Darius v Webb

Supreme Court of NSW|2024-07-03|Before: Faulkner J

Solicitors: O'Brien Criminal & Civil Solicitors (Plaintiffs) RHB and Associates Legal and Technical Consulting Services (Defendant) File Number(s): 2024/69271 Decision under appeal Court or tribunal: Local Court of New South Wales Jurisdiction: Civil Date of Decision: 25 January 2024 Before: Arms LCM File Number(s): 2022/264482

JUDGMENT

These proceedings were commenced in the Supreme Court on 22 February 2024 when Alex Darius and Niloofar Dinpanah filed a Summons. They seek orders under ss 40 and 41 of the Local Court Act 2007 (NSW) to permit them to appeal against an order for costs made by Arms Local Court Magistrate (the Magistrate) on 25 January 2024. By the Magistrate's cost order, Linda Webb (the Defendant) was ordered to pay $3,000 in solicitors' fees and other costs in respect of the Plaintiffs' Local Court claim which the Defendant had unsuccessfully defended. The Defendant was also ordered to pay damages of $4,500 from which there is no appeal. The Plaintiffs are nonetheless dissatisfied with the Magistrate's costs order. They contend that there was an error in the exercise of discretion by the Magistrate which warrants intervention by the Supreme Court.
Under s 40(2)(c) of the Local Court Act the Plaintiffs may appeal to the Supreme Court, but only with leave. The Plaintiffs apply for that leave. The application for leave was heard concurrently with the appeal which the Plaintiffs wish to bring should leave be granted.

Background

In order to understand how the dispute came to this point it is necessary to set out some, but not all, of the factual background. I will do so in three parts: 1. the facts giving rise to the underlying dispute; 2. the conduct of the Local Court proceedings from which the Plaintiffs wish to appeal; and 3. the hearing and determination of the question of costs by the Magistrate.

Facts giving rise to the underlying dispute

For the purposes of the remaining costs dispute there is no controversy about the underlying facts. The previous controversy about the underlying facts was the subject of the Local Court proceedings. All factual disputes have been resolved by the judgment of the Magistrate on 25 January 2024. Apart from costs, there is no appeal from the Magistrate's decision. The rights and wrongs of the interaction between the parties before the Local Court proceedings were commenced are not relevant to the question of costs. The question of costs is to be determined having regard to the conduct of the Local Court proceedings, not the anterior conduct of the parties which gave rise to those proceedings: Harrison v Schipp [2001] NSWCA 13 at [134]-[136] (Giles JA, with whom Handley and Fitzgerald JJA agreed). The background facts need to be understood only to the extent that they identify the nature of the dispute which the Magistrate was called upon to resolve.
The Plaintiffs are the owner of a dog named Brooklyn. The precise breed of Brooklyn is not relevant other than to say that Brooklyn is not a pure-bred pedigree dog.
The Defendant is the owner of a dog named Coco. She is not a pure-bred pedigree dog.
On 17 May 2022 the Second Plaintiff and the Defendant were walking their respective dogs when they met in the park. The Second Plaintiff and the Defendant had not previously met but they struck up a conversation. The precise words uttered in the conversation, or indeed any of the words, are not now relevant. For current purposes all that needs to be known is that, as a result of the conversation and subsequent texts, a legally enforceable contract was formed. The substance of the contract was that Brooklyn and Coco would mate and the Plaintiffs would receive one puppy from the anticipated litter.
The first part of the contract was performed on 18 May 2022.
From 18 May 2022, the Plaintiffs and the Defendant, and indeed Brooklyn and Coco, embarked upon a new friendship. They did so with enthusiasm. The dogs met for play dates. The First Plaintiff helped the Defendant troubleshoot technology around her home. The Defendant lent the Plaintiffs her health care book. There were other social interactions.
At the end of June 2022, it became apparent that Coco was gaining weight.
Over a period, which is described in a chronology as "18-20 July 2022", Coco gave birth to eight puppies. Throughout that period Coco and her expanding family were closely attended by the Defendant. They were also attended by the Second Plaintiff who, depending upon one's perspective, was "requested for help" or "wanted to witness the birth". To a lesser extent, Coco and her puppies were also attended by the First Plaintiff.
It appears to have been common ground in the Local Court that newborn puppies ought not be separated from their mother for a (disputed) number of weeks. Coco and her litter remained together at the Defendant's house for a number of weeks after the births. There was a lot of communication between the Defendant and the Plaintiffs, including numerous texts to which were attached photographs and videos.
On 7 August 2022, the Defendant sent the following text to the Second Plaintiff: "I have decided to keep 2 puppies. Late and Diamond dot. I would love it you could select fairly soon cause all of a sudden there is a lot of interest. I will try to give preference (and discount) to people who live very close so Coco , Brooklyn and pups can continue to interact. My neighbours sister (from Glebe) came yesterday and simply fell in love with Choco no 5. The image of a previous dog she had. I assume you'd like a smaller pup to match Brooklyn better??? But not sure if male eg Dice no 7. Or Warrior no 1. Or female eg Slash no 3. I saw one online yesterday at $9000. Others I see are all $5000 or under. If I need to advertise it will likely be over $4,500."
One of the puppies referred to in this text is the puppy named Dice. In other documents the same puppy is referred to as "Panda", but I will always refer to him as Dice for the sake of consistency. The Plaintiffs developed a preference for Dice as the puppy they were to receive under the contract. In the Supreme Court, it was common ground that the Plaintiffs wished to sell Dice. They had a buyer at $4,500. The prospective buyer was a friend of the Plaintiffs.
Whatever may have been the position previously, by the end of August 2022, the Plaintiffs' preference for Dice was not shared by the Defendant.
Discussions ensued, both oral and by text. The tone of the discussions changed and the Defendant began to resist giving the Plaintiffs any puppy.
On 25 August 2022, the Defendant sent an email to the Second Plaintiff stating: "Today I spoke with two Solicitor[s] who breeds Canoodles. Most enlightening! They say you broke the agreement by asking for two. And reniging your assurances thet you would keep puppy in Glebe not to mention feigning friendship to take advantage of my hospitality They also say they pay $600 for mating services of a pedigree cavoudle with pedigree papers. Brooklyn dose not have those papers."
The Defendant also sent a letter to the Plaintiffs on 29 August 2022 about the cost of mating services: "In the last week I have established a reasonable price for mating with a pedigreed dog with papers. Assuming the unpedigreed version might be half that at $300."
At some point the Defendant raised the possibility that Brooklyn was not the father of Coco's litter. DNA investigations commenced. Both parties started talking about their non-financial contributions, including things like "[f]acilitating socialisation and play sessions between the dogs for Coco and the Defendant's benefit" and "providing full board and lodgings" to the Second Plaintiff during Coco's extended labour. The Defendant wanted back her health care book. Clarification was required about the precise terms on which the book had been lent. The RSPCA paid an unannounced visit to the Defendant's house in circumstances which made the Defendant suspicious. Within the local dog loving group, messages about the rights and wrongs of the situation started to emerge on WhatsApp.
The Plaintiffs never received a puppy.
The parties were unable to resolve their dispute. After written warnings, on 5 September 2022 the Plaintiffs commenced proceedings against the Defendant in the Local Court.

