence to support the Guarantee and Indemnity Proceedings means that the usual compensation in costs offered to a successful party should extend to a complete indemnity. This is because Macquarie had to deal with a case that should never have been pursued because the Health District through its legal advisers at least ought to have known that it did not have the evidence to support.

The Guarantee and Indemnity Proceedings will be dismissed with an order that the Health District pay Macquarie’s costs of those proceedings on the indemnity basis. However, that outcome will not assist Macquarie in relation to the gross sum costs order. Macquarie has not filed any evidence in relation to its application for costs that identifies how much of its costs are attributable to the Guarantee and Indemnity Proceedings and what the difference might be were those costs to be assessed on the indemnity basis. There is therefore no evidence which enables the Court to award a higher gross sum costs order to take into account that proportion of Macquarie’s costs which the Court has concluded it would otherwise be entitled to have assessed on the indemnity basis.

Macquarie accepted that it was not logically possible for such an order to be made if a party obtains a gross sum costs order. I refer to what I have said in paragraphs [169] above.

Ms Moran’s affidavit of 16 October 2017 in support of the Costs Motion deposed that Macquarie’s costs were $8,268,334.48. That figure was derived from a supporting affidavit sworn by Macquarie’s accountant, Mr Rajakumar Sinnathambu. Mr Sinnathambu’s affidavit also established that what I will regard as an immaterially small amount of those fees remained unpaid. I will assume in Macquarie’s favour that they have since been paid.

Mr Dudman’s report for Macquarie dated 18 October 2017 recorded the amount of costs claimed as $8,324,666.65. In her report, Mr Vine-Hall noted the unexplained difference of $56,332.17. She wrote her report by reference to the figure in Ms Moran’s affidavit.

Through the work of the experts it became apparent that there was some double counting and adjustments that had to be made. Those matters were attended to in the experts’ joint report of 13 December 2017 and I am satisfied that the most reliable figure is set out in Annexure F to that report entitled “Joint Experts’ Summary of Adverse Costs”. That summary records Macquarie’s claimed costs as:

On the final day of the costs hearing (18 December 2017) Macquarie sought to update its costs claim through a second affidavit of Mr Sinnathambu made on 15 December 2017. That affidavit recorded further costs of $329,397.32 which a third affidavit of Mr Sinnathambu confirmed had all been paid. In an updating report of 17 December 2017, Mr Dudman gave his opinion of the likely assessment of those additional costs set out in Mr Sinnathambu’s second affidavit.

I admitted Mr Sinnathambu’s second affidavit and Mr Dudman’s updating report over the objection of the Health District. That objection was primarily based on the ground of lateness. The additional costs claimed in Mr Sinnathambu’s affidavit were:

While I have not undertaken a line by line analysis of the invoices attached to Mr Sinnathambu’s second affidavit, a relatively cursory perusal demonstrates that at least some of those invoices relate to both the final outstanding issues in relation to damages as well as Macquarie’s application for costs. The latter is certainly the case in relation to one of the disbursements, being Mr Dudman’s fees, which relate only to the question of costs.

For the purposes of the broad brush assessment which the Court is now undertaking to produce a gross sum costs order, I propose to discount entirely the amount of costs claimed in Mr Sinnathambu’s second affidavit. I will include that amount as part of the overall discounting which the Court will make as part of arriving at a gross sum for costs (see paragraph [251] below). However, two points need to be made about that discounting.

First, for the purposes of calculating the amount of the discount, I will immediately exclude the $60,025.00 in Mr Sinnathambu’s affidavit that relates to Mr Dudman’s costs. This leaves an amount of $269,372.32 (the “Recent Costs”). It is neither practical nor appropriate for me to attempt to otherwise divide those costs that remain between the damages hearing and the costs hearing.

Second, while mathematically some of what is left in that figure relates to the costs hearing and will form part of the discount, any such overlap will be without prejudice to Macquarie’s right to claim those costs on an assessment of its costs of the costs hearing. There was some discussion at the conclusion of the costs hearing as to what the Court should do about the costs of the costs hearing. For the avoidance of doubt, the gross sum costs order which the Court will make in relation to Macquarie’s costs pursuant to the Costs Motion does not include Macquarie’s costs of that motion (i.e. the costs hearing). While I will hear the Health District if it wishes to make submissions on this point, the simplest approach is that the orders finalising the Damages Enquiry should include an order that the Health District pay Macquarie’s costs of and incidental to the Costs Motion.

