Plaintiff v First Defendant

1 This is an application by the plaintiff for leave to discontinue these proceedings against both defendants. The plaintiff has offered, as the price of agreement, to pay the costs of both defendants on a party and party basis. The defendants, on the other hand, regard this proposal as inadequate and, instead, now seek an order for indemnity costs.

2 In order to appreciate the position of the parties in relation to this application it is necessary to say something of the background to this proceeding. In so doing I should indicate that most, if not all, of the evidence in relation to the liability issues has already been heard, but the evidence of Mr Henry Bateman and Mrs June Wong in support of the plaintiff's case was not heard prior to the proceeding being discontinued. Mr Bateman was, it appears, responsible for operational matters affecting the plaintiff as a result of his role as General Manager in Primary Health Care Limited ("Primary"). Also, in so doing, I stress that I have not made, and do not now make, any findings of fact with respect to the parties' cases.

3 The plaintiff is a wholly owned subsidiary of Primary, which is a listed public company. The plaintiff was formerly known as Symbion Medical Centre Operations Pty Ltd, a company that was part of the Symbion Group of Companies which operated medical centres as part of its business. In about March 2008, Primary acquired the Symbion Group and the operations of that group, including all of its medical centre operations.

4 Prior to July 2009 the plaintiff operated and managed the medical centre known as the Belmont Medical Centre located at 40 Roslyn Road, Belmont ("the Clinic"). The Clinic was one of the suite of medical centres that Primary, in effect, acquired as a result of its takeover of the Symbion Group. The plaintiff now operates all of the former Symbion Medical Centres and also the Primary Medical Centres that existed before the takeover of the Symbion Group. Any new medical centres are now operated by Idameneo (No 123) Pty Ltd, another Primary subsidiary company. Between them, that company and the plaintiff now operate 84 medical centres in all states and territories of Australia except for the Northern Territory and Tasmania.

5 The Clinic was an extremely well established provider of medical services in Belmont, a suburb of Geelong, and in other surrounding suburbs. The defendants' evidence was that its origin can be traced to the 1860s and the early doctors in the region. In any event the defendants are general practitioners who, prior to May 2009, had practised at the Clinic for many years.

6 By agreements between the plaintiff and each of the defendants, dated 20 February 2007[1] ("the Agreements"), each agreed to practise from the Clinic for a period of five years - from 5 February 2007 to 4 February 2012. In return the plaintiff agreed to provide practice management services for that time, in accordance with the provisions of the Agreements. It also paid the defendants monetary consideration under the terms of the Agreements.

7 By letter to the plaintiff, dated 8 May 2009, the first defendant (Dr Ward) alleged that the plaintiff had breached his Agreement and he gave the plaintiff five business days to remedy the breaches, failing which he would terminate his Agreement. The second defendant (Dr Magarey) sent a similar letter to the plaintiff, dated 10 May 2009, in relation to his Agreement. By separate letters, dated 15 May 2009, the plaintiff responded to each of these letters denying that it was in breach of the Agreements as the defendants alleged and stating that any purported termination of the Agreements based on the matters set out in these letters from the defendants would be unlawful.

8 By letters to the plaintiff dated 22 May 2009 from the first defendant (Dr Ward) and, dated 25 May 2009, from the second defendant (Dr Magarey), each defendant gave notice of termination of his Agreement with the plaintiff. The defendants ceased to conduct their practices from the Clinic in late May 2009. Shortly after giving notice of termination of the Agreements the defendants commenced to practise from the Waurn Ponds Medical Centre, which is a medical centre operated by Eastbrooke Medical Centres Pty Ltd ("Eastbrooke"). The defendants commenced to practise from the Waurn Ponds Medical Centre under agreements which they had entered into with Eastbrooke, on 16 September 2008 (in the case of the second defendant, Dr Magarey) and 17 September 2008 (in the case of the first defendant, Dr Ward), some nine months before they gave notice of termination of the Agreements.

9 Subsequently the plaintiff alleged that the defendants' notices of termination of the Agreements was unlawful and that they had repudiated the Agreements. The plaintiff required the defendants to resume their practices at the Clinic. In response the defendants reaffirmed their termination of the Agreements and that they would not be returning to resume their practices at the Clinic. They continued to practise at the Waurn Ponds Medical Centre. The plaintiff ultimately informed the defendants that it accepted their repudiation of the Agreements and terminated them on this basis.

10 The plaintiff closed the Clinic on 10 July 2009 claiming that it had been unable to attract other general practitioners to replace the defendants. On this basis the plaintiff claims in these proceedings damages for loss of profits flowing from the closure of the Clinic.

