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[2008] FCAFC 107
mixed. The respondent pay 70 per cent of the appellant's costs of the trial. The respondent pay the appellant's costs of the appeal.
2 cited instruments linked from this judgment.
After winning its appeal on how much compensation it should receive for a tenant damaging leased premises, the landlord asked the court to order the tenant to pay its legal bills. The tenant argued it should only pay part of the bills because the landlord had lost on several legal arguments. The Full Court decided the traditional approach of the winner taking all costs can be unfair. Instead, judges can split costs according to the issues won and lost if that is fairer. Because most of the evidence would have been needed anyway for the claim the landlord won, the tenant only had to pay 70 per cent of the trial costs. The tenant had to pay all the appeal costs because the main argument on appeal was won by the landlord. One judge would have reduced the appeal costs as well because the landlord's lawyers had not clearly identified the winning legal point earlier.
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Bowen Investments Pty Ltd, as landlord, had sued Tabcorp Holdings Ltd, its tenant, alleging that Tabcorp had breached the lease of premises by carrying out unauthorised alterations. At trial the appellant advanced a range of causes of action: waste in tort, rectification of the lease, contraventions of ss 52 and 53(g) of the Trade Practices Act 1974 (Cth), contraventions of ss 51AA and 51AC of that Act, and breach of the lease covenant itself. The appellant failed on every cause of action except the pure breach of contract claim. The trial judge awarded damages for that breach. Both parties appealed aspects of the liability and quantum findings. The Full Court (in the principal judgment not reproduced here) upheld the finding of breach and substantially allowed the appellant's appeal on the correct approach to assessment of damages.
After those substantive reasons were published, the respondent sought leave to file submissions on costs. Directions were made and both sides filed written submissions dated 20 and 27 March 2008. The respondent contended that the appellant had failed on most pleaded grounds and should therefore pay between 50 and 80 per cent of the respondent's trial costs, or alternatively that there should be no order as to the costs of the trial. On the appeal the respondent submitted that the appellant had succeeded only on a construction of the lease that it had neither pleaded nor argued, that it had been largely unsuccessful on the grounds it did pursue, and that approximately 80 per cent of the hearing time had been occupied by those unsuccessful arguments. The respondent therefore sought a costs order reflecting that substantial degree of failure.
The Full Court (Finkelstein, Rares and Gordon JJ) delivered separate reasons on 13 June 2008 dealing solely with costs. Finkelstein and Gordon JJ formed the majority. They accepted that the traditional rule that costs follow the event should not automatically apply because the appellant had failed on multiple discrete causes of action. However, they observed that the great bulk of the evidence tendered by both parties was relevant to the breach of contract claim on which the appellant succeeded. Had the statement of claim been confined to that cause of action, the preparation for trial and the trial itself would not have been substantially shorter. In those circumstances their Honours considered it fair to deprive the appellant of 30 per cent of its trial costs but declined to order the appellant to pay any portion of the respondent's costs. On the appeal their Honours held that the principal issue fully argued was the correct measure of damages for the established breach of lease. The appellant had succeeded on that issue. The fact that it had not identified every argument ultimately accepted by the Court did not warrant depriving it of its costs, especially as the additional arguments had not materially lengthened the hearing. Accordingly the respondent was ordered to pay the appellant's costs of the appeal in full.
Rares J agreed with the 70 per cent trial costs order (subject to a set-off for an earlier adjournment order made against the appellant when it amended its pleading) but dissented on the appeal costs. His Honour considered that the appellant's arguments on appeal had been "radically different" from the reasoning ultimately adopted by the Court. Both parties had therefore incurred costs on issues that had no substantive impact on the outcome. In his Honour's view it would be unjust to require the respondent to pay for that wasted expenditure. Rares J would have ordered the respondent to pay only 70 per cent of the appellant's appeal costs. Because the majority view prevailed, the formal orders were that the respondent pay 70 per cent of the appellant's trial costs and 100 per cent of its appeal costs.
The majority began from the proposition that the traditional rule, while long-standing, produces unfair outcomes when a successful party has raised a "plethora of issues" on which it fails. At [3] they noted that departures from the rule had hitherto been limited to exceptional cases, but described that limitation as "quite unfair". The unfairness arises because a winner can recover all its costs even though significant resources were devoted to unsuccessful claims that added to the length and expense of the litigation.