Conduct of the Local Court proceedings

The Local Court proceedings were commenced by a Statement of Claim. It was filed in the Small Claims Division. The Defendant was named as the defendant.
At the commencement of the proceedings the Plaintiffs did not have legal representation. The pleadings and particulars which they included in the Statement of Claim were as follows: "1- On 17-May-2022 Niloofar met Linda for the first time at Jubilee Park. Linda asked Niloofar if she would be interested in mating COCO (Linda's female dog) with BROOKLYN (Niloofar's male dog). Shortly after, they agreed to proceed with mating and dividing puppies, one puppy for the Male dog owner and the rest for the female dog owner. On 18-MAY-2022 COCO and BROOKLYN have been mated successfully two times; the first time at Linda's place and the second time at Alex and Niloofar's place. 2- Until 15-July-2022 we have been catching up at least once a week during COCO's pregnancy period. Then on 15th of July COCO, the female dog, was showing some signs of being in labor, and Linda requested for help and asked if Niloofar could come over to her place and stay overnight until COCO delivered the puppies. This occurred three times as Linda was desperately seeking the help from Niloofar and Alex as she believed delivery may happen at any time. 3- Niloofar accepted Linda's request and stayed with Linda on days 15,19 and 20 of July, considering Linda's age and provided her with materials to assist before and during the birth time (proof of text messages and videos captured are available as proof and evidence.) 4- On 20-July-2022, eight puppies were born, consisting of five black and three black and white; on the same day, Niloofar stated her interest in getting one of the black and white puppies. 5- On 22-July-2022, Linda told Niloofar that she was planning to sell six over seven shares of her puppies for the price of over $4,500. 6- On 7-August-2022, Linda started advertising on the local WhatsApp group of dog owners (evidence is available). In one of those advertisements, she clearly stated that only three puppies were left and asked members to be in a hurry if they were interested to buy them, and she announced an extra discount for the members of that group (Dogs in the Park) and set the price for them as $3500. (Evidence and screenshots are available). Also, she stated that she sold one of the puppies to a total stranger. 7- On 7-August-2022, Linda and Niloofar confirmed via text message that, Niloofar would take one of the black and white puppies called "Dice" which is male puppy number 7 8- On 14-August-2022, Niloofar notified Linda that she wanted to advertise Dice for sale; shortly after the message, Linda replied, dishonoring the agreement on Dice, and she refused to give us Dice (the promised puppy). Despite our initial agreement on Dice, Linda offered to give us another puppy subject to the DNA test and tried all grounds to drag us for a couple of weeks and failed to provide any specific timeframe for us to pick our puppy up. 9- Considering that Niloofar and Alex's close friend were already interested in Dice, Linda's refusal to follow through with the agreement was a deal breaker. Linda also stated that there would be no drop-ins and refused to update us with any further photos and videos of puppies. 10- After several back-and-forth communications with Linda, in which, on several occasions, she contradicted herself by saying that there is no proof supporting that Brooklyn is the father of puppies, which raised the question if Brooklyn is not a father, why should Linda take advantage of Alex and Niloofar asking for assistance in the process of puppies birth, inviting stranger people to stay at her place overnight for three nights and accepting the supplements, dog treats, pee mats, some health check-up equipment such as thermometer, scale etc.! Also, attempting to ask for money to recover the cost of food and care for puppies was against the initial agreement, as the male dog owner would only get one puppy. The female dog owner would get all the remaining puppies (which, in this case, were seven puppies), and she should cover the cost. 11- Regardless of all attempts by Niloofar and Alex to resolve the issue, Linda is still refusing to deliver the agreement, and she has stated that she has already sold and given all puppies away to people. As Linda decided not to give us our puppy and clearly broke the deal, and due to all these dramas caused by Linda, our friend already lost interest in buying Dice. Despite all of our concerns for the puppies' health, she kept us in the dark by refusing to provide any news and photos of the puppies. Plaintiffs claims compensation and reimbursement for our loss of share of puppies and additional costs which have been imposed on us. The outstanding amount of $4700 for Dice."
The relief claimed in the Statement of Claim was as follows: "1. That the defendant pays the Plaintiffs the total amount claimed below. [If you are making a liquidated claim (ie claiming a specific amount of money), include the following information:] Amount of claim $4700 Interest $0 Filing fees $149 Service fees $46 Solicitors fees $0 TOTAL $4895"

