New South Wales Supreme Court CITATION : McNamara v Bao San & Ors [2010] NSWSC 809 HEARING DATE(S) : 13 July 2010 JUDGMENT DATE : 29 July 2010 JUDGMENT OF : Hallen AsJ DECISION : Order that the Plaintiff should pay the third Defendant's costs, including reserved costs, of the proceedings, to the extent to which they have been dismissed, such costs to be calculated on the ordinary basis. Order the Plaintiff to pay the costs of the third Defendant of the hearing of the costs argument, such costs also to be calculated on the ordinary basis. CATCHWORDS : Procedure – costs –where proceedings dismissed – where no determination on the merits - Default provision for costs in UCPR 42.20— whether to depart from ordinary position - need for reason to depart from ordinary position. LEGISLATION CITED : Conveyancing Act 1919 Civil Procedure Act 2005 UCPR 42.20 CATEGORY : Principal judgment ASC v Aust-Home Investments Ltd (1993) 44 FCR 194; Australia Wide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32; Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302; Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335; CASES CITED : Huynh v Helleh Holdings Pty Ltd (2001) 10 BPR 19,333; (2001) NSWSC 1162; Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120; Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622; Noye v Robbins [2010] WASCA 83; Ohn v Walton (1995) 36 NSWLR 77; One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at 553; Oshlack v Richmond River Council (1998) 193 CLR 72; Pentroth Pty Ltd v Kirschild Pty Ltd (2006) 96 SASR 129; Trevorrow v State of South Australia (No 7) [2008] SASC 5; Wentworth v Rogers (2006) 66 NSWLR 474; [2006] NSWCA 145 PARTIES : McNamara, Plaintiff Ivan San, third Defendant FILE NUMBER(S) : SC 2007/256920 Mr McNamara - self-represented COUNSEL : No appearance by first and second Defendant Mr E W Young for the third Defendant LOWER COURT JURISDICTION : Supreme Court IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION ASSOCIATE JUSTICE HALLEN 29 JULY 2010 2007/256920 McNAMARA v BAO SAN & ORS JUDGMENT 1 HIS HONOUR: This is the hearing of a costs application, following the dismissal of proceedings, by Rein J, on 8 April 2010. Whilst the relevant parties were able to agree on the substantive outcome of the proceedings, they were not able to agree on the matter of costs. Thus, on that date, how the burden of the costs of the proceedings was to be met was reserved for further argument. Subsequently, the costs argument was set down, and proceeded, before me, on 13 July 2010. 2 In the substantive proceedings, the Plaintiff sought orders pursuant to s 37A of the Conveyancing Act 1919. In substance, he sought to set aside a sale by the first and second Defendants of their home, at Abbotsbury ("the property"), to their son, the third Defendant. In the Further Amended Statement of Claim, filed on 1 May 2008, it was asserted, inter alia, that the contract for sale of the property, which was made on 23 December 2006, and the transfer of the property pursuant to that contract, by a Transfer dated 19 January 2007, was voidable, at the instance of the Plaintiff. 3 It is not in dispute that the first and second Defendants are bankrupt. On 27 September 2007, the Official Trustee in Bankruptcy was appointed as trustee in bankruptcy of the estate of the second Defendant. On 18 July 2008, Schon Gregory Condon, and David Patrick Watson (now deceased) were appointed as joint trustees in bankruptcy of the estate of the first Defendant, who became bankrupt on his own petition. 4 It is also not in dispute that the property was, subsequently, sold by the mortgagee of the third Defendant in about August 2008. It appears that a letter, dated 4 July 2008, informed the Plaintiff, by his solicitors, that the third Defendant was in default of the terms of the mortgage and that the mortgagee had entered into possession. 5 The Plaintiff submits that there should be no order as to the costs of the proceedings, to the intent that each relevant party should pay his own costs. In the alternative, he seeks an order, if he is ordered to pay the third Defendant's costs, that those costs should be paid only upon proof that the third Defendant is liable to pay them. 6 The third Defendant, initially, sought an order that the Plaintiff should pay the third Defendant's costs of the proceedings, such costs to be calculated on the indemnity basis. In the alternative, indemnity costs were sought from 18 July 2008, being the date on which the first Defendant became bankrupt, or shortly prior thereto, when the Plaintiff was informed that the mortgagee of the third Defendant had entered into possession of the property. 7 During the course of submissions, Mr E W Young, counsel for the third Defendant indicated that he was instructed not to press for an indemnity costs order. In my view, this concession was properly made. When one considers all the relevant circumstances, I do not think that, in this case, justice between the parties would have required an indemnity costs order. 