Appeal Panel - Internal CITATION: Dykes and Wildie v Heatherway Pty Ltd (No 2) (RLD) [2007] NSWADTAP 46 FIRST APPELLANT Peter James Dykes PARTIES: SECOND APPLICANT Paul Richard Wildie RESPONDENT Heatherway Pty Ltd FILE NUMBER: 079002 HEARING DATES: On the papers SUBMISSIONS CLOSED: 25 July 2007 DATE OF DECISION: 29 August 2007 BEFORE: O'Connor K - DCJ (President); Montgomery S - Judicial Member; Weule B - Non Judicial Member CATCHWORDS: Costs - Discretion - Special Circumstances - Costs of Appeal - Weak Appeals - Retail Leases Act s 77A - Administrative Decisions Tribunal Act s 88 MATTER FOR DECISION: Principal matter FILE NUMBER UNDER APPEAL: 045145, 065059 DATE OF DECISION UNDER APPEAL: 12/14/2006 Administrative Decisions Tribunal Act 1997 LEGISLATION CITED : Legal Profession Act 2004 Real Property Act 1900 Retail Leases Act 1994 Heatherway Pty Ltd v Dykes & Wildie [2006] NSWADT 354 Dykes and Wildie v Heatherway Pty Ltd (RLD) [2007] NSWADTAP 26 Townsend v Chief Executive, State Rail Authority [1999] NSWADT 104 Alessa Pty Ltd v Total & Universal Pty Ltd [2001] NSWADT 150 Alessa Pty Ltd v Total & Universal Pty Ltd [2002] NSWADTAP 16 Singh v Solomon & Ors (No 2) (RLD) [2005] NSWADTAP 58 CASES CITED: Gizah Pty Ltd v AXA Trustees Ltd (No. 2) [2001] NSWADT 164 Sotiropoulos v Mattana Coiffure Pty Ltd (No 2) (RLD) [2004] NSWADTAP 43 Prasad & anor v Fairfield City Council [2002] NSWADTAP 2 Citadin Pty Ltd (No 2) v Eddie Azzi Australia Pty Ltd & General Pants Pty Ltd (RLD) [2001] NSWADTAP 31 North Eastern Travel Stops Pty Ltd v Bradley & Ors (No 2) (RLD) [2005] NSWADTAP 17 Cripps & Anor v G & M Dawson Pty Ltd & Anor; G & M Dawson Pty Ltd and Anor v Cripps and Anor [2006] NSWCA 81 G & M Dawson Pty Limited v Cripps, Jones & Anor (No 2) [2005] NSWADT 14 G & M Dawson Pty Limited v Cripps & Ors (No 3) (RLD) [2005] NSWADTAP 24 APPELLANT B Zipser of counsel instructed by P Tiernan, Tiernan and Associates REPRESENTATION: RESPONDENT M Easton of counsel instructed by G Efron, Efron and Associates ORDERS: That the appellants pay 70% of the respondent's costs of and incidental to the appeal, as agreed or assessed. REASONS FOR DECISION 1 In a decision delivered on 14 December 2006, the Tribunal, on the application of the lessor (Heatherway Pty Ltd), ordered two former directors of the lessee company (North Coast Foods Pty Ltd (NCF)), to meet defaults incurred by NCF on the basis of the personal guarantees they had given on entry into the lease: see Heatherway Pty Ltd v Dykes & Wildie [2006] NSWADT 354. The directors, Peter Dykes and Paul Wildie, appealed to the Appeal Panel. The Appeal Panel upheld the appeal in one respect, and reduced the interest element of the order: see Dykes and Wildie v Heatherway Pty Ltd (RLD) [2007] NSWADTAP 26. 2 Heatherway has now applied for orders for costs in respect of the proceedings before the Tribunal and the proceedings before the Appeal Panel. The relevant submissions are contained in a single set of documents: submissions filed 18 June 2007 by Heatherway; and submissions in reply filed 25 July 2007 by Messrs Dykes and Wildie. 3 The papers have been referred to the Tribunal below for consideration of the application for the costs of the proceedings before it. This decision deals with the application as it relates to the Appeal Panel proceedings. The matter is one appropriate for determination on the papers without conducting a hearing, and the parties are agreeable to that course being taken: see Administrative Decisions Tribunal Act 1997 (ADT Act), s 76. We will refer in the remainder of these reasons to the parties as the 'lessor' and the 'directors'. 4 The lessor leased premises to the company of which the appellants were directors as from 8 December 1998. There was also an agreement allowing the company to take over the operation of the business on the site, a Hungry Jacks franchise. The directors controlled the company, and owned all the shares. The situation changed on 10 February 2000 when they transferred the shares and the business to a couple, the Hammonds. The lease remained unaltered, but the company was now controlled by the Hammonds. These changes took place with the knowledge and approval of the lessor. Subsequently a new long term lease was executed with the company, taking effect from 1 July 2000. The old lease was terminated. 5 The company had not met all its payment obligations under the lease in the period during which the directors controlled it and ran the business, 8 December 1998 to 9 February 2000 nor in the period to 30 June 2000. The Hammond-controlled company also failed to meet their payment obligations. They abandoned the premises in June 2003. 