Hyder Consulting (Victoria) Pty Ltd v CGU Insurance Limited [2003] VSC 223

For the Second Defendant/Seventh Defendants by Counterclaim

2. This is a dispute about the costs of a counterclaim. The third defendant in the proceeding ("Heath") is the plaintiff by counterclaim and submits that there should be no order for costs as between it and a number of the defendants to counterclaim, namely, the sixth defendant by counterclaim ("CGU" - an insurer that was also the first defendant in the proceeding), the seventh defendant by counterclaim ("QBE" - an insurer that was also the second defendant in the proceeding) and the eighth and ninth defendants by counterclaim ("Pacific" - insurance brokers). CGU and Pacific have been represented by the same solicitors and appeared by the same Counsel on this application. CGU, Pacific and QBE all submitted that their costs of the counterclaim should be paid by Heath.

5. The background to this application is that a number of very large and complex proceedings were commenced and conducted in the Building Cases List relating to the CityLink tunnels ("the tunnel cases"). The first proceeding was commenced in 1998 and was brought by the proprietor, Transfield Obayashi Joint Venture ("TOJV") against a number of parties, including certain design engineers ("Hyder"). Subsequently a number of other proceedings were commenced, including this proceeding (No. 5651 of 2001), in which Hyder were the plaintiffs and CGU, QBE and Heath were the defendants.

8. In this proceeding, Hyder sought indemnity in relation to its potential liability in the tunnel cases under certain project professional indemnity and other policies alleged to have been issued by CGU and QBE. The amended statement of claim comprises 43 pages and there are a number of complex allegations and alternative causes of action advanced in it, including claims for rectification, misrepresentation and misleading conduct, estoppel and so on. An alternative claim is made against Heath, alleging that it was negligent and engaged in misleading conduct in acting as Hyder's insurance broker. In turn, Heath counterclaimed against CGU and QBE and also against Pacific, which allegedly acted as agent on behalf of CGU and QBE in respect of the negotiation and issue of certain professional indemnity policies. There were a number of other defendants to the counterclaim but they are not relevant to this application.

11. In its counterclaim (the latest version being dated 17 January 2002), Heath, inter alia, sought declarations against CGU and QBE regarding Hyder's entitlement to be indemnified by them; Heath also sought damages against CGU, QBE and Pacific for misleading and deceptive conduct and/or contribution in relation to any liability of Heath to Hyder.

14. After lengthy interlocutory proceedings in the tunnel cases, the principal claims were settled between TOJV, Hyder and various other parties in the course of a Court-ordered mediation, which settlement was only reached on the eve of a trial date being fixed. Additionally, Hyder's claim in this proceeding against the defendants (including CGU, QBE and Heath) was also settled. The various cases were struck out with no orders as to costs, and there is no evidence before the Court of the nature of any of the compromises that were reached. Having regard to the size and the nature of the claims involved and the potential length and cost of the trial of the principal tunnel cases, there were no doubt many commercial and other considerations which were taken into account in reaching those settlements.

17. Mr Garner of Counsel, who appeared for Heath submitted that no order as to costs should be made, as between Heath on the one hand and CGU, QBE and Pacific on the other hand. Mr Garner submitted, in the circumstances, that the relevant legal principles were that where a proceeding was not determined on its merits because it was settled or otherwise rendered futile and it appeared that all parties had acted reasonably in commencing and defending the proceeding, the proper exercise of the Court's discretion would usually mean that the Court would make no order as to costs, and he referred to a number of authorities in support of that proposition.

20. In Australian Securities Commission v Aust-Home Investments Limited [1993] FCA 585; (1993) 44 FCR 194, in a case where both parties acted reasonably and there had been no determination on the merits and neither party wished the proceeding to continue, the Court made no order as to costs. Hill J said (at 201), citing a number of authorities, that where neither party desired to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order and that it would rarely, if ever, be appropriate, where there had been no trial on the merits, for a Court to determine costs on the outcome of a hypothetical trial. Hill J said that in determining costs it would be appropriate to determine whether the parties acted reasonably in conducting and defending the proceeding.

23. In Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Lai Quin [1997] HCA 6; (1997) 186 CLR 622, McHugh J made no order for costs pursuant to O 71 r 39 of the High Court Rules 1952 which provided that, when for any reason the further prosecution of a proceeding became unnecessary, except for the purpose of determining by whom the costs of the proceeding should be paid, any party might apply to have that question of costs determined and the Court should make such order "as is just". The facts were that an applicant for a protection visa, who had failed at the administrative level, commenced a proceeding for prerogative relief in the High Court but, before that was heard, she obtained a visa pursuant to the Minister's discretion. The proceeding was therefore rendered futile. It is necessary to bear in mind the above specific provision in the High Court Rules and the particular facts of the case. However the judgment contains a statement of the general "principles which govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means."[1] McHugh J said:

