These proceedings were listed on Monday, 25 November and today for hearing. The Court was informed last Friday, 22 November, that the proceedings had settled but for a residual argument about costs. This judgment determines that costs argument.
The point at issue in this contest is whether or not a defendant who accepts an offer of compromise issued under Uniform Civil Procedure Rules 2005 ("UCPR"), r 42.13A in a small amount (namely $10) is liable under that rule to pay the plaintiff's costs, or whether the defendant can invoke UCPR r 42.34 and resist the making of any costs order on the grounds that the amount of the judgment is less than $500,000 and the proceedings could have been brought in the District Court.
The plaintiff's claim relates to the winding up of an accounting partnership that was conducted by two brothers, which was conducted through a company, Clarkes Pty Ltd ("the company"), the second defendant. In August 2015, the company was wound up under Corporations Act 2001 (Cth), s 461(k), the just and equitable ground, apparently due to differences between the partners. A liquidator was appointed.
Prior to the company's liquidation, the plaintiff and the first defendant had acted as co-directors of the company. After liquidation, one of the brothers, the plaintiff, Reginald Clark, took an assignment from the liquidator of the company's causes of action against the other brother, the first defendant, Stephen Clark. The causes of action so assigned were the company's actions for the first defendant's alleged breach of directors' duties, including under the Corporations Act, and breach of fiduciary duty and related causes of action against the first defendant. All these causes of action related to the defendant's alleged misapplication of the company's funds and alleged misuse of his position as a director.
The plaintiff commenced these proceedings in this Court in August last year, claiming a sum of $87,000. By various amendments that claim was increased to $105,000 in October of last year. The first defendant denied the plaintiff's allegations and prepared to defend the proceedings at the hearing fixed for this week.
But exchanges of correspondence in the last two weeks created a momentum that led to a settlement, subject to the present argument about costs. Negotiations unfolded in the following way. On 19 November, the first defendant made an offer to pay the plaintiff the settlement sum of $50,000, although this offer did not include an offer to enter judgment. Instead, it offered a future date for payment and proposed that the proceedings be dismissed.
That offer was in turn met by an offer of compromise from the plaintiff under UCPR, r 42.13A, which offered to compromise the whole of the proceedings for a judgment of $10. That led to correspondence from the first defendant, making enquiries as to the plaintiff's costs. The plaintiff responded on 21 November indicating that the plaintiff's professional fees incurred were $54,686.65 and disbursements were $37,345.20. The correspondence also suggested that there may be other unbilled professional fees in an amount of about $17,000.
On 21 November, the first defendant accepted the offer of compromise in the sum of $10. The plaintiff now moves by motion for the entry of judgment for $10. The Court will enter this judgment. Acceptance of the offer of compromise leads to that conclusion.
The plaintiff also seeks in his motion an order under UCPR, r 42.13A that the defendant pay the plaintiff's costs in respect of the claim up to 20 November 2019, that is up to the date of the offer of compromise. The correspondence suggested those claimed costs may be as much as $109,031.85 (being $54,686.65 plus $37,345.20 plus $17,000).
UCPR r 42.13A provides as follows:
"42.13A Where offer accepted and no provision for costs
(1) This rule applies if the offer--
(a) is accepted by the offeree, and
(b) does not make provision for costs in respect of the claim.
(2) If the offer proposed a judgment in favour of the plaintiff in respect of the claim, the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made.
(3) If the offer proposed a judgment in favour of the defendant in respect of the claim (including a dismissal of a summons or a statement of claim), the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made."
The circumstances here, after acceptance of the plaintiff's offer of compromise, qualify under r 42.13A(1). The offer was accepted and it did not make provision for costs in respect of the claim.
As the offer proposed a judgment in favour of the plaintiff, the application of UCPR, r 42.13A(2) means that the plaintiff would be entitled to an order against the defendant for the plaintiff's costs in respect of the claim assessed on the ordinary basis up to the time when the offer was made, being 20 November.
But the first defendant argues that r 42.13A(2) is subject to also the operation of r 42.34, which provides as follows:
"42.34 Costs order not to be made in proceedings in Supreme Court unless Court satisfied proceedings in appropriate court
(1) This rule applies if--
(a) in proceedings in the Supreme Court, other than defamation proceedings, a plaintiff has obtained a judgment against the defendant or, if more than one defendant, against all the defendants, in an amount of less than $500,000, and
(b) the plaintiff would, apart from this rule, be entitled to an order for costs against the defendant or defendants.
(2) An order for costs may be made, but will not ordinarily be made, unless the Supreme Court is satisfied that--
(a) for proceedings that could have been commenced in the District Court--the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted, or
(b) for proceedings under Part 2 of Chapter 7 of the Industrial Relations Act 1996 --the commencement and continuation of the proceedings in the Supreme Court, rather than the Local Court, was warranted."