6 It was only on 17 June 2003 that the lessor notified the directors that they were considered to be liable for all unpaid amounts under the lease including the period to June 2003. The lessor, a year later, issued a writ in the Supreme Court of Victoria in June 2004. As explained in the decisions of the Tribunal and the Appeal Panel, the proceedings were transferred to the Supreme Court of New South Wales and then to this Tribunal. 7 The lessor's original claim for damages covered the period 8 December 1998 to 9 June 2004 (date of commencement of the Supreme Court of Victoria proceedings). After the proceedings were transferred to the Tribunal the lessor amended the claim to cover only the period 8 December 1998 to 30 June 2000. The Tribunal below upheld the lessor's claim, and made an order in the amount claimed together with interest from 1 July 2000 to 9 June 2004, i.e. $80,720 plus $41,983, total $122,703. The Tribunal did not allow any interest for the period from 9 June 2004 to the date of its order (14 December 2006). 8 The Appeal Panel dismissed the directors' appeal as to the Tribunal's principal determination, i.e. that the directors were liable by way of the personal guarantee given by the lease for defaults that accrued in the period of currency of that lease. The Appeal Panel disagreed with the Tribunal's conclusions as to the appropriate form of order as it related to the award of interest. The Appeal Panel was critical of the tardiness of the lessor in making demand on the directors so long after they had ceased to have any involvement with the lease and the business, and in commencing action in the Supreme Court of Victoria for an amount far in excess of the amount ultimately claimed in the Tribunal. As a consequence the Appeal Panel left intact the Tribunal's order so far as it related to the principal amount claimed, but halved the amount of interest to be awarded. 9 The Appeal Panel allowed one year in respect of the original default period, and one year from when the claim was revised downwards. 10 The Appeal Panel said: '60 In our view there should be an adjustment downwards of the interest component of the order. We agree with Mr Zipser's point that the proceedings should have been brought promptly, in our view within a year of the default arising. This is particularly so in circumstances where the debtors had moved on, and there was no continuing commercial relationship. On the other hand, it is proper to compensate Heatherway for the period after they revised downwards their claim. (November 2005 to date of order). The result, in our view therefore, is that Heatherway should be awarded only two years interest. 61 Accordingly, we would partially allow the appeal on this point. In our view the appropriate course is to adopt the approach of reducing by half the amount ordered in respect of interest by the Tribunal, from $41,983 to $20,991.50. To this is to be added the principal sum of $80,270.' 11 In its substantive appeal the directors had submitted that a document purporting to bind the lessor and the Hammonds had the effect of extinguishing the directors' personal guarantees for the period they had been effectively responsible for the lease and its business. 12 In its application for costs of the appeal, the lessor notes the Appeal Panel's conclusion at [37] in respect of the substantive appeal: '37 In our view the arguments in this appeal are all designed to convert the fact finding in which the Tribunal engaged into 'questions of law'. In our view, there was ample evidence to enable the Tribunal to reach the conclusion that it did as to the effect of the May document.' 13 The lessor's submission is that the directors' appeal was without merit in respect of its principal points. The lessor acknowledges that the appeal was 'partially successful on a discrete point that was relatively minor to the greater appeal proceedings'. 14 In its submissions, the directors refer to what they see as the unfair way in which the lessor went about enforcing the liability, and to the complex history of the litigation. They noted in particular the observations of the primary Tribunal and the Appeal Panel over the possibly 'sham' nature of the May documentation. The Appeal Panel noted in its reasons: '32 The transaction between the appellants and the Hammonds in February 2000 was plainly in a commercial sense an onward sale of the business. It was achieved by the appellants transferring all of the shares in NCF to the Hammonds. In the Appeal Panel's opinion, the scepticism that the Tribunal below displayed in treating the May document as a genuine sale of business agreement was entirely justified. Heatherway had not owned the business in a commercial sense since December 1998. All it continued to possess was the franchisor's authority to conduct the franchise. 