NATIONAL ACCEPTANCE CORPORATION PTY LTD v HARTNIG SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MASON P, PRIESTLEY and MEAGHER JJA 15-16 April 1997, 18 April 1997 [1997] NSWCA 218 COSTS — WHETHER TRIAL JUDGE SHOULD HAVE A WARDED COSTS TO SUCCESSFUL PARTY — Finance company brought proceedings against three defendants to recover moneys owing under lease agreement — first defendant in liquidation when proceedings commenced — proceedings against first defendant discontinued — second defendant died during proceedings — proceedings against second defendant discontinued — series of offers and counter offers of settlement all rejected — judge finds for plaintiff on all issues and decides there shall be no order as to costs. On appeal: plaintiff appeals costs order — Held: judge took irrelevant matters into account — costs order set aside — sound reasons for varying usual order — appeal court in re-exercise of discretion concerning costs orders respondent to pay half costs of first instance proceedings. Mason P, Priestley and Meagher JJA At the end of the oral argument in this appeal on 15 April 1997, the case was stood over for delivery of judgment the following morning; however, the pressure of business then made it expedient for the court simply to announce its orders and to say that reasons would be given subsequently. These now follow. The grounds of appeal were only concerned with questions of interest and costs. Before the appeal came on for hearing the respondent had agreed that the appellant must succeed on the interest point. The amount to be added to the judgment was also agreed. The only argument left was about the trial judge's costs order. The appellant, the plaintiff in the first instance proceedings, had succeeded in its claim, and the respondent had failed in a cross-claim. The trial judge had decided to make no order for costs. Only the bare bones of the case need be stated for an understanding of the argument and decision on the costs question. The plaintiff commenced proceedings in the Local Court on 2 November 1990 claiming $7,470 from three defendants, the first a company, the second and third being Mr and Mrs Hartnig who were the persons principally concerned with the company and who had guaranteed the company's obligations under a lease of equipment made to it by the plaintiff. The plaintiff's claim was for amounts allegedly due following the determination of the equipment lease. At the time the proceedings began the company was in liquidation. The proceedings were pursued by the plaintiff against the second and third defendants as guarantors. The second and third defendants wished to rely on the Contracts Review Act 1980. The view was taken by the parties that the Local Court did not have jurisdiction to deal with the matters the defendants wished to raise. Upon the application of the second and third defendants the proceedings were, by consent, transferred to the District Court on 16 October 1992. In 1994 the solicitors for the second and third defendants made an offer of settlement which the plaintiff did not accept. The plaintiff made a counter offer. The second and third defendants did not accept. 2 UNREPORTED JUDGMENTS In 1993 the Courts Legislation (Amendment) Act 1993 enlarged the jurisdiction of the Local Court under the Contracts Review Act. In August 1994 the plaintiff's solicitors wrote to the second and third defendants' solicitors suggesting that the proceedings be transferred back to the Local Court. This suggestion was not responded to. On 7 April 1995 the second and third defendants filed an amended notice of grounds of defence and a cross-claim. At that point a hearing date had been fixed for 27 April 1995. On that date the plaintiff sought and obtained an adjournment on the footing that it had not had sufficient time to prepare its case in answer to the recently filed cross-claim. There was argument about the rights and wrongs of this assertion and the judge then hearing the matter ordered that the costs thrown away be costs in the cause. A new hearing date was fixed for 6 June 1995. On 6 June 1995 the case came on for hearing before his Honour Judge Downs QC. Before the hearing began the plaintiff made an offer of settlement to the second and third defendants which was rejected and the second and third defendants made a counter offer which was also rejected. When the hearing began the plaintiff reduced the amount it was claiming. The amount of $7,405 it had claimed in its statement of claim filed 2 November 1990 was said to have been the sum of $3,511 being the amount of the arrears owing under the lease at a date which seems to have been 31 July 1990 (see p 41 of the appeal papers) plus interest at 15% (as stipulated by the lease) from 31 July 1990 to 2 November 1990. In the reduced claim put to the court on 6 June 1995, it was said that the amount claimed as at that date, $6,065, was the original amount of arrears, $3,511, together with interest from 31 July 1990 to 6 June 1995, $2,554. It follows from this that using the method of calculation adopted by the plaintiff on 6 June 1995, the amount of its claim at 2 November 1990 would have been approximately $3,640, that is, the original amount owing, $3,511, plus approximately three months' interest at 15%. This means that the claim as made by the plaintiff against the defendants at the commencement of the proceedings was approximately double what it claimed on the first day of the hearing before Judge Downs. The case, although obviously important to the defendants, and no doubt of commercial importance also to the plaintiff, concerned a comparatively small amount of money. When the hearing continued into the second day, 7 June 1995, the trial judge is recorded (p 25 of the appeal papers) as having warned the parties that he had an absolute discretion as to costs. The transcript does not record what lay behind that remark but whatever else it may have meant, it must have meant that the judge was indicating