In the Supreme Court proceedings, counsel for the Defendant described the original Statement of Claim as "short and comprehendible, although not in proper form". I agree as to "short and comprehendible". As to the form, I think counsel for the Defendant was harsh. The purpose of the Small Claims Division of the Local Court is to provide a cheap and efficient mechanism by which parties who have a small dispute can have the dispute resolved by the judicial arm of the government. Section 35(2) of the Local Court Act provides: Proceedings in the Small Claims Division are to be conducted with as little formality and technicality as a proper consideration of the matter permits.
Consistent with that stipulation and the evident policy behind it, Part 2 of the Local Court Rules 2009 (NSW) (LCR) and Local Court Practice Note Civ 1 set out simplified procedures for the Small Claims Division. There will be a pre-trial review, the explicit objective of which is to settle the case (PN 23.3). Most applications are to be made orally (LCR 2.10). The final trial is to be conducted remotely (PN 21.6). The rules of evidence do not apply (PN 25.1). The case is to be heard and determined on the basis of "written statements (whether sworn or unsworn)" (LCR 2.6(2)(a)). Witnesses may not need to be cross-examined (PN 25.2). Expert evidence may not be allowed (PN 25.2).
Despite its form, the original Statement of Claim was appropriate having regard to the nature of the dispute, including the community context in which it had arisen, the simplicity of the issue, the price for which the Plaintiffs had wanted to sell Dice and the amount of money which it was appropriate to spend on legal costs (if any).
When they filed the Statement of Claim the Plaintiffs chose the right Division of the Local Court, the Small Claims Division. Apart from its simplified procedures, another important aspect of proceedings in the Small Claims Division is that it has a costs regime which is different to the General Division. The Small Claims Division is designed to limit the costs which are incurred in the resolution of the dispute. This is addressed in more detail below.
On 22 October 2022 a default judgment was entered against the Defendant. On 17 November 2022 the default judgment was set aside. On that day the Plaintiffs were granted leave to file an Amended Statement of Claim. An order was made about costs, namely: "Costs of the Motion and costs associated with the Amended Statement of Claim are reserved for determination by the Court."
On 24 November 2022, a firm of solicitors filed a Notice of Appointment by which they notified their appointment as the legal representative for the Plaintiffs. The Plaintiffs' solicitors have continued to act for them ever since, including in the current proceedings in the Supreme Court.
The Plaintiffs' newly appointed solicitors filed an Amended Statement of Claim on 24 November 2022. It is necessary to address the detail of the Amended Statement of Claim because it is not possible otherwise to understand the Magistrate's decision on costs or the appeal now brought.
The relief claimed in the Amended Statement of Claim was as follows: "1a. The First and Second Plaintiff claims the following relief: i. Damages for breach of contract. ii. Restitution for unjust enrichment. iii. Damages, including aggravated and exemplary damages, for conversion and detinue. iv. Interest; and v. Costs."
Unlike the original Statement of Claim, the Amended Statement of Claim did not specify the amount of damages which were claimed.
As for the pleadings and particulars, the 11 paragraphs previously relied upon by the Plaintiffs were deleted in their entirety and replaced by 20 new paragraphs.
New paragraphs 1-15 addressed the claim in contract. The contract claim was now put forward in a superficially formal structure but substantively it was convoluted and separate matters were conflated. Notwithstanding the formal changes, the only real difference to the substance was the addition of a claim for "emotional or mental distress damages". It is unusual for a contract to give rise to a liability for emotional or mental distress suffered by one of the parties. In general, a contract breaker is not liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which the breach of contract causes the other party: Johnson v Gore Wood & Co [2002] 2 AC 1 at 48 (Lord Cooke). For such a liability to arise, it is necessary for the express or implied terms of the contract to include a promise to provide the other party with pleasure or enjoyment: Baltic Shipping Co v Dillion (1993) 176 CLR 344 at 405 (McHugh J). No such term was pleaded in the Amended Statement of Claim. It is unlikely that such a term would arise in an oral contract formed by two dog walkers who had never previously met. Even if the necessary term could be found, the Plaintiffs would not be entitled to such damages unless they could prove that they had suffered emotional or mental distress by reason of the Defendant's failure to deliver Dice. The Court would not find that any relevant distress was suffered in circumstances where the Plaintiffs planned to sell Dice for $4,500. Their loss was money, not pleasure and enjoyment.
The appropriate contractual remedy for a money loss is damages, plus interest from the date when the money would have been received but for the breach of contract. There is nothing in the evidence to explain why it was necessary or appropriate to enlarge the contract claim in this way.
Paragraph 16 of the Amended Statement of Claim introduced a new cause of action which was described as "restitution based on unjust enrichment". Despite that description, the cause of action was a simple money claim as contemplated by r 14.12(1)(c) of the Uniform Civil Procedure Rules 2005 (NSW), namely a claim for money for services provided by the plaintiff for the defendant at the defendant's request. For such a claim, the law imposes an obligation to pay reasonable remuneration for the services which were provided: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 251 (Deane J). All the Local Court evidence was adduced into evidence on the application for leave to appeal to the Supreme Court. The only evidence which I have been able to locate about the reasonable remuneration for the services provided by the Plaintiffs is the statement by the Defendant that $600 is the going rate for mating services. That is only if the male is a pure-bred pedigree dog. The Defendant assumed $300 would be appropriate for Brooklyn. In any event, paragraph 16 of the Amended Statement of Claim correctly made clear that the money claim was an alternative to the contract claim. In other words, if the Plaintiffs succeeded on their contract claim, the money claim would have no work to do.
Paragraph 17 of the Amended Statement of Claim also introduced two further causes of action, namely the torts of conversion and detinue. As pleaded, these causes of action had as their essential premise the proposition that the Plaintiffs' contractual entitlement gave them "an immediate right to possession" of a puppy. The Amended Statement of Claim does not reveal how a contractual entitlement to receive a chattel could give rise to a proprietary right to possession. In any event, the tort claims depended on the success of the contract claim.
For the purposes of the new tort claims, an allegation was added that the Defendant "[d]eliberately exercised unlawful dominion [over] a puppy in which the Plaintiffs had an immediate right to possession". This was a serious allegation. No particulars were provided. The correctness of the allegation is objectively implausible. It is difficult to see how an exercise of unlawful dominion could have been deliberate unless the Defendant knew that the Plaintiffs had an immediate right to possession of a puppy. The Defendant may have needed to understand the circumstances in which a contractual entitlement might give rise to a proprietary interest in a chattel.
There is no apparent reason why claims in conversion and detinue were added to the case. The wording of paragraph 17(a) of the Amended Statement of Claim shows that the pleader was aware that the tort claims would only succeed if the Plaintiffs had already won in contract. On that hypothesis, the measure of compensatory damages would have been the same in contract and tort.
The only reason for adding the tort claims, which is apparent from the text of the Amended Statement of Claim, is the addition of the claims for aggravated and exemplary damages which was made in paragraph 18. Such damages are not available for breach of contract: Gray v Motor Accident Commission (1998) 196 CLR 1 at 6-7 (Gleeson CJ, McHugh, Gummow and Hayne JJ) but they may be awarded in tort. In support of the claims for aggravated and exemplary damages, it was alleged that "it was distressing, humiliating and insulting for the First and Second Plaintiff" to be denied the immediate right to possession of the puppy. No objective facts were pleaded which explained why non-receipt of the puppy was distressing, humiliating or insulting for the Plaintiffs. Contrary to UCPR 15.7 and 15.8, the claim was essentially unparticularised.
Even for torts, an award of exemplary damages or aggravated damages is rare. The court book for these proceedings contains over 100 pages of text messages and many pages of affidavits which were prepared for the Local Court proceedings. There is nothing in the material which suggests that the dispute between the parties was a kind which would make exemplary damages or aggravated damages appropriate. This was not a case where the Court would wish to punish the Defendant by requiring her to pay exemplary damages. Nor was it a case where the Court would wish to compensate the Plaintiffs with aggravated damages because of injury to their feelings.
The new torts were most unlikely to achieve anything which was not otherwise achievable by the basic contract claim.
Before leaving the tort claim, paragraph 18(c) of the Amended Statement of Claim provided as follows: "Should it appear to the First and Second Plaintiffs that the Defendant is conducting herself in these proceedings in manner so warranting, the First and Second Plaintiffs will claim further aggravated damages accordingly."
This statement was neither an allegation of a material fact nor a particular. There is nothing in the evidence which explains, much less justifies, why the statement was included in the Amended Statement of Claim when it was filed on 24 November 2022, or at any time afterwards. In the context of a dispute which the Plaintiffs had chosen to bring before the court, and which the Defendant was entitled to defend, the statement appears to have been made in terrorem. It should not have been included in the Amended Statement of Claim.
The last change introduced by the Amended Statement of Claim was the addition of paragraphs 19 and 20 in which a claim was made for "Services Rendered by the Plaintiffs". This claim was different to the claim in paragraph 16. It was directed to "services" provided by the Plaintiffs to the Defendant during their short friendship. As described in the Amended Statement of Claim, the services included assisting the Defendant with technological tasks at the Defendant's property, facilitating socialisation and play sessions between the dogs, dog sitting Coco after the Second Plaintiff and the Defendant had met up at the pub, purchasing 100 pee mats and a silicone mat for Coco, checking Coco's temperature and health during the births and cleaning Coco's blood and mucus from the Defendant's couch. There were other services of a similar nature.
The Plaintiffs alleged that these everyday social interactions were "services" which were provided in anticipation that the Defendant would perform the contract and, once that did not happen, the Plaintiffs became entitled to "the reasonable market remuneration of the relevant services rendered". It is another money claim. No such claim can arise if, at the time the services were provided, the Defendant did not know that the services were not being provided gratuitously: Programmed Total Martine Services Pty Ltd v Ships "Hako Endeavour" and "Hako Esteem" (2014) 229 FCR 563; [2014] FCAFC 134 at [164] (Besanko J, with whom Allsop CJ and Rares J agreed). Having regard to the nature of the "services" and the friendship between the parties, that may have been a difficult matter for the Plaintiffs to prove.
None of the additional claims added to the Amended Statement of Claim had a realistic chance of increasing the value of the case above the basic contract claim for $4,500.
The immediate consequence of the Amended Statement of Claim being filed is that the proceedings were transferred from the Small Claims Division to the General Division. The precise circumstances in which that occurred are unclear. The front sheet of the Amended Statement of Claim correctly identified that the proceedings were in the Small Claims Division at the time the amended pleading was filed. In January 2023 the Plaintiffs were considering making an application to transfer the proceedings to the General Division, but before they could do so they discovered that the transfer had already occurred. Their solicitors received an email from the Local Court Registrar which said: "It appears when the Amended Statement of Claim was filed the matter was transferred to the General Division as per the document filed."
It is not obvious what the Registrar meant by "as per the document filed". The Amended Statement of Claim described itself as filed in the "Small Claims Division" "List General". A plausible explanation is that the Registry staff noticed that the Amended Statement of Claim no longer specified the amount of damages claimed. Alternatively (or additionally), they may have noticed the complexity introduced by the amendments and formed the opinion that the dispute had become too complex for the Small Claims Division. Local Court Rule 2.3(1) expressly contemplates that such an opinion may be formed and empowers the Local Court to transfer proceedings of its own motion.
In this Court, it was common ground between the parties that once the Amended Statement of Claim was filed, the proceedings were too complex for the Small Claims Division. They had to proceed in the General Division. It is not therefore to the point that the Plaintiffs did not themselves apply for the transfer. Nor is it relevant that the Defendant did not apply to have the proceedings returned to the Small Claims Division. Once the Plaintiffs added the claims for emotional and mental distress damages, conversion, detinue, exemplary damages, aggravated damages and the two money claims for services provided by the Plaintiffs for the Defendant and at the Defendant's request, the proceedings were destined to be conducted in the General Division no matter what the Defendant tried to do about it.
An important consequence of the proceedings being transferred to the General Division is that the costs regime which is unique to the Small Claims Division ceased to apply. Although there was still a $2,500 cap on costs (paragraph 38.2(c) of Local Court Practice Note Civ 1 as at 7 June 2022), once the proceedings arrived in the General Division the Plaintiffs could apply to increase the cap (paragraph 38.3). There are other features of the Small Claims Division costs regime which ceased to apply, including the different way an unaccepted settlement offer is to be taken into account. These matters are addressed in more detail below.
After the proceedings were transferred to the General Division, a number of other relevant events occurred. On 19 January 2023 the Plaintiffs made an offer to settle the case for $5,500 plus costs. The Plaintiffs informed the Defendant that their current costs were $6,105 but offered to accept $6,000 as a compromise. The offer was not accepted.
The Plaintiffs do not rely on this unaccepted offer to support their argument that the Magistrate's ultimate costs order was vitiated by error. The offer is nonetheless relevant because it shows that, by 19 January 2023 the solicitors who filed their Notice of Appointment on 24 November 2022 had already incurred costs which exceeded the total amount claimed by the Plaintiffs in their original Statement of Claim ($4,700). The precise numbers are not known, but it may be inferred that most of the $6,105 figure represented the solicitor costs for preparing the Amended Statement of Claim. That was the largest work task undertaken at that stage.
Once transferred to the General Decision, on 24 March 2023 the Plaintiffs made an application under paragraph 38.3 of the Local Court Practice Note to increase the costs cap from $2,500 to $25,000. In support of the application the Plaintiffs relied upon an Affidavit by their solicitor which outlined the complexity introduced into the case by the Amended Statement of Claim. The Affidavit set out a long list of complexities which now needed to be decided as part of the case, including: "ii. Should either of the Plaintiffs' claims for restitution for unjust enrichment be established, the court may have to consider and resolve differing approaches of the majority of the High Court in Mann & Anor v Paterson Constructions Pty Ltd (2019) 267 CLR 560, and determine to what extent (if at all) the quantum of restitution for the Plaintiffs should be informed by the price of any contract between the parties."
Unsurprisingly, with the increased complexity, the Plaintiffs' solicitor estimated that the costs of the proceedings would be $25,000, ten times the $2,500 limit specified in paragraph 38.2(c). That was an estimate of the costs just for the Plaintiffs.
The Affidavit did not address the community context in which the claim had arisen or the amount originally claimed by the Plaintiffs, although the court file would have been available to the Magistrate who heard the application from which these matters may have been readily apparent. After a hearing at which both parties were represented by solicitors the costs cap was increased to $25,000.
On 29 May 2023 the Plaintiffs made a second offer to settle the case. The offer was constituted by a formal Offer of Compromise under UCPR 20.26, together with a covering letter which referred to the Calderbank principles on a contingent basis. In substance, the offer was for $4,000 plus costs to be agreed or assessed. The Defendant was notified that the Plaintiffs' costs were now in excess of $10,000. The offer was not accepted.
At the time the second offer was made, the Defendant was represented by a solicitor, Mr Rose. The Plaintiffs had not yet served their evidence. There were still no particulars of the loss caused by the breach of contract. The Plaintiffs' covering letter referred to emails which the Defendant had herself sent in August 2022 in which she had made references to selling other puppies for $4,500 and more. The most pertinent email is set out above at [155].
On 20 July 2023 Mr Rose ceased acting for the Defendant. The Defendant subsequently informed the Court that she could no longer afford to pay Mr Rose.
On 29 November 2023 another solicitor, Gary Cassim, commenced acting for the Defendant but his involvement was short lived. On 17 January 2024 he ceased acting. From that time onwards the Defendant was unrepresented.
On 4 December 2023 the Plaintiffs made a third offer to settle the case. The offer was also constituted by a formal Offer of Compromise under UCPR 20.26, together with a covering letter which referred to the Calderbank principles on a contingent basis. In substance, the offer was for $1,500 plus costs to be agreed or assessed. The Defendant was notified that the Plaintiffs' costs were now in excess of $38,000. To settle the case the Plaintiffs further offered to accept $33,000 for their costs. The offer was not accepted.
On 18 January 2024 the costs cap was further increased. The increase occurred as a result of a further application made by the Plaintiffs, in support of which their solicitor affirmed an Affidavit in which he expressed the opinion that a costs cap of $45,000 was appropriate. After a hearing at which the Defendant represented herself, the costs cap was increased to $45,000.
On 25 January 2024 the final hearing took place before the Magistrate. The Plaintiffs were represented by their solicitor who handed to the Magistrate a court book which contained 520 pages of documents. The Defendant represented herself.
Following the hearing, the Magistrate upheld the Plaintiffs' contract claim and awarded damages of $4,500 plus interest.
The Magistrate rejected the Plaintiffs' claims for emotional and mental distress damages, conversion, detinue, exemplary damages, aggravated damages and the two money claims. Everything which had been brought into the case by the Amended Statement of Claim failed.
The Notice of Order made by the Magistrate was as follows: "On 25 January 2024 the following orders (and/or directions) were made: Judgment: Linda Webb, First Defendant is to pay Alex Darius, First Plaintiff Niloofar Dinpanah, Second Plaintiff the sum of Claim amount: $4500.00 Interest claimed: $438.41 Filing fees: $149.00 Service fees: $46.00 Solicitors fees: $3000.00 Other costs: $0.00 TOTAL: $8133.41 Verdict for Plaintiffs after hearing. Interest calculated under S100 of Civil Procedure Act 2005 from 5/2/22. On costs - S60 proportionality of costs, S98(i) Discretion, Calderbank not reasonable offer)."
The order that the Defendant pay the Plaintiffs' costs of $3,000 is the subject of the application for leave to appeal to the Supreme Court.

