These proceedings were commenced on 4 September 2023 by filing a statement of claim. The plaintiff sought possession of a property in Rose Bay belonging to the first and second defendants, possession of two properties in Boyd St, Tweed Heads ("the Boyd St properties") belonging to the second and third defendants, judgment against the first defendant for $27,643,298.85 pursuant to five different loans, judgment against the second defendant for $27,169,844.64 in respect of four of the five loans claimed against the first defendant, and judgment against the third defendant for $6,027,201.94 in respect of one of the loans claimed against the second and third defendants.
Since the commencement of the proceedings the plaintiff has been paid in full in respect of the loan amount being claimed against the third defendant. Accordingly, the plaintiff intends to discontinue the proceedings, but wishes to do so without being required to pay the costs of the third defendant.
The five loans were made to five different companies. The first defendant was alleged to be the guarantor of all five of those loans. The second defendant was alleged to be the guarantor of four of those loans and the third defendant was alleged to be the guarantor of one of those loans, being a loan to Onward Business Consultants Pty Ltd ("OBC").
The mortgages were given by the defendants to secure their obligations as guarantors.
On 3 October 2023, the third defendant filed a defence denying that he was the guarantor of the OBC loan but did not admit the paragraphs that alleged that the Boyd St properties were mortgaged to secure his obligations as a guarantor.
On 15 November 2023, the solicitor for the plaintiff sent an email to the solicitors for the three defendants attaching what was described as a revised amended statement of claim. The additional amendments from an earlier circulated proposed amended statement of claim involved deleting claims for possession in respect of the Boyd St properties. The email said that the plaintiff no longer required possession of those properties because receivers were selling the land as it was. The proposed amended statement of claim made no other amendments affecting the third defendant.
At a directions hearing on 23 November 2023, the Registrar ordered by consent (inter alia) that the plaintiff had leave to file and serve by 27 November 2023 its amended statement of claim served under cover of the email of 15 November 2023. The amended statement of claim was not served by 27 November 2023.
At a directions hearing on 7 February 2024, the Registrar ordered by consent that the time for the plaintiff to file and serve its amended statement of claim was extended to 9 February 2024 and that the defendants were to file any defences by 4 March 2024. The amended statement of claim was duly filed on 9 February 2024.
On 5 February 2024, the plaintiff's solicitors sent an email to the third defendant's solicitors resisting answering a further request for particulars made by the third defendant's solicitors. The plaintiff's solicitors reiterated that, as was evident from the plaintiff's proposed amendments to the statement of claim, the plaintiff no longer sought any relief in relation to the Boyd St properties. The email went on to say:
• During the week commencing Monday 9 October 2023, the receivers undertook a sales program for the Properties [at Boyd St] and for XXX Wharf St, Tweed Heads, NSW (which as you would be aware is a neighbouring property - it was anticipated that XXX Wharf St Tweed Heads and the Properties may be valued more by the market if the Properties were offered to sale at the same time).
…
• After receiving bids on the Properties both individually and jointly, the receivers decided to exchange a contract for XXX Wharf St, Tweed Heads, NSW. The sale proceeds from the sale of this property will (assuming the sale completes) be sufficient to repay in full the debt which your client owns as guarantor of the loan which Perpetual made available to Onward Business Consultants Pty Ltd. Settlement is expected to occur on 28 February 2024, after which time we expect to receive instructions to discontinue proceedings against your client with no order as to costs.
The solicitors for the third defendant did not respond to that email, nor did they file their defence to the amended statement of claim by 4 March 2024. When the proceedings came before the Registrar again on 4 April 2024 the Registrar extended the time for the defendants to file and serve defences and any cross claim to 15 April 2024.
On 5 April 2024, the plaintiff's solicitors sent an email to the third defendant's solicitors noting that OBC had entered into contracts for the sale of XXX Wharf St, Tweed Heads ("the Wharf St property"), and that the settlement of that property had occurred. The email went on to say:
Accordingly, the debt owed by your client the subject of the above proceedings has been repaid.
In these circumstances we are instructed to offer to discontinue the proceedings against your client with no order as to costs. May we please have your response within 7 days of today.
The solicitors for the third defendant did not respond to that email but, rather surprisingly in the light of what was said in the email, they filed a defence to the amended statement of claim on 16 April 2024.
Rule 42.19 of the Uniform Civil Procedure Rules 2005 (NSW) relevantly provide:
(1) This rule applies to proceedings that are discontinued by the plaintiff, as referred to in rule 12.1.
(2) Unless the court orders otherwise or the notice referred to in rule 12.1(2) otherwise provides, the plaintiff must pay such of the defendant's costs as, at the date on which the notice of discontinuance was filed, had been incurred by the defendant in relation to each claim in respect of which the proceedings have been discontinued.