The first defendant argues, and the Court accepts, that the present circumstances qualify under UCPR, r 42.34(1) and attract the operation of r 42.34. The plaintiff has obtained a judgment against the first defendant in an amount less than $500,000, and the plaintiff would "apart from this rule, be entitled to an order for costs against the defendant" (emphasis added). The plaintiff's entitlement to an order for costs arises from UCPR, r 42.13A(2), which expressly confers that entitlement upon acceptance of the offer of compromise.
The Court must now apply UCPR, r 42.34(2)(a). The provision confers discretion on the Court, declaring that an order for costs "may be made". But an order for costs will "not ordinarily" be made "for proceedings that could have been commenced in the District Court", unless the Court is satisfied that "the commencement and continuation of the proceedings and Supreme Court, rather than the District Court, was warranted".
[2]
Could the Proceedings have been Commenced in the District Court?
The plaintiff argued that these proceedings could not have been commenced in the District Court, so r 42.34(2)(a) was not engaged. First, he argued that this was a case involving the execution of a trust and the District Court only has jurisdiction in respect of the execution of a trust where the "fund or estate…alleged to be subject to the trust does not exceed $20,000": District Court Act, s 134(1)(e).
Relevant parts of District Court Act, s 134(1) are as follows:
"134 Jurisdiction in equity proceedings
(1) The Court shall have the same jurisdiction as the Supreme Court, and may exercise all the powers and authority of the Supreme Court, in proceedings for:
…
(b) the specific performance, rectification, delivery up or cancellation of any agreement for:
…
(d) relief against fraud or mistake where the damage sustained or the estate or fund in respect of which relief is sought does not exceed $20,000 in amount or value, as determined by the Court,
(e) the execution of a trust or a declaration that a trust subsists, where the
estate or fund subject or alleged to be subject to the trust does not exceed $20,000 in amount or value, as determined by the Court, or
…
(h) any equitable claim or demand for recovery of money or damages, whether liquidated or unliquidated (not being a claim or demand of a kind to which any other paragraph of this subsection applies), in an amount not exceeding the Court's jurisdictional limit.
..."
The plaintiff argues he is suing upon an equitable assignment of a legal chose in action, which the company had against the first defendant. An equitable assignee of a chose in action suing on the assigned cause of action stands in the position of beneficiary of a trust, where the legal owner of the chose in action, the assignor, is the trustee for the equitable assignee: Cator v Croydon Canal Co (1843) 4 Y & C Ex 593. A suit by the equitable assignee joining the assignor as a defendant could readily be classified as the "execution of the trust", thereby removing from the District Court jurisdiction to adjudicate on the subject matter of the trust beyond the limit of $20,000. Thus the plaintiff's argument has validity, but for a timing issue.
The express plea of an equitable assignment was only introduced into the Statement of Claim at a late stage; a few weeks before the hearing. This amendment was so late that it should not be taken into account when considering whether or not the proceedings could have been commenced in the District Court.
The plaintiff deployed other arguments to try and show these proceedings could not have been commenced in the District Court. The plaintiff argued that the company's claim for breach of fiduciary duty, which had long been fielded in the pleadings, had to be brought in the District Court. This argument was based on a contention that the claim for breach of fiduciary duty was in substance a claim for equitable compensation for breach of trust and is therefore excluded by the words of s134(1)(h) as "not being a claim or demand of a kind to which any other paragraph of this subsection applies". The position here was submitted to be analogous to the claim for breach of trust considered in McDonough v Owners of Strata Plan No 57504 (2014) 17 BPR 33,573; [2014] NSWSC 1708, a case in which a claim for breach of trust for more than $20,000 would have been classified as beyond the District Court's jurisdiction and not within the general jurisdiction limit on equitable claims allowed by s 134(1)(h).
But this argument is invalid. A claim for equitable compensation for breach of fiduciary duty is not a claim for the "execution of a trust". Nor does the claim for equitable compensation for breach of fiduciary duty come within any of the other subparagraph of s 134(1). The claim for breach of fiduciary duty comes within s 134(1)(h) of the District Court's general limit of monetary jurisdiction and could have been commenced in that court.
This is a case therefore where the proceedings could have been commenced in the District Court. The plaintiff's claims fall within the District Court's equitable jurisdiction up to its maximum general jurisdiction of $750,000, conferred on the District Court by District Court Act, s134(h).
[3]
Was Commencement/Continuation in the Supreme Court Warranted?
Unless the Court is satisfied that the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, is warranted then an order for costs "will not ordinarily be made", where the amount of the judgment in the Supreme Court is less than $500,000: UCPR, r 42.34(2).
Although these proceedings could have been commenced in the District Court, the commencement and early continuation of the proceedings in the Supreme Court was warranted. In August 2018, when these proceedings were commenced, the legislation conferring jurisdiction on the District Court contained a temporary anomaly, discussed in a number of cases, which prevented the District Court from hearing matters which involved a "commercial transaction": see for example Commonwealth Bank of Australia v QBE Insurance (Australia) Ltd [2018] NSWSC 1440. This anomaly was corrected by the passage of the Justice Legislation Amendment Act (No 3) 2018, which was proclaimed on 29 November 2018, which amended District Court Act, s 44.