11 In response to this claim the defendants relied upon the alleged breaches by the plaintiff of the Agreements and, as they claimed, their lawful termination of the Agreements for breach under clause 2 of those Agreements.

12 The entitlement or otherwise for the defendants to exercise their rights of termination under the Agreements was the critical issue between the parties. In its Amended Reply (31 August 2011), the plaintiff alleged that:

"18. In its amended reply, Sidameneo alleges that:

(a) it did not breach the Agreements as the [defendants] allege, and the [defendants] were not entitled to terminate the Agreements;

(b) it did not breach any essential terms of the Agreements justifying termination by the [defendants];

(c) if it breached terms of the Agreements, which it denies, the breaches were not sufficiently serious such as to entitle the [defendants] to terminate;

(d) the [Breach Notices given by each of the defendants] were not effective as notices under clause 2 [of the Agreements] and, accordingly, the [defendants] purported terminations under that clause were not lawful because:

(i) the notices did not contain all of the matters required under clause 2; and

(ii) the conditions precedent to the right of termination under clause 2 were not satisfied and the right to terminate under the clause was not triggered; and

(e) on any objective assessment of the evidence, and given that the defendants entered into agreements with Eastbrooke in September 2008 and the content of their communications with Eastbrooke between that time and May 2009 when they purported to terminate the Agreements under clause 2:

(i) the [defendants] alleged the breaches identified in the [Breach Notices] in bad faith; or

(ii) if the [plaintiff] was in breach as the [defendants] allege, then the [defendants] did not exercise their right to terminate the Agreements in good faith; they terminated for the extraneous purpose of commencing practice with Eastbrooke rather than for any serious breaches of the Agreements by [the plaintiff]."[2]

13 The bases of the defendants' application are that:

(a) the proceeding was commenced or continued in circumstances where the plaintiff, properly advised, should have known that it had no chance of success, with the result that the proceeding must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law; and

(b) there were numerous instances where the plaintiff's conduct of the proceeding caused unnecessary costs to the defendants and loss of time to the defendants and the Court, and thus constituted special circumstances warranting the imposition of a special costs order. This includes, it was said, the plaintiff's conduct in relation to:

(i) compliance with Court-ordered time lines for the completion of various steps, including for the provision of the reply, further and better particulars of loss and damage and discovery;

(ii) repeated failures to comply with its discovery obligations.

In relation to the first basis the defendants stressed in their submissions that it went to both commencement and continuance of the proceedings - not merely the former.

14 It was also the defendants' position that in considering these bases the proceeding should be considered as made up of various stages in which either of these bases may be more relevant. The second clearly goes to the interlocutory stages and the hearing of submissions and evidence and the first spans all stages from pre-commencement until after the hearing in Geelong in September 2011.

15 In relation to these various stages of the proceeding it should also be noted that it was agreed that the hearing of the issues in the proceeding should be split between liability and quantum issues. The decision of the plaintiff to discontinue the proceedings comes after the opening submissions and the near completion of the hearing of evidence on liability issues in September 2011.

Civil Procedure Act

16 The Civil Procedure Act 2010 (Vic) provides, amongst other things, that:

(a) "the overarching purpose of the Act and the rules of court in relation to civil proceedings is to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute";[3]

(b) "a court must seek to give effect to the overarching purpose in the exercise of any of its powers";[4]

(c) in making any order or giving any direction in a civil proceeding, a court shall have regard to various matters,[5] including, amongst others:

(i) "the degree of promptness with which the parties have conducted the proceeding, including the degree to which each party has been timely in undertaking interlocutory steps in relation to the proceeding";[6] and

(ii) "the degree to which each person to whom the overarching obligations apply has complied with the overarching obligations in relation to the proceeding";[7]

(d) "[a] person to whom the overarching obligations apply must not make any claim or make a response to any claim in a civil proceeding that does not, on the factual and legal material available to the person at the time of making the claim or responding to the claim, as the case requires, have a proper basis";[8]

(e) "[a] person to whom the overarching obligations apply must cooperate with the parties to a civil proceeding and the court in connection with the conduct of that proceeding";[9]

(f) "[a] person to whom the overarching obligations apply must use reasonable endeavours to ensure that legal costs and other costs incurred in connection with the civil proceeding are reasonable and proportionate to the complexity or importance of the issues in dispute, and the amount in dispute";[10]

(g) "[f]or the purpose of ensuring the prompt conduct of a civil proceeding, a person to whom the overarching obligations apply must use reasonable endeavours in connection with the civil proceeding to act promptly, and minimise delay";[11]

(h) "[s]ubject to sub-section (3)[(which concerns privileged documents)], a person to whom the overarching obligations apply must disclose to each party the existence of all documents that are, or have been, in that party's possession, custody or control of which the person is aware, and which the person considers, or ought reasonably consider, are critical to the resolution of the dispute"[12]; and