In Furnish & Finish Pty Ltd v Hollands [2020] NSWSC 1593 the plaintiff sought and obtained ex parte relief pursuant to a restraint covenant in the defendant's employment contract. After some interlocutory skirmishing, the plaintiff indicated about two months after the proceedings commenced that it would not pursue the final relief in the summons and sought to discontinue the proceedings. Justice Ward (then the Chief Judge in Equity) said:
[29] The relevant principles applicable to the current application were not in dispute. The award of costs is a matter within the discretion of the Court, whether there is a discontinuance or dismissal of proceedings or, indeed, where there has been a hearing on the merits. That discretion is recognised as a broad one, but it must be exercised judicially and consistently with the overriding mandate provided for under the Civil Procedure Act 2005 (NSW) (Civil Procedure Act) in respect of the conduct of litigation in this Court (see ss 56-59 of the Civil Procedure Act).
[29] On dismissal of the proceedings, the usual order is for the plaintiff to pay the defendant's costs of the proceedings, subject to other specific orders as to costs of particular steps in the proceedings (r 42.20 of the UCPR). Similarly, on discontinuance of the proceedings, again subject to an order otherwise, the plaintiff must pay the costs of the defendant up to the discontinuance (s 42.19 of the UCPR).
[30] Both r 42.19 (which operates where there is a discontinuance) and r 42.20 (which operates where proceedings are dismissed) therefore expressly contemplate that the Court, in the exercise of its discretion, may make an order otherwise than as provided under those rules.
[31] In Chen v Fang [2019] NSWSC 960, when considering r 42.19(2), Darke J said (at [53]-[54]):
53. The effect of this rule is to create a default position concerning costs for discontinued proceedings. However, the rule does not create a presumption; it remains for the discontinuing party to show "some positive ground or good reason for departing from the ordinary course" of awarding costs pursuant to that rule (see Ralph Lauren 57 Pty Limited v Byron Shire Council [2014] NSWCA 107; (2014) 199 LGERA 424 at [21]; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 at [54]; Fordyce v Fordham (2006) 67 NSWLR 497; [2006] NSWCA 274 at [84]).
54. In some circumstances, a positive ground or good reason may include a supervening event that removes or modifies the subject matter of the dispute (Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 at [5], citing One.Tel Ltd v Commissioner of Taxation (2000) 101 FCR 548 at 552-3; see also Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [50]-[51]). …
[32] One matter for consideration in the exercise of the discretion is the reason the proceedings were discontinued (see Ritchie's Uniform Civil Procedure NSW at [42.19.5]).
…
[34] It is abundantly clear on the authorities that where there has been no hearing of the merits of the case (and that is here the case both at the interlocutory stage - where the Restraints were made by consent and without admissions - and ex hypothesis (sic) at the final stage which has not yet been, and will now not ever be, reached), it is not appropriate to embark on a hearing of the merits in order to determine the question of costs on the discontinuance or dismissal of the proceedings (see Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [4], per Bryson JA; Renton v Kelly [2018] NSWSC 1377 at [36]; Fordyce v Fordham (2006) 67 NSWLR 497; [2006] NSWCA 274 at [79], per McColl JA; and, more recently, Freelancer International Pty Ltd v Matthew O'Kane [2019] NSWSC 159 (Freelancer International v O'Kane) at [61]).
[35] The difficulty in the present case is that there has been no hearing on the merits of any of the issues in the proceedings; and satellite litigation in relation to costs is clearly to be avoided. It is well recognised that, in those circumstances, ordinarily for there to be a costs order in favour of one party, it is necessary to show that the other party's conduct has been so unreasonable as to warrant such an order (applying the principles applicable in Lai Qin). As I indicated in Freelancer International v O'Kane, it is difficult to see why the same kind of considerations would not be relevant when deciding whether to depart from the "starting position" in rr 42.19 and 42.20 of the UCPR.
[36] In Nichols v NFS Agribusiness Pty Ltd (2018) 97 NSWLR 681; [2018] NSWCA 84, Payne JA said (at [30]) that:
30. If both parties to a proceeding which has been settled without a hearing on the merits 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.
[37] In the same case, Basten JA said (at [8]-[9]) that:
8. Secondly, although it is possible to make an order for costs against one party if it can be shown that it has invited the litigation by its unreasonable behaviour, or has unreasonably pursued the litigation, such an order should only be made where that judgment is manifest by reference to known circumstances, not in dispute between the parties. If the question cannot be answered without reviewing large swathes of evidence and resolving, on a tentative basis, disputed questions of fact, the task should not be embarked upon.
