Supreme Court New South Wales Medium Neutral Citation: Dymocks Franchise Systems (NSW) Pty Ltd v Chapter Three Pty Ltd [2022] NSWSC 35 Hearing dates: On the papers; submissions received 7 and 24 December 2021 and 4 February 2022 Decision date: 10 February 2022 Jurisdiction: Equity - Commercial List Before: Stevenson J Decision: Order that the defendants pay the plaintiff's costs of these proceedings: (1) as to the first and second defendants, on an indemnity basis; and (2) as to the third defendant, on the ordinary basis. Catchwords: COSTS – court's discretion as to costs – rule as to costs where merits of proceeding not heard – where contractual entitlement to indemnity costs – where proceedings precipitated by unreasonable conduct of defendants – where plaintiff in substance succeeded – entitlement to indemnity costs Cases Cited: Gomba Holdings (UK) Ltd v Minories Finance Limited (No 2) [1993] Ch 171 Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 One.Tel Ltd v Deputy Commissioner of Taxation [2000] FCA 270 Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6 Category: Costs Parties: Dymocks Franchise Systems (NSW) Pty Limited (Plaintiff) Chapter Three Pty Limited (First Defendant) Meenakshi Kapuria (Second Defendant) Prosper Global Pty Ltd (Third Defendant) Representation: Counsel: J A C Potts SC with A R Langshaw (Plaintiff) A Cheshire SC (Defendants) Solicitors: Bartier Perry (Plaintiff) Arnold Bloch Leibler (Defendants) File Number(s): 2021/313008 Judgment 1. The Court is confronted with the familiar, and often difficult, problem of determining what orders should be made for the costs of proceedings, now dismissed, but where there has been no adjudication on the merits of the proceedings. 2. The principles are well established: [1] 1. the court cannot try a hypothetical action between the parties; 2. nonetheless, in an appropriate case, the 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; 3. an example of such a case is where the court is able to conclude that one of the parties has acted so unreasonably as to justify a costs order against it; 4. in other cases, the court may be able to conclude that one party would almost certainly have succeeded; 5. a distinction needs to be drawn between a case in which one party, after litigating for some time, effectively surrenders to the other on the one hand; and cases where some sort of supervening event or settlement so removes or modifies the subject of the dispute that no issue remains between the parties except as to costs, although no party can be said to have won; and 6. if both parties have acted reasonably in commencing and defending proceedings, and the conduct of the parties continued to be reasonable until the litigation was settled or the further prosecution became futile, the proper exercise of the court's discretion will usually mean there should be no order as to costs. 1. These proceedings were commenced before me as Commercial List Duty Judge on 4 November 2021. 2. They were subsequently dismissed by Ball J on 3 December 2021 on the basis that the question of costs would be determined on the papers. 3. The plaintiff, Dymocks Franchise Systems (NSW) Pty Ltd is the well-known book retailer. 4. On 27 May 2015, the first defendant, Chapter Three Pty Ltd, entered a Franchise Agreement with Dymocks in relation to the Castle Hill Dymocks store. The second defendant, Ms Meenakshi Kapuria, guaranteed Chapter Three's obligations. 5. The Franchise Agreement came to an end on 31 October 2021. A week earlier, on 25 October 2021, by written notice Dymocks exercised an option under the Franchise Agreement to acquire all the assets, equipment, fixtures, fittings and other chattels used in conduct of the business (the "Assets"). 6. On 27 October 2021, Chapter Three's then solicitor informed Dymocks that the Assets were already the subject of an asset purchase agreement. That is, Chapter Three had purported to sell the Assets. Under the terms of the relevant documents, Chapter Three was not entitled to sell the Assets otherwise than subject to Dymocks' rights. 7. A dispute arose as to the adequacy of Chapter Three's response to enquiries that Dymocks made about the Assets. On 3 November 2021, Chapter Three stated, by its then solicitor, that "the Assets remain in the premises awaiting resolution", that Chapter Three would consider any justified request for information pursuant to the terms of the Franchise Agreement but that otherwise Chapter Three was under no obligation to provide undertakings as to access to and delivery of the Assets; and refused to do so. 8. In those circumstances, Dymocks commenced these proceedings and on 4 November 2021, I made ex parte orders restraining Chapter Three and Ms Kapuria from dealing with the Assets and orders requiring them to provide Dymocks with information about the location of the Assets. 