FEDERAL COURT OF AUSTRALIA Travaglini v Raccuia [2012] FCA 620 Citation: Travaglini v Raccuia [2012] FCA 620 Parties: DINO TRAVAGLINI (AS TRUSTEE IN BANKRUPTCY FOR THE ESTATE OF CARMELO FRANCESCO RACCUIA) v ANTONIO GUISEPPE RACCUIA and VASCO (WA) PTY LTD ACN 008 935 313 File number: WAD 36 of 2008 Judge: MCKERRACHER J Date of judgment: 14 June 2012 Catchwords: COSTS – application for leave to discontinue with no order as to costs – application of r 26.12(7) of the Federal Court Rules 2011 that the discontinuing party is liable for costs unless the Court is satisfied there is a good reason for ordering otherwise – whether parties acted reasonably in prosecuting and defending the proceeding Held: when applicant commenced proceeding there was a reasonably foreseeable risk that litigation would become futile – applicant should pay the respondents' costs upon discontinuance Legislation: Federal Court Rules 2011 rr 26.12(2)(c), r 26.12(7) Cases cited: ACN 116 149 092 Pty Ltd v Coopers Brewery Ltd [2006] FCA 1119 Ahmed v Minister for Immigration & Multicultural Affairs [2000] FCA 1436 Ann Street Mezzanine Pty Ltd v KPMG [2011] FCA 453 Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 Bell v Macquarie Bank Ltd [2000] FCA 1521 Chapman v Luminis Pty Ltd [2003] FCAFC 162 Commissioner of Taxation v Edgewater Estates Ltd (No 2) [2009] FCA 811 Doolan v Newitt [2003] FCA 1507 Evans as Trustee of the Kamiyacho Superannuation Fund v BankWest [2007] FCA 506 Jeruth Pty Ltd v Haybale Pty Ltd [2004] VSC 319 McClure v Mayor and Councillors of the City of Stirling (No 3) [2009] WASC 247 Media Ocean Ltd v Optus Mobile Pty Ltd (No 11) [2011] FCA 19 Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 Mineralogy Pty Limited v National Native Title Tribunal [1998] FCA 1700 Novartis AG v Agvantage Pty Ltd [2012] FCA 160 O'Neill v Mann [2000] FCA 1680 ONE.TEL Ltd v Commissioner of Taxation (2000) 101 FCR 548 Potato Marketing Corporation of Western Australia v Galati Nominees Pty Ltd [2004] FCA 1216 Rhodium Australia Pty Ltd v Deputy Commissioner of Taxation [2012] FCAFC 17 Rickus v Motor Trades Association of Australia Superannuation Fund Pty Ltd (2010) 77 ACSR 216 Smith v Airservices Australia (2005) 146 FCR 37 Date of hearing: 27 April 2012 Date of last submissions: 1 June 2012 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 40 Counsel for the Applicant: NDC Dillon Solicitor for the Applicant: Karp Steedman Ross-Adjie Lawyers Counsel for the Second and Third Respondents: KM Pettit SC Solicitor for the Second and Third Respondents: Murfett Legal IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 36 of 2008 BETWEEN: DINO TRAVAGLINI (AS TRUSTEE IN BANKRUPTCY FOR THE ESTATE OF CARMELO FRANCESCO RACCUIA) Applicant AND: ANTONIO GUISEPPE RACCUIA Second Respondent VASCO (WA) PTY LTD ACN 008 935 313 Third Respondent JUDGE: MCKERRACHER J DATE OF ORDER: 14 JUNE 2012 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. Leave is granted to discontinue the application. 2. The applicant is to pay the costs of the second and third respondents, to be taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 36 of 2008 BETWEEN: DINO TRAVAGLINI (AS TRUSTEE IN BANKRUPTCY FOR THE ESTATE OF CARMELO FRANCESCO RACCUIA) Applicant AND: ANTONIO GUISEPPE RACCUIA Second Respondent VASCO (WA) PTY LTD ACN 008 935 313 Third Respondent JUDGE: MCKERRACHER J DATE: 14 JUNE 2012 PLACE: PERTH REASONS FOR JUDGMENT INTRODUCTION 1 The applicant (Mr Travaglini) applies for leave to discontinue this proceeding on terms that, save as to the costs of the interlocutory application, he and the second and third respondents should bear their own costs of the proceeding. He seeks the costs of the interlocutory application as the respondents have failed to accept the offer to discontinue with no order as to costs. 2 Mr Travaglini made clear that he would discontinue in any event and the discontinuance was not conditional upon any particular costs order. 3 The proceedings have already been finalised as between Mr Travaglini and all other respondents. As the pleadings have closed, the discontinuance requires leave under r 26.12(2)(c) of the Federal Court Rules 2011 (the Rules) but it is unopposed. The only argument is as to the question of costs. The wording of r 26.12(7) – and its difference in wording from the former Rules - is important. It provides: 26.12 Discontinuance … (7) Unless the terms of a consent or an order of the Court provide otherwise, a party who files a notice of discontinuance under subrule (2) is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued. BACKGROUND 4 The proceedings concern a property at 21 and 23 Lake Street, Cannington, Western Australia of which the first respondent was the registered proprietor. In so far as the proceeding concerned Mr Travaglini and the second and third respondents, Mr Travaglini claimed that the first respondent held the property on trust for Mr Frank Raccuia, the father of the second respondent who had become a bankrupt. Mr Travaglini was appointed as his trustee. This resulted in the beneficial interest in the property vesting in Mr Travaglini. Alternatively, it was contended that the property was held on trust for the second respondent with Mr Travaglini seeking a transfer of the property pursuant to s 139D of the Bankruptcy Act 1966 (Cth). 