Dymocks Franchise Systems (NSW) Pty Ltd v Chapter 3 Pty Ltd

Applicable principles

1. I first set out the applicable principles, before turning to the parties' submissions in respect of costs. The Court has power to make an order as to costs under s 98 of the Civil Procedure Act 2005 (NSW) and I bear in mind that a successful party has a "reasonable expectation" of being awarded costs against an unsuccessful party, unless there is good reason for that presumption to be displaced: Oshlack v Richmond River Council (1998) 193 CLR 72; (1998) 152 ALR 83; [1998] HCA 11 at [22] [134]. In Re Minister for Immigration & Ethic Affairs of the Commonwealth of Australia; Ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6 ("Lai Qin"), McHugh J in turn observed that: "In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action."
2. His Honour also there observed that: "If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases."
3. Mr Smith, who appears for Mr Ury Aleksandroff, also refers to my observation in Re HCafé Chatswood Pty Ltd [2018] NSWSC 362 at [6] that: "…both parties recognise authority that, although the Court can make an order for costs where there has been no hearing on the merits, it will generally not do so where that would require the trial of a hypothetical action between the parties and deprive them of the cost saving which would have been achieved by settlement, but may do so where it concludes that "one of the parties have acted so unreasonably that the other party should obtain the cost of the action" or where the Court can be confident that, although both parties are acted reasonably, one party was almost certain to have succeeded if the matter had been fully determined: Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin [1997] HCA 6; (1997); 186 CLR 622 at 624-625. While McHugh J there referred to the saving to the parties of avoiding a contest as to costs which canvasses the issues that would have been addressed at a substantive hearing, it seems to me that that principle also reflects matters of public policy. In particular, the community, which funds the Court system, should not be required to bear the costs of extended arguments as to the merits of proceedings that have settled only on the question of costs between the parties. There is also a significant risk of unfairness to the parties, if costs orders are made based on a perception of which party would have succeeded on a trial on the merits, without the unsuccessful party having the opportunity to defend that trial on the merits. The parties paid less attention to another important principle, also recognised in the case law in this area, including the observations of Burchett J in One.Tel Ltd v Deputy Cmr of Taxation [2000] FCA 270 at [6]; (2000) 101 FCR 548, the Court of Appeal in Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 at [79] and of Barrett AJA in Khoury v JCS Technologies Pty Ltd [2016] NSWSC 1575, which distinguish the position where, on the one hand, proceedings are dismissed by reason of a surrender or abandonment by a plaintiff, and on the other, where some supervening event has removed the plaintiff's cause of action. In Khoury v JCS Technologies Pty Ltd above, Barrett AJA noted that the principle in Lai Qin above is applicable where a supervening event removes the cause of action, and there is not a surrender or abandonment of the plaintiff's claim, but no need for a determination on the merits of a particular claim arises by reason of that supervening event".
4. Mr Smith notes my observation in that case, in somewhat similar circumstances, at [16] that: "[Counsel] also submits that, in effect, a winding up order was always inevitable, because of the breakdown of the relationship between the parties. Again, it does not seem to me that that submission can be accepted. Where the relationship between the parties has broken down, discretionary considerations come into play, including any fault of the parties in respect of the circumstances of the breakdown. As I have noted above, absent a determination on the merits, it cannot now be known whether, on the one hand, the Plaintiffs were at fault, or Ms Sun were at fault, or all parties were at fault, in the breakdown of relationship between them. It became more likely that the Company would be would up, as its financial position deteriorated, and particularly after a provisional liquidator had been appointed, where that appointment recognised the matters that would lead to an ultimate winding up. However, that, of course, reflects a deterioration in the Company's position occurring as the proceedings continued, and it seems to me to fall within the class of supervening events to which I have referred above."
5. Ms Bailey, who appears for Ms Duza Aleksandroff, in turn refers to HiTech Group Australia Ltd v Riachi [2021] NSWSC 1549 at [46], where Ward CJ in Eq (as the President of the Court of Appeal then was) observed that: "Matters to be taken into account when exercising the costs discretion in the context of a discontinuance of proceedings can include whether the plaintiff has in any sense abandoned its claims (see [Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32] at [71]); or whether supervening events have overtaken the position at the commencement of the proceedings rendering further prosecution of them otiose (see Re HCafe Chatswood Pty Ltd [2018] NSWSC 362 at [8] ). Also relevant is the conduct of the parties in relation to the conduct of the litigation (whether the plaintiff acted reasonably in commencing them and the defendant acted reasonably in defending them, for example), as well as the question whether the result achieved (albeit by consent) is one that would not have been able to be achieved without the commencement of the litigation (issues of the kind that I considered in [Murrumbidgee Irrigation Ltd v M & H Acar Pty Ltd [2019] NSWSC 807])."
6. All parties also accept the summary of the applicable principles by Stevenson J in Dymocks Franchise Systems (NSW) Pty Ltd v Chapter 3 Pty Ltd [2022] NSWSC 35 at [2], by reference to Lai Qin and One.Tel Ltd v Deputy Commissioner of Taxation [2000] FCA 270 at [5]-[6] as follows: "The principles are well established: (a) the court cannot try a hypothetical action between the parties; (b) nonetheless, in an appropriate case, the court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action; (c) an example of such a case is where the court is able to conclude that one of the parties has acted so unreasonably as to justify a costs order against it; (d) in other cases, the court may be able to conclude that one party would almost certainly have succeeded; (e) a distinction needs to be drawn between a case in which one party, after litigating for some time, effectively surrenders to the other on the one hand; and cases where some sort of supervening event or settlement so removes or modifies the subject of the dispute that no issue remains between the parties except as to costs, although no party can be said to have won; and (f) if both parties have acted reasonably in commencing and defending proceedings, and the conduct of the parties continued to be reasonable until the litigation was settled or the further prosecution became futile, the proper exercise of the court's discretion will usually mean there should be no order as to costs."