8 Before turning to factual matters, it is necessary to set out the legislative framework in which a costs application such as this should be determined. 9 The court, under s 98 of the Civil Procedure Act 2005 has a wide discretionary power to make orders for costs. The general principle concerning costs is that the unsuccessful party should pay the costs of the successful party. However that principle is subject to certain exceptions, and although, in the instant case, the proceedings have been dismissed, and, to that extent, the Plaintiff may be regarded as the unsuccessful party, nevertheless the proceedings were dismissed by consent of the Plaintiff and the third Defendant and there has been no hearing upon the merits. 10 The Uniform Civil Procedure Rules 2005 (UCPR) include, in Part 42, Division 1, Entitlement to Costs: 42.1 General rule that costs follow the event 42.1 Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs. 11 So far as is relevant, Rule 42.20 of the UCPR provides: (1) If the court makes an order for the dismissal of proceedings, either generally, or in relation to a particular cause of action, or in relation to the whole, or part, of any claim, then, unless the court orders otherwise, the plaintiff must pay the defendant's costs of the proceedings to the extent to which they have been dismissed. 12 The following principles may be regarded as relevant in determining who is to bear the burden of costs in a case where the proceedings are dismissed before a final hearing: (a) Costs discretions are truly discretionary: see Oshlack v Richmond River Council (1998) 193 CLR 72 at 84 and there are no absolute rules; (b) The purpose of a costs order is to compensate, or indemnify, the person in whose favour it is made, not to punish the person against whom it is made: Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ; (c) Rule 42.20 of the UCPR does not give rise to a presumption that costs will be ordered against the Plaintiff: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335 at [65]; Pentroth Pty Ltd v Kirschild Pty Ltd (2006) 96 SASR 129; Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [53]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32. However, the rule does create a starting point by requiring "… the plaintiff must pay the defendant's costs of the proceedings …" unless that outcome is displaced by a discretionary decision ("unless the court otherwise orders"); (d) Generally, there must be some proper justification, sound positive ground, or a good reason, for departing from the ordinary position: Fordyce v Fordham at [2] per Santow JA; Australiawide at [54] per Bryson JA; circumstances in which it has been held appropriate to depart from the ordinary position include where the proceedings have been rendered unnecessary by circumstances beyond the plaintiff's control; where the plaintiff achieved practical success in the proceedings, or where costs have been significantly increased by the unreasonable conduct of the defendant. (e) The Plaintiff should be the moving party on an application for an alternative costs order: Bitannia at [70] per Basten JA. If facts are to be relied upon to found the court making a different order, the Plaintiff will bear the onus of proving the relevant facts; (f) Where the proceedings are dismissed prior to any hearing on the merits, "the Court cannot try a hypothetical action between the parties" to determine the question of costs: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624; Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120 at [35]; (g) It may be necessary to analyse the whole of the proceedings to determine the appropriate costs order: Fordyce at [67] per McColl JA. A relevant consideration is whether the Plaintiff acted reasonably in commencing the proceedings and whether the defendant acted reasonably in defending them: Australian Securities Commission v Aust-Home Investments Ltd at 201 (cited with approval in Foukkare ); all the relevant circumstances, and not just the fact of dismissal, should be considered; (h) It is also important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event, or settlement, so removes, or modifies, the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs by the successful party. It is the latter type of case that usually creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs: One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at 553; cited with approval in Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 per Davies AJA (with whom Mason P and Meagher JA agreed) at [5]; (i) The distinction between the two categories referred to above is often helpful in exercising the costs discretion, notwithstanding that neither category can be precisely defined, the boundary between them is unclear and other factors may be relevant: Bitannia per Basten JA at [79]–[81]; Perre v State of New South Wales [2009] NSWLEC 51 at [49]; (j) The rule requires the court to make such order as it thinks just in the particular circumstances of the case. 13 I turn now to a brief summary of the facts: (a) The Plaintiff is a builder, and also describes himself as a Quantity