Metro Hotel Sydney Pty Ltd v Kol Tov Pty Ltd

LEGISLATION CITED : Uniform Civil Procedure Rules 2005, rr 42.19, 42.20

Australian Securities Commission v Aust-Home Investments Ltd [1993] FCA 585; (1993) 44 FCR 194; 116 ALR 523 Australian Securities Commission v Berona Investments Pty Ltd (1995) 18 ACSR 772 Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 Coleman v City of Melville (unreported, Supreme Court of Western Australia, 22 September 1994 per Scott J) Compadres Australia Pty Ltd v Waterfront Place No 2 Pty Ltd (unreported, Supreme Court of Queensland, 15 August 1995 per MacKenzie J) Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497 Foukkare v Angreb Pty Limited [2006] NSWCA 335 Inprint Ltd v K & D Media Pty Ltd (Administrator Appointed) (unreported, Federal Court of Australia, 22 December 1995 per Einfeld J) CASES CITED : Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534 McNamara v Bao San [2010] NSWSC 809 Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120 Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 Ohn v Walton (1995) 36 NSWLR 77 One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 Oshlack v Richmond River Council (1998) 193 CLR 72 Pentroth Pty Ltd v Kirschild Pty Ltd (2006) 96 SASR 129 Perre v State of New South Wales [2009] NSWLEC 51 Re Minister For Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 Seventh Mingcourt Pty Ltd v The Honourable Carmen Lawrence (unreported, Federal Court of Australia, 1 August 1996 per Branson J) The South East Queensland Electricity Board v Australian Telecommunications Commission (Federal Court of Australia, 10 February 1989)

(P1) Metro Hotel Sydney Pty Ltd (P2) Transmetro Corporation Ltd PARTIES : (D1) Kol Tov Pty Ltd (D2) Kol Tov Operations Pty Ltd ACN 112 248 352 (D3) Benjamin Saul Caplan

COUNSEL : Plaintiffs - Mr Gordon McGrath Defendants - Mr Jonathan Kay-Hoyle

SOLICITORS : Plaintiffs - Staunton & Thompson, Manly Defendants - Somerset Ryckmans

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

2007/257788 Metro Hotel Sydney Pty Ltd and Transmetro Corporation Ltd v Kol Tov Pty Ltd ACN 112 248 352; Kol Tov Operations Pty Ltd and Benjamin Saul Caplan JUDGMENT Ex Tempore - Costs 1 HIS HONOUR: This is a judgment relating to the payment of costs in these proceedings. The proceedings were originally fixed for trial for 10 days commencing this week. After they were partially settled, the fixture was reduced to four days. Subsequently, they were completely settled. That was effected by the making of orders. The orders were essentially in the form that both the plaintiffs' claim and the defendants' cross-claim be dismissed.

2 The proceedings arose from a hotel management agreement whereby the first and second defendants engaged the plaintiffs to manage a hotel. Although there were various refinements and complications, the plaintiffs' claim was essentially that the hotel management agreement continued in effect. The first and second defendants' cross-claim was for a declaration that it had been validly terminated and was at an end. There was interlocutory injunctive relief that meant that the status quo as to occupation and operation of the hotel was maintained during the period of about three years that the proceedings were on foot.

3 The settlement was preceded by a very important supervening event, namely, that upon the settlement of a sale of the hotel, the hotel management agreement was in any event undoubtedly brought to an end. This essentially rendered the proceedings otiose.

4 Prior to the enactment of the Uniform Civil Procedure Rules 2005, the rules relating to costs in settled proceedings in this Court, as in many others, were taken to be as stated by McHugh J in the High Court in Re Minister For Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. His Honour said at 624 - 625:

"In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs [ Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534]. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order [ Latoudis [1990] HCA 59; (1990) 170 CLR 534 at 543, 566-568]. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties [ Australian Securities Commission v Aust-Home Investments Ltd [1993] FCA 585; (1993) 44 FCR 194 at 201; 116 ALR 523 at 530]. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action [ Australian Securities Commission [1993] FCA 585; (1993) 44 FCR 194 at 201; 116 ALR 523 at 530]. …

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. This is perhaps the best explanation of the unreported decision of Pincus J in The South East Queensland Electricity Board v Australian Telecommunications Commission [Federal Court of Australia, 10 February 1989] where his Honour ordered the respondent to pay 80 per cent of the applicant's taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. But such cases are likely to be rare.