5 The second and third respondents claim, amongst other things, that the first respondent held the property on trust for the second respondent pursuant to a purported deed of trust dated 6 July 2001. BASIS OF THE CLAIM FOR NO ORDER AS TO COSTS 6 Mr Travaglini contends that in commencing the proceedings he acted reasonably and says that it is beyond argument that there is a strong factual foundation for the claim that the first respondent held the property on trust for the bankrupt. Mr Travaglini advances a number of arguments in support of the contention that there was a strong factual foundation for the claim that the first respondent held the property on trust for the bankrupt. He refers to the first respondent's admission as to Mr Travaglini's essential allegations that: (a) The first respondent and the bankrupt agreed that the first respondent would acquire the property and hold it for the bankrupt. (b) It was the common intention of the first respondent and the bankrupt that the first respondent would hold the property at the bankrupt's direction. (c) It was a term of the agreement between the first respondent and the bankrupt that the first respondent would hold the property in trust on behalf of the bankrupt and at his direction. (d) The first respondent did not sign the purported deed of trust dated 6 July 2001 as relied on by the second and third respondents. (e) The first respondent's dealings in relation to the property were pursuant to his agreement with the bankrupt and at the bankrupt's direction. 7 It follows that it cannot seriously be suggested, Mr Travaglini argues, that this was a case where from the start of the litigation he was almost certain to have failed if the matter had been fully tried. Mr Travaglini contends that this is strong support for the argument that it could not be contended that his conduct has been unreasonable for the purpose of determining costs in relation to his discontinuance application. 8 In contrast, he argues that there were aspects of the second and third respondents' conduct of the proceedings that were unreasonable, in particular: 1. In November 2009 it became apparent that the first registered mortgagee of the property was proceeding with a mortgagee sale. 2. On 16 February 2010 Agrico Nominees Pty Ltd, a company of which the second respondent is the sole director, entered into a contract to purchase the property for $1.6 million. The identity of the purchaser, and amount of the purchase price, was not disclosed to Mr Travaglini until late May 2010 – and such disclosure was given by the solicitors for the mortgagee, not the second respondent. 3. By reason of a letter dated 27 November 2009 the parties, including the second and third respondents, knew that it was Mr Travaglini's position that any sale of the property would affect the future course of the proceedings – particularly consideration of the parties' respective commercial positions. That has remained Mr Travaglini's consistent position. 4. Settlement of the sale contract, initially proposed for 28 April 2008, became delayed because the second respondent (who controlled the purchaser) refused to remove a caveat he had lodged in relation to the property. From late July 2011 to early October 2011 settlement was delayed due to the purchaser being unable to complete settlement. 5. Despite the foregoing, between late November 2010 and January 2011 the second and third respondents resisted Mr Travaglini's suggestion that there be no active steps taken in the proceedings, and instead sought orders that Mr Travaglini give discovery. The second and third respondents only abandoned that position at Court immediately before a hearing listed for 31 January 2011. The second and third respondents' actions in this respect were said to be inconsistent with the 'overarching purpose' and resulted in two unnecessary attendances before the Court and significant wasted costs. 9 The first registered mortgagee completed a mortgagee sale of the property on 7 October 2011 and Mr Travaglini argues that at that point, by reason of the supervening event of the completed mortgage sale of the property, the proceedings became moot and futile. That is because the subject matter of the proceeding and primary relief sought in the litigation was no longer available as 'the property had been transferred to a third party entitled to indefeasibility of title'. 10 Moreover and more to the point, he argues that by reason of the $1.6 million sale price being considerably less than the 2008 market appraisal of $2.15 million to $2.55 million and the first mortgagee's debt having risen to $1.449 million with there being a number of other outstanding encumbrances and costs of sale, the net proceeds of sale were less than the priority claims against the property. 11 Mr Travaglini relies upon observations of Hill J in Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 (at 201), where his Honour observed that: Where neither party desires to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order. It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits, i.e. to determine the outcome of a hypothetical trial. This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue. In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them. In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation. 