Surveyor (para 30 of his submissions), who carried out building works, at the property, for the first and second Defendants. On 20 September 2007, he obtained a judgment from the Consumer, Trader and Tenancy Tribunal, that the first and second Defendants pay the Plaintiff the sum of $329,848.83 plus interest, plus costs on a party/party basis. That judgment has not been satisfied. (b) The transfer of the property by the first and second Defendants to the third Defendant was completed in January 2007; the purchase price of the property disclosed on the Transfer was $1,150,000; (e) A mortgage was registered on title to the property following its purchase by the third Defendant; (f) The present proceedings were commenced by the Plaintiff in September 2007; (g) The Statement of Claim was filed in January 2008, it named the three Defendants as party/Defendants; (h) An Amended Statement of Claim was filed in February 2008; however, there was no amendment to the parties; (i) A Further Amended Statement of Claim was filed in May 2008, and again, there was no amendment to the parties; (j) In the Further Amended Statement of Claim, the solicitor for the Plaintiff certified that there were "reasonable grounds for believing on the basis of provable facts and a reasonably arguable view of the law that the claim for damages in these proceedings has reasonable prospects of success"; (k) The leave of the Court had not been obtained to commence, or continue, proceedings against the second Defendant; (l) The leave of the Court was not obtained to continue proceedings against the first Defendant; (m) The sale of the property by the third Defendant's mortgagee was settled in August 2008; (n) In September 2008, an order was made that the proceeds of sale of the property, after the payment of the amount required to discharge the registered mortgage of the third Defendant, was to be held in a controlled monies account; (o) On 15 September 2008, the trustee in bankruptcy of the first Defendant wrote to the Plaintiff's solicitors referring to the Supreme Court proceedings, advising that, in his view, the property had been sold for a fair value, that the purchase price had been paid by the third Defendant, and that he did not support the view that the transaction had been one to defeat the claims of creditors; (p) On a date that is not disclosed in the evidence, but which I was informed, without objection, was 4 November 2008, the continuation of the present proceedings was stayed by consent of the parties; (q) The Plaintiff filed an Application in the Federal Court in June 2009; an amended Application in August 2009; and a further amended Application in November 2009; the substance of the claims made in the Federal Court proceedings was that the transfer of the property by the first and second Defendants to the third Defendant was void; that the surplus of the proceeds of sale was held, on trust, for the trustees in bankruptcy of the first and second defendants; and that those funds should be paid to the trustees in bankruptcy, to be disbursed by them, firstly, to reimburse the Plaintiff for the costs of the Federal Court and some of the costs of the Supreme Court proceedings; in addition, leave to continue the Supreme Court proceedings was sought; (r) There were summary dismissal proceedings, in the Federal Court, in which a number of respondents, including each of the trustees in bankruptcy, sought dismissal of the Plaintiff's claim, which proceedings were heard by Graham J in February 2010; (s) Reasons for judgment were delivered by his Honour on 15 March 2010; the respondents were successful and the Plaintiff's further amended Application was dismissed. Leave to continue the Supreme Court proceedings was not granted to the Plaintiff; (t) In a report to creditors dated 12 March 2010, the trustee in bankruptcy of the first Defendant referred to the letter written to the Plaintiff's solicitors, but also noted that he understood the Plaintiff's frustrations as the first Defendant "is still yet to explain to me (and provide the documents in relation to same) as to his disposal of the proceeds of sale…"; he also noted that the Plaintiff had attended at his office and that members of staff and the trustee in bankruptcy's solicitor had discussed "the apparent lack of prospects associated with [the Plaintiff's] current legal proceedings"; (u) The proceedings in the Supreme Court were dismissed on 8 April 2010, by consent. At this time, the moneys and interest held in the controlled monies account, were permitted to be disbursed to the third Defendant, or as he otherwise directed; (v) During the course of the Supreme Court proceedings, a number of costs orders had been made, which costs orders neither party sought to vacate or vary; on other occasions costs were reserved. 