Direct Flow Pty Ltd t/as Arthur Rubber v Petersen (No 2) [2026] NSWSC 531 | Case summary

Direct Flow Pty Ltd t/as Arthur Rubber v Petersen (No 2) [2026] NSWSC 531 | Case summary | Zoe

The plaintiff put forward five separate grounds in support for its contention that the commencement and continuation of the proceedings in the Supreme Court was warranted.
First, the reason why the matter was commenced in the Supreme Court in the first place was because the focus of the relief sought in the beginning was a range of search orders against the defendant, and that when the plaintiff contacted the District Court it was ‘directed to the Supreme Court’. This is a reference to evidence given by Ms Sarah Hinchliffe, the solicitor who acted for the plaintiff when the proceedings were commenced, that she had been advised by Mr Catlin (the plaintiff’s counsel) to seek an ex parte search order to preserve evidence. She deposed that when she contacted the District Court Registry in Wagga Wagga to ascertain a date, she was told that the matter would have to be heard in the Supreme Court in Sydney, and that had it not been for this communication she would have commenced in the District Court.
The plaintiff also submitted that ‘there is no District Court practice note on search orders nor are there any recorded decisions of the District Court… making a search order’. Further, it noted that in a previous interlocutory judgment in this matter (Direct Flow Pty Ltd t/as Arthur Rubber v Andrew Peterson t/a Maxx Rubber [2023] NSWSC 318 (3 April 2023 J****udgment)), Robb J was alert to the possibility (and potentially even desirability) of the transfer of these proceedings to the District Court, but submitted that it was the defendant who should have taken these steps.
Secondly, because the matter originated as an application for a search order, it was submitted that it was ‘reasonable’ for the issue of the transfer of the proceedings to the District Court to be ‘neglected’ amidst the ‘critical battle for access to the search order materials and security for costs’. This is a reference to evidence given by Mr Peter Bahlmann, the solicitor for the plaintiff in the matter from August 2023, that he did not pay proper attention to the question whether the proceedings should be transferred to the District Court following the 3 April 2023 judgment, notwithstanding that the solicitor for the defendant had consented to an order to this effect in the Online Court portal in March 2024. He explained this on the basis that he was distracted by the dispute between the parties and correspondence in relation to access to the material obtained following execution of the search orders.
The plaintiff also submitted that the amount of security calculated by the defendant in this case was done on a Supreme Court basis, which indicated the defendant’s approval of the conduct of the matter in the Supreme Court, and that having enjoyed the benefits of that security the defendant cannot now submit that the plaintiff has acted wrongly to allow the matter to proceed in the Supreme Court.
Thirdly, it was submitted that the defendant’s conduct as revealed at trial, including the fact that some of his evidence in relation to his conduct within the 18 months prior to his termination was characterised in the J as unreliable (at J[9]), in conjunction with the fact that the defendant was non-compliant with discovery and has included false denials in his defence, resulted in the defendant having acted in an ‘unmeritorious’ manner which would have ordinarily warranted an order for indemnity costs. However, notwithstanding this, the plaintiff is only seeking an order for costs on the ordinary basis in the present case, based on the Supreme Court scale or alternatively the District Court scale.
Fourthly, since the plaintiff’s costs in this case would ‘obviously’ exceed the $50,000 judgment it obtained, this would result in the ‘punitive’ outcome that the plaintiff would effectively be making a payment to the defendant. Such a result is also said to be contrary to the fact that ‘[i]n other Australian states the policy is … that a party in the wrong Court gets costs at least on the scale of the lower court it should have been in.’
Fifthly, it was submitted that because the matter concerned a search order and claims for breaches of confidence, copyright and fiduciary duty, the matter was ‘complex’.