that the usual order for costs, that they should follow the event, might not be appropriate in the case before him. The only inference available from this is that the judge was concerned that the case might take longer and build up more costs than the subject matter of the case warranted. At the end of the second day of hearing, (7 June 1995), the case was adjourned part heard to 25 July 1995. The second defendant died on 14 July 1995. The third defendant then made another offer of settlement, which the plaintiff did not accept. The death of the second defendant led to the proceedings not coming on for further hearing until 11 March 1996. They then extended through 11, 12 and 13 March. Before resumption of the hearing another offer of settlement by the third defendant was rejected by the plaintiff. Upon resumption the plaintiff elected to discontinue against the second defendant and proceeded only against the third defendant. WRATIONAL ACCEPTANCE CORPORATION PTY LTD v HARTNIG (Mason P, Priestley an@ Meagher JJA) On 15 March 1996 the trial judge delivered judgment. On the plaintiff's claim he found for the plaintiff in the amount of $5,090, being $3,511, plus an amount for interest. He dismissed the defendant's cross-claim. This had been based on a number of features, including a claim that some parts of the leased equipment had been missing upon delivery and other parts did not operate. There had been an issue about this claim which the trial judge found had been established by the defendant but not in a way that assisted either her defence or cross-claim. He said he would enter judgment for the plaintiff in the sum of $5,090. He then heard argument on interest and costs. In the course of the argument about costs, the history of the series of offers and counter offers was put before him. The plaintiffs success in the proceedings left it in the position where it was better off than it would have been had the defendant accepted any of its offers or had it accepted any of the offers made by the defendants. There was argument about what should happen concerning the costs of 27 April 1995 and about which side had been substantially responsible for the adjournment on that day. The solicitor instructing counsel for the third defendant, who had been the solicitor for both the second and third defendants before the death of the second defendant, asked to be heard concerning the costs of the second defendant. He took the point that upon the plaintiff having discontinued the proceedings against the second defendant the plaintiff had exposed itself to the possibility of a costs order against it. He said it would be possible even at that point for a grant of representation to be obtained so that the second defendant's estate could make an application for costs. He suggested that instead of that procedure being followed "each party may pay their own costs in these proceedings because it may be difficult to separate how costs would be apportioned as between the second and third defendants". The statutory provisions and rules concerning costs are almost identical in the District Court with those in the Supreme Court. S148B of the District Court Act says that "Costs in or in relation to any proceedings shall be in the discretion of the Court", and, further that "the Court has full power to determine by whom, to whom and to what extent costs are to be paid'. Pt39A 19 of the District Court Rules provides that: "Tf the Court makes an order as to costs, the Court shall, subject to this Part, order that the costs follow the event, except where it appears to the Court that some other order should be made as to the whole or any part of the costs." The trial judge mentioned a number of matters in the course of reaching his decision to make no costs orders. The first of these was that the company defendant had been in liquidation at the time of the commencement of the proceedings. We doubt whether this had any relevance to his decision as there appears to have been nothing of a substantive kind that happened or was done in relation to the first defendant in the course of the proceedings. It seems simply to have been ignored. He next mentioned the discontinuation of the proceedings by the plaintiff against the second defendant. He noted that the plaintiff could have taken steps to carry the proceedings on against the estate but had not done so, with the result that it "might not be entitled to the costs of suing Mr Hartnig in the first place". He then mentioned the usual rule that a successful plaintiff normally gets costs. Then he referred to the various offers of settlement, all rejected. We think the facts concerning these offers had no relevance to the question whether he should depart from the usual rule concerning costs, because the offers by the plaintiff, 4 UNREPORTED JUDGMENTS which if accepted would have left the plaintiff with less that it obtained by the judgment, were all rejected, so that the second and third defendants in rejecting the offers were taking the risk of the usual order for costs if they happened to lose the litigation. In regard to the offers, the judge said they more or less cut one another out. It thus may be that he did not place any particular weight on the offers as a relevant consideration. The next matter that he mentioned was that the proceedings should have been brought in the Local Court. He noted that it was the defendants who had caused them to be taken to the District Court and that the plaintiff had later offered for them to go back to the Local Court; however, he said for the plaintiff to rely on that, the plaintiff should have come to the District Court and moved for the proceedings to be transferred back again. In the course of argument in this court the appellant/plaintiff said the judge had been wrong in what he said about the plaintiff's part in the proceedings continuing in the District Court, for two reasons. One was not brought to the judge's attention at the hearing. This was