33 While the Tribunal did not make a firm finding on whether the transaction was a sham designed simply to generate the kind of documentation that would pass muster with the franchisor, there are a number of elements of the documentation that point in that direction. For example, oddly Heatherway is declared by the document to be both the 'Vendor' and the 'Purchaser' of the business. Further, the consideration for the sale of the two businesses is expressed to be $2.1m. The commercial evidence suggests that the value of the two businesses was in the vicinity of $1.1m. NCF had bought Coffs Harbour in 1998 for $0.9m. The agreement valued Port Macquarie at $0.2m. It is highly unlikely, we think, that the Hammonds would have agreed to pay $1.9m for the Coffs Harbour business in circumstances where, it would seem, it had not been sufficiently profitable for the appellants (through NCF) to pay most of the rent that had fallen due.' 15 The directors' submission notes that the appeal was not hopeless, as reflected by the Appeal Panel's 'careful and detailed consideration' of the matter, and that it was successful on one point. 16 In the ordinary courts the discretion to award costs is, conventionally, exercised on the basis that costs follow the event. The position in this Tribunal, as is often the case in statutory tribunals, is that each side bears their own costs in proceedings in the Tribunal unless 'special circumstances' can be shown that justify an award of costs. 17 Section 88 of the ADT Act provides: ' 88 Costs (1) Subject to the rules of the Tribunal and any other Act or law, the Tribunal may award costs in relation to proceedings before it, but only if it is satisfied that there are special circumstances warranting an award of costs. (2) The Tribunal may: (a) determine by whom and to what extent costs are to be paid, and (b) order costs to be assessed on a basis set out in Division 11 of Part 3.2 of the Legal Profession Act 2004 or on any other basis. (3) However, the Tribunal may not award costs in relation to proceedings for an original decision unless the enactment under which the Tribunal has jurisdiction to make the decision provides for the awarding of costs. (4) In this section, costs includes: (a) costs of or incidental to proceedings in the Tribunal, and (b) the costs of or incidental to the proceedings giving rise to the application, as well as the costs of or incidental to the application.' 18 The retail leases jurisdiction involves proceedings for an 'original decision'. Section 77A of the Retail Leases Act 1994 provides: 'The Tribunal may award costs under section 88 of the Administrative Decisions Tribunal Act 1997 in respect of proceedings commenced by an application made under this Part.' 19 There are numerous decisions of the Tribunal at primary level and at Appeal Panel level dealing with the way in which the 'special circumstances' criterion might be exercised so as to authorise an award of costs. Historically there has been continuing pressure in the retail leases jurisdiction, perhaps because of its avowedly commercial nature, for an approach to be taken which is closer to the costs follow the event philosophy. The Tribunal, especially at Divisional level, has generally resisted this approach: Townsend v Chief Executive, State Rail Authority [1999] NSWADT 104; Alessa Pty Ltd v Total & Universal Pty Ltd [2001] NSWADT 150; Alessa Pty Ltd v Total & Universal Pty Ltd [2002] NSWADTAP 16 at [3]. 20 A more recent summary of the position is given in Singh v Solomon & Ors (No 2) (RLD) [2005] NSWADTAP 58: '12 According to the case-law on s 88(1) in its application to proceedings under the Retail Leases Act , (see eg Gizah Pty Ltd v AXA Trustees Ltd (No. 2) [2001] NSWADT 164 and Sotiropoulos v Mattana Coiffure Pty Ltd (No 2) (RLD) [2004] NSWADTAP 43), this requirement of 'special circumstances' applies both to decisions made by the Tribunal at first instance and to Appeal Panel decisions. 