"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... Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried... But such cases are likely to be rare. If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonably 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." [citations omitted]

27. In Gribbles Pathology Pty Ltd v Health Insurance Commission [1997] FCA 1414; (1997) 80 FCR 284, Finkelstein J said at 287 that in the absence of a hearing on the merits, it was difficult to see how any order, other than an order that each party bear its own costs, could be made except in special circumstances. However, I would agree, in that regard, with what was said by Gillard J concerning that dictum in Champagne View Pty Ltd v Shearwater Resort Management Pty Ltd [2000] VSC 214 at [47] where His Honour said that he would not go as far as Finkelstein J had because each case must depend on its own circumstances and there might be circumstances which would justify an order being made in favour of a party, but "[a]s a general proposition if there is no other material before the court other than the pleadings then it would be extremely difficult to make any order other than each party bear its own costs".

30. In One.Tel Limited v Commissioner of Taxation [2000] FCA 270; (2000) 101 FCR 548, Burchett J said at 553 that it was important to draw a distinction between cases in which one party, after litigating for some time, effectively surrendered to the other and cases where some supervening event or settlement so removed or modified the subject matter of the dispute that, although it could not be said that one side had simply won, no issue remained between the parties except that of costs. Burchett J went on to say:

"In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a real reason why one party, rather than the other should bear the costs."

34. In Akpata v Minister for Immigration and Multicultural and Indigenous Affairs [2003] FCA 514 an applicant sought to restrain the respondent from placing herself and her child in immigration detention, but in the meantime, obtained a result in relation to a visa rendering the Court proceeding futile. The applicant accordingly sought leave to discontinue the proceeding, and the granting of leave was not opposed. Mansfield J at [9] said that in his judgment the remarks of McHugh J in Ex parte Lai Quin applied equally whether the proposed discontinuance followed settlement of the issues in the proceedings, or whether the pursuance of the proceedings became futile by reason of matters remote from the issues in the proceedings (which his Honour thought was so in that case).

37. Mr Garner submitted that in this case, the counterclaim had been rendered futile by settlement of the main proceeding and that, as all parties had acted reasonably in commencing and defending the counterclaim, the proper exercise of the Court's discretion in the light of the foregoing authorities was to make no order as to costs.

40. Mr Thompson of Counsel, who appeared for QBE, conceded that all of the parties had acted reasonably but submitted that Heath had created this situation by settling with Hyder, the details of which settlement were not in evidence. He submitted that the question of costs could have been dealt with in the course of the settlement negotiations but, as it was not, an order for costs in favour of QBE should be made against Heath on the counterclaim.

43. Mr Quinn of Counsel who appeared for CGU and Pacific submitted, while conceding that the parties had acted reasonably, that the authorities relied upon by Mr Garner did not apply to what was in effect a discontinuance by Heath. The counterclaim was redundant only by virtue of the settlement made by Heath on a commercial basis, that the rules provided for a party seeking discontinuance to pay the costs and that Heath had taken the risk as to these costs when resolving the case with Hyder. I note that Mr Garner was content that the counterclaim be dismissed or struck out and did not necessarily see a need to obtain leave to discontinue the counterclaim. In substance, the parties all agreed that the counterclaim was not to proceed and, in effect, that it should be dismissed.

46. In this case the counterclaim has been rendered futile not by settlement of the counterclaim itself between the particular parties now before the Court, but has rather been rendered futile by other events namely, the settlement of the tunnel cases and of the claim by Hyder against Heath in this proceeding. It was no doubt appropriate for those representing the defendants to counterclaim to point out that Heath had procured a settlement with Hyder without regard to the risk of costs in its counterclaim. On the other hand, I have noted that CGU and QBE were also parties to a settlement with Hyder. It may be that in some cases where a principal claim is settled thereby rendering a counterclaim or third party proceeding redundant or futile, it would be appropriate to make an order for costs in favour of defendants to the counterclaim or third party proceeding. However, I think that those circumstances would probably be rare. I am assuming in making these comments that the parties will have acted reasonably in conducting and defending the counterclaim or third party proceeding. In the present case, where the merits of the counterclaim cannot be determined, there is a strong argument, as the authorities suggest, in favour of the Court exercising its discretion to make no order as to costs. I think that is particularly so in the present case where very heavy, complex and expensive proceedings have been settled. It would not be in the public interest to discourage or penalise parties who have settled proceedings of this nature by making orders for costs against them in any parts of such proceedings which were not settled but rendered futile. I think in all the circumstances that the just and reasonable exercise of the Court's discretion is to make no order as to costs. For similar reasons there should be no order as to costs in relation to the other claims and notices between the parties which were mentioned in argument.

[1] Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Lai Quin [1997] HCA 6; (1997) 186 CLR 622, 624.