Their Honours drew support from comparative developments. They referred at [4] to Lord Woolf's Interim Report on Access to Justice (June 1995) which recommended that judges take account of partial success on issues, a recommendation reflected in CPR r 44.3(4)(b). They also noted the narrower but still more flexible Western Australian rule that costs follow the event of each pleaded cause of action. The majority expressly rejected the need to wait for amendment of the Federal Court Rules before adopting a fairer practice. At [5] they stated: "Costs are in the court's discretion. Fairness should dictate how that discretion is to be exercised." Once fairness points to an issues-based approach, it should be applied even if the resulting apportionment is "rough and ready".
Applying that principle to the facts, Finkelstein and Gordon JJ at [6] emphasised the overlap of evidence. The unsuccessful causes of action had not generated a body of distinctly separate work. Therefore a 30 per cent reduction in the appellant's trial costs adequately reflected its partial failure without requiring it to contribute to the respondent's costs. Their Honours regarded an order that the appellant pay any of the respondent's costs as "perverse" in circumstances where the appellant had obtained a judgment for damages.
On the appeal costs the majority at [7]-[9] disagreed with the respondent's characterisation of the hearing. They recalled that the dominant issue was the proper method of assessing damages for the breach found by the primary judge. The appellant had succeeded on that issue. Passing reference to unsuccessful trial claims did not alter the position. A successful party should not be penalised for failing to articulate every supporting argument when that failure did not prolong the hearing. Hence the usual order was made in the appellant's favour on the appeal.
Rares J, while agreeing on the trial costs, placed greater weight at [11]-[13] on the appellant's failure to identify "the real point" at any stage of the appeal. He cited his own earlier judgment in Probiotec Ltd v University of Melbourne (2008) 244 ALR 96 for the proposition that the s 43(2) discretion, though unconfined, must be exercised judicially and is not limited to pure compensation. In his view both parties had incurred unnecessary costs on sterile issues. The just order was therefore a 70 per cent recovery on the appeal as well. The difference between the majority and Rares J thus turned on their respective assessments of how much of the appeal hearing was truly productive.
Prior to this judgment the orthodox position in the Federal Court was that a successful party obtained its costs unless the circumstances were exceptional. Issue-by-issue costs orders were rare and required strong justification. The majority at [3] acknowledged that limited practice but labelled it unfair. They pointed to the English reforms stimulated by Lord Woolf's 1995 report and to the Western Australian rule as evidence that more granular approaches were workable elsewhere.
After this decision, the law within the Federal Court shifted. The judgment stands as direct authority that the statutory discretion under s 43(2) of the Federal Court of Australia Act 1976 (Cth) is broad enough to permit an issues-based costs order whenever fairness so requires, without waiting for rules amendment. The 30 per cent reduction adopted here illustrates a "rough and ready" but principled apportionment grounded in evidentiary overlap rather than mechanical time recording. The majority's refusal to order the successful appellant to pay any of the respondent's costs, despite failure on several causes of action, reinforces that a costs order adverse to the overall winner remains exceptional.
The decision also clarifies that on appeal a party is not to be penalised for not having pleaded or argued every step in the reasoning ultimately accepted by the Court, provided the dominant issue was ventilated and the additional material did not inflate hearing time. Rares J's dissent, although not prevailing on the appeal costs, usefully reiterates that the discretion must be exercised judicially and may take account of costs wasted on arguments that had no substantive impact.
At paragraph [5] the majority said: "We do not believe there is any need to wait for a change in the Federal Court Rules to adopt an issue by issue approach here. Costs are in the court's discretion. Fairness should dictate how that discretion is to be exercised. So, if an issue by issue approach will produce a result that is fairer than the traditional rule, it should be applied." In plain English the Court is saying it does not need new written rules before it can start being fairer; the existing power to decide who pays costs is wide enough, and judges should use that power to reach a just outcome even if the calculation is approximate.
Paragraph [6] contains the critical application: "In these circumstances it is, in our view, reasonable to deprive the appellant of 30 per cent of its trial costs. It would be perverse to impose upon the appellant any obligation to pay the respondent a portion of its costs and we would decline to make any order to that effect." Translation: because most of the evidence would have been led anyway, we will dock the landlord 30 per cent of its trial bill but we will not make the winner contribute to the loser's legal fees; that would be unfair.
On the appeal, paragraph [8] states: "On that issue the appellant was wholly successful even if it did not identify each and every argument upon which its success depended. Anyway, a successful party should not be punished for not identifying the successful argument, when his failure to do so did not really add to the length of the hearing." Plain English: the landlord won the main fight about how to calculate damages. The fact that its lawyers did not spell out every supporting reason in advance does not matter if the hearing was not made longer by the extra arguments. Winners should not lose their costs for imperfect advocacy that did not waste time.