'Special circumstances' have been defined as 'circumstances that are out of the ordinary, but without having to be extraordinary or exceptional'. It is not enough that the circumstances are 'special': they must also 'warrant' an order for costs. They may include factors connected with the nature of Appeal Panel proceedings. On account of the 'commerciality' of the Retail Leases Division, the interpretation of 'special circumstances' differs significantly from the interpretation that might be adopted in any other Division of the Tribunal.' 21 The access philosophy that led the Parliament to take a conservative approach to the making of orders for costs by the Administrative Decisions Tribunal should mean that a party who commences or defends proceedings at the primary level of the Tribunal ought ordinarily not be at risk of costs. If a party, in effect, subverts the access philosophy by generating in their conduct of the litigation unnecessary additional costs, then there may be a case for the making of specific orders in respect of those costs. If the proceedings were futile or oppressive from the start, that might be another reason for ordering the applicant to pay costs. See, for example, Prasad & anor v Fairfield City Council [2002] NSWADTAP 2 at [36]-[40]. See generally, Practice Note 12. 22 The Appeal Panel observed in Citadin Pty Ltd (No 2) v Eddie Azzi Australia Pty Ltd & General Pants Pty Ltd (RLD) [2001] NSWADTAP 31 at [13]: 'It may be that more use of costs orders should be made where there is an appeal and it is dismissed. At the appeal level, there would seem to be a stronger case for recognising the complexity of retail leases disputes and their commercial character as relevant factors amounting to 'special circumstances'.' 23 It is now accepted, we consider, that the making of an appeal without any reasonable prospect of success can provide a 'special circumstance' sufficient to attract an adverse costs order. The Appeal Panel said in North Eastern Travel Stops Pty Ltd v Bradley & Ors (No 2) (RLD) [2005] NSWADTAP 17: '35 We are bound to take due account of the Appeal Panel's suggestion in Citadin (No 2) at [13] that in retail leases cases maybe 'more use of costs orders should be made where there is an appeal and it is dismissed', and also of the underlying justification, stemming from the 'commerciality' of such cases. 36 In our judgment, taking all these factors into account, the lack of real merit in the arguments advanced by the Appellant on the key issue of interpretation constitutes 'special circumstances warranting an award of costs' under s 88(1) of the ADT Act. This is the case even though we held the Tribunal to have committed an error of law by not dealing with this issue, thereby necessitating that it be resolved on the appeal. Our view, in essence, is that it could have been predicted with sufficient certainty that resolution of the issue, following due consideration, would not alter the outcome of the proceedings.' 24 The Court of Appeal has recently examined the Tribunal's discretion, in the context of a retail tenancy dispute. In Cripps & Anor v G & M Dawson Pty Ltd & Anor; G & M Dawson Pty Ltd and Anor v Cripps and Anor [2006] NSWCA 81, the Court made an order for costs under s 88 in favour of a lessee who had been successful before the Tribunal and the Appeal Panel. The Tribunal had refused an order for costs, upheld on appeal by the Appeal Panel. 25 Santow JA delivered the principal judgment of the Court of Appeal (Mason P, Brownie AJA agreeing). His Honour referred at [54] to the justification given by the primary Tribunal for the order not to award costs (see G & M Dawson Pty Limited v Cripps, Jones & Anor (No 2) [2005] NSWADT 14): '19 Unreasonable conduct that is out of the ordinary and conduct which is grossly unreasonable can attract the exercise of the Tribunal's power under section 88. The Applicant points to the conduct by the First and Second Respondents in failing to consent to the assignment and the consequence that it was unable to be fully compensated for its actual losses as a result of their actions; and asserts that it would be seriously unfair to the Applicant not to be awarded costs where it has been successful in this litigation and in effect forced to pursue this litigation in order to have its legal rights recognised. 20 I have no doubt that the Applicant, through no fault of its own, has been placed in the situation where it has been forced to pursue this litigation. In my view this is extremely regrettable. Nevertheless, the legislature has established a scheme for the resolution of retail tenancy disputes that anticipates that an order for costs will be the exception rather than the rule. I agree with the First and Second Respondents' assertion that, in order for the Applicant to succeed in this application, I must find that the circumstances surrounding the conduct of the case amount to 'special circumstances'. I also agree that costs orders are not a sanction to reprove unreasonable conduct that has led to an application for relief. 