Magistrate's costs order

The evidence before the Supreme Court included an audio recording of the proceedings before the Magistrate and, without objection, a transcript of the concluding part of the hearing. The transcript sets out the oral submissions on costs and the Magistrate's reasons for the orders which he made. As I indicated to the parties at the hearing, I have had regard to the transcript, but I would not listen to the audio recording other than as invited to do so by the parties. In the end, neither party asked me to listen to any part of the audio recording.
The transcript reveals that the Magistrate approached the costs issue by identifying the discretion given to his Honour under s 98 of the Civil Procedure Act 2005 (NSW) and the requirement that he have regard to the overriding purpose set out in s 56 together with the case management provisions in ss 57 and 58. The Magistrate particularly referred to the importance of s 60 which provides: 60 Proportionality of costs In any proceedings, the practice and procedure of the court should be implemented with the object of resolving the issues between the parties in such a way that the cost to the parties is proportionate to the importance and complexity of the subject-matter in dispute.
The immediate concern of s 60 is the implementation of the court's practice and procedure, not the subsequent making of costs orders. However, the statutory policy is clear: proportionality between the costs and the importance and complexity of the subject matter in dispute is encouraged.
In addition to proportionality, a reading of the entirety of the transcript shows that a matter which the Magistrate considered relevant to the exercise of his Honour's discretion was the fact that the proceedings had been transferred from the Small Claims Division and the circumstances in which that occurred. At the commencement of the costs argument, the following exchange occurred: "THE MAGISTRATE: ...On that basis, it's my intention that there will be a verdict and judgment for the Plaintiffs in the sum of $4500. That then grossly affects your claim for costs. You appreciate that? I know you've moved into the General Division, but you've been unsuccessful probably from removing the matter from the small claims. PLAINTIFFS' SOLICITOR: Yes, your Honour. THE MAGISTRATE: That's a major issue. PLAINTIFFS' SOLICITOR: As to the removal of the matter from the small claims Division, this was not done on application by the plaintiffs. This was done by the court upon filing of the- THE MAGISTRATE: I have to. Because you're going outside the jurisdiction, aren't you? PLAINTIFFS' SOLICITOR: Pardon, sorry. THE MAGISTRATE: Aren't you're going outside the jurisdiction? PLAINTIFFS' SOLICITOR: Well your Honour this- THE MAGISTRATE: So that the issue, but I still think. Some of it isn't necessarily something that I would probably have power because it's equitable. But anyway, we don't need to. PLAINTIFFS' SOLICITOR: Your Honour, I guess basically since the amended statement of claim and there have been motions both brought by the defendant and motions brought by the plaintiffs. The magistrates who have reviewed those motions, have seen no issue with the placement of the matter in the general division, no formal application to return the matter to the small claims division was- THE MAGISTRATE: With all due respect, I'm looking at a decision on the 18th of January. Oh no that's just in relation to costs. Who's done that? DEFENDANT: Wasn't I entitled to have it heard in the small claims court? THE MAGISTRATE: Generally speaking, yes. But if the court removes it. That's a matter for- DEFENDANT: But if they only remove it because of something this solicitor's done. THE MAGISTRATE: Correct. And as I. You might have heard me say at the start. It was never quantified as to what the claim was, and that's I'd say why they've removed it. Because it's an unquantified claim."
The Magistrate further dealt with this issue when giving his reasons for his Honour's costs order: "The purposes, I note that the Civil Procedure Act sets out the overriding purposes of proceedings in that the overriding purpose of the Act and the rules of the Court is and their application to civil proceedings is to facilitate the just quick and cheap resolution of the real issues in the proceedings. I also note 57-58 deal with Case management. But I note of importance as section 60, proportionality of costs, which is in any proceedings of practise and procedure, the Court should be implemented with the object of resolving the issues between the parties in such a way that the cost of the parties is proportionate to the importance and complexity of the subject matter in dispute. Further, I note that under Section 98.1. It's clear under the legislation if you look at 98.1. That in relation to the courts power as to costs, it's subject to rules of court to anything else costs are in the discretion of the Court and the Court has full power to determine by whom to whom and to what extent costs to be paid and see the court may or the costs are to be awarded on the ordinary basis or on an indemnity basis. In relation to the proceedings, I note that the matter was after an amended claim was filed, the matter was removed to the General Division in relation to the additional heads of claim that were put by the plaintiffs. Having heard the evidence and made a decision, I note that the additional material that caused the matter to be removed from the small claims division to the General Division was wholly unsuccessful the claim. The additional claims, as per my reasons were rejected."
The Magistrate again referred to the transfer from the Small Claims Division after hearing the Plaintiffs' further submissions about formal offers of compromise: "Again, noting that they were wholly unsuccessful in relation to the matter, and it's a matter that could have. Had the claim not been amended to include, been dealt with in the small claims division of the court and if that was the case, that would limit costs. I will however note that it was removed, and I have to have some regard to the additional work involved in relation to preparing for a hearing in this jurisdiction. It is still though, as I've said, a matter where I can't accept that the Calderbank offer where there was proposed $33,000 costs is just quick and cheap, having regard to the finding that I've made and the amount of the finding that I have made. In the general scheme of things, I do note that the original statement of claim was taken out by the Plaintiffs themselves without representation. As I said, if the proceedings had proceeded in the small claims, the costs would be substantially limited. Whilst I note the Calderbank offers. I still find that. Those amount the proportionality of costs to the judgment have to be taken into consideration. Having regard to all those circumstances and noting my discretion, I will make an order for professional costs for the sum of $3000."
In exercising his costs discretion, the Magistrate had regard to the Plaintiffs' success on the contract claim, the quantum of the damages to which they were found to be entitled ($4,500) and the fact that the matters introduced by the Amended Statement of Claim were "wholly unsuccessful".
The Magistrate also had regard to the offers made by the Plaintiffs in May 2023 and December 2023. In that respect the Magistrate set out the terms of the offer which was made in May 2023 at lines 142 to 145 of the transcript. Thereafter, the Magistrate's references to the offers were generally directed to the offer made in December 2023. The Magistrate found that the Defendant did not act unreasonably by not accepting the December 2023 offer in circumstances where it required her to assume a costs liability of at least $33,000.
The Magistrate did not explicitly make an equivalent finding in respect of the May 2023 offer. However, it is tolerably clear that the Magistrate reached the same conclusion in relation to the May 2023 offer because the Magistrate set out the terms of the May 2023 offer, the Magistrate's concluding words at line 227 of the transcript referred to "offers" plural and the Magistrate's express concern about the disproportion between the costs (more than $10,000 in May 2023), which concern also applied to the May 2023 offer.
Throughout the Magistrate's reasoning, his Honour generally referred to the offers as "offers" or "Calderbank offers". He did not refer to them as formal offers of compromise and he never referred to UCPR 42.14. However, after the Magistrate made his finding that it was not unreasonable for the Defendant not to accept the December 2023 offer, further submissions were made on behalf the Plaintiffs in which the Magistrate was specifically directed to the fact that the offers were formal offers of compromise. It is clear that the Magistrate understood and took into account those submissions. His Honour responded to the further submissions at line 213 of the transcript where he said: "Noting those matters, I accept the additional submissions made by [the Plaintiffs' Solicitor], again noting that the section 98(1)(a) is the discretion of the court".
As a result of the Magistrate exercising his Honour's discretion, the costs orders set out above were made.