9. On the return date of the Summons, 8 November 2021, the orders I made on 4 November 2021 were, by consent, discharged and replaced with slightly more precise orders. 10. On 9 November 2021, Chapter Three's and Ms Kapuria's current solicitors were retained. The following day, they wrote to Dymocks' solicitors stating that their clients "wish[ed] to resolve the inventorying and removal of the Assets cooperatively, expeditiously and with the minimum of disruption". 11. In the meantime, Chapter Three revealed that it had purported to sell the Assets to the third defendant, Prosper Global Pty Ltd. The sole director and shareholder of that company is Ms Kapuria's husband. Chapter Three acknowledged that Prosper Global did not assert that it had any priority, as against Dymocks, over the Assets. Nonetheless, Prosper Global did not respond to requests by Dymocks for appropriate assurances concerning the Assets with the result that, on 10 November 2021, Dymocks sought, and I made, orders joining Prosper Global as a defendant and restraining Prosper Global from dealing with the Assets. Prosper Global immediately retained the solicitors that are now acting for Chapter Three and Ms Kapuria and, through those solicitors, repeated that it did not assert it had any priority over any entitlement of Dymocks in respect of the Assets. 12. On 12 November 2021, Dymocks was granted access to the Castle Hill premises. Thereafter, negotiations have led to an agreement as to what assets should remain in the premises and what assets should be delivered up to Dymocks. 13. For the most part, Dymocks has succeeded in obtaining possession of the Assets to which it contended it was entitled. 14. In those circumstances, as I have said, on 3 December 2021, the Summons was dismissed, save for the question of costs. 15. Dymocks advances three bases upon which it should have its costs, including, as against Chapter Three and Ms Kapuria, costs on an indemnity basis. Contractual entitlement 1. Dymocks contends that it has a contractual entitlement to costs on an indemnity basis from Chapter Three and, as Ms Kapuria has guaranteed Chapter Three's obligations, against Ms Kapuria. 2. In its Summons, Dymocks has sought "[c]osts on an indemnity basis pursuant to the terms of the Franchise Agreement, or alternatively on the ordinary basis". 3. Thus, contrary to the submissions made by Mr Cheshire SC for the defendants, Dymocks has pleaded a contractual entitlement to costs on this basis. 4. Clause 14.6 of the Franchise Agreement provides, relevantly, that Chapter Three: "…indemnifies and holds harmless [Dymocks] … from and against all … cost, expense and loss … which it incurs or suffers directly or indirectly as a result of or arising out of: … (7) all legal costs, on a full indemnity basis … incurred by [Dymocks] in connection with a Claim." 1. "Claim" is defined broadly and includes all "legal costs on a full indemnity basis". 2. Mr Cheshire submitted that cl 14.6 deals only with the position where a claim is made against Dymocks and has no application where, as in this case, Dymocks brings a claim. 3. I do not agree. The clause includes an indemnity in relation to costs incurred by Dymocks in connection with a "Claim". I see no words in the clause excluding its operation in relation to a Claim brought by Dymocks, as opposed to a Claim brought against Dymocks. 4. In any event, cl 20.13 of the Franchise Agreement provides that: "(1) [Chapter Three] must pay the costs and expenses of [Dymocks] including … legal expenses on a full indemnity basis … : … (b) in exercising or attempting to exercise its rights under this Agreement; (c) in taking legal proceedings against [Chapter Three] to enforce or to attempt to enforce its rights under or in relation to this Agreement …". 1. Mr Cheshire submitted that this clause assumes that Dymocks has "rights" and "will not apply if, as here, there is a dispute about those rights and no judicial determination." 2. Again, I do not agree. The clause is wide enough to cover Dymocks' costs of "attempting" to exercise its rights. Chapter Three's obligations under this clause arise even if there is an unresolved dispute about those rights. 