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases [See, for example, Australian Securities Commission [1993] FCA 585; (1993) 44 FCR 194; 116 ALR 523; Seventh Mingcourt Pty Ltd v The Honourable Carmen Lawrence unreported, Federal Court of Australia, 1 August 1996 per Branson J; Coleman v City of Melville unreported, Supreme Court of Western Australia, 22 September 1994 per Scott J; Compadres Australia Pty Ltd v Waterfront Place No 2 Pty Ltd unreported, Supreme Court of Queensland, 15 August 1995 per MacKenzie J; Inprint Ltd v K & D Media Pty Ltd (Administrator Appointed) unreported, Federal Court of Australia, 22 December 1995 per Einfeld J; Australian Securities Commission v Berona Investments Pty Ltd (1995) 18 ACSR 772.]."

5 The statutory rule presently relevant was included in the Uniform Civil Procedure Rules 2005 ("the UCPR"). It is r 42.20:

"(1) If the court makes an order for the dismissal of proceedings, either generally or in relation to a particular cause of action or in relation to the whole or part of any claim, then, unless the court orders otherwise, the plaintiff must pay the defendant's costs of the proceedings to the extent to which they have been dismissed." That rule is juxtaposed to r 42.19, which deals with the costs of discontinued proceedings.

6 One possible reading of r 42.20 is that it should be taken to refer only to proceedings dismissed after a hearing on the merits. If it were read that way, it would leave the law as laid down in Lai Qin supra totally untouched. 7 That, however, is not the way in which the rule has been read in the Court of Appeal. It has been read instead as including dismissals by consent without a hearing on the merits, as well as dismissals after a hearing. The Court of Appeal has made it plain that this is the view that it takes of the incidence of r 42.20. This means, of course, that it intrudes upon the pattern laid down in Lai Qin: see Fordyce v Fordham (2006) 67 NSWLR 497 at [87]; Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [48], [53]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 at [78]. However, it is made plain in the same cases that r 42.20 does not give rise to a presumption that costs will be ordered against the plaintiff, but merely creates a starting point that will govern costs unless the outcome is displaced by a discretionary decision.

8 The rules that now apply in this field were admirably summarised by Hallen AsJ in McNamara v Bao San [2010] NSWSC 809 at [12], where his Honour said:

"12 The following principles may be regarded as relevant in determining who is to bear the burden of costs in a case where the proceedings are dismissed before a final hearing:

(a) Costs discretions are truly discretionary: see Oshlack v Richmond River Council (1998) 193 CLR 72 at 84 and there are no absolute rules;

(b) The purpose of a costs order is to compensate, or indemnify, the person in whose favour it is made, not to punish the person against whom it is made: Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ;

(c) Rule 42.20 of the UCPR does not give rise to a presumption that costs will be ordered against the Plaintiff: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335 at [65]; Pentroth Pty Ltd v Kirschild Pty Ltd (2006) 96 SASR 129; Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [53]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32. However, the rule does create a starting point by requiring "… the plaintiff must pay the defendant's costs of the proceedings …" unless that outcome is displaced by a discretionary decision ("unless the court otherwise orders");

(d) Generally, there must be some proper justification, sound positive ground, or a good reason, for departing from the ordinary position: Fordyce v Fordham at [2] per Santow JA; Australiawide at [54] per Bryson JA; circumstances in which it has been held appropriate to depart from the ordinary position include where the proceedings have been rendered unnecessary by circumstances beyond the plaintiff's control; where the plaintiff achieved practical success in the proceedings, or where costs have been significantly increased by the unreasonable conduct of the defendant.