Appeal to the Supreme Court

The Plaintiffs have approached this case by contending firstly, that their appeal has merit and secondly, by virtue of that merit they ought to have leave to appeal. I will approach the judgment in the same way.

Plaintiffs' submissions on the appeal

The Plaintiffs' do not dispute that the Magistrate had a discretion when ordering costs under s 98. Apart from the Magistrate's treatment of the formal offers of compromise, the Plaintiffs do not contend that the Magistrate made any error when exercising his Honour's discretion. The Plaintiffs do not submit that the Magistrate took into account any irrelevant matter. The Plaintiffs do not submit that any of the following matters which the Magistrate evidently did take into account was irrelevant: 1. the overriding purpose of the Civil Procedure Act and the UCPR ("just, quick and cheap"); 2. proportionality between the amount of the damages and the costs ("$4,500. That then grossly affects your claim for costs"); 3. the limited costs which would have been ordered in the Small Claims Division ("that would limit costs"); 4. the case should have been conducted in the Small Claims Division ("but you've been unsuccessful probably from removing the matter form the small claims"); 5. the Plaintiffs caused the proceedings to be moved out of the Small Claims Division by filing the Amended Statement of Claim ("Because you're going outside the jurisdiction, aren't you"); and 6. everything in the Amended Statement of Claim was rejected ("the additional material that caused the matter to be removed from the Small Claims Division to the General Division was wholly unsuccessful").
The Plaintiffs' appeal is confined to a single narrow argument. They simply submit that the Magistrate treated the offers as Calderbank offers when the costs implications arising from an unaccepted offer are different if the offer is made formally under UCPR 20.26 compared to an offer which is made pursuant to the principles in Calderbank v Calderbank [1975] 3 WLR 586.
The Plaintiffs submit that under the former regime the unaccepted offeror is entitled to a special costs order unless the Court orders otherwise: UCPR 42.14. The Court will not order otherwise unless there are "exceptional circumstances": South Eastern Sydney Area Health Services & Anor v King [2006] NSWCA 2 at [83] (Hunt AJA, with whom Mason P and McColl JA agreed). In contrast, under the Calderbank principles the Court will make a special costs order if it is shown that it was unreasonable for the offeree not to accept the offer.
The Plaintiffs further submit that the purpose of formal offers of compromise under UCPR 20.26 and Division 3 of Part 42 of the UCPR is to put the offeree at risk as to costs so as to encourage settlement. Formal offers under the UCPR should therefore produce greater certainty in the costs consequences if the offer is not accepted.
The Plaintiffs submit that an aspect of the difference between the two regimes is that the unaccepting offeree must demonstrate that there are special circumstances which warrant the Court otherwise ordering under UCPR 42.14, whereas under the Calderbank regime the Court will not make a special costs order unless the unaccepted offeror demonstrates that it was unreasonable for the offer not to have been accepted. The Plaintiffs stress the onus of proof.
More prescriptively, the Plaintiffs submit that someone who does not accept a more favourable offer under UCPR 42.14 must prove specifically that he or she gave "serious thought to the risk involved in non-acceptance of the offer" and "assessed the case properly". He or she must give an explanation as to why the offer was not accepted. For these propositions, the Plaintiffs rely on South Eastern Sydney Area Health Service & Anor v King and Vagg v McPhee (No 2) [2012] NSWSC 187.
The Plaintiffs contend that the Magistrate treated the Plaintiffs' offers in May and December 2023 as Calderbank offers, not formal offers under UCPR 42.14. The Magistrate thus had regard to the wrong test and the wrong onus of proof. The Magistrate found that "it isn't reasonably expected" that the offers would be accepted having regard to the amount of costs which would have to be paid once the offer was accepted. The Magistrate's orders include the text "Calderbank not reasonable offer". The transcript shows that the Defendant did not demonstrate exceptional circumstances for the purposes of UCPR 42.14. She does not explicitly say that she considered the offers. The Plaintiffs submit that the Magistrate should therefore have made the indemnity costs orders to which the Plaintiffs were entitled.
Although not stated explicitly, the Plaintiffs position is that, absent special circumstances, the Plaintiffs are entitled under UCPR 42.14 to an order that all their costs be paid on an indemnity basis regardless of any other aspect of the case which would otherwise be relevant to the exercise of the Magistrate's discretion, and regardless of any other provision in the relevant statutes and rules about orders for costs. The Plaintiffs did not address any of the other considerations taken into account by the Magistrate. Specifically, the Plaintiffs did not address the Magistrate's evident concern that the proceedings should have been conducted in the Small Claims Division.