As I have decided to exclude or discount all of the costs and disbursements claimed in Mr Sinnathambu’s second affidavit, the mathematical starting point for what follows will be the amounts claimed as set out in the joint experts’ summary reproduced in paragraph [206] above, being a total claim by Macquarie for costs of $8,142,775.78.

In considering the question of adverse costs, the experts arrived at five categories:

I will deal with each of these in turn.

Two of these items are straightforward. The experts agreed that the excluded costs should be excluded as part of resolving the adverse costs issue. Furthermore, Macquarie conceded that the costs of and related to Mr Wright’s evidence should be excluded. Those two amounts total $946,674.02 and when deducted from the total of Macquarie’s costs claimed, reduce Macquarie’s claim to $7,196,101.76.

In their joint report, the experts explained the category of partly excluded costs totalling $1,077,983.62:

The largest component of the partly excluded costs is approximately $895,000.00 for counsel’s fees. That is unsurprising because the main assumption underlying this category was the exclusion of the first 39 hearing days as potentially costs thrown away by reason of the Second Amendment Application.

With respect to the experts, I accept Macquarie’s submission that this assumption is almost completely misconceived.

In my judgment allowing the Second Amendment Application I said:

Those observations were based on my fresh recollection and impression of those days of the hearing which the experts’ assumption now seeks to exclude. I have briefly reviewed the first 39 days of the transcript at least to bring back to mind what witnesses were called during that period and the general subject matter of their evidence. That exercise has confirmed the impression reproduced in the preceding paragraph.

Looking at the matter very broadly, if not all, then a very large part of the evidence in those first 39 days was relevant to the Health District’s various hypothetical reasons why Macquarie would never have been able to build the private hospital or that it would have been a financial disaster. Those submissions were summarised in the Principal Judgment:

The Health District persisted in those various hypothetical defences in answer to Macquarie’s case after the Second Amendment Application. I therefore accept Macquarie’s submission that is inappropriate to exclude the first 39 days of the hearing and the work connected with that.

Nevertheless, while I disagree with the fundamental premise underlying the partly excluded costs, I am satisfied that some deduction ought to be made. Macquarie accepted that by reason of its amendment, about half of the costs of the oral and written opening submissions heard on 10 and 11 February 2014 should be excluded. Macquarie submitted this represented about 2.5% of the first 39 days, giving a reduction of $25,000 from the total of approximately $1 million in legal fees in this category.

However, I accept the Health District’s submission that Macquarie’s concession did not go far enough. It did not take into account what would have been a great deal of work done by Macquarie’s lawyers in preparation for those opening submissions.

Bearing these matters in mind, I propose to allow 10% of the figure proposed by the experts for the partly excluded costs, requiring a deduction from the total amount of fees claimed by Macquarie of $107,798.36. This seems to me to be a fair adjustment to reflect three matters:

The experts identified a further category to which they referred as contentious excluded costs totalling $567,903.00. The experts explained this category in their joint report:

Macquarie made two concessions in relation to the contentious excluded costs: $21,980 in relation to Lonergan & Edwards and $10,800 of the $123,499.50 charged by RLB. Macquarie otherwise submitted that the assumptions which supported this category were incorrect. Those assumptions were:

For the reason given in paragraphs [220] to [223] above, I accept Macquarie’s submission as to the general inapplicability of the assumptions identified in the preceding. Furthermore, insofar as some elements of the contentious excluded costs related to work done by experts which directly or indirectly fed into questions of the profitability of the Car Park and the hypothetical private hospital, I accept Macquarie’s submission that its abandonment of the loss of profits case does not necessarily mean that all of that work was irrelevant. I find that much (but not necessarily all) of that work would have been relevant and was relied upon in subsequent evidence for the mesne profits case.

Nevertheless, as with the partly excluded costs, some allowance for the contentious excluded costs should be made to reflect the Court’s acceptance of the likelihood that were a detailed assessment of the contentious excluded costs ever to be undertaken (the cost of which I am certain would be disproportionate to the benefit to be obtained in improving the accuracy of any assessment), some of Macquarie’s costs that should be excluded would be identified. Doing the best I can, and consistently with the view I took in relation to the partly excluded costs, I am satisfied that justice will be done to both parties, but in particular to the Health District, if 10% of the contentious excluded costs identified by the experts were excluded from Macquarie’s total claims. This requires a deduction of $56,790.30.