(e) The Plaintiff should be the moving party on an application for an alternative costs order: Bitannia at [70] per Basten JA. If facts are to be relied upon to found the court making a different order, the Plaintiff will bear the onus of proving the relevant facts;

(f) Where the proceedings are dismissed prior to any hearing on the merits, "the Court cannot try a hypothetical action between the parties" to determine the question of costs: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624; Metro Chatswood Pty Ltd v CRI Chatswood Pty Ltd [2007] NSWSC 1120 at [35];

(g) It may be necessary to analyse the whole of the proceedings to determine the appropriate costs order: Fordyce at [67] per McColl JA. A relevant consideration is whether the Plaintiff acted reasonably in commencing the proceedings and whether the defendant acted reasonably in defending them: Australian Securities Commission v Aust-Home Investments Ltd at 201 (cited with approval in Foukkare ); all the relevant circumstances, and not just the fact of dismissal, should be considered;

(h) It is also important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event, or settlement, so removes, or modifies, the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs by the successful party. It is the latter type of case that usually creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs: One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at 553; cited with approval in Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 per Davies AJA (with whom Mason P and Meagher JA agreed) at [5];

(i) The distinction between the two categories referred to above is often helpful in exercising the costs discretion, notwithstanding that neither category can be precisely defined, the boundary between them is unclear and other factors may be relevant: Bitannia per Basten JA at [79]-[81]; Perre v State of New South Wales [2009] NSWLEC 51 at [49];

(j) The rule requires the court to make such order as it thinks just in the particular circumstances of the case."

9 The plaintiffs rely heavily on r 42.20. Furthermore, to the extent that the rules in Lai Qin apply, they say that there was a surrender by the first and second defendants of their position. They say that the plaintiffs remained in possession of the hotel throughout the litigation and, until the termination that ultimately took place, they obtained all the benefits that they were entitled to under the contract. In those circumstances, they should be entitled to costs. Furthermore, there was unreasonable conduct in or relating to the litigation on the part of the first and second defendants, which should lead to the same result.

10 Important in determining this matter is the distinction made between the two relevant types of case set out in 12 of Hallen AsJ's judgment in McNamara supra. The plaintiffs say that the first and second defendants, after litigating for some time, surrendered. The first and second defendants say that what is embodied in the orders is a settlement in which each side abandoned the claim that it made and that that occurred after the supervening event of the hotel management agreement coming to an end in the circumstances that have been mentioned.

11 I do not regard this as a case where it can be said that one side surrendered. Although the orders that were made were in terms of dismissal, they were in effect a trade-off by each side of its position as against the other by way of compromise of the proceedings and this occurred after the supervening event that the subject matter of the proceedings had ceased to exist. In those circumstances, it appears to me that what occurred falls within the second class of case dealt with in 12, and not the first class

12 So far as the question of the reasonableness of the first and second defendants' conduct is concerned, it is said that they ambushed the plaintiffs by terminating the agreement as they did after notice of breach. It does not seem to me that this can fairly be characterised as an "ambush" and it does not appear to me to be unreasonable conduct on the first and second defendants' part.

13 The other head of unreasonable conduct that was alleged was the giving by the first and second defendants of a large number of breach notices, which is said to have complicated and protracted the litigation. Without going into detail as to this, essentially the breach notices - or at least those that were ultimately relied on - complain about different breaches of which it was said the plaintiffs were guilty. In the end, I do not think that the first and second defendants' conduct in relation to these matters can be characterised as unreasonable in the requisite way

14 This leads me to the conclusion that, rather than the proceedings simply being abandoned by one side, they were compromised after the occurrence of a vital supervening event. There was no unreasonable conduct on the first and second defendants' part. In those circumstances, it is my view that there should be no order as to costs as between the plaintiffs and the first and second defendants.

15 Separate arguments were put in relation to costs relating to the third defendant, who was or had been a principal in the defendant companies. Although these causes of action were somewhat different, once the third defendant had been joined, it seems to me that essentially the litigation was conducted against and by the defendants collectively. I do not propose to separate out the proceedings insofar as they relate to the third defendant for a separate costs regime.

16 The result will be that as between the plaintiffs and all the defendants, there will be no order as to the costs of the proceedings. The argument as to costs is part of the costs of the proceedings and will be dealt with accordingly.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.