Rares J at [12] cited Probiotec and observed: "There is no general rule that the sole purpose of a costs order is to compensate one party at the expense of another." This reminds practitioners that costs orders serve broader public interests in the efficient conduct of litigation, not merely private indemnification.
This precedent is engaged whenever a party obtains overall success but has failed on one or more discrete causes of action or significant issues that were separately pleaded and argued. The decisive factual inquiry is whether the evidence or preparation for the unsuccessful claims was substantially independent of the successful claim or whether, as here, the material overlapped to such an extent that the trial would not have been materially shorter had the unsuccessful claims been abandoned at the outset.
The judgment is also triggered on appeal where the dominant issue is decided in favour of one party even though that party advanced additional arguments that were rejected or not ultimately relied upon by the Court. The length of hearing time occupied by the unsuccessful arguments is treated as material; if the extra time is negligible, the successful party retains its costs. Conversely, where both parties have incurred costs on issues that had no bearing on the outcome, a judge following Rares J's approach may reduce the successful party's recovery to reflect that waste.
The precedent applies only to the exercise of the Federal Court's statutory costs discretion; it does not disturb the traditional rule in cases where the unsuccessful claims generated truly discrete and substantial costs. The "rough and ready" assessment endorsed at [5] means precise time sheets are not required, but some rational connection between the percentage chosen and the relative significance of the unsuccessful issues must exist.
Although the present reasons do not themselves survey subsequent authority, the principles articulated have been cited with approval in later Federal Court decisions dealing with partial success. The emphasis on fairness as the touchstone of the s 43(2) discretion, the legitimacy of issue-by-issue orders without awaiting rules reform, and the refusal to penalise a successful party for not having perfectly identified every winning argument have all been treated as authoritative. The 70/30 split adopted here is routinely cited as an example of a proportionate response where evidentiary overlap is substantial. Rares J's reminder that the discretion is not confined to a compensatory purpose has also been picked up in judgments examining the public interest dimensions of costs orders. The decision is generally regarded as having accelerated the move away from the rigid "winner takes all" philosophy in complex commercial litigation within the Federal Court.
The judgment leaves open precisely how judges should quantify the "rough and ready" percentage reduction. No arithmetic formula is prescribed, and different judges may reach different percentages on similar facts. The weight to be given to the proportion of hearing time versus the proportion of pleaded issues versus the resources devoted to evidence remains unsettled.
It is also unclear whether the majority's refusal to order a successful party to pay any of the loser's costs sets a high threshold for such "reverse" costs orders or whether, in a case where the unsuccessful claims dominated preparation, such an order might be made. The interaction between this discretionary power and specific costs provisions in the Federal Court Rules (for example, offers of compromise) was not addressed.
Finally, the decision does not explore the position where a successful appellant has run a completely new point on appeal that was not before the primary judge. Whether that would trigger a costs sanction despite overall success is a question left for future cases. Practitioners should therefore continue to plead with care and to identify the real issues early, while recognising that courts now possess greater flexibility to mould costs orders to the justice of the individual case.
REASONS FOR JUDGMENT FINKELSTEIN AND GORDON JJ 1 When judgment on the appeal was handed down the respondent sought leave to file submissions on costs. Directions for that purpose were made. The parties' submissions have been filed. These reasons deal with the question of costs. 2 The respondent first of all contends that, as regards the trial, the appellant failed on most of the grounds it had pleaded and argued and, accordingly, the appellant should pay a substantial proportion of the respondent's costs (it suggests 50 to 80 per cent) or alternatively that there should be no order as to costs. 3 We think there is force in the argument that the appellant should not benefit from the usual rule that costs follow the event. For many years the traditional rule has been that the winner (once the winner is properly identified) is entitled to recover his costs of the trial. It sometimes happens that there is a departure from the traditional rule and the costs order takes account of the success of the parties on particular issues. But to date the award of costs on an issue by issue basis has only been accepted in limited cases and then only when the circumstances are exceptional. 