FEDERAL COURT OF AUSTRALIA Lean v Tumut River Orchard Management Limited [2004] FCA 1670 PRACTICE AND PROCEDURE – costs – proceeding discontinued by consent – principles governing exercise of discretion to award costs – whether conduct of parties in the circumstances reasonable – relevance of first respondent's status as company in liquidation Federal Court of Australia Act 1976 (Cth) ss 33V(1), 33ZF, 43 FAIRA Aboriginal Corporation v Minister for Aboriginal and Torres Strait Islander Affairs [2002] FCA 9 cited Fashion Warehouse Pty Ltd v Pola [1984] 1 Qd R 251 cited Garwolin Nominees Pty Ltd v Statewide Building Society [1984] VR 469 cited Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 cited Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284 cited Harvey Norman Holdings Ltd v Fels (2002) ATPR 41-852 cited Lean v Tumut River Orchard Management Ltd [2003] FCA 269 cited Leghaei v Minister for Immigration & Multicultural & Indigenous Affairs [2004] FCA 1118 cited Marks v GIO Australia Holdings Ltd (1996) 63 FCR 304 cited Minister for Immigration & Ethnic Affairs, Re; Ex parte Lai Qin (1997) 186 CLR 622 applied O'Neill v Mann [2000] FCA 1680 cited Tasmanian Conservation Trust Inc v Minister for Environment and Heritage [2004] FCA 883 cited GRAEME TREVOR LEAN v TUMUT RIVER ORCHARD MANAGEMENT LIMITED, H P MERCANTILE PTY LTD and RRKM PTY LTD WAG 329 of 2002 RD NICHOLSON J 17 DECEMBER 2004 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAG 329 OF 2002 BETWEEN: GRAEME TREVOR LEAN APPLICANT AND: TUMUT RIVER ORCHARD MANAGEMENT LIMITED (ACN 003 501 611) FIRST RESPONDENT H P MERCANTILE PTY LIMITED (ACN 067 362 877) SECOND RESPONDENT RRKM PTY LTD (ACN 008 930 532) THIRD RESPONDENT JUDGE: RD NICHOLSON J DATE OF ORDER: 17 DECEMBER 2004 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The discontinuance of the representative proceeding as between the applicant and the first respondent be approved. 2. There be no order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAG 329 OF 2002 BETWEEN: GRAEME TREVOR LEAN APPLICANT AND: TUMUT RIVER ORCHARD MANAGEMENT LIMITED (ACN 003 501 611) FIRST RESPONDENT H P MERCANTILE PTY LIMITED (ACN 067 362 877) SECOND RESPONDENT RRKM PTY LTD (ACN 008 930 532) THIRD RESPONDENT JUDGE: RD NICHOLSON J DATE: 17 DECEMBER 2004 PLACE: PERTH REASONS FOR JUDGMENT 1 This proceeding is a representative proceeding. In accordance with s 33V(1) of the Federal Court of Australia Act 1976 (Cth) ('the Federal Court Act') the applicant seeks the approval of the Court to the settlement and discontinuance of the proceeding. As against the first respondent, the applicant seeks that the proceeding be discontinued and as against the second and third respondents, that it be settled. By consent orders dated 17 November 2004 the proceeding against the second and third respondents were dismissed. As against the first respondent, it is sought that there be no orders as to costs. There is no consent to that from the first respondent. Rather the first respondent seeks costs attributable to the applicant's application for leave to amend the application and statement of claim filed on 6 June 2003 and the applicant's request on 20 September 2004 to subsequently amend the substituted application and substituted statement of claim with the consent of the respondents. background circumstances 2 The background circumstances are set out in the applicant's outline of submissions as follows. 3 As the first respondent had a liquidator appointed, it was necessary for the applicant to apply for leave to institute proceedings against the first respondent. On 16 September 2002 the applicant sought the leave of the Federal Court to institute the representative proceeding against the first respondent, namely proceeding No. 3017 of 2002 ('application for leave to proceed'). 4 The applicant's application for leave to proceed against the first respondent was successful and the applicant was granted leave on 20 November 2002 to proceed against the first respondent in liquidation by way of the representative proceeding. 5 The orders made by Carr J regarding the application for leave to proceed included provision that: '7.1 The First Respondent was excused from filing any pleadings in the Representative Proceedings (subject to obtaining legal advice that such a course was appropriate and subject to any contrary order by the docket judge or other responsible judge); and 7.2 The costs of the Application for Leave Proceedings would be costs in the cause in the Representative Proceedings as between the Applicant and the First Respondent.' 6 The applicant initiated the representative proceeding on 29 November 2002 against the respondents. 7 On 6 June 2003 the applicant filed a notice of motion to amend the application and statement of claim ('first application for leave to amend') which was initially heard on 12 June 2003 by Carr J, on which occasion timetabling orders were made. 8 On 15 August 2003 the first application for leave to amend was heard before Carr J at which time the first respondent's counsel made the following submissions: (1) The first respondent had essentially taken no part in the representative proceedings since the applicant had successfully obtained leave to proceed against the first respondent on 20 November 2002; and (2) While counsel acknowledged that the first respondent had been provided with the minute of proposed substituted application and minute of proposed substituted statement of claim by way of service, the first respondent: (a) had not been advised by the applicant as to whether or not the amendments in the first application for leave to amend encroached upon the leave given on 20 November 2002; and (b) therefore counsel had not previously appreciated the changes made to the statement of claim and did not have instructions regarding the application. 