(i) "...in exercising its discretion as to costs, a court may take into account any contravention of the overarching obligations".[13]

17 Supreme Court (General Civil Procedure Rules 2005 ("RSC") Rule 25.02(2)(b) provides that a plaintiff may discontinue a proceeding at any time, by leave of the Court or with the consent of all other parties. RSC 25.05 provides that where a proceeding is discontinued, "liability for costs shall be determined in accordance with RSC 63.15". RSC 63.15 provides that:

"Unless the Court otherwise orders, a party who discontinues or withdraws part of a proceeding, counterclaim or claim by third party notice shall pay the costs of the party to whom the discontinuance or withdrawal relates at the time of the discontinuance or withdrawal."

18 The defendants adopted a statement of the relevant principles in this respect from a recent judgment of mine in Manderson M & F Consulting v Incitec Pivot Ltd (No 3)[14]. The defendants emphasised various aspects of the statement of these principles which they submitted were particularly relevant in the present case. Accordingly, it is helpful to set out this statement in full so that the principles which the defendants emphasise are clear, as is their context:

"[8] The jurisdiction of the Court as to costs is conferred by sub-s 24(1) of the Supreme Court Act 1986, in the following terms:

"24(1) Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid."

This general discretion must be exercised in accordance with Order 63 of the Rules.

[9] The usual order as to costs is an award of costs to the successful party on a party and party basis.[15] This position is reflected in rule 63.31 of the Rules. Nevertheless, the Court has a discretion to make special costs orders. The previously identified categories of circumstances that warrant a special costs order provide guidance in relation to the exercise of this discretion. These categories were identified by Sheppard J in Colgate Palmolive Company v Cussons Pty Ltd as including[16]:

"...the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud ...; evidence of particular misconduct that causes loss of time to the Court and to other parties ...; the fact that the proceedings were commenced or continued for some ulterior motive ... or in wilful disregard of known facts or clearly established law ...; the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions ...; an imprudent refusal of an offer to compromise ...; and an award of costs on an indemnity basis against a contemnor..."

[10] In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd, Woodward J commented in relation to the commencement or continuation of proceedings with no chance of success[17]:

"... it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established laws."

[11] Further, with respect to this category or circumstance, the Victorian Court of Appeal said in Macedon Ranges Shire Council v Thompson that[18]:

"Where the proceeding has no prospect of success

Costs may be ordered whenever it appears that an action has been commenced in circumstances where the applicant properly advised should have known it had no chance of success. When a litigant presses on where on proper consideration their case should have been seen to be hopeless, the discretion to make a special costs order may be enlivened. French J (as he then was) in J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers Western Australia & Anor[19] considered that the discretion to award such costs would be enlivened when a party persisted, for whatever reason, in what should on proper consideration have been seen to be a hopeless case, and alluding to the presumption referred to by Woodward J in Fountain Selected Meats said that it was an unnecessary condition of the power to award such costs that a collateral purpose or some species of fraud be established. But where the litigant did not recognise that its case was without merit a Court may be disinclined to make a special costs order.[20] The Court must measure the litigant's conduct against the facts then known or which ought to have been known, the inquiries that the litigant ought reasonably to have made and the legal advice which the litigant ought reasonably to have obtained.[21] This exercise may be subject to some qualification in respect of a self represented litigant."

[12] As was made clear by Sheppard J in Colgate Palmolive Company v Cussons Pty Ltd[22], a special costs order may be warranted where a party has engaged in misconduct leading to unnecessary costs or delay. An application for a special costs order on this basis was considered by French J (as he then was) in Re Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd[23]:

"[21] Counsel for the respondent next attacked the applicant's conduct of the proceedings saying that interlocutory steps had been protracted by its failure to comply with requests for particulars and discovery and with orders of the Court. Further, it was said, there were untenable applications to amend pleadings and for leave to appeal. Discontinuance of the action was at the last minute and no explanation had been advanced for it. He submitted that it should be inferred that there had been a sudden acceptance by the applicant of the hopelessness of its case and that this was a matter which should have been apparent very shortly after the commencement of the proceedings.

[22] I accept that the interlocutory processes were unduly protracted and that the applicant must bear much of the responsibility for this. However, costs orders were made in favour of the respondent where the applicant was responsible for wasted appearances. When, in an individual case, there is evidence of particular misconduct on the part of a party that causes loss of time to the Court and to other parties then an order for solicitor-client costs and/or costs to be paid forthwith may be made. In my opinion a global order of this kind is not warranted in this case."