The experts identified $279,471.25 of costs in relation to Macquarie’s Car Park Site damages expert Mr Milou ($225,700 of this were his fees). In their joint report, the experts said:

Macquarie submitted that none of the costs associated with Mr Milou should be excluded because all of his evidence and reports remained relevant and was relied upon by Macquarie on all of the issues relating to damages in connection with the Car Park Site. Macquarie drew attention to the fact that in its points of claim filed after the granting of the Second Amendment Application, it expressly relied upon seven reports of Mr Milou which had been served in the proceedings to that date.

The Court accepts Macquarie’s submission for the reasons identified in paragraph [229] above. The profitability of the Car Park Site in matters such as daily fees and operating expenses, which were considered by Mr Milou, all remained relevant for the mesne profits case. However, for the reasons given in paragraph [230] above, I am satisfied that a similar 10% allowance should be made in relation to the costs identified as relating to Mr Milou prior to the time of the Second Amendment Application. This means that a further $27,947.12 should be deducted from the total amount of costs claimed by Macquarie.

The position reached thus far can be summarised as follows:

For the purposes of the calculation that follows, I will round that figure for Macquarie’s claimed costs to $7,000,000.

The costs experts agreed that once the Court had come to a view as to the appropriate deductions for adverse costs, it would then be necessary to consider their respective methodologies as to how the Court should arrive at a gross sum costs order.

I have already set out Mr Dudman’s description of his methodology in paragraph [146] above. In summary, after making specific deductions on the various invoices, he applied what he referred to as “further global reductions” in varying percentages. Importantly, as will also be apparent from the extract from his report in paragraph [146] above, Mr Dudman said that he had made allowance for the adverse costs issue. However, it was very difficult, if not impossible to tell exactly for what amount and on what basis he had done that. This did reduce the weight I thought should be given to Mr Dudman’s overall conclusions.

Ms Vine-Hall’s report took issue with a number of fundamental matters in Mr Dudman’s report, in particular how S Moran & Co’s fees and Mr Dubler SC’s fees would be treated on an assessment. I will return to this. Like Mr Dudman, Ms Vine-Hall applied various percentage deductions based on her knowledge and experience. For reasons which I have already explained, her report did not take make any deductions for the adverse costs issue.

Before I express any further views on the relative merits of the experts’ reports, and because the Court is engaged in a broad brush exercise, a useful starting point is to look at the outcomes of each of the experts globally as to their assessments on the ordinary basis.

In his initial report (as corrected by him later), Mr Dudman expressed the view that on assessment Macquarie would likely recover $6,893,498.63 of total costs incurred of $8,324,666.65. This represents a recovery of 82.80%.

Mr Dudman prepared a second report dated 17 December 2017 in which he took into account the excluded costs from the joint experts’ report (but not any deductions for the partly excluded costs, contentious excluded costs, Mr Milou or Mr Wright). He also sought to incorporate the Recent Costs which I have discounted as set out in paragraph [210] above. In his second report, Mr Dudman opined that Macquarie would recover costs of $6,792,895.54 from total costs expended of $8,461,422.79. This represents a recovery of 80.28%. Because it does take into account the agreed excluded costs, I will treat Mr Dudman’s second report as the more reliable and authoritative one for the purposes of the comparison I am making.

In her report, Ms Vine-Hall expressed the opinion that Macquarie would recover $5,981,147.86 from a total claim of $8,135,494.48. This represents a recovery of 73.52%.

In making this global comparison I have not overlooked that Ms Vine-Hall’s report does not take account of adverse costs. That does not, in my view, invalidate the comparison of the outcomes of the methodology which each of the experts applied. The issue of adverse costs goes to the starting point of the amount of Macquarie’s claim, not to the proportion between the claim and what might be recovered.

The point I draw from this comparison is that the overall percentage rate of recovery arrived at by the experts is not all that far apart when considering the broad brush nature of the exercise in which the Court is engaged.

For the following three reasons I prefer Ms Vine-Hall’s approach;

In coming to the conclusion that I should prefer Ms Vine-Hall’s approach, it is not necessary for me to resolve some particular areas of dispute between her and Mr Dudman. In particular, they disagreed as to what (if any) allowance should be made for Macquarie’s in-house solicitor Ms Cousins or for work done by the firm of Bruce & Stewart. The fees involved, for example, in relation to those two disputes represent 1.46% of the $7,000,000 claim under consideration and are de minimis for the purposes of a gross sum costs order in this case.