Costs provisions applicable to the Local Court

As with other civil courts in New South Wales, the starting point for the Local Court's power to order costs is s 98 of the Civil Procedure Act. Section 98 relevantly provides as follows: 98 Courts powers as to costs (1) Subject to rules of court and to this or any other Act - (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis. (2) Subject to rules of court and to this or any other Act, a party to proceedings may not recover costs from any other party otherwise than pursuant to an order of the court. (3) An order as to costs may be made by the court at any stage of the proceedings or after the conclusion of the proceedings. (4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to - (a) costs up to, or from, a specified stage of the proceedings, or (b) a specified proportion of the assessed costs, or (c) a specified gross sum instead of assessed costs, or (d) such proportion of the assessed costs as does not exceed a specified amount.
Section 98(1) is "subject to the rules of court". The UCPR makes provision for formal offers of compromise to be made under r 20.26. If such an offer is made by a Plaintiffs and not accepted by the defendant, r 42.14 provides: 42.14 Where offer not accepted and judgment no less favourable to plaintiff (1) This rule applies if the offer is made by the plaintiff, but not accepted by the defendant, and the Plaintiffs obtains an order or judgment on the claim no less favourable to the Plaintiffs than the terms of the offer. (2) Unless the court orders otherwise, the Plaintiffs is entitled to an order against the defendant for the Plaintiffs' costs in respect of the claim - (a) assessed on the ordinary basis up to the time from which those costs are to be assessed on an indemnity basis under paragraph (b), and (b) assessed on an indemnity basis - (i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and (ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made.
The procedure for making a formal offer of compromise and the costs consequences apply to proceedings in the General Division of the Local Court. By virtue of UCPR 1.5(2) and Sch 1, they do not apply to proceedings in the Small Claims Division.
Section 98(1) of the Civil Procedure Act is also subject to "any other Act". Section 37 of the Local Court Act provides that the Local Court sitting in its Small Claims Division has no power to award costs except as provided by the Rules.
Rule 2.9 of the Local Court Rules provides for the costs which may be awarded in the Small Claims Division. Rule 2.9 provides as follows: 2.9 Costs (1) In this rule, costs include fees, disbursements, expenses and remuneration. (2) The Court may make orders for the payment of costs only in the following circumstances - (a) if proceedings are discontinued or dismissed, or a defence is struck out, at a pre-trial review or at a hearing, (b) if proceedings are adjourned as a consequence of a party's default or neglect, including a party's failure to comply with a direction of the Court, (c) if proceedings on a motion are heard by the Court, (d) if judgment is given after a trial of proceedings. (3) The maximum amount of costs that may be awarded to a party under subrule (2) is - (a) in the circumstances referred to in subrule (2)(a), (b) or (c) - the amount of costs that would be allowable on entry of default judgment for a liquidated claim in the proceedings, and (b) in the circumstances referred to in subrule (2)(d) - the amount of costs that would be allowable on entry of default judgment for an unliquidated claim in the proceedings. (3A) Despite subrule (3)(b), the maximum amount of costs that may be awarded to the party under subrule (3)(b) is increased by 25% if the Court considers that - (a) the party made a genuine offer to compromise on the claim that was not accepted by the other party, and (b) it was unreasonable for the other party not to have accepted the offer. (4) Despite subrule (2), the Court may also allow costs for the following - (a) matters for which costs are fixed by a fixed costs legislative provision within the meaning of the Legal Profession Uniform Law (NSW), (b) court and service fees, (c) fees for expert opinion reports (limited to a maximum of $350 for each report), (d) search fees, (e) costs in relation to, or arising out of, the issue of a subpoena.
One matter to notice is rule 2.9(3A) which makes provision for unaccepted offers in the Small Claims Division which is similar to Calderbank principles. If the proceedings had remained in the Small Claims Division the Defendant's non-acceptance of the offers made by the Plaintiffs, no matter what form the offer took, would have been irrelevant to the costs order to be made, unless the Magistrate considered that it was unreasonable for the Defendant not to have accepted the offer. Even then, the costs which would otherwise be ordered against the Defendant would only be increased by 25%. There would be no question of the Defendant being ordered to pay the full costs actually incurred by the Plaintiffs, and to pay them on an indemnity basis.
The amount of costs which would be allowable in each of the specific circumstances referred to in clause 2.9(3) are to be found in Part 3 of Sch 1 of the Legal Profession Uniform Law Application Regulation 2015 (NSW). Specifically: 1. under Item 2 of Pt 3 of Schedule 1, the amount of costs that would be allowable on entry of default judgment for a liquidated claim is $912; 2. under Item 3, the amount of costs that would be allowable on entry of default judgment for an unliquidated claim is $1574; and 3. under Item 4(b), the amount referred to in Item 2 and Item 3 is reduced to 60% of the amount for the proceedings where (as here) the amount at issue is between $1,000 and $5,000.
These are relatively modest sums.
Costs are also addressed in Local Court Practice Note Civ 1. Paragraph 35.1 provides: "The Court will seek to ensure that the party/party costs (including disbursements) remain proportionate to the amount in issue."
Paragraph 36 is entitled "Costs at the end of the trial". It provides as follows: 36. Costs at the end of the trial 36.1. The legal representatives must be prepared to deal with a costs argument at the end of a trial (on the same day where possible) including any application for an award of costs on an indemnity basis. 36.2. The Court may fix the amount of costs or order that quantum of costs be as agreed or assessed. 36.3. To assist the Court to fix the costs, the legal representatives should have available: (a) a summary of the fair and reasonable costs that will be sought if their client is successful; (b) evidence of time spent (e.g., copies of time ledger print outs, file notes and memoranda); (c) a copy of the written notice as required by clause 35.3, 'Proportionality of costs'. 36.4. The Court will not engage in an assessment (i.e., allowing or disallowing individual items on a bill of costs) when fixing an amount of costs. Instead, the Court will consider whether the time spent on the case was reasonable in all the circumstances. 36.5. If parties agree on the quantum of costs after the trial, they can file consent orders without the need for a further attendance at court. 36.6. LCR Part 2 (r 2.9) limits the costs that can be awarded at the end of a trial in the Small Claims Division.
Part G of the Practice Note is directed to the maximum costs orders that may be made in the General Division. Of particular relevance to the current case is paragraph 38.2(c) which provides as follows: "38.2 Unless the Court otherwise orders, the following orders are taken to have been made when the defence is filed in the proceedings: … (c) where the proceedings were transferred from the small claims division to the general division, then the maximum costs that can be awarded to the successful party is $2500."
The subsequent subparagraphs of paragraph 38 provide for a party to apply to increase the maximum costs which may be awarded. The application is to be made by a notice of motion and supporting affidavit. Paragraph 38.8 provides that the Local Court may confirm or vary the amount of the maximum costs order or make such other order as is appropriate. As set out above, the Plaintiffs twice made applications under paragraph 38, as a result of which the maximum amount of costs was raised first to $25,000, then to $45,000.
Paragraph 38 is followed by paragraph 39 of the Practice Note is as follows: 39. All claims in the General Division 39.1. Clause 39.2 applies to all proceedings in the General Division, regardless of the amount claimed, where the Plaintiffs or cross-claimant: (a) has obtained a judgment in an amount that is less than $20,000.00 against the defendant or cross-defendant (or all defendants or cross-defendants, if more than one); and (b) would be entitled to an order for costs against the defendant or cross-defendant. 39.2. An order for costs will not be made in an amount greater than that which would otherwise have been awarded if the proceedings had been determined in the Small Claims Division, unless the Court is satisfied the commencement and/or continuation of the proceedings in the General Division rather than the Small Claims Division was warranted.
For the purposes of paragraph 39.2, the parties made competing submissions about what costs would have been awarded if the Plaintiffs' proceedings had been determined in the Small Claims Division. The Defendant submitted that the awarded costs would have been no more than $2,045.40 (not including the filing fee and service fee separately ordered by the Magistrate). The Plaintiffs submitted that the maximum costs would have been higher for three reasons: 1. they would have been entitled to an extra $204 as the costs for the two successful applications under paragraph 38.3 of the Practice Note, but these applications would not have been permitted in the Small Claims Division so the additional $204 is not correct; 2. they would have been entitled to a 25% uplift because it was unreasonable for the Defendant not to have accepted one of the offers, but the Magistrate did not consider that it was unreasonable for the Defendant not to have accepted the offers so the additional 25% is not correct; and 3. under r 2.9(4)(c), the Local Court may have allowed extra costs relating to a subpoena for which costs of $1,458 were incurred in accordance with the relevant scale and the Plaintiffs' solicitor time records.
It is not possible on the information before the Court to determine the correctness of this last increase. It cannot be assumed that the subpoena would have been issued had the proceedings remained in the Small Claims Division or that the expenses arising from it would have been as high. This is especially so if the Defendant has been able to continue to retain a solicitor to advise her, which may have been possible under the simplified and cheaper procedures of the Small Claims Division.
What can be said is that the costs which would have been awarded in the Small Claims Division would have been between $2,045.40 and $3,503.40.
As the Plaintiffs' submissions recognise, and as stated in South Eastern Sydney Area Health Services & Anor v King at [83], UCPR 42.14 has a purpose namely to encourage the proper compromise of litigation in the private interests of the litigants and the public interest of the prompt and economical disposal of litigation. It seeks to achieve that purpose by creating certain cost consequences of not accepting an offer and signalling to the parties those cost consequences.
The costs regime for the Local Court Small Claims Division also has a purpose, namely to encourage parties to conduct proceedings with as little formality and technicality as a proper consideration of the matter permits. It seeks to achieve that purpose by creating a costs regime under which a successful plaintiff will likely be entitled to modest costs only, or maybe even no costs. The Local Court Rules and the Practice Note provisions set out above clearly signal to the parties that a low costs regime is in place and thereby encourages the parties to conduct their proceedings accordingly. If a party chooses to conduct proceedings in the Small Claims Division which include expansive, complex and unnecessary elements, that party cannot expect the other party to be ordered to pay the costs of the proceedings.
The significance of paragraph 39 of the Practice Note is that for claims worth less than $20,000, the policy referred to above and the relevant provisions of the Local Court Rules and Practice Note apply not just to proceedings in the Small Claims Division, but also to proceedings which ought to have been in the Small Claims Division.

