Lactos Fresh Pty Ltd v Finishing Services Pty Ltd

Federal Court of Australia|2006-07-01|Before: Weinberg J

the applicant's submissions in relation to restitution 59 In its written submissions, the applicant submits that it is entitled to restitution of the overpaid rent on the basis that the first respondent threatened interference with the applicant's right to quiet enjoyment of the premises, pursuant to the lease, unless it paid the increased rent. It contended that this compulsion constituted a legal wrong. 60 However, this basis for restitution was not pressed during the hearing. Rather, the applicant framed its claim as one for money had and received. It also framed its claim as one for money paid under compulsion. It recognised that these claims are not necessarily distinct causes of action. I agree. The applicant's claim is properly framed as one for restitution for money had and received on the basis of compulsion. The reasons for this are discussed under the heading of "Consideration" below. 61 The applicant referred to three cases in support of its claim. The first is Air India v Commonwealth [1977] 1 NSWLR 449, a decision of the New South Wales Court of Appeal. The facts of the case can be briefly summarised. The owner of the Sydney International Airport, the Commonwealth, demanded increased rent from the lessees, a number of airlines, purportedly pursuant to their leases. In general terms, the airlines paid the increased rent, but stated that they may need to challenge the validity of the rent increase. 62 The airlines brought claims for money had and received on the basis of compulsion. The trial judge found that the Commonwealth had no right to require the payment of increased rent. However, he refused to order the repayment of the increased rent because he found the payments had been made voluntarily. That latter finding was the focus of the appeal. 63 The Court of Appeal upheld the trial judge's finding that there had been no compulsion. It did so on the basis that there was no express threat to forfeit the leases should the increased rent be paid, and that such a threat could not reasonably be implied. The Court found (at 455): It hardly seems to be reasonable to fear that the Commonwealth would determine the leases of seven major international airlines servicing Sydney and Australia because of a rent dispute involving the construction of a lease document, when they could be held to their leases and sued to fruitful verdicts. Bringing about an almost empty and non-productive facility would hardly seem a likely course of action." 64 The applicant contends that its case stands in sharp distinction to that of Air India. It points to the two letters from the first respondent, extracted above, dated 6 and 12 March 2003, and the file note of the conversation of 17 March 2003. It submits that in its case a clear threat to evict was being made. 65 The second case the applicant relies upon in relation to compulsion is McKay v National Australia Bank Ltd [1998] 4 VR 677. The appellant in that case claimed he had made an "involuntary payment … under unlawful compulsion within the principles enunciated in Mason v New South Wales". Mason v New South Wales (1959) 102 CLR 108 is a case involving a claim for money had and received on the basis of compulsion. 66 In McKay, Winneke P stated as follows (at 686): "I venture to suggest that the legal doctrine of involuntary payments made under compulsion or coercion has no application to the facts of this case. That doctrine, in my view, is limited to circumstances where a party has been wrongfully compelled to make a payment demanded of him by an authority which, ex necessitate, he cannot resist. Compulsion leading to involuntary payment within the meaning of this doctrine, as I understand it, can only occur where the demand for payment is made under threat of immediate and empowered distress or seizure of the party's property or person so that the party is coerced into making the payment as a matter of necessity." (emphasis added) 67 The applicant submits Mr Allen's threats to evict come within the test for compulsion articulated by Winneke P. 68 The applicant also drew attention to the statement of Tadgell JA in McKay (at 689): "To act in response to pressure exerted by another will not be to act involuntarily and so to act under duress unless the pressure is fairly to be regarded by the law as unacceptable. A means of pressure or influence that the law will regard as unacceptable are various and indefinite and the categories are not closed." 69 During oral submissions, I raised the issue of whether compulsion can be found to have occurred where there was nothing to stop an applicant seeking injunctive relief. The applicant submits that the availability of injunctive relief to the party the subject of compulsion is irrelevant. It contends that this has to be so, as whenever a party has time to make a payment it also has time to seek an ex parte injunction. Any party the subject of a wrongful threat could always seek an injunction rather than pay the money over, and, accordingly, an action for money had a received by way of compulsion, at least in respect of threats to property, could never be made out. 70 Lastly, the applicant referred to the decision of Gobbo J in Esso Australia Resources Ltd v Gas and Fuel Corporation of Victoria [1993] 2 VR 99. His Honour found that Mason v New South Wales (at 105): "confirmed that a payment is made under duress or compulsion where there is a belief, on reasonable grounds, that non-payment will result in serious consequences such as interference with property rights or with the carrying on of a business. In the Air India Case, the test required the threat of a step, other than an invocation of legal process, which would cause harm to the payer." (emphasis added) 71 The applicant submits that it falls squarely within the test for duress and compulsion as formulated by Gobbo J.

the first respondent's submissions in relation to restitution 72 The first respondent submits that the applicant has simply stated, in its pleading, that the retention of the overpaid rent would constitute "unjust enrichment". It contends that "unjust enrichment" is insufficient to give rise to a cause of action or an entitlement to refund the monies paid. 73 Second, the first respondent submits that a prima facie right to recover will be displaced where it would be consistent with good conscience to allow the lessor to retain the overpaid rent. It referred to the statement of the High Court in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 (at 379) that a defendant "is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust". 74 The first respondent contends that if it were ordered to refund the overpaid rent in its entirety, the applicant would obtain a windfall benefit. It would be a windfall because at the time that this dispute arose, the applicant conceded there should have been a rental increase, at least up to the level assessed by Mr Ned Walsh, whose assessment is discussed in the primary judgment. 75 In support of its submission that it would be unjust to require the landlord to repay the overpaid rent, it referred to Ovidio v Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6, a recent decision of the Victorian Court of Appeal. 76 Ovidio involved the lease of retail premises. The parties had signed a lease on 14 August 2000. Section 8 of the Retail Tenancies Reform Act 1998 (Vic) provided that a prospective landlord must give a disclosure statement to the prospective tenant before entering into a lease. This was not done. Section 8 also provided that a failure to give a disclosure statement means "the tenant may withhold payment of rent until the end of 7 days after the landlord gives the tenant a copy of the disclosure statement" and "the tenant is not liable to pay the rent attributable to the period before the landlord gave the tenant a copy of the disclosure statement". 77 The landlord belatedly gave the tenant a disclosure statement on 5 May 2003. Up to this point, the tenant had been ignorant of its rights, and had been paying the rent pursuant to that lease. The tenant successfully brought an action in the Victorian Civil and Administrative Tribunal ("VCAT") seeking restitution of the rent it had paid since entering into the lease, in its entirety. The landlord appealed VCAT's decision. 78 The Court of Appeal unanimously found for the landlord. Chernov JA found for the landlord on two bases. First, his Honour found that the tenant received "good consideration" for its money, namely exclusive possession of the premises. Second, Chernov JA held that the landlord had a sound counter-restitutionary claim against the tenant for use and occupation of the premises, the quantum of which was broadly equal to the rent agreed to be paid under the lease. 79 Likewise, Nettle JA found that a claim for money had and received could not be made out where the respondent got the benefit of the use and occupation of the premises. His Honour also acknowledged the existence of a counter-restitutionary claim. He found this to be an alternative way of looking at the matter, stating (at [49]): "an entitlement to sue for "counter restitution" is pro tanto an answer to a claim for restitution. It follows, at least to that extent, the appellant's retention of the moneys paid as rent would not be unjust." (emphasis added) 80 By parity of reasoning, the first respondent submits that it is entitled to recover reasonable compensation for the use and occupation of the premises from the applicant, or, alternatively, that it would not be "unjust" for it to retain the overpaid rent. 81 The first respondent submits, as a "fallback position", that if there is to be restitution of the overpaid rent, it should be limited to the difference between the overpaid rent and the figure that the Court determines to the "relevant rent". It contends that the relevant rent should be determined by averaging the four rental figures identified in [177] of the primary judgment. I must say I find this suggested method to be a somewhat implausible technique for the Court to adopt in determining what should be the "relevant rent" or "reasonable rent". However, counsel for the first respondent, Mr O'Callaghan QC, submitted that such an approach was founded in common sense. 82 In relation to the issue of compulsion (which the applicant has to demonstrate in order to receive any restitution, whether partial or the whole, of the overpaid rent), the first respondent submits that a landlord purporting to exercise its rights under the lease cannot constitute an unlawful threat. That is so, it submits, even if it is misconceived about the correct basis for those rights. 83 In support of this submission, the first respondent relies upon the observation in McKay that the threat to issue legal proceedings or to pursue another legal remedy could "seldom be a wrong in itself". The Court in McKay said (at 690) that the "proper use of legal process does not constitute duress" and that "the threat to institute a civil action in good faith cannot constitute duress". It held, by analogy, that a "bona fide threat by a secured creditor to exercise rights conferred by the security can scarcely be relevantly different from a bona fide threat to sue". The first respondent contends that a bona fide threat by a landlord must fall into the same category.