4 This approach is, if we may be permitted to say so, quite unfair. Its effect is that a winner is entitled to all of his costs even if he raises a plethora of issues on which he is unsuccessful. The unfairness of the traditional rule has been recognised in England where, following Lord Woolf's interim report, Access to Justice (June, 1995) [at para 25.22], the Civil Procedure Rules were modified to require the judge to have regard to the circumstance (if it occurs) that the unsuccessful party has succeeded on some issues: see r 44.3(4)(b). In Western Australia, the Supreme Court Rules provide that costs should follow the event of each pleaded cause of action: see r 66(2)(a). This is narrower than the English approach but certainly more reasonable than adherence to the traditional rule. 5 We do not believe there is any need to wait for a change in the Federal Court Rules to adopt an issue by issue approach here. Costs are in the court's discretion. Fairness should dictate how that discretion is to be exercised. So, if an issue by issue approach will produce a result that is fairer than the traditional rule, it should be applied. It is not suggested that such an approach requires a precise arithmetical apportionment of the costs as between the winner and loser of discrete issues. No doubt the assessment will often be rough and ready. But it will have the virtues of both fairness and reasonableness, which are often lacking in the application of the traditional rule. 6 At trial the appellant pleaded a case in tort (for waste), for rectification of the lease, for breach of ss 52 and 53(g) of the Trade Practices Act 1974 (Cth) and for breach of ss 51AA and 51AC of that Act. In each of those causes of action it failed. On the other hand, much of the evidence tendered, not only by the appellant but also by the respondent, was relevant to the single cause of action upon which the appellant was successful both at trial and on the appeal (its claim for breach of contract). Put another way, if the appellant had confined its claim to the cause of action upon which it succeeded, the work involved in both preparing for trial and the trial time itself would not have been substantially different. In these circumstances it is, in our view, reasonable to deprive the appellant of 30 per cent of its trial costs. It would be perverse to impose upon the appellant any obligation to pay the respondent a portion of its costs and we would decline to make any order to that effect. 7 So far as the costs of the appeal are concerned, we are in no doubt that they should be borne in full by the respondent. The respondent asserts that the appellant was ultimately successful on the appeal on a construction of the lease that was not pleaded by the appellant and not argued by it on appeal and that otherwise it was largely unsuccessful on the claims it pursued on the appeal. The respondent estimates that the time taken up on the unsuccessful arguments occupied about 80 per cent or more of the time before the Full Court. 8 The respondent's description of what occurred on the appeal does not accord with our own recollection. It is true that the appellant did make passing reference to some of the claims in which it was unsuccessful at trial. But the principal issue raised on the appeal, and the issue that was fully argued before the Full Court, was the correct manner in which damages should be assessed for the breach of the lease that was found by the trial judge to have occurred. On that issue the appellant was wholly successful even if it did not identify each and every argument upon which its success depended. Anyway, a successful party should not be punished for not identifying the successful argument, when his failure to do so did not really add to the length of the hearing. 9 We are of the view that so far as the appeal is concerned the usual order as to costs should prevail. I certify that the preceding nine (9) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Finkelstein and Gordon.
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: BOWEN INVESTMENTS PTY LTD
REASONS FOR JUDGMENT RARES J 10 I have had the benefit of reading the reasons of Finkelstein and Gordon JJ in draft on the issue of costs. I agree with their Honours' reasons for their assessment that the appellant should receive 70% of the costs of the trial, with the proviso that the respondent may set off in full the benefit of O 7 made by the primary judge on 19 October 2006, as a result of an adjournment which was granted when the appellant changed its case and amended its statement of claim. 11 However, I do not consider that the interests of justice would be served by making an order that the appellant receive its full costs of the appeal. Its arguments were radically different from those which the Court identified and upon which the appellant ultimately succeeded. 12 Ultimately, the discretion to order costs under s 43(2) of the Federal Court of Australia Act 1976 (Cth), although unconfined, must be exercised judicially. There is no general rule that the sole purpose of a costs order is to compensate one party at the expense of another: Probiotec Ltd v University of Melbourne (2008) 244 ALR 96 at 108 [48], see too at 107-109 [45]-[52]; 75 IPR 222 at 223-235 per myself, Finn and Besanko JJ agreeing at 244 ALR at 97 [1]; 116 [82]. I there reviewed the authorities relating to the scope of the discretion. 13 In my opinion the failure of the appellant to identify the real point in the proceedings at any time during the course of argument in the appeal, meant that both it and the respondent incurred unnecessary costs pursuing issues and arguments that had no substantive impact on the outcome of the litigation. It would be unjust to require the respondent to pay for wasted costs of this exercise. 14 I am of opinion that a fair and just order would be that the respondent pay 70% of the appellant's costs of the appeal. This will reflect the fact that much work, which has been wasted, occurred before the hearing of the appeal in preparing and considering submissions. I certify that the preceding five (5) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.
Associate: Dated: 13 June 2008 Counsel for the Appellant: M Colbran QC T Best
Counsel for the Respondent: C Macaulay SC E Woodward
Solicitor for the Respondent: Mallesons Stephen Jaques
Bowen Investments Pty Ltd
Tabcorp Holdings Ltd
(2008) 244 ALR 96
The respondent pay 70 per cent of the appellant's costs of the trial. The respondent pay the appellant's costs of the appeal.