[Defendants' emphasis]

The defendants also emphasised the point made in various authorities, namely that the categories of special circumstances in which indemnity costs may be awarded are not closed.

19 The first ground raised by the defendants was that the proceeding was commenced or continued in circumstances where the plaintiff, properly advised, should have known that it had no chance of success.

20 In this respect the defendants relied upon the following particular matters in support of their submission that the plaintiff should have known prior to the commencement of the proceeding, or at the very least at the time of preparing its witness statements at the commencement of the trial, that the plaintiff's case was hopeless and had no chance of success:

(a) the plaintiff's policy of encouraging medical practitioners to refer patients to Dorevitch Pathology;

(b) the staffing shortages at the Clinic for at least the entirety of the period from Christmas 2008 onwards;

(c) the plaintiff's unauthorised deductions from the doctors' PIP payments to pay for the provision of an after hours locum service for the Clinic;

(d) the plaintiff's refusal to supply all of the INR testing strips required by the Clinic;

(e) the plaintiff's refusal to supply various dressings reasonably required by the doctors;

(f) the discontinuance of, and failure to provide a suitable replacement for, the continuous laundered hand towel service; and

(g) the inadequate consideration given by the plaintiff to the commencement of the proceeding.

21 Further, it was submitted by the defendants that by commencing and in continuing the proceeding notwithstanding what it knew or should have known regarding these matters it was plain that the plaintiff should have known that its case was hopeless and had no chance of success.

22 The plaintiff responded on a number of bases. First it was submitted that it was obvious before the plaintiff commenced the proceeding "that it had an unassailable case against the Doctors on liability".[24] Secondly it submitted that if the defendants were of the view that the plaintiff's case was hopeless and doomed to fail this was never communicated in any way to the plaintiff - either by way of letter warning the plaintiff to this effect or by way of a Calderbank letter. It was submitted that whether a defendant warns a plaintiff that its case is misconceived or cannot succeed is a matter that the Court should take into account when considering an application for indemnity costs against the plaintiff, referring to Thomson Land Ltd v Lendlease Shopping Centre Development Pty Ltd, where McDonald J said:[25]

"[21] In David S. Holdings Pty Ltd v Coles Myer Ltd (1995) ATPR 41-383 Drummond J dismissed an application made by the defendant for indemnity costs in circumstances which involved the plaintiff unsuccessfully seeking interlocutory relief, thereafter filing numerous statements of claim after part of the initial statement of claim had been struck out and eventually discontinuing the proceedings. In his judgment, Drummond J stated at p.40-303 -

"If a respondent at an appropriate stage, which may be at the very outset or at some later stage, e.g., after it has received pleading or after discovery, puts an applicant on notice that it regards the action as misconceived and goes further and sets out its detailed reasons for so thinking then if the applicant nevertheless proceeds without indicating any justification for doing so and fails there may be good reason to consider whether indemnity costs should not be ordered".

[22] In UFH Holdings Pty Ltd v Ord Minnett Corporation Finance Ltd (S.C. Vic - Chernov J, No. 2020/1998, 26 June 1998, unreported) at p.4, Chernov J, after referring to that said by Drummond J in David Holdings, said -

"... what his Honour was saying was that in circumstances where a plaintiff has been put on notice, proceeds and fails, that does not of itself dictate the imposition of indemnity costs. Nevertheless, in the circumstances such a conclusion is a powerful factor to take into account as to whether or not such costs should be ordered"."

23 In the present case the defendants did not put the plaintiff on notice in the relevant sense, by letter or, alternatively or additionally, by means of a Calderbank letter. In the present circumstances this is, in my view, "a powerful factor to be taken into account", to use the words of Chernov J (as he then was), in relation to the claim for indemnity costs.[26]

24 Additionally, and as highlighted by the plaintiff, it is important that in the inquiry as to whether there are grounds for the award of indemnity costs hindsight is not allowed to interfere with the process. This was emphasised by McDonald J in Thomson Land Ltd v Lendlease Shopping Centre Development Pty Ltd:[27]

"[26] There were issues of fact to be determined on the evidence at trial. It was on the evidence that the plaintiff failed. One must be careful on an application as the present not to allow the wisdom of hindsight to overwhelm the circumstances in which the Court must consider whether there exists circumstances which should warrant an order being made for costs on a basis other than a party and party basis. It must be borne in mind that normally an unsuccessful party will pay the costs of the successful party on a party and party basis. It is only where there exists circumstances which in justice requires that costs be ordered on a higher scale, that such order ought to be made."

Justice Redlich also warned against relying on hindsight in these circumstances in Aljade & MKIC v OCBC[28].