Conclusions 84 Before turning to my specific findings, I wish to make some brief comments about the current position in Australia law with respect to restitutionary claims and "unjust enrichment". 85 Historically, what were described as the "common", "indebitatus" or "money" counts were generally seen as an appendage to the law of contract. The common counts included the action for money had and received, and other actions, such as for quantum meruit. The common counts were traditionally regarded as being based upon an implied contract theory. That is, they were based upon the implication of a contract which required the defendant to repay the plaintiff. Accordingly, the claims were described as "quasi-contractual". See Goff and Jones, The Law of Restitution (6th ed, 2002) at [1-002]-[1-004] ("Goff and Jones") and K Mason and JW Carter, Restitution Law in Australia (1995) ("Mason and Carter") at [101]-[109]. Goff and Jones describe quasi-contract as "the most ancient and significant part of restitution" (at [1-001]). 86 In the seminal case of Moses v Macferlan (1760) 97 ER 676, Lord Mansfield identified the specific, but non-exhaustive, instances where the action for money had and received lay. These were (at 681): "for money paid by mistake; or upon consideration which happens to fail; or for money got through imposition, (express, or implied); or extortion; or oppression; or an undue advantage taken of the plaintiff's situation, contrary to the laws made for the protection of persons under those circumstances." 87 In Ovidio, Chernov JA referred to the history of the action for money had and received in the following terms (at [8]): "Historically, restitutionary relief was provided by courts of common law, although equitable principles played an important part in moulding the action. The basis of the claim for money had and received was articulated in the 18th century by Lord Mansfield in Moses v. Macferlan. I will deal later with what his Lordship relevantly said in that regard, but for present purposes it is sufficient to mention what is said in the third edition of Bullen & Leake'sPrecedents of Pleadingsabout the gist of the action, namely, that a claim for money had and received is "the most comprehensive of all common counts [and is] applicable wherever the defendant has received money which in justice and equity belongs to the plaintiff, under circumstances which render the receipt of it a receipt by the defendant to the use of the plaintiff."" (footnotes removed) 88 In Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, the High Court rejected implied contract as the theoretical basis for claims in restitution. Instead, Deane J, with whom Mason and Wilson JJ generally agreed, stated (at 256-7): "unjust enrichment … constitutes a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by ordinary processes of legal reasoning, of the question whether the law should, in justice, recognize such an obligation in a new or developing category of case … " (emphasis added) 89 The recognition of a "unifying legal concept" does not, however, render the traditional categories of restitutionary claims, such as the action for money had and received, null and void. On the contrary, in recent years the High Court, and superior State courts, have chosen to frame claims in restitution within the bounds of these established categories. See Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516, Baltic Shipping Company v Dillon (1993) 176 CLR 344, David Securities, Pavey & Matthews, Ovidio, McKay (referring to Mason v New South Wales), and Vickery v JJP Custodians Pty Ltd(2002) 11 BPR 20,333. 90 Roxborough is the most recent High Court case dealing with a claim for restitution. In that case, five out of six judges referred to the instances identified by Lord Mansfield in Moses v Macferlan where an action for money had and received was recognised to arise. Gleeson CJ, Gaudron and Hayne J noted (at [15]) that Mason and Carter: "point out that cases decided in relation to the common indebitatus counts, although they involved an implied contract analysis which is now out of date "form the precedents which make up the legal matrix of restitution law"." (footnote omitted) 91 Despite Deane J's overture in Pavey & Matthews that "unjust enrichment" assists in determining whether the law should recognise new categories of restitution, in David Securities, the majority (Mason CJ, Deane Toohey, Gaudron and McHugh JJ) noted that (at 379): "it is not legitimate to determine whether an enrichment is unjust by reference to some subjective evaluation of what is fair or unconscionable. Instead, recovery depends upon the existence of a qualifying or vitiating factor such as mistake, duress or illegality." 92 It is therefore clear from the High Court's approach in David Securities and Roxborough that while the categories of restitution are not closed, the "established categories" still provide, at the very least, the starting point for analysing restitutionary claims. 93 In my view, the present case falls squarely within one of those established categories. The overpaid rent was money had and received on the basis of compulsion or duress. The first respondent had no right to the payments under the lease. The payments were only made after the first respondent threatened, both impliedly and expressly, to evict the applicant from the premises if it did not make those payments. 94 The facts of this case are analogous to those in Mason v New South Wales, where the High Court upheld a claim for money had and received on the basis of compulsion. In that case, the plaintiffs conducted a business transporting goods by road between Victoria and New South Wales. A New South Wales statute made it an offence to carry goods for consideration without a permit. That law was, at the relevant time, the subject of a constitutional challenge before the Privy Council for contravening s 92 of the Commonwealth Constitution insofar as it related to interstate trade. The plaintiffs paid the permit fees "under protest". The Privy Council upheld the constitutional challenge. The plaintiffs then sought remittal of their permit fees. 95 The High Court accepted that the plaintiffs had made the payment involuntarily. Dixon CJ stated (at 115-16): "The question what should be done pending news of the result was one which obviously concerned State transport authorities as much as it did the carriers themselves. The plaintiffs made it plain enough that they paid for permits only under a sense of constraint and with the intention of making a claim for a refund of the money if the decision of the Privy Council should uphold the contention that consistently with s. 92 the State could not enforce its demand for the money. In all these circumstances I think that it is a proper inference that, in the case of each journey in question, the plaintiffs paid the money unwillingly and only because they apprehended on reasonable grounds that without the permit which could not otherwise be obtained officers acting under the authority of the State of New South Wales would or might stop the motor vehicle and refuse to allow it to proceed upon the journey." 96 Windeyer J specifically noted in Mason v New South Wales that the availability of injunctive relief will generally not suffice as a defence to compulsion. His Honour stated (at 145): "Payments made as the result of constraint are none the less involuntary because the law might have ultimately provided the payer with a remedy if he were prepared to suffer in the meantime. … And so generally, in an action at law for the recovery of money illegally exacted by duress of property, a payment will be considered as made under compulsion notwithstanding that the plaintiff might have avoided having to make it by resorting to equity for an injunction". 97 While there may be a distinction between threats made by public authorities, and those made by private citizens, in circumstances where the legal basis for those threats turns out to be non-existent, Mason v New South Wales is nonetheless instructive. It demonstrates that the law does not limit restitution where an applicant theoretically has other options. In Mason v New South Wales, the other option was to refuse to obtain a permit and risk the resulting consequences, and perhaps seek damages after the handing down of the Privy Council judgment. In the present case, the applicant could have refused to pay the increased rent and then fought the ensuing legal battle as to eviction (including, presumably, seeking injunctive relief). In both cases, the alternative options would have had a potentially severe impact on the relevant businesses. 98 Accordingly, I do not accept that a wrongful threat to evict a tenant, even if made in bona fide belief that the landlord has the right to do so under the lease, exempts such a threat from being considered as an "unlawful threat" for the purposes of compulsion or duress. Where it turns out that the threatening party had no legal basis upon which to make those threats, in these kinds of circumstances the law regards that type of pressure as unlawful, and sufficient to found a claim for restitution. 99 Nor do I consider as relevant the fact the applicant may be considered to achieve a "windfall" by reason of it receiving restitution of the overpaid rent. The High Court squarely faced this issue in Roxborough, and held that that fact did not prevent a claim in restitution. 100 Roxborough involved a claim for money had and received by retailers of tobacco products against the wholesaler of those products. The contracts of sale between the parties involved invoices that specified the wholesale price of the products and an additional fee representing an ad valorem license fee imposed by New South Wales state law. The license fee was subsequently held to be unconstitutional by virtue of it imposing an excise in contravention of s 90 of the Commonwealth Constitution. The retailers claimed sums equal to the amounts specified in the invoices as the "tobacco license fee", for approximately the month prior to the constitutional decision being handed down. These amounts had been paid by the retailers, but had been retained by the defendant and not paid to the New South Wales Government. 101 The retailers' claim was upheld by the High Court on the basis that there had been a failure of consideration. The failure in this case was described by Gummow J at [104] as "the failure to sustain itself of the state of affairs contemplated as a basis for the payments the appellants seek to recover". Gleeson CJ, Gaudron and Hayne JJ described, at [19], the failure as "the failure of a severable part of the consideration for which the net total amounts shown on the invoices were paid". 102 In Roxborough, there was no suggestion that the retailers would pass on the remitted monies to its customers. Gleeson CJ, Gaudron and Hayne JJ stated (at [5]): "[i]n all probability, whoever succeeds in these proceedings will have made a windfall gain. In the absence of some legislative intervention, the appellants, if they succeed, are unlikely to be obliged to pass on the fruits of their success to the smokers who bore the financial burden of the invalid tax. For its part, the respondent has collected what was held to be a tax on goods, but it has not had to pay it over to the revenue authorities." 103 The Court went on to order repayment by the wholesaler to the retailers of the relevant monies, irrespective of the fact that this would provide the retailers with a "windfall" benefit. 104 I also find the first respondent's reliance upon Ovidio in support of its claim that it would not be unjust for it to retain either all or part of the overpaid rent to be flawed. The present case is distinguishable from that of Ovidio on a number of grounds. 105 The most obvious point of distinction is that the landlord in Ovidio was found to have a counter-restitutionary claim against the tenant. Although the first respondent in this case submitted it also had a counter-restitutionary claim against the applicant, I do not see how such a claim could succeed. It must be remembered that in Ovideo, the effect of finding the tenant was entitled to restitution would have been that it would have had occupancy of the relevant premises for two and a half years for free. It was in this context that the Victorian Court of Appeal found the landlord would have a counter-restitutionary claim against the tenant for use and occupation of the premises. 106 Those facts are far removed from those in the present case. The parties in this case agreed to a tenancy on the terms set out in the lease. The tenant paid rent pursuant to that lease. The terms of the lease included that the rent be increased if the rental review procedures were followed (at least so far as clause 3.2.2 was concerned). Those procedures were not adhered to. Accordingly, in ordering that the applicant is entitled to restitution of the overpaid rent, the parties will actually get exactly what they bargained for under the terms of the lease, and the rent that the applicant has paid (minus the overpaid rent) constitutes good consideration for its tenancy. In those circumstances, it can hardly be said that the first respondent would have a claim against the applicant for use and occupation of the premises. 107 I do not accept the first respondent's "fall back" submission that I should determine what the "reasonable rent" would have been, and only order restitution of any amount that the applicant has paid over that sum. The amount by which it would have been "reasonable" to increase the rent is not relevant in these circumstances. As Deane J stated in Pavey & Matthews (at 256), restitution does not provide "judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate". 108 The real question is what was the applicant was obliged to pay under the lease? While the applicant did make an offer to pay increased rent by reference to an independent assessment, the first respondent rejected that offer. It did so on the assumption that it was entitled to a higher rent. That assumption proved to be wrong. Accordingly, the agreement on foot between the parties provided that the rent payable was that which was paid, less the overpaid rent. The applicant, therefore, did not receive any additional benefit for its payment of the overpaid rent. 109 This finding is fortified when it is considered that, in Ovidio, when the Court came to determine the quantum of the counter-restitutionary claim, that is, what the "reasonable rent" was that the tenant should pay, their Honours had regard to what in fact the parties had bargained for. They did not themselves embark upon any independent assessment of the reasonable rent (although I acknowledge that there was no evidence before their Honours as to this matter). This demonstrates the inappropriateness of the Court deciding what a reasonable rental figure would be, when the parties have themselves agreed upon procedures to determine this. 110 For completeness, I note that even if I did seek to determine the "reasonable rent", I do not think averaging the four assessments tendered before me in evidence would be an appropriate way to determine objectively the correct figure. In such circumstances, the Court would have to determine that figure for itself, albeit with the assistance of the assessments available in the evidence. 111 Turning to the question whether the applicant's restitutionary claim was properly pleaded, I agree that the claim was not pleaded as well as it could have been. However, Mason and Carter make some salient observations about pleading claims for restitution. The learned authors state (at [2904]): "A pleading that asserts in the abstract that P was unjustly enriched at D's expense will usually be struck out. The authorities require the basis of such an allegation to be explained in the pleading. In light of the general statements in David Securities Pty Ltd v Commonwealth Bank of Australia, courts have been averse to pleadings which simply appeal to 'idiosyncratic notions of what is fair and just', or which plead generalised claims based on unjust enrichment. We explain elsewhere why it is legitimate to say that causes of action arise in restitution. Nevertheless, we are not advocating pleadings which rely merely on 'unjust enrichment', unless the essential facts are set out. … Pleaders are unlikely to allege unjust enrichment in a context devoid of any facts, and the likelihood that the facts pleaded might attract some novel restitutionary claim in this fast-developing area of the law, saw Gummow J refusing to strike out such a pleading in Winterton Constructions Pty Ltd v Hambros Australia Ltd." (footnotes removed) 112 The applicant pleaded its claim of "unjust enrichment" by reference to the invalidity of the notice. While it could have more clearly identified the claim as one for restitution on the basis of money had and received, the relevant issue was adequately raised. In addition, as Mason and Carter point out, there are good reasons not to plead claims in restitution with a great degree of specificity. In a developing area of the law, where the categories of claims are not closed, an applicant should not shut itself out of making a case for "some novel restitutionary claim", as long as the relevant facts upon which the claim is based are identified. 113 As it turns out, the facts in this case do not "attract some novel restitutionary claim". They fall squarely within an established category - an action for money had and received. However, it is for the above reasons that I am satisfied that the applicant pleaded its claim for restitution adequately.