The defendant submits, relying on the former version of r 42.34(2) set out below, that the appropriate order is that there be no order as to costs, essentially for the following reasons.
First, contrary to the plaintiff’s submissions, the matter was not of such complexity which would justify its commencement (or at the very least continuation) in the Supreme Court, drawing attention to the following matters:
In the 3 April 2023 Judgment, Robb J expressed a concern about the operation of the search orders ‘given the amount of damages that the plaintiff will apparently seek and the proposal that the proceedings be transferred to the District Court’ and explicitly made orders which recognised the potential for the matter to be transferred to the District Court;
At the commencement of the hearing, Mr Catlin in the opening submissions effectively conceded the lack of complexity of the case when he said to the Court that ‘the decisions in this area are particularly fact sensitive. So you won’t be too troubled by the law. It really is a question of fact.’
The plaintiff’s case at its highest was only ever that the losses suffered totalled $459,000 (an amount said to be supported by an aide memoire by the plaintiff which was never ultimately supplied), and by the final day of the hearing the damages claim was only $130,000; and
The proceedings involved only one expert witness, Mr Le Roux, who conducted the search orders, and did not involve the giving of evidence from forensic accountants or other experts which would ordinarily be involved in a case of sufficient complexity so as to be heard in the Supreme Court.
As a result, the defendant submitted that in the circumstances the District Court ‘was in just as good a position as this Court’ to make findings about credit and allegations of breach of the duties of employment, trust, fidelity and confidence. Further, since all of the witnesses in the case were located in or near Wagga Wagga, the natural place for these proceedings to have taken place was the District Court in Wagga Wagga.
Secondly, the plaintiff did not ever make an offer of settlement which would enliven UCPR r 42.14 or any other provision that would displace the natural consequences of r 42.34. The only offer it made to the defendant was an offer to settle the proceedings for $250,000, which was itself well within the jurisdictional limit of the District Court and underscored the fact that the whole matter (even on the plaintiff’s optimistic view prior to trial) was not one which warranted commencement and/or continuation in the Supreme Court.