25 Where a plaintiff discontinues a proceeding, or the case is ultimately dismissed, in order to justify an award of indemnity costs the Court must be satisfied that the plaintiff's case was "hopeless from the outset".[29] It follows that the Court should also guard against relying on hindsight to inform itself of the plaintiff's prospect at the outset and what the plaintiff knew or ought to have known at the outset.

26 Additionally, in considering an application for indemnity costs in circumstances such as the present where there has been no judgment on the merits it is not appropriate to attempt to assess the likely outcome of a hypothetical trial.[30] However, in some cases the judge may feel sufficiently confident that one party would almost certainly have succeeded or that its discontinuance is an acknowledgement of almost certain defeat or amounting to "effective surrender" and so determine the issue on the basis of that outcome.[31] For the reasons that follow I do not think that either position applies to the plaintiff's case or the plaintiff's discontinuance in this proceeding.

27 With the warning against hindsight and the inappropriateness of seeking to assess the likely outcome of the hypothetical trial, particularly where I have not had the opportunity to hear and assess all the evidence on liability issues or the benefit of closing submissions - particularly in light of the whole of this evidence - I turn now to consider the particular matters raised by the parties.

28 First, I am of the view that the plaintiff's submission that it had unassailable case against the defendants on liability unless, in effect, they established their defence is to do no more than state the position in any proceeding where a plaintiff has, what may be described as, a prima facie good cause of action on the pleaded facts and as a matter of law. If the defendant to such a proceeding does not defend, or does not establish its defence, then the plaintiff will succeed. However, absent a situation where the defendant does not, formally or in substance, defend the claim at all any assessment of the strength of a plaintiff's case must also involve an assessment of the strength of the case of the defendant.

29 Secondly, in my opinion the issues raised by the defendants as indicative of weakness in the plaintiff's case are matters that were likely, to become evident only at trial, particularly in the process of cross-examination of witnesses. I am strengthened in this view by the fact that the defendants did not indicate in correspondence or by way of a Calderbank letter that the plaintiff's case was hopeless and doomed to fail. It seems clear that they did not do so because any difficulties with its case only became evident at trial and any suggestion to the contrary is simply not correct, or a position illuminated only with the benefit of hindsight.

30 Many of the particular matters the subject of submissions by the parties in the course of the hearing of this application illustrate and support this position.

31 In relation to, what might be termed, good faith issues the plaintiff submitted that there was ample evidence before the trial commenced in support of the plaintiff's lack of good faith argument. It was submitted that the defendants, according to their own witness statements, held an unreasonable and adverse view of Primary based on little more than rumour. It was submitted by the plaintiff that it was clear from their evidence that the defendants would never have contracted with the plaintiff at all and, further, that by July 2008, the first defendant, Dr Ward, was in negotiations with Eastbrooke and in mid-August of that year was providing information to that company about the Clinic; in circumstances where the plaintiff was unaware of either the negotiations or the provision of information. There was a variety of documentary evidence referred to by the plaintiff in support of these submissions, including the first defendant's agreement with Eastbrooke which the plaintiff said required him to commence practising from an Eastbrooke centre by March 2010, which was before the expiry of his contract with the plaintiff. The defendants made the point that the contracts with Eastbrooke entered into by both the first defendant and the second defendant may have had such an "early" commencement date but that there was a provision that this was subject to termination of their contract with the plaintiff; the Agreements. There was also reference made by the plaintiff to emails between Dr Ward and Eastbrooke in relation to the "implosion" of the Clinic. The plaintiff referred to an email dated 15 February 2009 from Dr Ward to Rickie Tamburro, Eastbrooke Development Manager, in which Dr Ward suggested to Eastbrooke that "[m]aybe we should be more aggressive at imploding the current centre". Following this, on 23 February 2009 an email was sent by Simon de Picot, Director of Eastbrooke to Dr Ward stating "we are in favour of promoting the implosion of the existing centre ASAP as we believe this is the only way you will be able to negotiate with Primary on your exit."

32 On the basis of this documentary material the plaintiff submitted:[32]

"[22] In the face of that clear evidence of clandestine negotiations with Eastbrooke, which began well before the Doctors purported to terminate their Agreements with Sidameneo, their clear expressions of hostility toward Primary, and their clear intention to avoid the Agreements with Sidameneo in order to join Eastbrooke, all of which did not require concessions in cross-examination to perfect, it was plainly reasonable for Sidameneo to believe, and open to it to argue, that the Doctors did not act in good faith and that their purported terminations of the Agreements were accordingly unlawful. That the Doctors did not act in good faith and were unwilling to cooperate and act reasonably in order to perform their Agreements with Sidameneo was, on any view, plainly arguable before the trial commenced, and remains arguable now. The Doctors do not suggest otherwise in their outline of submissions."