quantum of the overpaid rent 114 The applicant and first respondent are in dispute over the exact amount of money which was overpaid. The dispute surrounds three issues:

whether interest can be claimed on the GST component of the overpaid rent when the applicant would have received an "input tax credit" from the Australian Taxation Office for those sums;
whether the appropriate interest rate to be applied to the overpaid rent is the penalty rate or the business overdraft rate as specified by the Reserve Bank of Australia; and
whether the first respondent was entitled to an automatic increase in rent of three per cent on 1 September 2005, pursuant to clause 3.2.1, irrespective of whether it has served a notice under that clause. 115 Section 51A(1)(a) of the Federal Court Act 1976 (Cth) provides significant discretion in determining questions relating to the application of interest to any award of money. It is in the following terms: "In any proceedings, for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either: (a) order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered …" (emphasis added) 116 In relation to the question whether interest can be claimed on the GST component of the overpaid rent, I am not inclined to separate out the GST component of the overpaid rent from the remainder of that sum for the purposes of interest calculation. While the applicant may have received input tax credits some time after paying the overpaid rent, there is no evidence before me as to when this occurred in relation to each monthly rental payment. At the very least, the applicant is entitled to interest for the period between it paying the overpaid rent and it receiving the relevant input tax credits. In those circumstances, and given that the amount in question is hardly substantial in the context of the entirety of the claim, interest should be calculated on the whole of the overpaid rent, and not a smaller amount from which the GST component has been deducted. 117 In relation to the appropriate interest rate to be applied, the applicant submits that the penalty interest rate, as specified in Penalty Interest Rates Act 1983 (Vic), should be used to calculate interest in this case. It referred to my judgment in McCormick v Riverwood International (Australia) Pty Ltd [2000] FCA 32 in support of that submission. In that case I applied the penalty interest rate after citing the following observations of Heerey J in EMCL Pty Ltd v Esanda Finance Corporation Ltd (No 2) (1998) 160 ALR 382 (at 384): "I think there is obvious practical value in having the Federal Court applying the same interest rate as would be applied in litigation in the same State in which the case is being heard. It would be undesirable for there to be distinctions drawn from State to State, depending on whether it was thought the regime in any particular State did or did not impose a commercial rate of interest." 118 The question of the appropriate interest rate to be applied in any case is a discretionary matter for the judge. In my view, in a case of this nature, involving restitution rather than damages, the applicable interest rate should reflect the real cost to the applicant of not having the benefit of the funds constituted by the overpaid rent. Accordingly, I accept the submission of the first respondent that the appropriate interest rate to be applied in this case is the business overdraft rate, as specified by the Reserve Bank of Australia. 119 In relation to the question of whether the lease provides for an annual automatic increase of three per cent or CPI, I have already indicated my view that, despite the terms of clause 3.2.2 when viewed in isolation, the lease in fact provides for an automatic annual increase. I have come to that view for the following reasons. Items 11(b) and (c) appear to have been designed to summarise the terms of clause 3.2. Unfortunately, the lease in general is hardly a paragon of drafting, and item 11 does not achieve this. In fact, on their face the terms of clause 3.2.1 and items 11(b) and (c) are plainly inconsistent - the former provides for an increase only upon the first respondent giving notice, the latter provides for an automatic increase. 120 In the face of a plain inconsistency within a lease, regard must be had to the general canons of contractual construction. The objective intention of the parties must be ascertained, and a common sense and commercially sensible approach must be taken. See, for example, Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 cited by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 210 CLR 181 at [43], and Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 770-71 per Lord Steyn. 121 The only way I can see to resolve this inconsistency is to find that the parties intended the annual increase to be automatic, and that the notice under clause 3.2.1 was not intended to be a trigger for that increase, but rather merely provided the mechanics for identifying whether the increase would be by CPI or three per cent. To find that the increase was not intended to be automatic would involve disregarding entirely the terms of item 11. A commercially sensible approach recognises that the lessee would need to be informed of the new level of rent, and that this was the purpose behind clause 3.2.1. 122 The only potential stumbling block to this interpretation is clause 3.2.3. As previously mentioned, that clause expressly provides that a notice can be served late "so long as the notice is given before the next Review Date". However, I can see no reason why the lease cannot be construed as providing for an automatic increase, the practical mechanics of which are provided by clause 3.2.1, but that that right is lost if a notice is not served before the next "Review Date". That is, the lessor has a right to an annual increase, but that right can be lost. Such a construction is different from one which says the right does not exist until a notice is served. 123 There is no doubt that these issues of construction require some interpretive gymnastics. However, this is the unfortunate result of poor drafting. The distinction I have drawn in the preceding paragraph probably only has significance in the circumstances at hand. In my view, the construction of the annual rent increase provisions outlined above best gives effect to the objectively ascertained intentions of the parties in a commercially sensible manner. 124 Accordingly, when calculating the overpaid rent, the first respondent's entitlement to an annual increase as at 1 September 2005 must be taken into account. The applicant has conceded that the first respondent has indicated it wishes to increase the annual rent by three per cent, rather than CPI (see [125]-[126] below). As such, when calculating the amount the applicant is entitled to be repaid, the first respondent is entitled to a three per cent per annum increase commencing upon 1 September 2005. 125 The applicant has conceded that it received a notice, dated 24 May 2006, from the first respondent on 26 May 2006, purporting to increase the rent post-1 September 2005 by three per cent. It does not expressly challenge the validity of that notice. It does, however, say that the notice is defective in purporting to operate retrospectively. The applicant says that I should disregard the notice given that it is not in evidence before me. 126 For my part, I fail see why the 24 May 2006 notice cannot operate retrospectively, assuming it is valid. As far as I can ascertain, no "Review Date" has passed in the period between 1 September 2005 and 24 May 2006. The applicant conceded in its submissions in relation to the proposed cross-claim that a notice could be served late, and with retrospective effect, as long as a subsequent "Review Date" under clause 3.2 had not passed during the intervening period. 127 Accordingly, without finally resolving the issue (given that the 24 May 2006 notice is not before me), there appears to be a prima facie basis for finding that the first respondent has a right to a three per cent increase in the annual rent as at 1 September 2005, even if the lease does not provide for an automatic annual rent increase. 128 Finally, there is also an issue between the parties as to whether the applicant has calculated interest on a compounding or simple basis when determining the exact figure of the overpaid rent. Both parties accept that simple interest is the appropriate interest to be paid. I propose to direct that a Registrar resolve this issue. I will also direct that the Registrar quantify the exact figure the first respondent must pay to the applicant by way of restitution on the basis of the principles enunciated in this judgment. I do so pursuant to O 38(1) of the Federal Court Rules. Although that provision is phrased in terms of ascertaining "damages" where that ascertainment is a matter of calculation, it is plainly applicable in cases such as the present.