9 Consequently on 15 August 2003 Carr J made the following order in relation to the first respondent: 'The First Respondent have leave to file and serve submissions in relation to the Applicant's motion, notice of which was filed on 16 June 2003, within 10 days. The question of any costs whether thrown away or otherwise in relation to the position vis a vis the Applicant and the First Respondent is reserved.' 10 Subsequently on 25 August 2003 the first respondent filed submissions in respect of the applicant's first application for leave to amend. 11 On 29 August 2003 the applicant filed submissions in response to the first respondent's submissions referred to above. 12 In reply to the applicant's submissions referred to above, the first respondent filed further submissions on 3 September 2003. 13 On 23 September 2003 Carr J delivered judgment in the applicant's first application for leave to amend, which resulted in the applicant being granted leave to amend. The application provided that the costs of that application be costs in the cause. However, on 23 September 2003 when Carr J delivered his reasons for decision and judgment he made orders that the question of the costs of the applicant's motion be stood over for consideration, if necessary, on a date to be fixed. 14 In relation to the first respondent's objection to the applicant's first application for leave to amend, the judgment of 23 September 2003 provided (at [41]) that: 'I think that the relief sought in the amendment falls within the leave granted to bring proceedings against the first respondent.' The judgment further provided (at [44]) that: '… I do not consider that there is, at this stage, any real prospect of the first respondent being obliged to take part in the proceedings by defending the applicant's claims in order to protect itself from a claim by the second respondent. …' 15 The applicant, by way of a letter dated 20 September 2004, requested the respondents' consent to the amendment of the substituted application and substituted statement of claim so as to correct an ambiguity in the definition of the group of members and to narrow the class of the representative proceeding ('second application for leave to amend'). By way of a letter dated 22 September 2004, the first respondent stated that it did not oppose the amendments sought to the application and statement of claim as provided in the second application for leave to amend. statutory provisions 16 Section 43 of the Federal Court Act gives the Court a wide discretion to award costs in a proceeding. In the case of a representative proceeding, being one falling within the ambit of Pt IVA of that Act, s 33ZF provides that 'the Court may, of its own motion or an application by a party or a group member, make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding': cf Marks v GIO Australia Holdings Ltd (1996) 63 FCR 304. applicant's contentions 17 The applicant submits that this is not a case where he should be seen as simply abandoning the proceeding because he does not have a good chance of success if the matter were to proceed to trial: Garwolin Nominees Pty Ltd v Statewide Building Society [1984] VR 469 at 472. Rather, here the applicant contends he is seeking to have the representative proceeding discontinued because the continued prosecution of the matter is futile. The futility arises from a number of factors. First, the individual group members, including the applicant and the second respondent, have reached a confidential agreement to settle the proceedings which the second respondent had instituted, or threatened to institute, against the individual group members in New South Wales ('the NSW proceedings'). Second, the primary purpose of the representative proceeding was to remove the threat of the NSW proceedings and this purpose has been achieved. Third, the first respondent is in liquidation and its liquidator has estimated that it is likely that a dividend of only $0.05 in the dollar will be paid to its unsecured creditors. Fourth, in these circumstances it is pointless to pursue a judgment against the first respondent. Fifth, the third respondent has negligible assets and no professional indemnity insurance. This aspect of the submissions is supported by an affidavit of the applicant's solicitor. 18 Additionally, the applicant states that the confidential settlement between the individual group members of the representative proceeding (including the applicant) and the second respondent has made the applicant's claim for equitable set-off involving the first respondent a moot point. 19 It is then submitted that in these circumstances, where the issue of costs is the only outstanding issue as between the applicant and the first respondent, unless the circumstances are exceptional such as they exhibit hopelessness, the appropriate order is that each party bear its own costs: Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284 at 287. 