3. Dymocks accepts that the power to award costs is ultimately at the discretion of the court, notwithstanding contractual provisions of the kind I have set out. 4. However, such provisions provide a powerful basis to order costs consistently with them. Thus, in Kyabram Property Investments Pty Ltd v Murray, [2] the Court of Appeal [3] cited with approval the decision of Scott LJ in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [4] that: "Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right." 1. Thus, these provisions provide a powerful basis to order indemnity costs against Chapter Three and, as Ms Kapuria has guaranteed the obligations of Chapter Three, against Ms Kapuria. The proceedings were precipitated by the defendants' unreasonable refusal to acknowledge Dymocks' rights under the Franchise Agreement 1. As against Chapter Three and Ms Kapuria, I am satisfied that the proceedings were necessitated by the unreasonable positions adopted by them concerning Dymocks' requests and enquiries in relation to the Assets. 2. At no time prior to 10 November 2021 did Chapter Three or Ms Kapuria provide any confirmation as to Dymocks' entitlement to the Assets. It was not until 10 November 2021 that Chapter Three and Ms Kapuria indicated, for the first time, that they would complete the sale of the Assets to Dymocks. 3. As against Prosper Global, although, shortly after the proceedings were commenced, Chapter Three's solicitors stated that Prosper Global did not assert any priority over the Assets as against Dymocks, Prosper Global did not respond to Dymocks' requests for assurances concerning that position and only acceded to Dymocks' position once joined as a defendant. Effective surrender and capitulation 1. Finally, I see there is substance in Dymocks' contention that each of the defendants have changed their position, and in effect acceded to the substance of Dymocks' claims, only after the commencement of proceedings. 2. Although Dymocks has compromised, to some extent, in effect it has emerged as a "clear winner", to adopt the language of Burchett J in One.Tel Ltd v Deputy Commissioner of Taxation. [5] 3. In relation to this, Mr Cheshire made two points. 4. The first was to point to a supposed tension between a demand made by Dymocks on 14 October 2021 that Chapter Three remove Dymocks' fixtures, fittings and so on from the premises on the one hand, and Dymocks' claim for possession of the Assets on the other; it had been argued that Dymocks' demand that the Assets be removed somehow implied Dymocks' permission that Chapter Three could sell the Assets. 5. Chapter Three could have had no doubt about Dymocks' entitlement to the Assets. As Mr Potts SC and Mr Langshaw for Dymocks submitted, Mr Cheshire's submission elides the distinction between physically removing the Assets to a separate location from the premises on the one hand, and dealing with the Assets, in the sense of creating or disposing of a proprietary interest in the Assets, on the other. 6. The second point Mr Cheshire made was that, as I have said, after the proceedings were commenced, Dymocks had refined to some extent, and more precisely particularised, the Assets the subject of its claim. 7. In that regard I think that Mr Potts and Mr Langshaw were correct to submit that: "The issue between the parties was whether Dymocks had a contractual right, secured by a perfected security interest, to take title and possession of the Assets in priority to an unidentified third party with whom Chapter Three asserted that it had purportedly contracted to sell the Assets. It was Chapter Three's refusal to recognise and acknowledge those rights, rather than any narrower dispute as to their precise scope, that led to the joinder of issue between the parties in correspondence and which necessitated Dymocks' commencement of the proceedings." Decision 1. In those circumstances, I am satisfied that this is a case where, notwithstanding the fact there has been no adjudication on the merits, it is appropriate to make a costs order in favour of Dymocks. 2. I order that the defendants pay the plaintiff's costs of these proceedings: 1. as to the first and second defendants, on an indemnity basis; and 2. as to the third defendant, on the ordinary basis. ********** Endnotes 1. See Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6 at 624-625 (McHugh J) and One.Tel Ltd v Deputy Commissioner of Taxation [2000] FCA 270 at [5]-[6] (Burchett J). 2. [2005] NSWCA 87. 3. Beazley JA (with whom Hodgson and Ipp JJ agreed) at [14]. 4. [1993] Ch 171 at 194. 5. At [7]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 February 2022