costs as between the applicant and first respondent 129 In general, costs follow the event and any departure from this principle should only occur in exceptional circumstances: Trade Practices Commission v Nicholas Enterprises Pty Ltd (1979) 28 ALR 201; Cretazzo v Lombardi (1975) 13 SASR 4; and Ritter v Godfrey [1920] 2 KB 47 at 52-3.

The First respondent's submissions on costs 130 The first respondent submits that I should depart from the ordinary course of awarding costs to the applicant, and apportion costs as between those parties. It contends that the applicant should only receive 20 per cent of its costs on a party/party basis. It does so on the basis that the applicant was unsuccessful on some of its claims (either by reason of them not being pleaded or being rejected in the primary judgment), the claim of breach of good faith was not decided, and the claim for the tort of deceit was abandoned during the hearing. 131 The applicant succeeded only upon validity of the form of the notice claim. The first respondent was put on notice that this claim would be added to the applicant's statement of claim only days prior to the commencement of the hearing, and the applicant's pleading was formally amended on the first day of the trial. 132 The first respondent submits that if the case had been confined to the issue of the validity of the form of the notice, the trial would have taken less than a day. Accordingly, the first respondent contends that the claims which the applicant lost (and on which the first respondent says it had no reasonable prospects of success) unnecessarily and unduly prolonged the trial. It cites Keddie v Foxall [1955] VLR 320, Thorne v Doug Wade Consultants Pty Ltd [1985] VR 476 and Re Elgindata Ltd (No 2) [1993] 1 All ER 232 in support of the proposition that the costs the applicant would otherwise be entitled to should be reduced. 133 The first respondent also contends that the deceit claim, which was only abandoned by the applicant in its closing submissions, was included in the applicant's pleadings for the collateral purpose of attacking the credit of Mr Allen and Mr Williams (the author of the second respondent's assessment of the applicable market rental rate on the premises). It contends that its defence to the deceit claim was set out in its pleadings, and that this explanation was not challenged by the applicant. 134 The first respondent submits that each of these matters warrant a substantial discount to the costs the applicant would otherwise be entitled to recover.

The Applicant's submissions in reply 135 Turning to the applicant's submissions, it contends that, given it was successful in its claim against the first respondent, it is entitled to all of its costs and there are no exceptional circumstances that warrant a departure from that course. 136 First, the applicant submits that although it only succeeded on one of its claims, it only needed to succeed on one. It relies upon the following comments of Jacobs J in Cretazzo (at 16), cited with approval by Toohey J in Hughes v Western Australian Cricket Association (Inc) (1986) ATPR ¶40-748 (at 48,136): "trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issue of fact or law. The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues, however doubtful, which might be material to the decision of the case. There are, of course, many factors affecting the exercise of the discretion as to costs in each case, including in particular, the severability of the issues, and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues." 137 It also relies upon the statement of Goldberg J in Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [54]: "a court should be reluctant to embrace the proposition that, as a general rule, it is appropriate to undertake an enquiry as to who was successful in relation to particular issues in a case to determine whether there should be an apportionment of costs against a successful party. A court should not be too ready to disallow costs simply because a party has failed upon an issue, unless it be quite a separate and distinct issue from the issues in respect of which it succeeded or unless there be some element of unreasonableness or inappropriate conduct in relation to that issue: cf Verna Trading Pty Ltd v New India Assurance Pty Ltd [1991] 1 VR 129 at 152‑154." 138 This passage was cited with approval by Kenny J in Inspector-General in Bankruptcy v Bradshaw (No 2) [2006] FCA 383 at [12]. 139 The applicant submits that it was reasonable for it to plead the claims that it did, that there was substance to the claims and that there was a contest of facts in relation to them. 140 However, if I am minded to apportion costs, the applicant contends that I should take into account the approach of Toohey J in Hughes. In that case, although the applicant failed in the majority of causes of action it pleaded, it was awarded 75 per cent of its costs. His Honour did so on the basis that the applicant had "succeeded in his primary aim", and that the applicant "failed on some issues in circumstances where, not only should he not have the costs of those issues, but there should be some compensation for the respondents for the time taken in meeting those issues both prior to and at the hearing": see Hughes at 48,137. 141 The applicant in this case contends that in a majority of its claims it either succeeded or the issue was not determined. As the applicant acknowledged, however, I expressed serious misgivings about a number of its claims that were not, in a formal sense, finally determined. 142 The claim I did not express a view upon was the breach of good faith allegation. That claim was a true alternative to the challenge to the formal validity of the notice in the following sense. The applicant framed its claim for breach of good faith by contending that the more "generous" the requirements under the lease were for validity of notices, the more stringent the duty to act in good faith was. The converse of that submission is that the more stringently a notice is required to be construed, the less chance there is of finding a breach of good faith. Accordingly, because I found the notice to be invalid as a matter of form, at least one of the bases of the applicant's claim for the implication and breach of a duty of good faith fell away. 143 This fact assumes some importance because the applicant submits that a great deal of the evidence during the trial that went to the good faith claim, also went to its other claims. This includes the expert evidence. As such, the applicant submits that a significant amount of the evidence in the trial went to a claim that was not determined, and which I did not express any views upon. 144 In relation to the deceit claim issue, the applicant submits there should be no discount to its costs by virtue of it making, and maintaining until closing submissions, this claim. The deceit claim arose out of an internal email discovered by the second respondent relating to the "management fees" paid by the applicant in relation to the premises. That email stated: "Note on our file says "Tenant pays management fees of $462-50 (plus GST), half goes to owner half goes to Colliers Jardine' Rent goes direct to owner, CJ's [Colliers Jardine] are involved so that owner can claim full management fees as an outgoing." (emphasis added) 145 This email concerned the applicant because under the lease it was obliged to reimburse the lessor for outgoing "management fees". It appeared to the applicant, on the basis of this email, that it was being charged double the management fees that were in reality being paid to the managing agent, Colliers Jardine. 146 The applicant contends that after it unsuccessfully sought to obtain an explanation from the first and second respondents as to the email, it amended its statement of claim to plead a claim in deceit against both respondents. 147 The applicant submits that it was only on the second day of the trial that critical information was provided to it that explained the arrangement and demonstrated it was legitimate. Mr Allen was cross-examined briefly as to the arrangement. Ultimately the applicant contends that the deceit claim occupied very little of the hearing time. The applicant submits that it withdrew the claim once it had examined the evidence and the transcript of Mr Allen's evidence, and had obtained instructions. Accordingly, it says that its prosecution of the deceit claim should not be taken into account in discounting any of its costs.