In accepting Ms Vine-Hall’s approach to these central questions, I am not to be taken as being critical of Macquarie or its legal advisers for the way in which they chose to deploy the various legal resources available to them. However, the principles underlying the assessment of costs engage different considerations from those which might justify particular cases being run in particular ways. Whether something will or will not be recoverable on assessment is but one of many factors that clients and their lawyers take into account in making decisions as to how to run litigation.

Based upon the outcome of Ms Vine-Hall’s report (see paragraph [242] above), for the purposes of a gross sum costs order I propose to allow 73.52% of the $7,000,000 total costs incurred as determined in paragraph [235] above. This gives a figure of $5,146,400. However, that is not the end of the matter. Two further deductions need to be considered.

First, there is the question of whether the Court should make a further global percentage reduction as is often done in the case of gross sum costs orders. The basis for doing so was explained by Brereton J (as his Honour then was) in Hancock v Rinehart (Lump Sum Costs) [2015] NSWSC 1640:

I was initially of the view that this was a case in which it would have been appropriate to make a general discount of 20%. Given the large sums involved and the complexity of the issues, and bearing in mind the rationale identified by Brereton J, the making of a gross sum costs order will result in a significant saving to Macquarie, but also deprive the Health District of the opportunity to engage in what would, I have no doubt, have been a detailed scrutiny of Macquarie’s bill. However, I will reduce the proportion of the further general discount to 15% to reflect the higher degree of certainty that has been obtained through the assistance of the experts in identifying a significant sum of money as excluded costs. 15% of $5,146,400 is $771,960.

As explained in paragraph [210] above, I propose to allocate the Recent Costs of $269,000 towards that discount, so that only $502,960 ($771,960 - $269,000) need be further deducted from the $5,146,400. This gives a final gross sum costs figure of $4,643,440 which I shall round to $4,643,000. This conclusion is subject only to the determination of whether there should be one further discount.

The Health District submitted that if the Court was minded to make a gross sum costs order, there should be a discount of 20% from whatever Macquarie was otherwise entitled to recover in order to reflect Macquarie’s lack of success on a number of issues. The Health District submitted:

In making this submission, the Health District accepted that it would not be appropriate in a matter of this kind for the Court to attempt to apportion costs in respect of discrete issues, but that in adopting a broad brush approach there should be a reduction in Macquarie’s costs by an appropriate percentage amount, in this case 20%.

The Health District also called in aid the fact that while Macquarie was likely to obtain approximately $85 million, a substantial proportion of which was for interest (plus potentially a tax gross up), Macquarie had previously quantified its claim as high as $260 million and, thereafter, at various points on a “best case” basis down to $140 million.

There will be cases where the usual rule that costs should follow the event will be ameliorated by the recognition that it would be unjust to visit all of the costs on the unsuccessful defendant where the successful plaintiff claimed much and won little, or won notwithstanding having lost on many of the issues that were litigated. Cases can exhibit either or both of these features. The Court’s underlying concern in such cases is one of proportionality.

In this case there is no unfairness or disproportionate outcome for the Health District to pay all of Macquarie’s costs on the ordinary basis as assessed by the gross sum costs order. The Damages Enquiry was large and complex litigation, fought between two well-resourced and sophisticated litigants. I observed in the Principal Judgment:

Without resiling from that observation, this was nevertheless a case in which every point that could properly be taken was taken and no quarter was given or asked. Macquarie has been successful in obtaining a judgment for a very large sum of money. To get to that point both parties put forward many issues, some of which they won and some of which they lost. In the total scheme of this litigation, I am unable to accept that either the difference between what Macquarie claimed and received, or the number of discrete issues on which it might have failed, are of such magnitude or significance to warrant a departure from the usual outcome that the Health District as the unsuccessful defendant should pay all of Macquarie’s costs of the enquiry as assessed by the Court.

The orders which the parties bring in should include an order that the Health District should pay Macquarie’s costs of the Damages Enquiry, the Guarantee and Indemnity Proceedings and the L&E Proceedings assessed on a gross sum basis as $4,643,000.

The Court will direct the parties to prepare short minutes of order giving effect to these reasons and such other orders consistent with the Court’s earlier judgments as are necessary to bring the Damages Enquiry [1] to a formal conclusion.