9. Thirdly, if contrary to the views set out above, it was appropriate to investigate whether the applicants or the respondent had been unreasonable, either in their conduct prior to the proceedings, or in their conduct of the proceedings, the approach adopted was untenable. Thus, regard was had to the motives of the respondent in commencing proceedings, but no account was taken of the motives of the applicants in capitulating. Further, once it is clear that there is a real dispute as to a significant fact in issue in the proceedings, it is inappropriate to determine that matter, other than in making an interlocutory ruling, by accepting one party's case without permitting the other party an opportunity to challenge the opposing party's witnesses.
(emphasis added)
In Edwards Madigan Torzillo Briggs Pty Ltd v Gloria Stack and Ors [2003] NSWCA 302, Davies AJA (with whom Mason P and Meagher JA agreed) quoted with approval what was said by Burchett J in One Tel Ltd v Commissioner of Taxation (2000) 101 FCR 548 at 553:
It is accepted that, in a case which terminates before there has been a hearing, the Court should not resolve the issue of costs by engaging in something in the nature of a hypothetical trial: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 AT 201; Re Minister for Immigration and ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624. But this does not mean that the Court can never make an order for costs. Often, it will be unable to do so; but in other cases an examination of the reasonableness of the conduct of the parties, respectively, may provide the basis of an order, or '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', as McHugh J put it in Ex parte Lai Qin at 625. His Honour added:
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.
Although his Honour thought this would 'usually' be so, he made it clear that he was not laying down an invariable rule. At the beginning of his discussion of the applicable principles (at 624), he referred to the discretionary nature of the power to order costs, and to the 'general rule [that] the successful party is entitled to his or her costs', and he said:
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.
As Sackville J pointed out in Rizal v Minister for Immigration and Multicultural Affairs [1999] FCA 334 at [16], the remarks made by McHugh J evince ' a somewhat more flexible approach' than that taken by the Court in Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284 at 287, when it suggested that 'there will be very few cases, where the issues will be sufficiently clear, in the absence of a hearing, for an order for costs to be made in favour of a party'. What is well established is that frequently the determining factor will be the reasonableness of the conduct of the parties, a matter which was emphasised in each of the decisions I have cited, and also in Reddy v Hughes (1996) 37 IPR 413; Sun Zhan Qui v Minister for Immigration and Ethnic Affairs [1999] FCA 119; and Australian Securities Commission v Berona Investments Pty Ltd 18 ASCR 772. In the last case, Cooper J commented, concerning the principles laid down in Australian Securities Commission v Aust-Home Investments (at 774):
These propositions are of assistance in focussing attention upon some of the relevant circumstances which should be considered in the exercise of the discretion to award costs where proceedings do not proceed to a final hearing. However they are not the only circumstances; nor are they intended to limit the discretion.
In my opinion, it is 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 to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs.
(emphasis added)
In Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32, Basten JA said at [79]:
In some circumstances it may be argued that a discontinuance does not involve a surrender or abandonment by the plaintiff, but recognition that "some supervening event" has militated against success, rendered the proceedings futile, or wholly removed the plaintiff's cause of action: see One.Tel Ltd v Commissioner of Taxation [2000] FCA 270; 101 FCR 548 at 553 (Burchett J); Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 at [5] (Davies AJA, Mason P and Meagher JA agreeing); Australiawide Airlines at [50]-[52] (Bryson JA, McColl JA agreeing).
The third defendant submitted that there were three reasons the plaintiff should pay the third defendant's costs if it discontinues the claim. First, the "event", being the sale of the Wharf St property was not a supervening event as contemplated by the authorities. The third defendant submitted that a supervening event is a reference to where the parties have settled proceedings, where there has been a change of legislation since the commencement of the proceedings, or where there has been some conduct on the part of the defendant that has rendered the proceedings futile. The third defendant said that it had not done anything to procure the sale of the Wharf St property. Rather it was the receivers appointed by the plaintiff who had brought about that situation.
Secondly, the third defendant submitted that the courts discretion would not be exercised to deviate from the usual course found in UCPR r 42.19 because of the hedging strategy the plaintiff employed in taking security directly from the borrower as well as security from the third defendant as the guarantor. The third defendant submitted that the discontinuance of the proceedings meant that it no longer had the opportunity to have the issue between the plaintiff and the third defendant heard and determined.
Thirdly, the third defendant submitted that, in relation to the correspondence relied on by the plaintiff, it indicated only that a sale of the Wharf St property was contemplated, the sale had not settled until around 5 April 2024, in the meantime the claims against the third defendant were still being pursued, and it had to incur costs in defending the proceedings.
In my opinion, the plaintiff should be entitled to discontinue the proceedings against the third defendant without being required to pay the third defendant's costs for two reasons. First, it seems to me that the sale of the Wharf St property which resulted in payment of what the plaintiff claimed from the third defendant was a supervening event. The authorities do not specify the nature of a supervening event. Clearly, a change in legislation, or some act on the part of the defendant which changed the landscape would amount to a supervening event. However, the word "supervene" does not carry with it any connotation of unexpected or unanticipated. Further, the authorities do not qualify "supervening" by any such adjective.