These proceedings were arguably about a "commercial transaction". Although the brothers appear to have conducted professional practice rather than trading enterprise through the company, the proper overall characterisation of their corporate business operations is not free from doubt. The company applied commercial considerations in acting for commercial clients in relation to many commercial transactions. And its own expenses and payments, the very transactions under challenge, were commercial as distinct from domestic transactions.
When these proceedings were commenced it was at least arguable that notwithstanding the jurisdiction conferred by District Court Act s134(h), the conduct in the District Court of a matter such as this with commercial overtones may have been prohibited by the existing anomalous legislation. Given the jurisdictional uncertainty of cases such as this in the District Court, created by the then legislative regime, it was reasonable for the plaintiff to commence the proceedings in the Supreme Court. Responsible legal advisers will ordinarily counsel a client to circumvent avoidable procedural obstacles that may involve the client in unnecessary expense.
The proceedings could have theoretically been transferred back to the District Court after 29 November 2018. But after passage of the legislation, it was reasonable for a cost benefit analysis to be done about transferring the proceedings back to the District Court at that point. After all, by then there had already been considerable investment by the plaintiff in legal costs in the Supreme Court proceedings and a transfer to the District Court would itself involve further expense that, depending on what happened in the proceedings, may not necessarily be outweighed by the reduced costs likely to be incurred in the District Court.
Given that the amount in issue is closer to Local Court jurisdictional limits the argument for transfer to the District Court was weighty. But a factor constraining the transfer of the proceedings to the District Court was the complexity of the arguments surrounding the assignment from the company to the plaintiff. Advice would have had to have been taken about the 2018 legislation and the considerations relevant to transferring the proceedings back to the District Court.
A transfer to the District Court should have been unopposed, reasonably straightforward and likely to save some margin of legal costs. The transfer should have been initiated by about April this year and completed within about another month.
In summary, in my view, although commencement in this jurisdiction was appropriate, the proceedings should have been transferred to the District Court before trial.
[4]
What costs order should now be made?
The Court does not have residual costs discretion under r 42.13A after acceptance of an offer of compromise: Johnston v Johnston (2016) 14 ASTLR 123; [2016] NSWCA 52. But it does have costs discretion under UCPR, r 42.34. The Court will exercise that discretion weighing the following relevant considerations that the facts before the Court bring into focus.
Close consideration should have been given by the plaintiff to initiating transfer of the proceedings to the District Court by some time in about April this year, so they could have been concluded there. The actual transfer may not have taken place for another month. That would have stopped Supreme Court levels of costs being incurred. Maintaining the proportionality of costs to the overall importance and complexity of the subject matter in dispute in litigation is an important relevant consideration for the Court, as is directed by Civil Procedure Act 2005, s 60. But upon a transfer, some costs, albeit reduced costs, would still have been incurred to bring the proceedings to a conclusion, which may have ended up being similar to the money judgment that has now been achieved. UCPR, r 42.13A is a common procedural rule that also applies to District Court proceedings. The ultimate judgment was only for $10.
In my view, the Court should approach the matter on the basis that costs should be allowed on a proportioned basis up to approximately the time that the case should have been transferred back to the District Court. The Court is mindful that the plaintiff claims total costs of close to $110,000. Most of the plaintiff's costs will have been incurred closer to the hearing.
Such an approach is authorised by r 42.34., which provides that "an order for costs may be made". What cost savings might have occurred had the matter been transferred to the District Court, and what costs might have been incurred in the District Court, are a relevant considerations to the Court's exercise of its costs discretion under r 42.34, as are the other matters mentioned above.
The Court does not have enough material before it to work out what costs were incurred by the plaintiff before the proceeding should have been transferred to the District Court. Nor does it have the material to work out what costs would have been incurred in the District Court had the proceedings been transferred to that court. The Court must do the best it can with what it has, knowing what it does about the conduct of this type of litigation. This is not a matter where further money should be spent on gathering evidence merely to enable the Court to make a costs order. The Court wishes to bring these proceedings to an end, doing the best it can on the available materials to avoid further argument between the parties.
The Court will therefore make an order which limits the amount of costs which the plaintiff can recover. This will not be a lump sum cost order under Civil Procedure Act 2005, s 98(4)(c). The Court has insufficient information to exercise that statutory jurisdiction. In my view, the plaintiff should have an order for costs against the first defendant but limited so the plaintiff cannot recover more than $40,000, a limit chosen to reflect the considerations discussed here.
[5]
Conclusion and Orders
Accordingly, the Court makes the following orders and directions:
1. Judgment for the plaintiffs against the first defendant for $10.
2. Order the first defendant pay the plaintiff's costs of the proceedings but limited so that the plaintiff is able to recover no more than $40,000 in costs from the defendant.
[6]
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Decision last updated: 02 December 2019