Conclusions 148 Section 43 of the Federal Court Act provides that the award of costs is a discretionary matter for the Court. That power must, of course, be exercised judicially. I have determined that the applicant should only have 20 per cent of its costs paid, on a party/party basis. I am sympathetic to the view that applicants should not be dissuaded from canvassing all the issues that may be relevant on the facts. However, the reality in this case is that the applicant has been successful on a very narrow claim only. That claim required very little evidence, and was raised only shortly prior to the commencement of the trial, in the context of a sizeable commercial dispute which required eight days of hearing. In those circumstances, I do not think that the respondent should have to bear the applicant's costs in respect of the majority of the proceeding. 149 In making this decision, I have also taken into account the fact that the applicant only withdrew the deceit claim in its closing submissions. The authorities recognise that the making of an allegation of fraud is, in general terms, a serious matter. I do not consider the making of the claim, in the circumstances of this case, to have been improper. The applicant made the claim on the basis of the Colliers email and after not receiving an explanation of the arrangement between the first and second respondent in relation to the management fees. However, the arrangement was explained in the defences, and, at the very latest, the claim should have been abandoned following Mr Allen's cross-examination. 150 In all the circumstances, I consider that the first respondent's contention that it should be required to pay no more than 20 per cent of the applicant's costs is reasonable, and should be accepted.

Costs as between the applicant and second respondent

The second respondent's submissions on costs 151 The second respondent submits it is entitled to have its costs paid on an indemnity scale on three bases. The first basis is the contention that the applicant advanced a hopeless case in the face of a clear warning. The second respondent notes that in the primary judgment I found the case against it to be "fundamentally flawed" on the issue of causation. It also relies upon a letter its solicitors wrote to the applicant's solicitors on 16 February 2004. The letter was written shortly after the second respondent was joined to the proceedings, and was relevantly in the following terms: "With respect, I do not consider the facts pleaded in the statement of claim disclose a cause of action against the second respondent that would entitle the applicant to damages under the Trade Practices Act. Alternatively, the case against the second respondent as pleaded in the statement of claim is hopeless, has no prospect of success and ought to be struck out. … The cause of any loss suffered by the applicant is the failure by the tenant to object to that assessment, alternatively the conduct alleged against the first respondent. It cannot be said that the applicant was in any way misled by the second respondent. Further or alternatively, there is clearly no causal connection between the assessment my client has made on 24 October 2002 and the damages claimed in this proceeding. … Obviously I reserve the right to use this letter in support of an application for costs to be awarded in favour of my client on a full indemnity basis." 152 The second basis upon which the second respondent says it is entitled to indemnity costs is its contention that the applicant made a baseless allegation of fraud, namely the deceit claim. As already indicated, the applicant amended its statement of claim on 12 November 2004 to incorporate this claim. The applicant sought to recover exemplary damages by reason of the alleged management fees arrangement. 153 The second respondent points out that the deceit claim was maintained at the trial, despite no evidence being led by the applicant in support of it. The second respondent contends it responded to the deceit claim in its defence by stating that half the management fees were paid to Mr Allen as he was responsible for some of the work ordinarily done by a managing agent, such as the collection of rent. It also points out that the applicant did not withdraw the deceit claim even after Mr Allen was cross-examined. As previously indicated, it waited approximately three weeks, until the final day of the trial, to abandon the claim. 154 The second respondent contends that it was improper to institute the deceit claim in the first place. It submits that the claim involved an allegation of criminality. As such, the claim should not have been made without proof to the Briginshaw standard: see White Industries (Qld) Pty Ltd v Flower & Hart (1988) 156 ALR 169 at 241. 155 In addition, the second respondent invites me to infer that the deceit claim was included for the "ulterior motive" of "poisoning" the Court against the respondents, or to bring pressure upon the respondents to settle. It submits that the deceit claim was very small, $12,000, compared to the overpaid rent claim, which was in the realm of $700,000. It contends that therefore, the claim was raised so as to discredit the respondents. 156 The third basis upon which the second respondent submits it is entitled to indemnity costs is by reason of the applicant's rejection of a settlement offer. In the 16 February 2004 letter, the second respondents' solicitors offered to settle the case on the basis that each side bear its own costs. The second respondent contends that the applicant was imprudent to reject this offer.

The applicant's submissions in reply 157 The applicant contends that its case was not "hopeless". It points to the fact that the Court dismissed an application for summary dismissal brought by the second respondent on 29 March 2004. In those circumstances the Court has already been determined that the applicant's case against the second respondent was not wholly untenable. 158 In relation to the deceit claim, the applicant points to the Colliers email and the lack of any explanation of the relevant arrangement, to demonstrate there was evidence to support the claim. It also submits that, to the extent it should have withdrawn the deceit claim earlier, such as after the cross-examination of Mr Allen, little occurred during the intervening period that would have incurred substantial costs on either side in relation to the deceit claim. 159 In relation to the compromise claim, the applicant contends that in circumstances where the offer was for each party to walk away, it was not imprudent for it to reject the claim. 160 Independent of its specific rebuttals of the second respondent's contentions, the applicant claims that the second respondent's conduct during the proceeding in relation to discovery should disentitle it to any award of indemnity costs. It relies upon the comments of Einfeld J in Telstra Corporation Ltd v First Netcom Pty Ltd [1998] FCA 656, where his Honour stated (at 4): "… while it is certainly true that some unreasonable conduct on the part of the party against whom indemnity costs are sought must be demonstrated, it must equally be true that the party seeking the indemnity costs must come to the Court with clean hands." 161 The applicant contends that this extract is authority for the proposition that, when the Court exercises its discretion on costs, it takes into account the conduct of the parties 162 The particular conduct the applicant relies upon relates to a notice of motion heard by a Registrar of this Court on 10 September 2004. That notice of motion sought further discovery from the second respondent. The applicant had specifically requested, amongst other things, documents relating to Mr Williams' knowledge of sales and leasing markets for industrial premises similar to the subject premises. It filed the notice of motion having not received what it considered to be a satisfactory response to its request. 163 When the notice of motion was heard, the solicitor for the second respondent. Mr David Leggatt, informed the Court that the two properties already identified by the second respondent "are the only two Mr Williams considered to be comparable". The Registrar declined to order further discovery. However, he stated: "ruling quite simply, there are affidavits here saying there are no further documents. It has been explained and it is on transcript what is meant by that. I will feel very sorry for you and your clients if on cross examination there happens to be any further documents, but it has been made clear to me there are no further documents, particularly after an application has been made today by Mr Gleeson [counsel for the applicant]." 164 However, on the first day of the trial, the second respondent filed a further affidavit of Mr Williams on behalf of the second respondent. In that affidavit, Mr Williams deposed to having had regard, when giving his assessment, to properties in addition to the two already identified. The following day, the applicant brought a motion seeking orders that the second respondent file a further affidavit of documents, file an affidavit explaining how it came to make the statements that it did to the Court on 10 September 2004, and pay the costs of that motion, and the previous hearing before the Registrar, on an indemnity basis. The second respondent filed the two affidavits sought the following day, and the question of costs was deferred. 165 The affidavit explaining why the statements to the Court on 10 September 2004 were made was given by Mr Leggatt. He stated: "During the course of argument, I stated a number of times that Colliers had already provided discovery of documents relating to two properties that Mr Williams had regard to. … My understanding of the instructions from Mr Williams as at September 2004 were that he had specific regard to the two properties prior to writing his letter dated 24 October 2004, being the Clelands cold storage facility and the John Lewis Foods site. … The statements I made were consistent with my understanding of Mr Williams instructions at that time. However, I also made it clear that if the Applicant provided a list of comparable properties I would ensure my client provided discovery of those properties." 166 The applicant invites me to infer, on the basis of this affidavit, that Mr Leggatt did not seek specific instructions from Mr Williams in relation to the discovery application. It also relies upon the evidence of Mr Williams, given under cross-examination, where he said (somewhat equivocally) that, if he had seen the letter from the applicant's solicitors, saying that the second respondent would be held to the statement that he only had regard to two comparable properties in making his rental assessment, he would have instructed his solicitors that this was incorrect. The applicant submits that it is not sufficient for Mr Leggatt to assert that his statements to the Registrar were "consistent with (his) understanding of Mr Williams' instructions at the time".

The Applicant's Independent submission on costs 167 Should the Court order that costs be paid by the applicant on a party/party basis, the applicant contends that the second respondent's conduct in relation to discovery also supports the Court making a discount to those costs. Alternatively, it submits that the second respondent be ordered to pay the applicant's costs of the proceedings before the Registrar, and its costs of the application made on the second day of the trial seeking a further affidavit of documents and an affidavit explaining how it came to make the statements that it did to the Registrar. The applicant seeks these costs on an indemnity basis.