14 The Plaintiff, who represented himself on the application, filed written submissions in the proceedings which will be retained in the Court file. In those submissions: (a) The Plaintiff makes assertions of fact (see paras 1 – 26 and 30 - 36) that go to the substantive proceedings; many of the facts alleged were clearly the subject of dispute; (b) The Plaintiff submits that to award costs against him "would be unreasonably harsh and will ensure that money flows from the creditor to the debtor" (para 26); (c) If costs are awarded, he seeks that "those costs be on the basis that funds can be proved to have been paid by the respondent and that further the source of the moneys can be traced to taxable income" (para 27); he does not state the source of any power to make such an order; (d) He refers to evidence given in an affidavit relied upon by the third defendant in which it is asserted that the Plaintiff "is a man of straw". He submits if that is so, "there is no point in awarding costs"; (e) He submits that the third Defendant has not established that he is liable for costs, since he has not given evidence of a costs agreement with his lawyers; (f) The third Defendant had no capacity to pay costs to his lawyers. 15 In his oral submissions, the Plaintiff emphasised that: (a) the evidence disclosed that the third Defendant was really the agent of the first and second Defendant; (b) the solicitors for the third Defendant were taking instructions from the first and/or second Defendant and not from the third Defendant; (c) the Federal Court proceedings had been determined upon the basis of a lack of evidence, rather than on the basis of the issue of standing, which the Plaintiff had understood was the real issue in those proceedings. This submission echoed the submission made in para 29 of the written submissions. 16 In support of his submission that no costs order should be made if the third Defendant had no obligation to pay costs, the Plaintiff relied upon Wentworth v Rogers [2006] NSWCA 145 (2006) 66 NSWLR 474. The submission, in essence, was that a party who does not have a liability to his solicitor for costs, cannot recover costs against the unsuccessful party to the litigation. 17 At the outset, it should be noted that the New South Wales Court of Appeal, in that case, was reviewing costs principles, particularly, what has been described as "the indemnity principle", in the context of conditional costs agreements. There is no evidence of any such agreement between the third Defendant and his solicitors in this case. 18 In Trevorrow v State of South Australia (No 7) [2008] SASC 5, it was said, after referring to a number of cases, including Wentworth v Rogers: "[17] From these authorities, the following principles can be discerned of relevance to the present proceedings: — the indemnity principle is the guiding principle concerning the recovery of costs; — the indemnity principle allows for an indemnity if there is a liability of the claimant to his or her solicitor; — in the absence of any express agreement, the retainer of a professional person to act will normally give rise to an implied agreement for the payment of reasonable professional fees and disbursements; — the onus is on the party seeking to avoid an order to establish that there is no liability on the part of the claimant to his, or her, solicitor for costs; — the fact that the solicitor is employed by a Crown law office or some other agency or institution or corporate employer does not preclude the making of a costs order; and — the indemnity principle is a flexible principle, designed to allow for a just and fair result." 19 More recently, Fullerton J in Coates v Harbour Radio Pty Ltd & Anor [2010] NSWSC 796 has summarised the indemnity principle in the following terms: The indemnity principle 35 The uncontroversial rationale behind the operation of the indemnity principle is to ensure that the successful party to litigation is indemnified against the costs they have incurred in vindicating or upholding their legal rights. Equally as plainly, if the successful party to the litigation is not liable to meet his or her lawyers' costs, the compensatory aim of the indemnity rule has no function, since in those circumstances a costs order would serve to unjustifiably enrich the successful party. 36 Where there is an agreement between client and solicitor, pursuant to which the litigant is absolved from paying lawyer-client costs, the indemnity principle is breached. No such agreement is alleged here. … 37 Before resolving the question of retainer and construing the terms of the resolution, to the extent that it bears emphasis, the indemnity principle has been frequently and consistently applied even where the discharge of the litigant's liability in respect of costs is remote or where, as was the case here according to the plaintiff, the AOC's payment of the plaintiff's legal costs progressively throughout the litigation reduced the prima facie liability of the plaintiff to pay that amount to his solicitors. The leading case is Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495 where Bankes LJ reasoned as follows: 'When once it is established that the solicitors were acting for the plaintiff with his knowledge and assent … he became liable to the solicitors for costs, and that liability would not be excluded merely because the Union also undertook to pay the costs. It is necessary to go a step further and prove that there was a bargain, either between the Union and the solicitors, or between the plaintiff and the solicitors, that under no circumstances was the plaintiff to be liable for costs.' 