that even after some jurisdiction had been conferred on the Local Court under the Contracts Review Act, it was not full jurisdiction and some of the relief sought by the defendants in their cross-claim was not available in the Local Court, even in its enlarged jurisdiction. The other reason was the one argued before the trial judge, namely that it was not right to blame the plaintiff for the case being heard in the District Court since it had started it in the Local Court and it had been transferred to the District Court at the request of the defendants. This seems to us a sound argument, so that, irrespective of the question concerning the jurisdiction of the Local Court after it was enlarged, we do not think it was right for the trial judge to take into account against the plaintiff the fact that the proceedings were not in the Local Court. The trial judge next mentioned the argument concerning the adjournment of 27 April 1995. He did not say what his opinion was about that matter except to say that there were "arguments back and forth". Finally he mentioned Pt39A r12 of the District Court Rules which placed limitations on costs orders in proceedings which could have been brought in the Local Court but were brought in the District Court. He said that rule might apply to the case then before him. It is not fully clear but it seems likely that he did not base himself on the applicability of this rule, but nevertheless took its existence into account. In view of the way in which the proceedings came to be in the District Court, we do not think it was appropriate for any consideration to be given to the possible applicability of this rule as weighing against the plaintiff. The trial judge concluded that the situation was "complex" and "there are arguments both ways". He said this "leads me to only one conclusion and that is I consider that each party should pay its own costs and I so order". With respect to his Honour, for the reasons already indicated, we think his exercise of discretion in arriving at the costs order he made was affected by matters which he should not have taken into account; also, again with respect, it seems to us that he gave no satisfactory explanation why the usual order for costs should be departed from. His reasons give some indication of some valid considerations for varying the usual order that costs follow the event, but they seem to us to be incomplete and, in part, flawed by irrelevant considerations. The result is that we think the judge's flawed discretionary decision on costs must be set aside. It then becomes necessary for the court to consider what order should be made for the costs of the proceedings. WRATIONAL ACCEPTANCE CORPORATION PTY LTD v HARTNIG (Mason P, Priestley an@ Meagher JJA) One primary matter is that the proceedings concerned a comparatively small amount of money and took up a considerable amount of time in their hearing, leading to the incurring of costs on both sides which, according to what this court was told from the Bar table, far exceeded the amount in issue between the parties. This obviously was a matter of concern to the trial judge, who reminded the parties during the costs argument of what he had said earlier in the proceedings about the very wide discretion he had in regard to costs (see p 61, appeal papers). Although his exercise of discretion was flawed for the reasons already mentioned, it also seems that his decision was legitimately influenced by the consideration of the length of time taken for the hearing of the case, and it also seems that he must have considered the plaintiff at least partly responsible for this. In this court it is not possible to assess the strength of this consideration because the court does not have before it the same material that was available to the judge. However, firmly putting the last matter mentioned on one side, there is a cognate matter which in our view this court should take into account. That is that parties should not be encouraged to expect that they will recover full legal costs in long fought out cases over comparatively small amounts. This is a policy demonstrated by costs rules in many courts over a long period. The smaller the amount in issue, the lower the scale of costs available for the successful party. This policy is reflected at the present time in the Supreme Court and the Local Court Rules. In the Local Court, for example, Pt31 of the Rules provides for six scales of costs, the lowest scale being where the amount in issue does not exceed $1,000, the next where it does not exceed $2,000, the next where it does not exceed $5,000, the next where it does not exceed $15,000, the next where it does not exceed $20,000 and the last where it exceeds $20,000. The Rules provide for a 'fixed fee" which the successful party may obtain on the highest scale; for each lower scale a percentage only of the fixed fee may be recovered, that percentage declining from 90% where the amount in issue does not exceed $20,000 to 28% where it does not exceed $1,000. The same idea lies behind the Supreme Court Rules Pt52A r33. In the present case we think it relevant, in the court's exercise of the "full power" given by s148B of the District Court Act "to determine... to what extent costs are to be paid", to take into account the amount of the plaintiffs claim in the District Court. We wish to make it clear that the reference to the Local Court scales is not an indication that we think those scales should in any sense be applicable to the present case. The references to the rules in the District Court and in this court are to show the explicit policy which lies behind the awarding of costs in those courts and which in our opinion should be recognised as operative also in the District Court, even in the absence of explicit statement of it. We think that policy provides a strong reason why in the present case full costs should not be awarded to the plaintiff/appellant. There are other features of the case which tend