The second Respondent's submissions in reply 168 In response, the second respondent does not accept that it gave inadequate discovery. It submits that at the time of the further discovery application before the Registrar, Mr Leggatt was quite correct when he stated that there were only two comparable properties Mr Williams had specific regard to when preparing his assessment. However, just prior to the commencement of the hearing, it became apparent that Mr Williams also had "in the back of his mind" another property that his firm had been involved in leasing. Accordingly, a further affidavit was filed by Mr Williams to this effect. The second applicant submits that it cannot be the case that every property which a real estate agent has in their mind, through years of experience, when giving a rental assessment, gives rise to a discovery obligation. It contends that only once Mr Williams referred to the additional property in his affidavit did documents relating to it become discoverable. 169 In any event, the second respondent rejected the applicant's contention that those who seek indemnity costs must come with "clean hands". In this regard, it referred to R Meagher, D Heydon and M Leeming, Meagher, Gummow and Lehane's Equity Doctrines and Remedies (2002), where the learned authors state at ([3-130]): "For the defence of unclean hands to operate at all, the impropriety complained of "must have an immediate and necessary relation to the equity sued for". In the relationship to the cause of action relied on by the plaintiff is indirect, it is irrelevant. Mere general depravity is not enough." (footnote removed) 170 Accordingly, the second respondent submits that the comments of Einfeld J in Telstra Corporation Ltd are wrong.

Conclusions 171 The relevant principles relating to the imposition of indemnity costs were summarised by Sheppard J in Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 (at 233-4): "In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v. Barnes (supra) at 141 said the Court had a general and discretionary power to award costs as between solicitor and client "as and when the justice of the case might so require." Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v. Preston (supra) at 637; namely, there should be some special or unusual feature in the case to justify the Court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at p 8) in Tetijo, "The categories in which the discretion may be exercised are not closed". Davies J expressed (at p 6) similar views in Ragata (supra). Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp (supra)); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525, Maitland Hospital v Fisher (No. 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal), Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestly JA, Cripps JA, No 40744/1992, 27 September 1993) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records (supra)). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis. It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice." (emphasis added) 172 The insurmountable hurdle that the second respondent faces in relation to the hopeless case submission is that I rejected its application for summary dismissal of the case against it on 29 March 2004. In rejecting that application, I held that causation is a question of fact, and therefore I was unable at that stage to make a finding that the case was "clearly untenable", under the test laid down in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130. This was the requisite test for a summary dismissal at the time, although I note that this position has now changed as a result of an amendment made to the Federal Court Act by the Migration Litigation Reform Act 2005 (Cth). Section 31A of the Federal Court Act now provides that the Court may summarily dismiss a matter where that matter has no reasonable prospect of success. The section expressly provides that a proceeding need not be "hopeless" or "bound to fail" for it to have no reasonable prospect of success. 173 Although the second respondent submits that the facts going to causation were entirely matters within the knowledge of the applicant, and about which it had the onus to adduce evidence, I do not consider that its case was "hopeless", or, in the words of Sheppard J in "wilful disregard of known facts or clearly established law". This is a very high bar indeed to meet. 174 Nor do I consider that the applicant imprudently rejected an offer of compromise. The second respondent's offer can hardly be described as generous. It was an offer for each party to walk away and bear their own costs. Moreover, the offer was made very early in the proceeding, prior to discovery being given by the parties. In addition, the offer appears to have been open for, at most, 24 hours. The 16 February 2004 offer requested a response to the offer no later than 10 am the following day. One can hardly be critical of the applicant rejecting an offer in these circumstances. 175 I also do not consider that the applicant's failure to withdraw the claim at an earlier time constitutes a basis for indemnity costs to be awarded in relation to the entire claim against the second respondent. I am not prepared to infer that it was incorporated in the proceeding in order to prejudice the Court against the respondents. Nor was the deceit claim "irrelevant" in the sense in which the authorities on indemnity costs use that term. An "irrelevant" claim is one that has nothing to do with the matters in dispute between the parties. That can hardly be said to be true in the present case. The arrangements between the first and second respondent with respect to the leasing of the premises are important, given that the second respondent provided a rental assessment to the first respondent, and that assessment was central to the first respondent's attempt to increase the rent. 176 The second respondent does have an arguable case for being paid its costs on an indemnity basis with respect to the deceit claim alone. As previously indicated, the claim should have been withdrawn, at the very latest, following the cross-examination of Mr Allen. An explanation for the internal Colliers email which pricked the applicant's attention was given in the defences of the respondents. No affidavit material was adduced by the applicant to meet those denials. 177 However, I am not inclined to make an order that the applicant pay the second respondent's costs of the deceit claim on an indemnity basis. Those costs, in the context of the entire proceeding, are likely to be insubstantial. Moreover, separating out these costs from those of the rest of the proceeding is likely to be a difficult process which is unwarranted in the circumstances, particularly given that the applicant is already paying those costs on a party/party basis. 178 For the same reason, I also reject the applicant's claim for the costs awarded against it to be discounted by reason of the second respondent's conduct in relation to discovery or, alternatively, for the second respondent to pay the applicant's costs of the proceedings before the Registrar on 10 September 2004, and its costs of the application for further affidavits made on the second day of the trial. While the respondent failed in its discovery obligations, this matter constituted a very small aspect of the dispute between the parties. Again, in those circumstances, I am not prepared to depart from the ordinary course. 179 Accordingly, it is unnecessary for me to vary the order I made on 15 March 2006, namely that the applicant pay the second respondent's costs. Those costs are to be paid on the usual party/party scale.

costs of this hearing 180 There should be no order as to the costs of, and incidental to, this hearing. As between the applicant and first respondent, both have had a measure of success. The applicant has succeeded in persuading me not to grant the first respondent leave to amend its pleadings, and in obtaining restitution of the overpaid rent. On the other hand, the first respondent has persuaded me that it should only pay 20 per cent of the applicant's costs. Accordingly, it is appropriate that the costs of, and incidental to, this hearing fall were they lie with respect to those parties. 181 As between the applicant and the second respondent, it is true that this hearing was brought on the basis of the second respondent's application that costs be awarded on an indemnity basis, and that application has been unsuccessful. However, the applicant did not simply defend the second respondent's application. It resiled from its position that it pay all the second respondent's costs on a party/party basis, and made its own application for indemnity costs to be paid to it in relation to the discovery issue. Accordingly, although the second respondent was unsuccessful in its application on costs, so was the applicant in relation to its application against the second respondent. Costs of and incidental to this hearing should therefore also lie where they fall. In all the circumstances, and in particular taking into account the fact I rejected the second respondent's case for the deceit claim costs to be paid on an indemnity basis, I consider this to be a fair outcome. I certify that the preceding one hundred and eighty-one (181) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg.

Associate: Dated: 15 June 2006 Counsel for the Applicant: Mr J.J. Gleeson

Solicitors for the Applicant: Corrs Chambers Westgarth

Counsel for the First Respondent: Mr P.J. O'Callaghan QC with Mr M.S. Osborne

Solicitors for the First Respondent: Allen & Allen

Counsel for the Second Respondent: Mr P.J. Cawthorn

Solicitors for the Second Respondent: Phillips Fox

Date of Judgment: 15 June 2006

Federal Court Act 1976(Cth)

Trade Practices Act 1974(Cth)

Retail Tenancies Act 1986(Vic)

Retail Tenancies Reform Act 1998(Vic)

Migration Litigation Reform Act 2005(Cth)