It was submitted by the plaintiff that the position was strengthened as a result of the defendants' opening at trial and subsequent cross-examination.

33 On this basis I am of the opinion that it was reasonably open to the plaintiff to argue an extraneous or bad faith purpose underlying the termination by the defendants of the Agreements and as also providing an answer to their allegations that the plaintiff had breached the Agreements in a manner that justified termination. It is not necessary for me to say anything further in relation to this issue having regard to the fact that all the liability issue evidence was not heard and I did not have the benefit of the closing submissions of the parties. I also stress that nothing I have said in relation to the extent to which bad faith or extraneous purpose issues might have been arguable is indicative of any preliminary or final view in relation to these issues. The view of the defendants which I was left with at the conclusion of that part of the trial which I heard was that the defendants were very dedicated medical practitioners whose principal concern was for the welfare of their patients. This does not, by implication, indicate an adverse view of the plaintiff and its personnel. It and they are clearly seeking to provide medical practice management services of a high standard. There are, however, legitimately different approaches to medical and other professional practices. The problems occur when there is a mismatch of approaches and expectations and, without expressing any concluded view for all the reasons I have indicated, I am inclined to think that this is the position underlying this proceeding. The problem is potentially more acute when, as was the case here, the parties were not brought into contractual relationships consensually - but as a result of a takeover of the Symbion Group.

34 Finally, in relation to good faith or bad faith issues it was submitted by the defendants that allegations of bad faith, or lack of good faith, should be treated on the same basis as a groundless allegation of fraud for the purposes of an application for a special, indemnity, costs order. In my view this is not correct in circumstances like the present, and possibly more generally. Here the allegations of bad faith or lack of good faith have not been finally tested or determined and, for the reasons indicated, is not open to find that they were unsubstantiated in any sense that may be relevant to the issue of a special costs order. Further, it would seem to be a significant extension of the principles applied with respect to special costs orders to equate an allegation of breach of a good faith obligation in the context of the law of contract with an unsubstantiated allegation of fraud. This is particularly so as the authorities indicated developing jurisprudence in favour of broader application of good faith obligations in contracts, and possibly more broadly. This highlights the extent of the extension of the present principles which would flow from accepting the defendants' submissions in this respect. Accordingly, I do not do so.

35 Further issues would, as appears from the plaintiff's submissions, have arisen in relation to the validity of the notices of termination of the Agreements:[33]

"26. Second, in its amended reply and in written opening, Sidameneo alleged that clause 2 of the Agreements prescribed that before the Doctors could terminate for breach they were required to serve written notices on Sidameneo that specified the alleged breaches, informed it of what it was required to do to remedy the breaches, and gave it a proper opportunity to remedy the breaches. The notice requirements of clause 2 operated as a condition precedent to the right to terminate the Agreements under the clause and the right would not be enlivened unless the requirements of the clause were satisfied. The breach notices that the Doctors served on Sidameneo under clause 2 did not contain all of the matters that the clause required and, accordingly, the Doctors purported terminations of the Agreements were unlawful. Sidameneo refers generally to paragraphs 37-38 and 51-60 of its written opening where the argument is articulated in more detail. It should also be noted that the construction of clause 2 that the Doctors' urged on the Court (they could terminate for any breach except a de minimus breach) adds importance to Sidameneo's argument on whether the Doctors' breach notices triggered the termination right under clause 2. If the doctors could terminate for any breach, then it was all the more critical that that they comply with clause 2 strictly.

27. Sidameneo's argument that the Doctors' right to terminate the Agreements was not triggered and that their purported terminations were unlawful as a result was plainly arguable before the trial commenced, and that if it succeeded would have provided a complete answer to the Doctors' claim of breach of contract justifying termination. Further, the argument is still available now and there is nothing in the evidence adduced under cross-examination at trial that would undermine the force with which Sidameneo could have urged the argument on the Court in closing. It is respectfully submitted that the argument still has prospects of succeeding. Again, the Doctors do not argue otherwise in their outline of submissions and have never argued otherwise. However, for the reasons set out below, Sidameneo recognises that the argument could have failed if the Court ultimately took the view that the Doctors had established a right to terminate based on a serious breach. Sidameneo has taken the view that its prospects are likely to be contingent on the outcome of the arguments concerning serious breach."

36 Again, without expressing any view on the particular issues, I am of the opinion that the issues raised with respect to the validity of the notices of termination of the Agreements by the plaintiff have merit in the sense that they were reasonably arguable and thus constituted a basis for commencing and continuing the proceedings.