The main difference between the two provisions is that r 42.34(2) as it currently stands has removed the discretion to award costs to the successful plaintiff where the proceedings could have been commenced in the District Court but the Court is not satisfied that the commencement and continuation of the proceedings in this Court was warranted.
The difference can be illustrated by Re Clarkes Pty Ltd [2019] NSWSC 1693, where Slattery J found that the commencement but not continuation of the proceedings in the Supreme Court was warranted: at [23]-[30]. However, since that case was decided under the old version of r 42.34(2), his Honour invoked the residual discretion in that provision in limiting the order as to costs only to that portion of the proceedings for which litigation in the Supreme Court was warranted: [31]-[36]. As that discretion has been removed in the new r 42.34(2), it must now be the case that no costs order could be made in an analogous case to Re Clarkes.
The defendant’s submissions did not explain why the old rule, rather than the current rule, would be the applicable provision in the present case. As a matter of statutory construction, because the operative portion of the rule governs the Court’s approach in awarding costs, prima facie the applicable provision would be that which is current at the time the order for costs is made, being the date of judgment. Since that date was in March 2026, the current version of rule 42.34(2) is the applicable provision in the present case. This conclusion is supported by the following further considerations.
First, the amending statutory instrument which introduced the new rule provided only that it was to commence ‘on the day on which it is published on the NSW legislation website’ (being 13 September 2024), without any savings provision included.
Secondly, the current version of rule 42.34(2) merely takes into account antecedent facts (how the proceedings were commenced and continued) as a basis for what it prescribes for the future (how the costs order is to be made following judgment). Such provisions have consistently been held not to be affected by the presumption against retrospectivity: Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285; [1998] HCA 20 at [10] per Brennan CJ and [57]-[59] per McHugh and Gummow JJ, citing Coleman v Shell Co of Australia Ltd (1943) 45 SR (NSW) 27 at 31 per Jordan CJ; Robertson v City of Nunawading [1973] VR 819 at 824.
Further, it is well-established that the presumption against retrospectivity does not apply to provisions regarding costs, because the Court’s jurisdiction to award costs is merely a matter of procedure which do not affected vested rights or liabilities: see eg Sykes v Queensland Gas Company Ltd [2009] QCA 163 at [78]-[82] and authorities there cited. Although it is to be borne in mind that care should be taken in characterising all costs matters as ‘procedural’ (as to which see generally Thaina Town (On Goulburn) Pty Ltd v City of Sydney Council (2007) 71 NSWLR 230; [2007] NSWCA 300 at [114]-[117]), the present legislation is in my view properly characterised as procedural because it does not take away any vested entitlement (cf, eg, accrued interest pursuant to s 101 of the Civil Procedure Act 2005 (NSW) (CPA) and UCPR r 36.7: Woolworths Ltd v Strong (No 2) (2011) 80 NSWLR 45; [2011] NSWCA 72 at [59]). Rather, it merely alters the manner in which the discretion to award costs is exercised in situations where proceedings have been commenced and continued in the wrong forum.
The second preliminary issue is whether these proceedings ‘could have been commenced in the District Court’. Neither party made submissions on this question.
The statement of claim in these proceedings did not specify any final relief – the only relief that was explicitly sought was a search order. It is only when regard is had to the pleadings that one finds references to allegations of breaches of fiduciary duty, breaches of the employment contract, copyright infringement under the Copyright Act 1968 (Cth), and passing off. Both of the copyright and passing off allegations were dropped at the commencement of the hearing. Importantly, although there appeared to have been allegations of breaches of the Corporations Act 2001 (Cth) in the correspondence prior to the commencement of the proceedings, no claim under that Act was ever brought.
The explanation for this appears to be that the search order was sought in anticipation of a proceeding, which is permitted by UCPR 25.19. The usual approach in such a case is for the application to be brought by a notice of motion followed by (or contemporaneously with) a statement of claim seeking final relief. Indeed, there was a notice of motion filed at around the same time as the statement of claim which included a claim for the search order and also claimed final relief. It was this notice of motion which was considered by Kunc J and subsequently Slattery J in July 2022 when the application for the search order was granted. The failure to include the claims for final relief in the statement of claim appears to have been a drafting oversight.
Despite the apparent misunderstanding of the plaintiff’s solicitor when the matter commenced, there is no doubt that the District Court has power to grant a search order. This follows from UCPR r 25.1(1) which states that UCPR Pt 25 applies to the District Court, and it is Div 3 of Pt 25 which sets out the power to grant search orders: see also UCPR r 1.5, Sch 1 and Ritchie’s Uniform Civil Procedure N**ew South Wales, LexisNexis, Sydney (online at 14 May 2026) at [1.5.10] and [DCA 46.10].
In my opinion, given the nature of the claims brought and that the overall quantum of the damages sought was well below the jurisdictional limit for the District Court, the proceedings could have been commenced in the District Court.