REASONS FOR JUDGMENT 1 Judgment in this matter was delivered on 15 March 2006: Lactos Fresh Pty Ltd v Finishing Services Pty Ltd [2006] FCA 219 ("the primary judgment"). However, the question of the form of the final orders, and issues relating to costs, remain outstanding. This judgment deals with those matters. 2 The facts surrounding this proceeding are set out in the primary judgment. Briefly, the applicant is a tenant of industrial premises in Mulgrave, Melbourne ("the premises"). The first respondent is the landlord of those premises. The first respondent purported to give written notice to the applicant of a rental increase, as was provided for under the terms of the lease ("the notice"). The first respondent attempted to increase the rent significantly. The applicant failed to object to the notice within 30 days after it was given. If it had objected within that period, the lease provided for an independent third party to assess the proper rent to be paid. However, having not objected in time, the lease provided that the rent specified in the notice was the new rent payable. 3 As against the first respondent, the applicant claimed breaches of an implied duty of good faith and fair dealing, and unconscionable conduct in contravention of s 51AA of the Trade Practices Act 1974 (Cth) ("the TPA"). On the first day of the trial, the applicant amended its statement of claim to also include a claim that the form of the notice was invalid, or at least to make it clear that this point was being taken. 4 The second respondent is a commercial real estate agent. At the request of the first respondent, it provided a letter addressed to the first respondent, giving its opinion of the market rental rate applicable to the premises. This letter was incorporated in the notice as an attachment. 5 As against the second respondent, the applicant claimed it had engaged in misleading or deceptive conduct in contravention of s 52 of the TPA. 6 In the primary judgment, I upheld only one of the applicant's various claims against the first respondent, namely that the form of the notice was defective, and that the notice was therefore invalid. I found that the applicant would not have succeeded in relation to its claim of unconscionable conduct. I made no finding as to the applicant's claim for breach of good faith. 7 In addition, in its submissions, the applicant claimed that the notice was invalid as a matter of substance. This was because, so it was submitted, the first respondent had failed to take into account a series of matters that it was obliged, under the lease, to consider when arriving at its assessment of the proper rent. I held that the applicant required an amendment to its pleading to make that claim. I declined to grant leave to make such an amendment. 8 The claim against the second respondent was dismissed, with costs. 9 At the time of handing down the judgment, I made a declaration that the notice was invalid. However, I ordered that the parties file and serve proposed minutes of orders reflecting the findings made in the judgment, and that there be a further hearing in relation to those final orders, as well as any issues in relation to costs. 10 The primary issue to be resolved in relation to the final relief to which the applicant is entitled, as against the first respondent, arises from the following circumstances. After the applicant failed to object to the notice in time, the first respondent insisted upon the payment of the increased rent. Following correspondence passing between the parties, and negotiations being held, the applicant agreed to pay the increased rent "under protest", but indicated that it would proceed to have an independent valuation prepared. Subsequently, proceedings were instituted. 11 The question to be determined is, having regard to my finding that the notice was invalid, is the applicant entitled to have all, or some portion, of the money that it has paid "under protest" remitted? 12 The matter is complicated by the fact that since the primary judgment was delivered, the first respondent has given a fresh notice, in what appears to be proper form, seeking a rental increase in the same amount as was sought under the original notice, backdated to 1 March 2003, the date from which that original notice was said to be operative ("the further notice"). The applicant objected to that notice, and arrangements have been made for an independent assessment of the proper rent to be undertaken, pursuant to the terms of the lease. There is an issue as to whether any such assessment can apply retrospectively. If that course is open, it might render moot the question of the return of the payments made "under protest". 13 The second issue to be resolved as between the applicant and the first respondent is the question of costs. Given that the applicant was only successful on one of the claims made against the first respondent, and given that that claim was a relatively narrow one, introduced quite late into the proceedings, should the applicant be entitled to all, or only some, of its costs of this proceeding? 14 The only issue remaining to be determined as between the applicant and the second respondent is the question of costs. The primary issue is whether the second respondent is entitled to have its costs paid on an indemnity, rather than party/party, basis. A secondary issue is whether the applicant is entitled to have the costs it will have to pay discounted by virtue of the second respondent's conduct in relation to discovery.