20 The applicant submits that the circumstances here are not exceptional nor could they be viewed as hopeless. In support the applicant draws attention to the statement by Carr J in reasons for judgment delivered on 28 March 2003 in relation to the applicant's case as to equitable set-off as against the parties said to have engaged in misleading or deceptive conduct (namely, the first respondent) was 'at a much higher level than simply being "reasonably arguable"': Lean v Tumut River Orchard Management Ltd [2003] FCA 269 at [61]. Further, he points to the statement by the High Court in Marks and Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 that a discrepancy between an oral or written representation and the written contract between the parties can be misleading or deceptive conduct. Therefore the applicant submits that the correct view is that if the representative proceeding were to proceed to a trial on the merits the applicant would have a clearly arguable case and certainly not a hopeless case and should be seen as having good prospects of success. 21 In addition, the applicant submits that any delay in seeking orders as to discontinuing the proceedings was not something which occurred at a critical point of time nor, it is said, was it capricious or calculating or unreasonable: Tasmanian Conservation Trust Inc v Minister for Environment and Heritage [2004] FCA 883. 22 Further, the applicant submits that the first respondent's submission for costs must fail as that respondent was not required to and has not participated in any active way in the representative proceeding. 23 In relation to the first respondent's submission for costs to be awarded regarding the first application for leave to amend, it is submitted this must fail as the first respondent was not required to, and has not, filed a defence to the statement of claim. Therefore, submits the applicant, the first respondent cannot ask for costs thrown away by the first application for leave to amend as the first respondent could not have reasonably incurred costs which became wasted in defending the statement of claim in the first place: Fashion Warehouse Pty Ltd v Pola [1984] 1 Qd R 251 at 254. 24 In relation to the first respondent's submission for costs to be awarded regarding the second application for leave to amend, the applicant submits this must fail for the same reason. In those circumstances, the first respondent could not have reasonably incurred costs which became wasted in defending the substituted statement of claim: Pola at 254. 25 An additional matter raised in the submissions for the applicant relates to the order made by Carr J that the costs of the application for leave to proceed should be costs in the cause of the representative proceeding. It is consequently submitted that any costs order made in favour of the first respondent in the representative proceeding may or will render the applicant also responsible for the costs of the first respondent in the application for leave to proceed. This, the applicant submits, would be unjust. It is submitted that in seeking to discontinue the representative proceeding as against the first respondent on the basis of no order as to costs, the applicant is acting in a reasonable manner. It is said that relevant to assessing that reasonableness is that in so doing the applicant is potentially also relinquishing a claim to his costs associated with the application for leave to proceed, which were not insignificant. The result, it is submitted by the applicant, is that there should be no order as to costs in the representative proceeding and that, consequently, the applicant and first respondent should bear their own costs of the application for leave to proceed. first respondent's submissions 26 The first respondent starts from the fact that it is a company in liquidation in relation to which the liquidator seeks to preserve the company's assets for the benefit of the company and its creditors. The evidence is that its estimated final dividend to unsecured creditors is likely to be in the order of $0.05 in the dollar. In those circumstances the first respondent consents to the discontinuance of the proceedings but does so provided there are terms that provide appropriately for the payment of the first respondent's costs of the proceedings. 27 The first respondent accepts that the Court has a broad discretion in respect of costs in the circumstances and that there are no general rules governing the exercise of the discretion in cases where s 43 of the Federal Court Act applies: Leghaei v Minister for Immigration & Multicultural & Indigenous Affairs [2004] FCA 1118 at [12]. Nevertheless, the first respondent contends there is a policy underlying the rule relating to leave to discontinue that the discontinuing party should be liable for the other party's costs unless the Court otherwise orders. Such an award is not automatic and the Court will look to the reasonableness of the conduct of the parties in commencing, defending and discontinuing the proceedings. Three authorities are relied upon: FAIRA Aboriginal Corporation v Minister for Aboriginal and Torres Strait Islander Affairs [2002] FCA 9; Harvey Norman Holdings Ltd v Fels (2002) ATPR 41-852; and Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. 