12 Reliance is also placed upon Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 (at 624 and particularly at 625) per McHugh J, where his Honour said (footnotes omitted): 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 cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases. 13 There is a distinction to be drawn in cases where one party effectively surrenders on the one hand and a case in which a supervening event renderers the matter futile or moot. In the former case it is often appropriate to make an award of costs in favour of the party receiving the effective surrender. In the latter, it may not be: ONE.TEL Ltd v Commissioner of Taxation (2000) 101 FCR 548 per Burchett J (at [6]-[7]). 14 Mr Travaglini relies on principles set out in Jeruth Pty Ltd v Haybale Pty Ltd [2004] VSC 319 (at [2]-[8]) and particularly the passages reading (at [2] and the whole of [5]) (footnotes omitted): 2 …Where no hearing on the merits has taken place the criteria upon which costs are normally awarded, namely success or failure of the litigant, is absent and the appropriate order is generally that each party bear its own costs. … … 5 Where it is not clearly discernible that a party would have won and it appears that both parties have acted reasonably in commencing and defending the proceedings until the litigation was compromised or became futile, the Court, would usually make no order as to costs. But where the Court concludes that a party has acted unreasonably prior to or during the course of the litigation the making of a costs order against it may be justified. RELEVANT PRINCIPLES 15 Mr Travaglini places heavy reliance upon Lai Qin which he says has been cited in over 450 decisions and applied in all Australian jurisdictions and where cases have not followed Lai Qin, it has usually been on the basis that they are 'surrender cases'. 16 In my view, it is necessary to recognise the fact that the observations made by McHugh J in Lai Qin were principles set out by his Honour (at 624) '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 he action either by settlement or by extra-curial means' (emphasis added). That is certainly not this case. 17 There are two further observations to make about Lai Qin. The first is that the rule concerned was O 71 r 39 of the former High Court Rules 1952 (Cth) which provided: r 39 Costs when further proceedings become unnecessary When for any reason the further prosecution of a proceeding becomes unnecessary, except for the purpose of determining by whom the cost of the proceeding should be paid, any party may apply to the Court or a Justice to determine the question, and thereupon the Court or Justice may make such order as is just. 18 That is a very different rule from the rule under consideration under the Rules. 19 Secondly, the reason that the prosecutrix in Lai Qin had 'achieved the relief sought in the action either by settlement or by extra-curial means' was because the Minister revoked a refusal to grant a protection visa under the Migration Act 1958 (Cth) following launch of the appeal. The question for his Honour, sitting as a single judge, was whether or not to grant the application by the prosecutrix for costs pursuant to O 71 r 39 as she had succeeded in obtaining the relief she would have obtained had she pursued the proceedings. 20 Lai Qin has been followed in a number of Federal Court decisions. In Rickus v Motor Trades Association of Australia Superannuation Fund Pty Ltd (2010) 77 ACSR 216, the Full Court cited Mineralogy Pty Limited v National Native Title Tribunal [1998] FCA 1700 (at 118]) for the proposition that in most cases where there has been no trial on the merits, it is not appropriate in determining an issue of costs to make a prediction as to the outcome of the hypothetical case. That principle cannot be in doubt. 21 In Rhodium Australia Pty Ltd v Deputy Commissioner of Taxation [2012] FCAFC 17, the proceeding under appeal raised the question as to whether the Commissioner had acted reasonably in commencing winding up proceedings and then discontinuing on the taxpayer filed affidavit evidence. The Full Court, after citing Lai Qin, approved application of the principle that a party who acts unreasonably can still be visited with a costs order notwithstanding discontinuance before the merits are determined. Again, that principle cannot be in doubt. 22 In Chapman v Luminis Pty Ltd [2003] FCAFC 162, the Full Court (at [7]) acknowledged the distinction between the 'surrender' cases and other cases as identified by Burchett J in ONE.TEL. There have been other single judge decisions citing Lai Qin: Ann Street Mezzanine Pty Ltd v KPMG [2011] FCA 453; Novartis AG v Agvantage Pty Ltd [2012] FCA 160; Commissioner of Taxation v Edgewater Estates Ltd (No 2) [2009] FCA 811; Media Ocean Ltd v Optus Mobile Pty Ltd (No 11) [2011] FCA 19; Evans as Trustee of the Kamiyacho Superannuation Fund v BankWest [2007] FCA 506; and Doolan v Newitt [2003] FCA 1507. 23 But of these cases, only those involving the Rules will be of assistance. Although generally speaking, in the Explanatory Statement for the introduction of the Rules it is indicated that they are not intended to substantially alter existing practice, in relation to the Explanatory Statement concerning r 26.12 the position is somewhat different. The Explanatory Statement states: The new Rules include some significant changes in relation to costs. These changes are the result of a separate review of costs carried out from mid-2009 until late 2010. 