Preliminary question Involving the further notice 17 The first respondent claims that prior to resolving any question in relation to unjust enrichment or restitution, I should deal with the question of whether the further notice served upon the applicant has retrospective effect. The first respondent served the further notice on 31 March 2006. This was approximately two weeks after I delivered the primary judgment. The further notice was in the following terms: "The Manager Lactos Fresh Pty Ltd (formerly Nobi Holdings Pty Ltd) 42-44 Glenvale Crescent MULGRAVE 3170 Dear Sir/Madam, Re: Rental Review - 1 March 2003 We refer to clause 3.2.2 of the lease made 1 September 1999. The lessor, hereby gives notice to the lessee, pursuant to clause 3.2.2 of the lease made 1 September 1999, that it assesses the proper rent for the premises for the period commencing 1 March 2003 to be $435,920.00 per annum (exclusive of GST) Yours faithfully, [signed] Finishing Services Pty Ltd" 18 The issue I must resolve is whether the further notice can operate with retrospective effect. If the independent third party assessed the relevant rent to be equal to or greater than that amount assessed by the first respondent, and if that notice could operate retrospectively from a date prior to the date when the applicant commenced paying the increased rent "under protest", the question of restitution could be avoided. That is, the question would be moot as the applicant would be obliged to pay the increased amount (and perhaps more) to the first respondent by virtue of the further notice. 19 In the primary judgment, I made the following comments in relation to this issue: "In determining what orders may be appropriate, the parties may wish to consider the applicability of the principles laid down in United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 ("United Scientific Holdings") in relation to the retrospective application of rent reviews completed outside the period provided for under the lease. In United Scientific Holdings, the House of Lords held that there was nothing in that case that displaced the presumption that strict adherence to the timetables specified in the relevant rent review clauses was not of the essence of the contract. There were in fact two separate cases decided in United Scientific Holdings. The first involved a rent review on a 99 year lease. The review was to occur each ten years after the commencement of the lease, with the new rent to commence on 31 August of that year. The rent review mechanisms provided that the revised rent was to be determined by agreement, or failing agreement, by arbitration "during the year immediately preceding" the 10 year period to which that rent would relate. By the end of the first 10 year period, such agreement had not been reached, and nor had the matter been referred to arbitration. The second case involved a 21 year lease, commencing upon 8 April 1968. The rent was to be reviewed every seven years. The relevant machinery provided for the lessor to serve a notice on the lessee, and the lessee to serve a counter-notice accepting the proposal or making a counter-offer. The parties were then to negotiate. If agreement had not been reached after a certain time, the lessor was required to appoint an independent valuer. In this case, the lessor's notice was served within time. However, no agreement had been reached by the parties, and the lessor failed to appoint an independent valuer within the time provided for under the lease. In both cases the House of Lords held that time was not of the essence in relation to the clauses in the leases which the lessors had not complied with. The lessors had not lost the opportunity to have the rent for the next rental period reviewed by virtue of not complying with the time periods set down in the rent review machinery clauses. The potential significance of the case for this proceeding in terms of any final orders that may be made is as follows. The House of Lords held that once the relevant terms were complied with (namely an arbitration concluded in the first case and independent valuation conducted in the second case), the new rent would be payable from the date that the lease provided that the new rental period was to commence. That is, despite the lessors' tardiness, not only did they maintain their rights to rent reviews, but once the rent reviews were completed, the revised rent applied retrospectively as if those reviews had been completed on time." 20 The first respondent relies on United Scientific Holdings to assert that the further notice operates retrospectively back to 1 March 2003. To the extent that it is necessary, it seeks leave to file an amended defence and cross-claim so as to seek the appropriate declaratory relief to this effect. The declarations sought are that the further notice is valid, and that the rental for the period commencing 1 March 2003 is that which will be determined in accordance with the rent review machinery in the lease (namely the amount assessed as the proper rent by the independent third party). 21 The applicant objects to the Court granting the first respondent leave to file and serve an amended defence and cross-claim. It submits that it has informed the first respondent since early 2003 that it rejected the validity of the notice, yet the first respondent did not seek to protect its rights by issuing a provisional further notice. The applicant contends that the first respondent has provided no explanation as to why it did not take this course or plead the issue of its entitlement to do so. 22 The applicant submits that the first respondent is now seeking to implement the rent review machinery relating to independent third party assessment of the proper rent to be paid, despite having rejected the applicant's offer to take this course on 20 March 2003. At that time, the first respondent rejected the applicant's offer because the first respondent asserted it was entitled to the amount specified in the notice by reason of the applicant not objecting in time, and therefore the first respondent was not bound to submit to any third party assessment of the rent. 23 The applicant also submits that the determination of the issues arising under the cross-claim would require further evidence, and, in any event, would have remote prospects of success. 24 The applicant relies upon the following passage from Lakatoi Universal Pty Ltd v LA Walker [2000] NSWSC 561 at [48] per Einstein J to support its objection to the grant of leave to file and serve an amended defence and cross-claim: "It is one thing for the court to case manage proceedings in terms of carrying out its best endeavours to ensure that unnecessary multiplicity of proceedings are avoided wherever possible. It is entirely another thing once a complex hearing extending over some 10 weeks is then followed by detailed findings on a multiplicity of issues binding all the parties, for one party then and only then, to seek to proceed against another party on a cross-claim, relying upon aspects of the judgment to sustain that claim." 25 The applicant contends allowing the first respondent to amend its pleading would result in the applicant being required to put on further evidence by way of defence. It says that it would raise an estoppel defence to the proposed cross-claim, and that would require evidence to be led as to the issue of reliance. 26 The applicant submits that I should take into consideration the fact that an application by it to amend its pleading was rejected in the primary proceeding on the basis that further evidence would need to be led by the respondents in answer the applicant's new claims, and I was not prepared to permit the case to be reopened. The applicant contends that the same approach should be taken to the first respondent's proposed cross-claim. 27 In response, the first respondent relies upon the fact that the applicant's pleading was only amended to challenge to the validity of the form of the notice on the first day of the trial, and that it had no "notice" that the validity of the form of the notice was at issue. It submits that it therefore had no reason to issue a further notice, even on a without prejudice basis to its position that the notice was entirely valid. 28 In order to seek the declaratory relief that it does the first respondent is plainly required to seek leave to amend its pleading to include a cross-claim. There is no other basis upon which I could grant the declaratory relief sought. 29 As I said in the primary judgment when considering the application of the applicant to amend its pleading following the close of evidence, the strength of the case, in relation to the proposed amendment, is a relevant consideration when determining whether to grant leave to amend. I do not consider that the first respondent's proposed cross-claim has strong prospects of success. 30 In addition to United Scientific Holdings, the first respondent relies upon the decision of the New South Wales Court of Appeal in GR Mailman & Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 per Gleeson CJ as authority for the proposition that time is presumed not to be of the essence in relation to the right to invoke a rent review. These cases acknowledge that the presumption is rebuttable by sufficient "contra-indications" in the lease itself or the surrounding circumstances. 31 There plainly is such a "contra-indication" in the lease. Clause 3.2.3 provides: "Failure to Give Notice The Lessor shall not by reason of the Lessor's failure to give notice of the rent which it proposes by a Review Date or within a reasonable period thereafter forfeit its right under this Clause 3.2 to have the rent reviewed as at the relevant Review Date so long as the notice is given before the next Review Date." (emphasis added) 32 This clause acknowledges the right of the Lessor to give its notice late, but only if it is served before the next "Review Date". The key area of dispute between the applicant and the first respondent is how the term "Review Date" should be interpreted. That term is defined at the commencement of clause 3.2. Clause 3.2 is headed "Rental Determination". The following words appear under that heading: "Where in this lease it is provided that the Annual Rent shall be determined in the manner set out in this clause the following provision shall apply in respect of the period for which such determination is undertaken (the commencement date of such period being hereafter referred to as a "Review Date")…" 33 The clause then goes on to provide two methods for determining the Annual Rent. Clause 3.2.1 provides: "LESSOR'S NOTICE The Lessor shall be entitled on each anniversary of the Commencement Date of this Lease and of any further term and on the Commencement Date of any further term to serve a written notice upon the Lessee fixing the Annual Rent (subject as herein provided) at an annual increase of 3% per annum (compounding) or by the Annual Rent being adjusted by reference to the Consumer Price Index for the purposes of this clause and clause 3.2.2 whichever is the higher. The formula for calculating the adjustment of rental by reference to the Consumer Price Index is set out in Schedule 1." 34 Clause 3.2.2 provides the second method of determining the rent. It is described as the "Market Rent Review" and the clause was set out in the primary judgment. In brief, it provides the machinery for the lessor to give notice to the lessee, every three and a half years, of what it assess to be the proper rent for the premises. It provides a timetable for the lessee to object to the notice and for a third party valuation procedure to be undertaken. A notice under clause 3.2.2 may be given "[u]pon any day being not more that six months prior to 1 March 2003 and (if the Lessee exercises its option to renew) not more than 6 months prior to 1 September 2006 and 1 March 2010". 35 The applicant submits that the introductory words to clause 3.2 make it clear that the clause provides two methods for determining rent - the method set out in clause 3.2.1 and the method set out in 3.2.2. It contends that the clause makes it plain that the commencement date for a determination conducted under clause 3.2 is described as the "Review Date". Accordingly, both the commencement date from which a determination under clause 3.2.1 applies, as well the commencement date from which a determination under clause 3.2.2 applies, are "Review Dates". 36 The applicant therefore contends that the next "Review Date" was the date from which any increase in rent applied by virtue of a determination under either clause 3.2.1 or clause 3.2.2. It points to the fact that the first respondent gave notice on 1 September 2003, pursuant to clause 3.2.1, of a three per cent per annum increase, applicable from the date of that notice. As a result, the applicant submits that by reason of the first respondent giving a notice under clause 3.2.1 on 1 September 2003, from that date onwards the first respondent was precluded from serving a late notice under 3.2.2. 37 In response, the first respondent contends that clause 3.2.1 actually provides for an automatic increase of three per cent or CPI, whichever is the higher. As such, the process of rental increase provided for under that clause could not properly be considered a "review", and therefore the commencement date of a rent increase pursuant to 3.2.1 cannot be a "Review Date". 38 There are two, interrelated, issues involved in the first respondent's argument. First, is clause 3.2.1 is properly characterised as providing for an automatic increase in rent, rather than a "rent review"? And second, is the objective meaning of "rent review" relevant in circumstances where that term in defined by clause 3.2? 39 Turning to the first question, read in isolation, clause 3.2.1 does not provide for an automatic increase in rent. Any increase pursuant to this clause appears to be dependent upon the lessor serving a written notice on the lessee. However, the first respondent points to the "Reference Schedule" to the lease. Item 11 in this schedule is relevantly in the following terms: "(a) The commencement rent shall be $244,152.00 per annum. (b) The rent shall be increased annually with an agreed 3% per annum increase or an annual CPI increase whichever is the higher. Further the rent may increase (subject to clause 3) at the expiration of each 3 ˝ years from the commencement date to a market rental as defined in clause 3 and thereafter shall increase annually at 3% or CPI whichever is the higher until the termination of this lease. (c) The Lessee will be liable to pay the increased annual rent from the commencement of the year in which it is to take effect whether or not the Lessor has notified it of the amount to which the annual rent has been varied. However if the Lessee continues to pay rent at the rate of the current annual rent until the Lessor notified it of that amount, it will not for that reason only be in default for non-payment of rent. When the lessor notified it of the amount, any necessary adjustment is to be made on the day on which rent is next due." (emphasis added) 40 Item 11 appears to reflect the provisions of clause 3.2, but suggests that the annual rent increase is automatic. While item 11 is not specifically referred to in the main body of the lease, it is incorporated in the lease through clause 2, which provides that the lessee pay the rent specified in the Reference Schedule. 41 The first respondent submits that as the annual rental increase provided for under the lease is automatic, it cannot relevantly be described as a "Rent Review". It relies upon Pasen v Buy-Rite Discounts Pty Ltd (1992) V ConvR ¶54-431 in support of this submission. That case dealt with the issue of whether a provision in a lease was a "rent review clause" for the purposes of s 10 of the Retail Tenancies Act 1986 (Vic). It was held that a clause that automatically increased the rent over the term of the lease was not a "rent review clause" for the purposes of the legislation. Brooking J, with whom Marks and Smith JJ agreed, stated (at 65,091): "In my view, a lease which fixes the rent for the whole of the term by enabling the rent throughout the term to be ascertained from within the four corners of the lease does not, according to the ordinary use of language, provide for a review of the rent if it provides for an increase or increases or decrease or decreases in the rent in the course of the term, whether by way of simply stating the new amount or amounts or by way of requiring a calculation to arrive at the new amounts or amounts. The rent is fixed by the lease itself throughout the term and the lease in fixing different amounts is not providing for a review of the rent: it is simply fixing a rent which is not uniform throughout the term." 42 The first respondent noted Brooking J's use of the term "fix" and the use of that term in 3.2.1 in support of its submission that clause 3.2.1 does not provide for a "Rent Review" 43 Ultimately, the hurdle that the first respondent would face in relation to its preferred interpretation of the term "Review Date" is that this term is expressly defined at the beginning of clause 3.2. Whether the process provided for in clause 3.2.1 can objectively be described as a "rent review" seems to be immaterial to me. The question that would need to be resolved is not what the ordinary meaning of the term is, but rather what the parties intended it to mean in the context of the lease. When the lease itself expressly says what the meaning of the term is, regard must be had to that meaning. 44 As a result, my inclination would be to regard the issue of whether clause 3.2.1 operates to provide a rental increase on written notice, or an automatic increase, as immaterial. Even if clause 3.2.1 was interpreted, by virtue of item 11, as providing for an automatic increase (and my view is that it does, as discussed below under the heading "Quantum of Overpaid Rent"), that automatic increase is most likely defined by clause 3.2 to be a "Rent Review". 45 Without finally resolving the issue, I consider that the first respondent's proposed cross-claim does not have significant prospects of success. I have taken this into account in considering whether to exercise my discretion to allow the first respondent to amend its pleadings. I have also taken into account the fact that further evidence would be needed in order to finally determine this issue, particularly in relation to the applicant's defence to the proposed cross-claim. Such evidence would be led not only after the case had closed, but also after judgment had been given. There must, at some point, be an end to litigation. I have some sympathy with the first respondent's complaint that the validity of the notice was only squarely raised just prior to trial. However, once the matter was raised, there was no barrier to the first respondent seeking leave during the hearing to amend its pleading to incorporate a cross-claim. 46 Accordingly, leave to amend the first respondent's pleadings is refused.

At a glance

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Judgment (22 paragraphs)

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Legislation Cited (6)

Cases Cited (24)