21 In the circumstances of this matter it is my view that requirements for an order pursuant to section 88 have not been met. The circumstances were not out of the ordinary such as to amount 'special circumstances' that could be relevant to the question of costs. Accordingly, the appropriate order is that each party should bear its own costs.' 26 The Appeal Panel upheld the Tribunal's ruling. The Court of Appeal reversed the ruling, and made an order for costs. To fully understand the Court's view, it is desirable to set out the Appeal Panel's reasoning (G & M Dawson Pty Limited v Cripps & Ors (No 3) (RLD) [2005] NSWADTAP 24): '32 Having given the issue our own careful consideration, we would share the disinclination, shown by the Tribunal in all the cases that we have cited, to assess the reasonableness and probity of the conduct of an unsuccessful party that has given rise to litigation, and to make a finding of 'special circumstances warranting an award of costs' on the basis of this conduct if it is found to have been unlawful, 'grossly unreasonable' or in some other way manifestly improper. In our opinion, it is the task of the substantive orders made in litigation in the Tribunal, not a costs order, to provide sufficient remedies in respect of such conduct to the aggrieved party. 33 In a high proportion of cases brought in the Tribunal, whether in its jurisdiction under the RL Act or in other jurisdictions, the conduct of the losing party giving rise to the proceedings will have been unlawful, unreasonable and/or improper. To determine in each case whether the degree of unlawfulness, unreasonableness and/or impropriety present was sufficiently serious to warrant a costs order under the s 88 criterion of 'special circumstances' would require value judgments of extreme difficulty and the drawing of wholly unsatisfactory distinctions. 34 The present case illustrates this difficulty. Mr Reuben submitted that the Tribunal's finding of 'equitable fraud' against the First and Second Respondents provided a sufficient basis for holding that the criterion of 'special circumstances' was satisfied. In response, Mr Robertson, counsel for these Respondents, pointed out that the finding was of 'fraud' for the purposes only of a statutory concept enacted in s 42 of the Real Property Act 1900 as one of the exceptions to the indefeasibility of the title of a registered proprietor. It was, he asserted, fraud in a technical sense only, totally distinct from the notion of fraud in ordinary speech, which connotes disreputable and dishonest conduct. 35 Whether or not there is or should be a firm principle that the range of relevant factors under s 88 cannot extend to the parties' conduct outside the scope of the litigation, we consider in any event that in the present case, the conduct of the First and Second Respondents themselves, as outlined in the Tribunal's findings, was not unlawful, improper or unreasonable to such a degree as to constitute 'special circumstances'. The failure to register the lease to the Applicant was an omission on the part of their solicitor, not of them personally. There was no evidence that they encouraged this omission or participated in any other way in the process of registering the documents involved in transferring to them the title to the land at Sutherland. 36 The other conduct of the First and Second Respondents that might constitute 'special circumstances' is their continued assertion up to and during the present proceedings that their title to the land should not be subject to the lease and their consequent refusal of consent to the assignment of the lease. They maintained this stance, presumably, on the advice of their lawyers that they were legally entitled to do so. If it was wholly unwarranted, it might amount to 'special circumstances'. But this would be because, as outlined below in our discussion of the Third Respondent's appeal on costs, it relates directly to their conduct within the scope of the litigation. This line of argument therefore provides no support for the submission by Mr Reuben with which we are now dealing. 37 For these reasons, our conclusion is that the Tribunal was correct in rejecting the Applicant's claim for costs in so far as it was based on allegedly unlawful, improper and/or unreasonable conduct of the First and Second Respondents outside the scope of the litigation.' 