in the same direction, although less powerfully. One is the fact of the plaintiff's discontinuance of the proceedings against the second defendant. For what were no doubt good practical reasons the plaintiff did not seek to continue against the second defendant's estate following his death. Nevertheless, that left the position as one where proceedings had been begun against the second defendant and never carried to completion, at the plaintiff's election. The ordinary consequence of this would be that the second defendant's costs of the discontinued proceedings would be borne by the plaintiff which had commenced and then discontinued them. What order would have 6 UNREPORTED JUDGMENTS resulted in the present case had this costs aspect been properly argued cannot be examined in this appeal: the second defendant is not a party. However, the situation concerning costs in regard to the second defendant, taken in light of the overall situation, seems to us to be a factor tending somewhat towards departing from the usual costs orders so far as the third defendant is concerned. Another factor of some weight, although not great, is the downward amendment by the plaintiff of its claim four and a half years after it commenced its proceedings. It is impossible to know whether the stance of the defendants would have been different had the proper claim been made at the outset, but we think it must have been a real possibility the defendants would have conducted themselves differently and have been more amenable to settlement in respect of a claim for $3,600-odd than for one for $7,400-odd. Then there is the question of the adjournment of 27 April 1995. It was argued in this court that the order then made that costs of that day should be costs in the cause meant that the winning party would have to get the costs of that day in any event. We do not think that was the effect of the order. In our view such an order means that if one party obtains an order for costs at the conclusion of the final hearing then the costs earlier ordered to be costs in the cause will be comprehended within that costs order. We think the impact of the costs situation on the particular earlier day is a matter to be taken into account in deciding what costs order should be made at the final hearing. Taking that into account and having reviewed so far as is possible the reasons why the proceedings had to be adjourned on that day, it seems to us that the parties on either side of the record were more or less equally to blame although we think the responsibility lay slightly more at the door of the plaintiff than of the defendants. When these matters are all taken into account, we think an appropriate costs order is that the third defendant should be ordered to pay half of the plaintiff's costs of the proceedings in the District Court. The orders announced on the morning of 16 April 1997 were that: the appeal should be allowed; the judgment below set aside; instead judgment should be entered in favour of the plaintiff against the third defendant in the sum of $6,470.29; judgment be entered in favour of the plaintiff against the third defendant for one half of the plaintiff's costs in the District Court; the respondent/third defendant should pay the appellant/plaintiff's costs of the appeal; and the respondent should have a Suitors Fund Certificate. The judgment figure of $6,470.29 was accepted by the appellant/plaintiff as being an appropriate amount to be entered, taking into account such interest as should have been awarded at the date of judgment in the District Court in 1996, and waiving any interest accrued between then and 16 April 1997. The judgment for $6,470.29 was therefore to be operative from 16 April 1997. Upon these orders being made, counsel for the respondent/third defendant informed the court that his client had made an offer of settlement of the appeal which according to this court's interpretation in Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721, of the Supreme Court Rules would, in his submission, require the making of a different costs order in regard to the costs of the appeal, if it turned out that half of the plaintiff's costs of the District Court proceedings were less than $10,000. Whether that would be so could not be determined for some time. The court therefore directed that the parties bring in short minutes, or in the absence of agreement on short minutes, put in written submissions, upon which the court could determine appropriate orders to be made concerning the costs of WRATIONAL ACCEPTANCE CORPORATION PTY LTD v HARTNIG (Mason P, Priestley and Meagher JJA) the appeal; it being contemplated that such orders would be made in the alternative, depending on the outcome of the assessment of the plaintiff's costs of the District Court proceedings. The orders earlier announced therefore stand, with the exception of that concerning the costs of the appeal, which may need to be reformulated in light of the short minutes or written submissions referred to in this paragraph. na 8. 1. Appeal allowed. 2. 3. Judgment in favour of the plaintiff against the third defendant in the sum Judgment below set aside; of $6,470.29. Judgment in favour of the plaintiff against the third defendant for one half of the plaintiffs costs in the District Court. The respondent/third defendant should pay the appellant/plaintiff's costs of the appeal, subject to order 7. The respondent should have a Suitors Fund Certificate. Parties to bring in short minutes, or in the absence of agreement on short minutes, put in written submissions, upon which the court can determine appropriate orders to be made concerning the costs of the appeal as from the date of the offer of settlement made by the respondent in respect of the appeal. Judgment to operate from 16 April 1997. Counsel for the Appellant: A Stevens Solicitors for the Appellant: Lincoln Smith & Co Counsel for the Respondent: G O'Gorman Solicitors for the Respondent: John R De Mattia & Co