In my opinion, the sale by the plaintiff of another secured property which had the practical effect of eliminating any debt allegedly owed by the third defendant, is a supervening event for the purpose of the principle identified in One Tel and subsequently followed in the cases earlier cited.
Secondly, as Ward CJ in Eq made clear in Furnish & Finish at [35], in the circumstances of a situation where there has been no hearing on the merits, ordinarily for there to be a costs order in favour of one party it is necessary to show that the other party's conduct as has been so unreasonable as to warrant such an order: see also Transtar Linehaul Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 159 at [55].
In that regard I note the following. The proceedings were commenced on 4 September 2023. On 15 November 2023, the plaintiff indicated that it intended to amend the statement of claim to delete the claims for possession of the Boyd St properties. On 5 February 2024, the plaintiff informed the third defendant that it intended to sell the Wharf St property and that the proceeds of sale would be sufficient to repay in full the debt they said the third defendant owed. They expected settlement to occur on 28 February 2024 and then they intended to discontinue the proceedings against the third defendant. On 5 April 2024, they confirmed that the sale had settled and that the debt being claimed had been repaid.
It is difficult to understand in those circumstances why the solicitors for the third defendant apparently continued on with their conduct of the proceedings as if nothing had happened. As noted earlier, in the face of that email of 5 April 2024, they filed a defence to the amended statement of claim some 11 days later. The explanation for doing so provided by the third defendant relied upon an email only sent to the plaintiff's solicitor on 11 June 2024 which set out some difficulties the third defendant was having around the time of the email from the plaintiff's solicitor of 5 April 2024. That email claimed that the third defendant was under pressure to file its defence to the amended statement of claim pursuant to consent orders made on 4 April 2024. However, the email of 5 April 2024 from the plaintiff's solicitors changed the landscape in that regard.
The significant matter is not, however, whether the third defendant behaved unreasonably, but whether it could be said that the plaintiff's conduct of the proceedings were so unreasonable as to warrant a costs order when the plaintiff is seeking to discontinue. It is a relevant consideration whether the commencement of the proceedings was justified: Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [11]. The claim against the third defendant was based on a Deed of Guarantee and a mortgage given by the third defendant and a default by the borrower OBC. The defence was not that the documents were not agreed to or executed by the third defendant but that they should be set aside for the reasons set out in the defence. Accordingly, the commencement of the proceedings was justified.
Thereafter, in my opinion, the plaintiff acted more than reasonably in keeping the third defendant informed from the moment it decided to amend its claim to delete the claims for possession of the Boyd St properties right up to the settlement of the sale of the Wharf St property.
The authorities make clear that the court cannot embark on a mini trial or satellite litigation to determine issues that would have been determined at a final hearing had the proceedings not been brought to an end. I agree with the plaintiff's submission that the hedging issue is not something that can be determined on the present application for costs. The circumstances surrounding, and the reasons for, the taking of security over both the borrower's land and the guarantor's land might have been an issue in the final proceedings based on what is pleaded in the defence, but the reasonableness of it cannot be determined in the present circumstances.
The third defendant's submission, that it was deprived of the opportunity to have the hedging issue heard and determined, appears to be based on what was said by Hodgson JA in Bitannia at [57]:
They [other considerations] do not alter the fact that the applicants were brought to court and caused to incur costs by proceedings which they claim are unjustified, and the applicants are being denied the chance to make good this claim by Parkline's decision to discontinue.
The position in the present matter does not involve an assertion on the third defendant's part that the commencement of the proceedings was unjustified, and I have determined already that the commencement of the proceedings was justified.
It is not without significance that at the time the plaintiff indicated that it might seek to discontinue, and then when it said that it would seek to discontinue, the proceedings had only reached a relatively early stage. A defence had been filed. Despite the intimation that the statement of claim would be amended in November 2023, no such pleading was filed until 9 February, a date after the third defendant had been informed the Wharf St property would be sold instead. The third defendant then did not file its defence to that amended statement of claim until 16 April, after it had been told there was no debt any longer owing to the plaintiff by the third defendant. Further, the amended statement of claim only deleted claims against the third defendant; it did not add any.
In all of the circumstances where a supervening event made the claim against the third defendant futile and such an early stage, and it cannot be said the plaintiff behaved unreasonably in commencing nor carrying on those proceedings, the plaintiff should not be ordered to pay the third defendant's costs.
The following orders should be made:
1. Grant leave to the plaintiff to discontinue the proceedings against the third defendant.
2. No order as to the costs of the proceedings to the intent that each of the plaintiff and the third defendant should bear its and his own costs.
[2]
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.
Decision last updated: 18 June 2024