24 Of the cases cited for Mr Travaglini only two were determined after the Rules change: Rhodium (at [21]) and Novartis AG. In Novartis AG, however, the argument presently under consideration does not appear to have been drawn to the attention of the Court. The Rules are not mentioned at all. No argument is referred to suggesting that the Court was taken to the issue. In many instances the debate may not arise. Rhodium is a Full Court appeal after the introduction of the Rules, however, dealing with the first instance case decided on 29 August 2011 with the greater part of that case being conducted under the pre-2011 Rules. The only extent to which Lai Qin was relied upon both at first instance and the Full Court was to the extent that it allowed costs against the successful party on account of untoward conduct. There is no reference to the Rules and no reference to the argument advanced by reason of the Rules. Neither case suggests that r 26.12 of the Rules does not mean what it says, namely, that the starting point is that the discontinuing party pays costs unless for good cause shown the Court orders otherwise. 25 The authorities relied upon by Mr Travaglini almost all pre-date the Rules just as the High Court Rule considered in Lai Qin did not reflect the provision which is now set out in the Rules. 26 The question for me is whether the evidence and arguments advanced by Mr Travaglini are such that I should 'provide otherwise' within the meaning of r 26.12(7) of the Rules. 27 In support of this contention, Mr Travaglini advanced three main submissions: first, instituting and persisting with proceedings was reasonable; secondly, there was an extraneous cause rendering the pursuit of the proceeding pointless; and thirdly, the Court should take into account the conduct of the second and third respondents in relation to the connection of that conduct with the ultimate inutility of the pursuit of the proceedings. Reasonableness 28 Dealing with the first and second points together, it is not advanced against Mr Travaglini that issuing the proceeding was unreasonable but simply that it carried with it an inherent risk as with all litigation. Further, in this litigation in particular, the utility of the litigation depended upon the value of the particular property. As is presently notorious, the values of many properties have declined. The fact is that the property continuing to hold the value expected by Mr Travaglini was a risk that was taken in issuing the proceeding. It is not something wholly unforeseeable or unexpected and, more importantly, unlike like Lai Qin, where the applicant for costs (the prosecutrix) had entirely achieved success extra-curially, that is certainly not the case here. Mr Travaglini has decided not to press on because there would be no point in doing so. While making no criticism of the decision at all, the fact remains that he has not achieved success through the curial process or otherwise. 29 In the present situation, Mr Travaglini seeks to withdraw in circumstances where even if 100 percent success were attained in the application, no funds would be returned to the Mr Travaglini because the value of the property does not exceed the aggregate amount of liability due in respect of it. Not only was this foreseeable as a potential possibility at the time of issuing the proceeding, there was express advice as to that prospect. On 19 July 2006, the second respondent advised Mr Travaglini that the property would not fetch enough to satisfy all caveated debts. The outcome foreshadowed in that advice is exactly the basis upon which Mr Travaglini now seeks to discontinue on the basis that no costs ought to be made. The advice given was supported by a valuation from an ostensibly reputable valuer. That was followed about a month later with an affirmation of the valuation on commission. 30 Aside from that professional valuation, there is no evidence of any other proper evaluation. There was no evidence that Mr Travaglini sought further professional valuation advice before commencement of the action or, indeed, close of pleadings. The risk concerning of the value of the land continued throughout from 2006 onwards. It might well be that in 2006 buoyant or rising property prices looked more likely than they did by 2012 but the risk was always there bringing the matter within the expression adopted by Finn J in ACN 116 149 092 Pty Ltd v Coopers Brewery Ltd [2006] FCA 1119 (at [22]) where his Honour said that 'from its inception this matter contained the seeds of its own futility'. This expression was adopted by Beech J and followed in McClure v Mayor and Councillors of the City of Stirling (No 3) [2009] WASC 247 (at [43]-[47]). 