28 With respect to the motion filed by the applicant dated 6 June 2003 to amend the statement of claim, the first respondent, with the leave of the Court filed written submissions subsequent to the hearing which, primarily, sought clarification and explanation of the proposed amendments. Such explanation was provided by the applicant in the written submission. Further short written submissions were provided by the first respondent in opposition to the amendment. The amendment was ultimately allowed but the question of the costs of the motion, as stated above, was stood over. 29 The first respondent submits that its costs should otherwise be paid by the applicant. In support it says, first, that this is because it is in liquidation. Second, the proceeding has necessarily caused a further depletion of the asset and fund available to unsecured creditors. Third, the applicant was aware of these facts when it sought leave pursuant to s 500(2) of the Corporations Act to commence proceedings against the first respondent. Fourth, the applicant commenced these proceedings against the first respondent for 'formal' reasons only; that is, to preserve and maintain alleged rights of set-off against the second respondent. Fifth, the first respondent has participated in the proceedings only to the minimum extent necessary, so that it has not incurred costs unreasonably or unnecessarily. Sixth, since approximately March 2004 the applicant has proposed a settlement or discontinuance of the proceeding but has failed to act in a timely manner. This has caused the first respondent to incur further costs in corresponding with the applicant's solicitors and re-listing the matter before the Court for directions. Finally, it is said that there is some suggestion in the applicant's affidavit evidence that it does not have sufficient funds to proceed with the action. 30 In respect of the applicant's application for leave to proceed against the first respondent pursuant to s 500(2) of the Corporations Act, the Court there ordered that the costs of that application be costs in the cause of the proposed application. Accordingly, the respondent submits that its costs of that application should be paid by the applicant. reasoning 31 In Ex parte Lai Qin, McHugh J examined the principles which govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means. He accepted (at 624) that 'in an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action'. That statement was founded on his further statement that 'the Court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action'. He also referred to cases where a judge may feel confident that, although both parties have acted reasonably, one party is almost certain to have succeeded if the matter had been fully tried, although he considered such cases were likely to be rare. The broad principle which he expressed was, aside from these exceptions: 'If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the costs discretion will usually mean that the court will make no order as to the cost of the proceedings.' (at 625) He stated this approach had been adopted in a large number of cases. 32 Judges of this Court have considered the application of the principles in various circumstances. In O'Neill v Mann [2000] FCA 1680, Finn J, in reliance on what was said by McHugh J in Ex parte Lai Qin at 625, said the conduct of the parties in the matter and the reasons for the discontinuance can bear heavily on the exercise of the discretion as to costs. In FAIRA Aboriginal Corporation, Cooper J (at [7]) referred to an underlying policy in the rules that where an applicant abandons proceedings the discontinuing party should be liable for the other party's costs unless the Court otherwise orders. However, in O'Neill v Mann at [13], Finn J did not regard this as having hardened into a 'usual rule' where leave is granted. In Harvey Norman Holdings Limited, Stone J considered Ex parte Lai Qin. Stone J rejected submissions that the principles addressed by McHugh J in Ex parte Lai Qin should be restricted to the circumstances of that case. 33 It is apparent from the authorities that the focus must be on the conduct of the parties in the circumstances and its reasonableness. 34 This proceeding is not a case where the discontinuance can properly be seen as an acknowledgement of likely defeat. Nor is it a case where no objective circumstance provides reason for the discontinuance: O'Neill v Mann at [13]. 35 In my view this is a case where it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile. Consequently, the proper exercise of the costs discretion would usually mean that in those circumstances the Court would make no order as to the costs of the proceedings: Ex parte Lai Qin at 625. 36 The one additional circumstance that makes me hesitate in the exercise of the discretion is the fact that the first respondent is a company in liquidation and that, that was known to the applicant when it sought leave to commence proceedings against it. However, I do not consider that such circumstance alone creates the condition for exceptionality to the principles generally applicable. I have been unable to find and have not had my attention drawn to any statutory provisions or authority relevant to the circumstance of liquidation that would lead to a different conclusion. In counterbalance to the first respondent's submissions concerning the significance of its status in liquidation, there are equally compelling submissions on behalf of the applicant. It is therefore appropriate that the general principles should apply to resolve the exercise of discretion. conclusion 37 For the above reasons I conclude the Court should give its approval to the settlement and discontinuance of the proceeding against the first, second and third respondents on the basis there be no order as to costs. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice RD Nicholson. Associate: Dated: 17 December 2004 Counsel for the Applicant: J O'Donovan Solicitor for the Applicant: Gadens Lawyers Solicitor for the First Respondent: Jackson McDonald Solicitor for the Second Respondent: Versace & Co Solicitor for the Third Respondent: Minter Ellison Date of Last Written Submissions: 15 November 2004 Date of Judgment: 17 December 2004