No error by the Magistrate

Having regard to these provisions, the Plaintiffs have not demonstrated that the Magistrate made an error in the exercise of his Honour's costs discretions.
As set out above, I am satisfied that the Magistrate considered both the May 2023 offer and the December 2023 offer.
The transcript shows that the Magistrate had his attention drawn specifically to the difference between a formal offer of compromise for the purposes of UCPR 42.14 and a Calderbank offer. It is evident from the Magistrate's response that he averted to the difference ("noted") and took the difference into account ("accept"). The Magistrate's reasons are expressed with as little formality and technicality as proper consideration of the matter permitted.
The Magistrate then referred to his discretion under s 98. There is no basis to find that the Magistrate did not continue to "note" and "accept" the different offer regimes when his Honour proceeded to exercise the discretion. It is true that the Magistrate continued to refer to "Calderbank offers" and "reasonableness". This includes what the Magistrate wrote in the record of the Orders made. However, given the Magistrate's express and specific acceptance of the submissions about different kind of offers, and the context of the Magistrate's reasons as a whole, these references are to be understood as shorthand for offers generally and the residual discretion under each offer regime. In this respect, contrary to the Plaintiffs' submissions, reasonableness is a consideration as to whether the Court ought otherwise order under UCPR 42.14 (see below). It is important to observe that most of the statements attributed to the Magistrate in the transcript are brief and sometimes less than precise, but nonetheless clear.
I reject the contention that the Magistrate failed to consider the fact that the Defendant did not accept offers formally made under UCPR 42.14.
The flaw in the Plaintiffs' reasoning is that despite the Magistrate's express acceptance of the further submissions about the formal offers, the Plaintiffs seek to demonstrate that the Magistrate failed to consider UCPR 42.14 by pointing out that the Magistrate did not expressly undertake the precise analysis which the Plaintiffs contend is required by UCPR 42.14. The Magistrate did not ask whether the Defendant had proved (her onus) that she gave serious thought to the offers, nor did she give an explanation for why she did not accept them. According to the Plaintiffs, it follows that there were no special circumstances, and therefore the Magistrate must have ignored UCPR 42.14.
The Plaintiffs' submissions about what is required to demonstrate special circumstances should not be accepted. Neither South Eastern Sydney Area Health Service v King nor Vagg v McPhee (No 2) say that the Court's residual discretion under UCPR 42.14 is to be confined by the narrow and prescriptive approach for which the Plaintiffs contend.
The correct position is as stated by Ward P (with whom Kirk JA and Basten AJA agreed) in Langdon v Carnival PLC [2024] NSWCA 168 at [187]-[188]: "At the outset, it should be noted that a rule such as r 42.15A has been treated as conferring a conditional entitlement to indemnity costs subject to the discretion to order otherwise (see Hillier v Sheather (1995) 36 NSWLR 414). Exercise of the discretion to order otherwise does not necessarily require that there be "exceptional circumstances" (see Barakat v Bazdarova (No 2) [2012] NSWCA 140 at [42]-[49] per Tobias AJA, Bathurst CJ and Whealy J agreeing). More recently, it has been said that "the prima facie position should only be departed from for proper reasons which, in general, only arise in an exceptional case", rather than the Court's discretion being impermissibly fettered by a requirement of exceptional circumstances (see Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 (Perisher Blue) at [36]-[37] per Gleeson JA and Tobias AJA, citing Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) [2004] FCA 1437; 212 ALR 281 at [17] per Hely J). What is required is that the Court be satisfied that in the particular circumstances of the case a departure from the rule is justified. Courts have declined to define exhaustively the factors that may justify displacing this entitlement (see New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100, at 102 per Gleeson CJ). However, what has been accepted is that the reasonableness of the rejection or non-acceptance of the offer is a relevant (though not determinative) consideration (see The Uniting Church in Australia Property Trust (NSW) t/as Northaven Retirement Village v Takacs (No 2) [2008] NSWCA 172 at [15] per Hodgson JA, McColl JA agreeing). When considering the reasonableness or otherwise of a party's rejection of the offer, there are again a number of factors that may be taken into account (see Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298 at [25] per Warren CJ, Maxwell P and Harper AJA (approved by Basten JA in Miwa Pty Ltd v Siantian Properties Pte Ltd (No 2) [2011] NSWCA 344 at [12])). Those may include the offeree's prospects of success assessed at the date of the offer (which in turn may depend on the state of awareness by the offeree of adverse material evidence)."
The approach to the Court's residual discretion under UCPR 42.14 is not to be approached in such a rigid mechanical way: Hillier v Sheather at 423 (Kirby P). It is true that the purpose of UCPR 42.14 is to encourage settlement and that a regime of formal offers of compromise serves that purpose by promoting relative certainty in the costs consequences that flow form not accepting an offer. However there will be exceptional cases where departure from the prima facie position is justified even though the unaccepting offeree does not explicitly explain why the offer was not accepted.
In this regard, the Plaintiffs' heavy focus on the onus of proof is misconceived.
Which party bears the onus of demonstrating why a special costs order should, or should not, be made may be important in a case which sits at the margin, but it is unlikely to make a difference where it is obvious that it is an exceptional case and/or it was not unreasonable for the offer not to be accepted. The Magistrate's reasoning, and the matters to which his Honour had referred, amply demonstrate that this was an exceptional case.
To start with, the Magistrate was obliged to give effect to the overriding purpose of the Civil Procedure Act and the UCPR when exercising his costs discretion: s 56(2). Section 60 reveals a legislative policy that the costs of proceeding be proportionate to the importance and complexity of the subject matter in dispute. Although not expressly referred to in s 60, the amount in dispute will often be an integral element of the importance of the subject matter in dispute.
More broadly, the Local Court is required by s 56(2) to seek to give effect to the overriding purpose when it exercises any power given to it by the Civil Procedure Act. One such power is the power under s 15 to issue practice notes. True to the obligation under s 56(2), Practice Note Civ 1 was issued to describe the practice of the Local Court in managing civil proceedings to achieve the overriding purpose: paragraph 3.3. Relevant provisions of the Practice Note are set out above from which it is clear that the practice of the Local Court is to ensure that costs remain proportionate to the matters in issue. The maximum costs for proceedings transferred from the Small Claims Division will be $2,500 unless the court otherwise orders: paragraph 38.2.
Paragraph 39.2 warrants repetition: "An order for costs will not be made in an amount greater than that which would otherwise have been awarded if the proceedings had been determined in the Small Claims Division, unless the Court is satisfied the commencement and/or continuation of the proceedings in the General Division rather than the Small Claims Division was warranted."
The wording of paragraph 39.2 is similar to UCPR 42.35 which provides: "Costs order not to be made in proceedings in District Court unless Court satisfied proceedings in appropriate court (1) This rule applies if-- (a) in proceedings in the District Court, 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 $40,000, 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 District Court is satisfied the commencement and continuation of the proceedings in the District Court, rather than the Local Court, was warranted."
In Averkin v Insurance Australia Ltd (No 2) [2016] NSWCA 150 the Court of Appeal addressed the case where both UCPR 42.14 and UCPR 42.35 apply. At [9]-[10] the Court said: "[9] Mr Averkin contended that [42.35] was inapplicable, he having obtained a judgment in an amount exceeding $40,000, once pre-judgment interest was included. The insurer pointed to the fact that judgment on Mr Averkin's principal claim was $38,070, and maintained that the rule applied notwithstanding the award of pre-judgment interest. For the reasons which follow, it will not be necessary to decide the point, but there is force in the proposition that if r 42.35 applies and the proceedings should not have been commenced and continued in the District Court, then the making of an offer of compromise would not of itself detract from the proposition that there be no order as to costs. That is because while r 42.14 (which may be enlivened when an offer of compromise should have been accepted) affects the way in which a costs order is to be assessed, r 42.35 affects whether a costs order is to be made at all. Put differently, although both rules displace the operation of the default positions stated in rr 42.1 (costs to follow the event) and 42.2 (costs to be assessed on the ordinary basis), it is clear that r 42.35 takes priority, because only if a costs order is made can it matter whether that order is assessed on an ordinary basis or some other basis. [10] The matter may be tested thus: suppose a plaintiff with a small straightforward claim for a debt of $5,000 commences in the Supreme Court, but makes an offer of compromise for $4,500 shortly thereafter. It cannot be right that a plaintiff who chooses to commence proceedings in the wrong jurisdiction, thereby becoming subject to a default regime that the plaintiff not be awarded costs in the event of success, becomes entitled to an order for indemnity costs by making an offer of compromise."
Whilst the potential conflict between the two rules did not ultimately fall for decision in Averkin v Insurance Australia Ltd, the Court's view about the interplay between the two rules is expressed in clear terms. In this respect, UCPR 42.35 (and paragraph 39.2 of the Local Court Practice Note Civ 1) is not concerned solely with the parties' respective interests in the proceedings being conducted in the appropriate court (or the appropriate division of the court) but also the public interest in the appropriate allocation of business between the different courts (and divisions).
At no time was the conduct of the Plaintiffs' proceedings in the General Division of the Local Court warranted. The nature and complexity of the real issue in dispute meant that it should have been resolved in the Small Claims Division where simplified procedures applied. Amongst other things, those procedures are intended to keep costs down. One means by which that is sought to be achieved is to place limits on the costs which may be awarded and thereby signal to parties that they need to conduct the claim economically.
The Plaintiffs caused the proceedings to be removed to the General Division by filing the Amended Statement of Claim. Both the Magistrate and the Defendant referred to that fact at the time submissions were made about costs at the end of the hearing.
The title page for the Amended Statement of Claim stated that it was filed in the Small Claims Division. As set out above, s 35(2) provides that proceedings in the Small Claims Division are to be conducted with as little formality and technicality as the proper consideration of the matter merits. Section 35(2) conforms harmoniously to the overriding purpose of the Civil Procedure Act and the rules of court as specified in s 56(1) of the Civil Procedure Act, namely, to facilitate the just, quick and cheap resolution of the real issues in the proceedings.
Section 56(3) provides: A party to civil proceedings is under a duty to assist the court to further the overriding purpose and, to that effect, to participate in the processes of the court and to comply with directions and orders of the court.
The real issue in the Local Court proceedings was compensation for the Plaintiffs not receiving a puppy which they wanted to sell to a friend for $4,500. By filing the Amended Statement of Claim, the Plaintiffs were not conducting the proceedings with as little formality and technicality as the proper consideration of the matter permitted. The Amended Statement of Claim included unnecessary causes of action, an allegation of deliberate wrongdoing for which there was no apparent justification and claims for relief which were a barrier to the resolution of the real issue. It may be inferred that the cost of drafting the Amended Statement of Claim exceeded the amount of the claim. As the Plaintiffs' solicitor himself estimated in his Affidavit dated 24 March 2023, after the Amended Statement of Claim was filed the Plaintiffs' costs were estimated at $25,000.
By filing the Amended Statement of Claim, it is doubtful that the Plaintiffs complied with s 35(2) of the Local Court Act and their duty under s 56(3) of the Civil Procedure Act.
Section 56(5) of the Civil Procedure Act provides: The court may take into account any failure to comply with subsection (3) or (4) in exercising a discretion with respect to costs.
In the circumstances of this case, even if the Plaintiffs were entitled to pursue their claim in the complex manner set out in the Amended Statement of Claim, the cost consequences of that choice should not be visited upon the Defendant.
The Magistrate's regard to the Plaintiffs' unsuccessful claims and the costs caused by those claims was sound: O'Neill v Williams [2007] NSWSC 51 at [5] (Brereton J); In Baulderstone Hornibrook Pty Ltd v Qantas Airways Ltd [2003] FCA 325 at [4], Finkelstein J said: "The days when a plaintiff could, with impunity, mount an attack on several fronts, some with little prospect of victory, in the hope of a direct hit and the recovery of all costs must be put behind us. Litigation is too expensive for courts to sanction this approach. Indeed it should be discouraged". See also Beckett v State of New South Wales [2015] NSWSC 1500 at [38]-[39] (Harrison J).
In relation to the offers of compromise, acceptance by the Defendant would have led to a requirement that she pay the Plaintiffs' costs assessed on the ordinary basis up to the time when the offer was made: UCPR 42.13A. As at January 2023, the Defendant's costs were over $6,000. As at May 2023 they had increased to more than $10,000. By December 2023 they were $38,000, although the Plaintiffs were prepared to accept $33,000. By introducing disproportionate legal costs into the Local Court Proceedings, the Amended Statement of Claim had made the just, quick and cheap resolution of the real issue harder. It may be inferred that it made the Local Court proceedings unsettleable.
It is in this context that the Magistrate's residual discretion under UCPR 42.14 is to be considered. A reading of the Magistrate's reasons as a whole shows that this was not a case where the Magistrate considered that the reasonableness or otherwise of the Defendant's non-acceptance of the offers was determinative of the issue. The Magistrate evidently considered that this was an exceptional case which warranted him otherwise ordering. The reasons given by the Magistrate, whilst differently expressed, accord with those set out above.
The Plaintiffs have not demonstrated that there was any error in the Magistrate's exercise of his discretion when making the costs order. Were leave to appeal granted, the appeal should be dismissed.