Since the onus to demonstrate that the commencement and continuation of proceedings in this Court was warranted within the meaning of UCPR r 42.34(2) lies on the successful plaintiff: Pike v Coles Supermarkets Australia Pty Ltd; Pike v Solomon [2022] NSWSC 1080 at [64]; Megerditchian v Khatchadourian (No 2) [2020] NSWSC 112 at [20], it is necessary to consider the grounds relied on by the plaintiff to discharge that onus. For the following reasons, I reject each of those grounds.
In relation to its first ground at [4] above, the proceedings should have been commenced in the District Court, together with an application for a search order. Further, even if I were to assume, favourably to the plaintiff, that the proceedings were properly commenced in the Supreme Court because the plaintiff had doubt about the District Court’s jurisdiction due to what the plaintiff’s solicitor was told by the District Court Registry, the continuation of the proceedings in this Court after the issues in relation to the search order had been dealt with was not warranted because the total quantum of the claims was small and (as submitted by the defendant) the proceedings were not complex. Hence even if the commencement of the proceedings in this Court was warranted, the continuation of the proceedings in this Court was not and therefore no costs order can be made.
In relation to the plaintiff’s second ground at [6] above, I do not accept the contention that it was ‘reasonable’ for the issue of transferring the matter back to the District Court to have been ‘neglected’, even if the parties were primarily concerned with other interlocutory battles in relation to applications for security for costs and search orders. It is clear on the material before me that the question of whether the proceedings ought to have been transferred to the District Court is something which ought to have been at the ‘front of mind’ for both parties given the potential costs consequences and the fact that it was explicitly raised as an issue by Robb J in the 3 April 2023 Judgment. The mere fact that parties were embroiled in other interlocutory disputes at the time is not relevant to the statutory test under r 42.34(2), which is directed solely as to whether the pursuit of proceedings in this Court is ‘warranted’.
Further, it is no answer for the plaintiff to seek to shift the blame on the defendant for not having initiated the transfer application, in circumstances where (a) it was perfectly open to it to do so of its own motion; (b) when the issue was raised in March 2024 the defendant consented to the transfer being made; and (c) the onus is on the plaintiff to demonstrate why the continuation of the matter in the Supreme Court was warranted.
It also follows that I reject the plaintiff’s third ground at [8] above concerning the defendant’s ‘unmeritorious’ conduct in the litigation. That submission in my view appeals to an irrelevant consideration, namely the question of delinquency on the part of the losing party. Although that issue would obviously be relevant as to the general discretion to award costs (as to which see, eg, Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [44]), that is not the case when r 42.34(2) is engaged since that provision governs the question of ‘whether a costs order can be made at all’: Averkin v Insurance Australia Ltd (No 2) [2016] NSWCA 150 at [9] (emphasis original).
In relation to the fourth ground at [9] above, I do not accept that the application of r 42.34 would be affected by a ‘policy’ said to be alive in ‘other Australian states’ that ‘a party in the wrong Court gets costs at least on the scale of the lower court it should have been in’. No authority was cited to me as to the existence of such a policy. Even if it existed, I fail to see how that has any relevance on the application of a NSW statutory rule, in situations where that rule provides, in clear terms, that no costs order be made unless a legal test is met without leaving any room for judicial discretion.
Substantially for the same reasons, I also do not accept that the operation of the provision would ‘result in the Plaintiff – who is not the [sic] wrong doer – making payment to the Defendant’. That is incorrect, since the effect of the Court’s refusal to make a costs order is merely that each party bear their own costs: *Leach v Nominal (QBE Insurance (Australia) Ltd) (*No 2) [2014] NSWCA 391 at [32]. It does not have the effect of making the successful party pay the losing party’s costs. Although the operation of the rule may be punitive in entirely depriving the successful party of the entitlement to costs to which it would otherwise have been entitled (an issue which has also been averted to by Parker J in Megerditchian at [24]), that is just the outcome of the express terms of the rule. As Parker J himself observed in another case, the mere fact that r 42.34(2) may from time to time operate harshly does not justify the Court’s refusal to apply it where it is applicable, particularly where the only harshness arises from the fact that the plaintiff has been successful: France v Siekaup [2020] NSWSC 1286 at [63].
Lastly, in relation to the fifth ground at [10] above, I do not accept that this case was relevantly ‘complex’ as to warrant its commencement and continuation in the Supreme Court. The overwhelming majority of the claims in this proceeding, and indeed all those which were actually litigated following the abandonment of the breach of copyright claim, concerned breaches of confidence, fiduciary duty and various duties under the employment context. These are matters routinely dealt with by the District Court and therefore do not justify a conclusion that the commencement and continuation of the proceedings in this Court was warranted: see eg Averkin at [16]-[17] (making the same point in relation to fraud claims in the Local Court).
In relation to evidence, I also accept the defendant’s submission that the matter did not involve any complexity in relation to the kind of evidence adduced. The only expert witness called was Mr Le Roux in relation to matters which were themselves not complex. As Mr Catlin himself remarked at trial, the matter is at its heart ‘really a question of fact’ and that the Court ‘won’t be too troubled by the law’. That was indeed the case, and for that reason the District Court was in as good a position as this Court to determine the substantive proceedings.

Direct Flow Pty Ltd t/as Arthur Rubber v Petersen (No 2)

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment

JUDGMENT

Plaintiff’s submissions

Defendant’s submissions

Consideration

Whether the ‘commencement and continuation of the proceedings in the Supreme Court was warranted’

Conclusion

Parties

Legislation Cited (7)

Cases Cited (24)