31 As observed by Stone J in Smith v Airservices Australia (2005) 146 FCR 37 (at [48]) and by Finn J in O'Neill v Mann [2000] FCA 1680 (at [13]), if the reasons for discontinuance are relevant and if discontinuance is on account of futility, then the reasons for the futility are relevant. They have been canvassed above. A similar approach was taken by French J, as his Honour then was, in Potato Marketing Corporation of Western Australia v Galati Nominees Pty Ltd [2004] FCA 1216 where the applicant contended that the proceedings were to be rendered futile or academic because of a report recommending or foreshadowing legislative change that was apparently accepted by the State Government. While his Honour accepted that the applicant's practical considerations were entirely legitimate, his Honour nevertheless held (at [4]) that the decision to discontinue 'turns upon a prognosis about the introduction of legislation which at this stage, giving due respect to the intention of the Executive to introduce it into the Parliament, is somewhat speculative'. His Honour noted that a Bill had not be drafted or introduced into Parliament. The applicant was ordered to pay the respondent's costs on discontinuance. 32 In this case, the futility relied upon by Mr Travaglini was not unforeseeable or unexpected. It may have been common in 2006 to assume that there would be rises in land value which would outstrip rising debts but that was a risk taken despite the receipt of two licensed valuers' opinions to the contrary. Even without that evidence, the drop in value of the land is not the sort of futility which should in this case warrant a departure from the prima facie position under r 26.12(7) of the Rules. Respondents' conduct 33 There are several complaints raised about the conduct of the respondents. To investigate all of them would involve a mini trial in itself and I do not propose recording all the complaints or evaluating them other than to say that I am not satisfied that the delay contributed to the reason for the discontinuance. Dealing with the conduct of the second and third respondents, it is difficult to see how the conduct of the second respondent who is a minor when the trust was created could be held against him in any discretionary consideration under the rule. The conduct of the second respondent has been consistent with the beneficial interest that he contends he is entitled to in the land under the trust. There cannot be a complaint raised against him that he had acted to protect that interest and, in particular, that his failure to agree to remove the caveat should lead to an inference that his conduct was unreasonable. 34 The further difficulty for Mr Travaglini on this argument is that by the time of these actions or inactions, Mr Travaglini had already identified problems with the commerciality of the proceeding. A delay by the second respondent in agreeing to the removal of a caveat was at a point in time when Mr Travaglini was well and truly committed to the prosecution of the proceeding notwithstanding the inutility in doing so. 35 It is also a relevant consideration in this regard, in my view, that Mr Travaglini advanced the contention against the second respondents that the relevant trust was a 'sham'. The second respondent has been deprived of the opportunity to clear his name in respect of those allegations. As noted by her Honour, Stone J, in Smith (at [44]), this is also a relevant consideration. I emphasise that this is not deciding the matter in any respect on the merits but simply noting that the second respondent has been deprived, by reason of the discontinuance, of the opportunity to vindicate his position despite generally having incurred costs in preparing to do so. As her Honour noted in Smith (at [44]), although the reasons for discontinuance may vary considerably, it is likely to be in the interests of justice that in such circumstances the respondent to the claim should have those costs met by the discontinuing party. CONCLUSION 36 In my view, there is now under the Rules a prime facie entitlement on the part of the party not discontinuing to costs. It can of course be disturbed. Even in respect of the former O 62 r 26(1) of the pre-2011 Rules that approach was not unknown: see for example Ahmed v Minister for Immigration & Multicultural Affairs [2000] FCA 1436 in which Emmett J held that where the discontinuing applicant failed to satisfy the Court that another order should be made, the respondent was to be awarded its costs. I would adopt that approach to the present situation. In addition, Lehane J held in Bell v Macquarie Bank Ltd [2000] FCA 1521 where the applicant discontinued albeit without leave that the applicant was prima facie liable to pay the other party's costs because of the operation of O 22 r 3 and O 62 r 26 of the pre-2011 Rules saying that (at [5]): the ordinary result of the applicants' discontinuance would be that they would be required to pay the respondents' costs of the proceeding. The question is whether the applicants have established that, in the particular circumstances of this case, there is any particular matter which should, as a matter of discretion, displace that ordinary consequence. 37 These cases post-date Lai Qin. 38 If the consequence of all of this is that parties reflect more carefully about the risks of launching into costly litigation, this is not to be regretted. 39 For the foregoing reasons I would have been reluctant to deprive the respondents of their costs under the former Rules but in any event see no reason to do so under the Rules. 40 Therefore, these orders are made: 1. Leave is granted to discontinue the application. 2. The applicant is to pay the costs of the second and third respondents, to be taxed if not agreed. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate: Dated: 14 June 2012