Leave to appeal

There is no dispute that by reason of s 40(2)(c) of the Local Court Act the Plaintiffs require leave in order to appeal against the Magistrate's costs order. The Defendant opposes the grant of leave.
In Ackerman v Morgan [2019] NSWSC 1250 at [49]-[55] Walton J conducted a survey of the authorities on leave to appeal from which his Honour distilled the following principles at [53]: "The relevant principles may be summarised as follows: (1) An applicant for leave must demonstrate something more than that the trial judge was arguably wrong in the conclusion arrived at, and that where small claims are involved, it is important that there be early finality in determination of litigation, otherwise the costs that will be involved are likely to swamp the money sum involved in the dispute: Carolan. (2) Ordinarily it is appropriate to grant leave to appeal only concerning matters that involve issues of principle, questions of general public importance or an injustice which is reasonably clear, in the sense of going beyond what is merely arguable: Jaycar at [46]. (3) The leave requirement is a preliminary procedure "recognised by the legislature as a means of enabling the Court to control in some measure the volume of appellate work requiring its attention": Coulter at 356 (Mason CJ, Wilson and Brennan JJ). Whilst that was a criminal matter, the statement is clearly applicable to civil, as well as criminal, appellate jurisdiction: Be Financial at [32]-[36] (per Basten JA, with Tobias AJA agreeing). (4) A requirement of leave to appeal is intended to act as a filter to ensure that unsuitable appellant proceedings are not able to be brought, with the demands they place upon the resources of the Court and the burden they place upon other parties and the delays which they cause to other litigants: Chapmans at [11] per Fitzgerald JA (with whom Mason P and Davies AJA agreed). (5) An application for leave is not a proceeding in the ordinary course of litigation but a preliminary procedure: Collins v The Queen (1975) 133 CLR 120 at 122; [1975] HCA 60. (6) Section 58 of the Civil Procedure Act applies and requires the Court to consider "the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction": s 58(2)(b)(vi). Leave should be granted only where there are substantial reasons to allow an appellate review (Johnson Tiles Pty Ltd v Esso Australia Ltd (2000) 104 FCR 564; [2000] FCA 1572, such as where there is an error of principle which, if uncorrected, will result in substantial injustice."
Where there is no question of principle, leave will usually be refused: Ackerman v Morgan at [54]. Having regard to the terms of s 60 of the Civil Procedure Act, if the costs of a trial are disproportionate to the amount in dispute, the incurring of further costs on an appeal for a potentially uncertain return will be a factor weighing heavily against a grant of leave: Be Financial Pty Ltd v Das [2012] NSWCA 164 at [39] (Basten JA).
The principles set out above apply to an application for leave to appeal under s 40(2)(c) of the Local Court Act: Ackerman v Morgan at [56].
In Ashi Pty Ltd v Karasco Investments Pty Ltd [2009] NSWSC 780 at [35] Davies J held that leave ought not be granted under s 40(2)(c) if the applicant could show no more than that the magistrate was said to have made an error of principle or law and that the applicant would suffer detriment. Something more was required.
In support of their application for leave to appeal, the Plaintiffs contend that there is an issue of principle because the Magistrate treated the offers as Calderbank offers, not formal offers of compromise under UCPR 42.14. It is doubtful that this is an issue of principle but rather an issue about the application of established principle to the facts. In any event, even if there was a relevant error, the Plaintiffs did not suffer any prejudice. The Plaintiffs' contention that they suffered prejudice or injustice is based on the assumption that they would have recovered an order for all their costs, on an indemnity basis, if the offers were correctly characterised as offers under UCPR 42.14. For the reasons set out above, that assumption is incorrect.
For a case about the non-receipt of a puppy to be sold for $4,500, the importance of early finality, and the avoidance of costs which would overwhelm the money sum involved, means that leave to appeal should be refused.
This is a classic case where the discretion to award costs resides with the Magistrate who heard the case and had before him all the relevant information. This is not a case where intervention by the Supreme Court is warranted.

Orders

I make the following orders: 1. Summons dismissed. 2. Plaintiffs pay the Defendant's costs.

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. Decision last updated: 07 August 2024

Legal Profession Uniform Law Application Regulation 2015(NSW)

Local Court Act 2007(NSW)ss 35, 37, 40, 41

Uniform Civil Procedure Rules 2005(NSW)rr 14,12, 15.7, 15.8, 20.26, 42.14, 42.13A, 42.35

Civil Procedure Act 2005(NSW)ss 15, 56, 57, 58, 60, 98

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