20 In this case, the evidence does not support the proposition that the third Defendant has not incurred costs. The third Defendant's solicitor gave evidence that the third Defendant "had incurred significant legal costs and disbursements of defending the Supreme Court proceedings which have been dismissed by consent". There is no reason to disbelieve this statement. 21 There is also no basis, other than the unsubstantiated assertion of the Plaintiff, to conclude that the third Defendant does not have to pay the costs incurred or that under no circumstances will he be liable for costs. 22 Furthermore, to the extent that the Plaintiff submitted that a third party (one, or other, of the first or second Defendant) had paid the third Defendant's costs, a successful party can still recover costs, if he has an obligation to pay his solicitors, notwithstanding the fact that a third party might (and in all probability will) relieve him of that obligation: Noye v Robbins [2010] WASCA 83 per Owen JA (with whom Pullin and Buss JJA agreed) at [309] – [338] and the authorities there cited. 23 In this regard, the Plaintiff stated that he did not have any reason to believe that there was some relationship between the third Defendant and his lawyers which would result in them not charging him for the work they were doing, but rather that there was some relationship between the first and second Defendants and the third Defendant's lawyers which resulted in them paying his costs: T14.37- T14.44; T15.05 – T15.08. The evidence said to substantiate this belief is referred to at T18 –T19; T23.03 – T23.12. However, I do not consider that it does this. 24 It would be inappropriate to make any finding, in these proceedings, about the basis upon which the Federal Court proceedings were determined; in particular, whether they had been determined upon the basis of a lack of evidence, rather than on the basis of the issue of standing, which the Plaintiff had understood was the real issue in those proceedings (T32.22 – T33.06). I should, however, note, that the Plaintiff was legally represented by a solicitor, and by counsel, in the Federal Court proceedings. 25 The third Defendant also filed written submissions which will be retained in the Court file. In substance, it was submitted that: (a) The Plaintiff's claim had been dismissed and, therefore, the onus was on him to satisfy the Court that it should otherwise order him not to pay the costs; (b) The third Defendant had a substantial victory, and that, in those circumstances, the Plaintiff should be ordered to pay costs; (c) The Plaintiff's claims never had any reasonable prospects of success and should never have been brought against the third Defendant; (d) The Plaintiff's claims could not proceed, against the first and second Defendants, without leave, following the sequestration of the estate of each of them; (e) The Plaintiff's proceedings were otiose upon the completion of the sale of the property by the mortgagee of the third Defendant. In this regard, he relied upon Huynh v Helleh Holdings Pty Ltd (2001) NSWSC 1162; (2001) 10 BPR 19,333. 26 The submissions (a) and (b) accord with the principles to which I have referred above. There is merit in the submissions (d) and (e). 27 In respect of submission (c), it would be inappropriate to make any finding about the outcome that would, or might, have eventuated had the matter proceeded to trial. I am in no position to express any view on the facts that the Plaintiff asserts, whether they could be proved, or, if proved, what would have occurred. I also cannot conclude, at this time, that the Plaintiff had no reasonable prospects of success or that the proceedings should never have been brought. 28 In the circumstances of this case, the Plaintiff has not satisfied me that there is any proper justification, a sound, positive ground, or other good reason, for departing from the ordinary course prescribed by rule 42.20 of the UCPR. To the contrary, it must be concluded that the third Defendant has had substantial success in the proceedings, as a result of the dismissal of the proceedings. After almost three years, the Plaintiff has given up seeking the relief that he had strived to maintain in the present proceedings. 29 The proper application of the principles to the facts of this case mandate the conclusion that the Plaintiff should pay the third Defendant's costs, including reserved costs, of the proceedings, to the extent to which they have been dismissed, such costs to be calculated on the ordinary basis and I so order. I order the Plaintiff to pay the costs of the third Defendant of the hearing of the costs argument, such costs also to be calculated on the ordinary basis. ********** 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. 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