37 Without expressing any views in relation to these issues, I am of the opinion that these good faith and notice issues would in themselves justify the plaintiff commencing and continuing the proceedings - and, in particular, the trial hearing in September 2011. There is disagreement between the parties as to whether the proceedings as originally pleaded did raise the good faith allegations as they were ultimately put by the plaintiff. Nevertheless I am inclined to the view that they were inherent in the original pleadings and that they were, desirably, fully pleaded in the Amended Reply of 31 August 2011.

38 A great deal of emphasis was placed by the defendants on the failure of the evidence of Mr Noel Smith, the Victorian State Manager responsible for managing the medical centres in Victoria,[34] to support the plaintiff's case in a variety of respects.

39 In relation to staffing levels, the defendants submitted that it should have been clear from the document attached to Mr Smith's primary witness statement, namely the "Response Document",[35] that staff shortages had been an ongoing problem at the Clinic. Consequently it was said that the plaintiff knew or ought to have known that Mr Smith's evidence did not support the plaintiff's position - a position which was likely to become clear as a result of cross-examination. The, so-called, "Response Document" dealt with a variety of matters, under the headings: Staff Levels, Current Staff Coverage, Scanning, Barwon Health Support/Barwon Medical Imaging, Yellow Pages, Letterhead, Stationery, Payment of Invoices, ECG Machine, Provision of Amenities, Provisions of Vaccines to Staff, Easter and Anzac Day trading hours and INR Testing. In other words, this document canvassed a wide variety of issues which were very material to the position being put by the defendants with respect to the operation of the Clinic.

40 The plaintiff readily conceded that Mr Smith's evidence in cross-examination involved some concessions inconsistent with the position set out in his witness statement.[36] In any event, the plaintiff submitted that it was reasonable for it, and its legal advisers, to expect Mr Smith to adhere to his evidence. With particular reference to the issue of staff shortages it was submitted that there was extensive documentary evidence in support of attempts by the plaintiff to recruit staff to the clinic to make up shortages and that the statements of Mr Smith supported a position that the staff shortages were temporary and were being addressed.[37] On this basis it was submitted by the plaintiff that at all times before and after the commencement of the proceeding it was reasonable for it to conclude that the staff shortages at the clinic were not sufficiently serious to justify the defendants' terminating the Agreements. Although the defendants clearly saw the situation differently I am of the view that it could not be said, absent the benefit of hindsight, that the plaintiff was bound to fail on this issue.

41 In relation to the issue of referrals to Dorevitch Pathology (a subsidiary of the plaintiff), the defendants asserted that the plaintiff must have known that it had breached the relevant provision of Schedule 5 of the Agreements that provided that the plaintiff "must not specify or direct or attempt to influence you in any way whatsoever as to the referral of patients...the use of ancillary medical services, including, without limitation, pathology and diagnostic imaging services". The defendants asserted that a breach of this provision should have been evident to the plaintiff by September 2011 at the latest. However, in order to arrive at that conclusion the Court would need to find that the plaintiff was in breach of Schedule 5 of the Agreements at the relevant time. Clearly this is a matter which involves the construction of provisions of the Agreements, a process that had not been addressed at the time the hearing concluded. In any event, it is, in my opinion, by no means certain that the plaintiff would have failed in its arguments with respect to the interpretation of the terms of the Agreements in this respect or that it would have failed on the evidence in light of a settled interpretation of critical provisions of the Agreements.

42 Finally, the defendants relied upon the evidence of Dr Bateman, both in chief and under cross-examination, and the evidence of Mr Smith in cross-examination in support of their position in relation to breach of these provisions. Dr Bateman said that the plaintiff's policy was not to direct any of its contracted doctors to refer pathology to any third party, both in chief and in cross-examination. He refuted the evidence that Mr Smith gave in cross-examination about a "basic policy" in this respect and said specifically that directing or encouraging doctors to refer to Dorevitch Pathology was a practice in which the plaintiff and Primary did not engage. The plaintiff submitted that Dr Bateman's evidence on this point can be put no higher than the plaintiff's staff worked with the doctors and encouraged them to support the plaintiff's ancillary services and that this was not unusual in general practice. In any event, the evidence on this issue was not complete in that it would have been expected that Mr Henry Bateman, the person responsible for the operations of Primary and its subsidiaries with respect to medical centres, would have also traversed this area. Consequently, I accept the plaintiff's submissions that it cannot be sensibly concluded now that the plaintiff was bound to fail on this question.

43 Issues in relation to the availability of INR test strips, dressings and bandages were the subject of expert evidence as to what was "reasonably required" in this respect by the defendants under the Agreements. The plaintiff's case in relation to this issue was that the INR test strips were not reasonably necessary or required for the provision of medical services at the Clinic. The defendants submit, however, that the evidence led from its expert and the doctors and nurses working at the Clinic was overwhelmingly to the contrary.