The parties' submissions

1. By submissions filed on 18 November 2022, Mr Mi seeks an order that the Defendants or at least the Second Defendant, Mr Uri Aleksandroff, should pay his costs of the Originating Process, or alternatively an order that he should have his costs of the winding up as a priority amount in the liquidation of the Company under s 466(2) of the Act. It is common ground that there should be no order as to the costs of Mr Uri Aleksandroff's Interlocutory Process.
2. Ms Perry, who appears for Mr Mi, acknowledges that there has been no hearing on the merits of Mr Mi's Originating Process or Mr Uri Aleksandroff's Interlocutory Process and that ordinarily each party would pay their own costs. However, Ms Perry submits that Mr Mi has achieved the relief sought in the Originating Process and that the Defendants or the Second Defendant acted unreasonably such that the Court should exercise its discretion to award costs against them on the basis set out in Lai Qin. Ms Perry also draws attention to aspects of the conduct of the proceedings, referring to evidence led at various points in the proceedings and to matters relating to the appointment of the provisional liquidator, which were the subject of Stevenson J's costs judgment. Ms Perry submits that Mr Mi incurred the costs of preparing for a final hearing, including the costs of compiling a court book and in relation to a dispute as to notices to produce. Ms Perry then returns to matters agitated before Stevenson J, and before me, and addressed by the earlier costs orders.
3. By her submissions dated 25 November 2022 on behalf of the First Defendant, Ms Duza Aleksandroff, Ms Bailey opposes any order for costs against Ms Aleksandroff in respect of the costs of the Originating Process and notes that no order for costs is sought against her in respect of Mr Aleksandroff's Interlocutory Application dated 6 July 2022. Ms Bailey submits that the Originating Process has not been determined and became otiose when the Court wound up the Company in insolvency on Mr Bailey's application, and relies on the principle in Lai Qin in that respect. She also points out that the Plaintiff did not obtain the relief he sought, which was a winding up on the just and equitable ground, when the Company was instead wound up on the basis of insolvency.
4. Ms Bailey in turn addresses Ms Perry's criticisms of Ms Aleksandroff's involvement in respect of the conduct of the proceedings. She submits that Ms Aleksandroff's position was, throughout, that she neither consented to nor opposed the substantive relief sought in the Originating Process, and that Mr Mi cannot be characterised as a successful party in respect of the Originating Process, so as to have the expectation of his costs of the proceedings.
5. Mr Smith, on behalf of Mr Uri Aleksandroff, points to the distinction between a winding up in insolvency by reason of the Company's inability to pay its debts as and when they fall due, as sought and obtained by the provisional liquidator, and a winding up on the just and equitable ground reflecting a breakdown of the relationship between the parties, as sought by Mr Mi. He submits, and I accept, that Mr Mi did not achieve the relief sought, at least in legal terms, where he sought relief on the just and equitable ground, and the Company has now been wound up on the basis of its insolvency, on the application of its provisional liquidator, several months after he commenced the proceedings. Mr Smith also submits, and I also accept, that Mr Mi's Originating Process has not been determined on its merits, but instead been rendered moot by the supervening winding up made on the provisional liquidator's application, by reason of the Company's insolvency. Mr Smith also points out, and I accept, that the Court cannot find that a winding up of the Company on the just and equitable ground was inevitable, where Mr Uri Aleksandroff sought an order that Mr Mi buy out his shares, and the circumstances in which a winding up order would have been made was limited by s 467(4) of the Act. The position changed, of course, once it was accepted that the Company was insolvent. Mr Smith in turn takes issue with the accuracy and significance of complaints made by the Mr Mi as to the conduct of the proceedings, but I do not consider it either possible or necessary for me to determine those matters in an application of this kind.
6. I recognise that Mr Mi contends that the Defendants, and particularly Mr Uri Aleksandroff, acted unreasonably in respect of the conduct of the proceedings, but I am not satisfied that that has been established as a matter of fact. Although the Company has been wound up, on the provisional liquidator's application, I am not able to conclude that Mr Mi would have succeeded, still less that he would almost certainly have succeeded where Mr Uri Aleksandroff had a Cross-Claim in respect of oppression against Mr Mi. It seems to me that all parties have surrendered, not to each other, but to the fact of the Company's insolvency, in not opposing the appointment of a liquidator. Accordingly, I am not persuaded that I should make any order that either Defendant pay Mr Mi's costs of the proceedings.
7. Mr Smith also submits that the Court should not make an order under s 466 of the Act in relation to the Originating Process, where that section applies to the person on whose application any winding up order was made. I accept that the winding up order, here made on the basis of insolvency, was made on the provisional liquidator's application, where Mr Mi had not sought a winding up on the ground of insolvency. I also accept Mr Smith's submission that, as a matter of discretion, Mr Mi should not have his costs of the winding up on the just and equitable ground, the merits of which have not been determined, paid in priority to the claims of the Company's creditors. That is particularly the case where it is now accepted that the Company is insolvent and there is no certainty that its assets would be sufficient to pay the proper claims of those creditors, a fortiori if Mr Mi's costs were paid in priority to creditors' claims.
8. On balance, I am not satisfied that, given the history of the proceedings, the Court should make further orders in respect of the costs of the costs application.

Orders

1. Accordingly, I make the following orders:
2. There be no order as to the costs of the Plaintiff's Originating Process filed on 9 June 2022.
3. There be no order as to the costs of the Second Defendant's Interlocutory Process filed on 6 July 2022.
4. There be no order as to the costs of the costs application.

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