27 In concluding otherwise, Santow JA for the Court, said: '55 While determination of costs is a discretionary matter and moreover a matter of practice and procedure, as the Tribunal itself recognised, unreasonable conduct that is out of the ordinary and conduct which is grossly unreasonable can attract exercise of the Tribunal's power under s88 to award costs. 56 Here, the special circumstances relied upon by Dawson, said to be out of the ordinary, are twofold. First, Cripps failed to recognise the existence of Dawson's lease, refusing to register it without proper cause. 57 Second, taking advantage of that failure, and being fully on notice of Dawson's need for the lease to be registered and consent to its assignment given so that the sale of his business could proceed, in breach of the Act and of the lease Cripps withheld consent to that request for assignment of the lease. This was notwithstanding that Dawson had complied with the requirements of the Act, including in particular s41 thereof, covering consent to assignment. The result was the lost sale to Kilbane and the consequent damage. 58 Thus the commencement of the proceedings was prompted by the need to ensure that the lessor recognised both the existence of the lease and the obligation to consent to its assignment. 59 There followed five hearing days before the Tribunal at first instance, with further hearing days before the Appeal Panel, strenuously contested. 60 It is not necessary to determine whether in the circumstances the appellant committed equitable fraud. In my view it suffices that the conduct of Cripps and Jones, in relying upon their status as the registered proprietors of the freehold and the doctrine of indefeasibility of title to wrongly deny registration and consequently assignment of the lease, so acted as by their conduct to give rise to special circumstances; that is, circumstances that were clearly out of the ordinary and grossly unreasonable so far as the respondent tenant was concerned. On the one hand, the Tribunal correctly concluded that the respondent, through no fault of its own, has been placed in the situation where it has been forced to pursue this litigation. Yet it still failed to find special circumstances. With respect, I consider that the Tribunal was in error in failing to conclude that special circumstances here applied. For this purpose, it suffices that the circumstances are out of the ordinary. They do not have to be extraordinary or exceptional. While a finding of "serious unfairness" is not prerequisite to determining that there are special circumstances, it is nonetheless a highly relevant consideration.' The Present Case 28 In this case the special circumstance is, essentially, that the appellant pursued, in relation to the liability claim, a weak appeal, an appeal that was doomed to fail. Its success was on a second and relatively narrow point. 29 Weak appeals should, we think, be discouraged. In the retail leases jurisdiction, particularly, the underlying circumstances (the 'factual matrix') are often complex. Often many points of law are raised. Trial level decisions are often long and detailed. An appeal will often involve the need to revisit all, or many, of the factual or legal elements of the underlying decision. The potential impact on the resources of the respondent is obvious. 30 We accept that there will be cases where an appeal raises reasonably contestable points but fails. No costs order may be appropriate. In our view, though we respect the vigour with which the arguments were put by Mr Zipser, this appeal so far as it related to the liability issue was weak. 31 In our view the directors should pay 70 % of the lessor's costs of the appeal. This order seeks to acknowledge the fact that the directors were successful on a subsidiary point. 32 In the ordinary courts it is not usual to qualify costs orders in this way: see generally, Ritchie's Uniform Civil Procedure [42.1.15]. We are mindful of the concerns that have generally led courts away from issue-splitting for the purpose of costs orders. However, we think that it will sometimes be practical to make separate assessments as to the strength of an appeal, by reference to the broad categories of 'liability', 'quantum' and 'relief'. Order That the appellants pay 70% of the respondent's costs of and incidental to the appeal, as agreed or assessed. 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.