44 Further, it was submitted that the expert evidence led by the plaintiff in this respect, the evidence of Dr Pers, did not support its position in that his conclusion that the use of on-site INR testing at the Clinic was not reasonably required was said to flow from his opinion that the use of on-site INR testing was not an essential part of safe patient care at the Clinic. The defendants submitted that as a matter of logic this conclusion did not flow from his opinion. The plaintiff, on the other hand says that the defendants' submissions as to its evidence in support of its position confuses several things. First it said that the evidence of an expert as an aid to construction is one thing but what the doctors and nurses working at the Clinic said about the use of INR testing was another matter and could not be treated as evidence of what was reasonable within the terms of the contract, as a matter of construction. The plaintiff contended that the defendants' arguments in this respect do not go to show that the plaintiff's case was hopeless, particularly in circumstances where it had two experts who said in their reports that INR test strips were not reasonably required.

45 In conclusion in relation to the INR test strip issue the plaintiff submitted that on the evidence, it was always open to it to resist the defendants' allegations relating to the strips on at least the following grounds, even if the Court would have found that the plaintiff had ceased to supply them from a particular time:

(a) the plaintiff was not in breach of clause (g) of Schedule 3 of the Agreements as the strips were not reasonably required by the defendants in order to provide medical services at the Clinic. It was conceded that the expert witnesses relied upon by the plaintiff and the defendants differed on the point but, nevertheless, it was said that it would be open for the Court to prefer the evidence of the plaintiff's expert; and

(b) even if the Court preferred the defendants' expert and their evidence on the point and found that the plaintiff had breached clause (g) of Schedule 3 of the Agreements by discontinuing supply of the strips, it remained arguable that the breach was not sufficiently serious to justify termination because the defendants could always (and did) refer patients to an external pathology provider for INR testing. The plaintiff submitted that this practice was an acceptable one and in line with the practice adopted at other general practitioner medical clinics.

46 In my view, absent hindsight, the plaintiff is correct in its submissions. I agree that, for the reasons advanced, it could not be said that it was bound to fail on these issues and that it was unreasonable to maintain and run its argument.

47 Having regard to the position I have taken with respect to the particular issues considered in the context of the defendants' argument that the plaintiff's case was hopeless and doomed to fail - hence it should not have been commenced or continued - it is not necessary to consider the further particular matters raised by the defendants. In the scheme of the issues raised against the plaintiff they could not affect the overall assessment in this respect. Additionally, I note for completeness arguments raised by the defendants in relation to the failure, as the defendants put it, of the plaintiff to call certain witnesses, such as Dr Monk and Ms James. It was submitted that this "failure" would have provided a compelling basis to draw adverse inferences against the plaintiff on a variety of important issues, the INR test strip issue and others. Whether or not such a compelling basis for the drawing of adverse inferences would have been established would not, however, be clear until all the evidence on liability had been heard, considered and the subject of closing submissions. In all the circumstances of this proceeding, to the point it reached, it could not be said that such a possibility supports or is indicative of a position that the proceeding was not properly commenced or maintained.

48 Without detracting from this view mention should, I think, be made of the issue of electronic transmission of pathology results. The plaintiff's position was that its computer system, apparently for technical and security reasons, could not accommodate this process other than from Dorevitch Pathology, as an arm of or an entity within the Primary Group hence within its computer network or protocols. Expert evidence was advanced on both sides in relation to this issue. In my view this was a matter appropriately tested at trial and it could not be said that the plaintiff's position in this respect was necessarily unsustainable. This matter was an aspect of the issue of whether the plaintiff encouraged referrals to Dorevitch Pathology in breach of the Agreements, a matter which has already been considered.

49 The defendants also relied, particularly, on the evidence of Dr Bateman and his conceded unfamiliarity with critical documents in the proceeding, including pleadings, correspondence from the defendants in relation to the alleged defaults under the Agreements and the like. Dr Bateman's evidence was, however, that he had relied on the advice of Mr Henry Bateman, who was responsible for the operations of Primary and subsidiaries, including the plaintiff. Although it was clear that Dr Bateman had formed an adverse view of the behaviour of the defendants and thought they were not genuinely identifying and relying upon default or defaults under the Agreements this does not, in all the circumstances, detract from the position which Dr Bateman maintained - that the decision to commence the proceedings was one made on the advice of Mr Henry Bateman. As Mr Henry Bateman's evidence was not heard, this position could not be tested further. Nevertheless it does not appear to me that Dr Bateman's position was necessarily unreasonable having regard to his position as the head of a listed public company with a multiplicity of national businesses and operations. In my opinion Dr Bateman's evidence in this respect does not provide any basis for the argument on the part of the defendants that the commencement of the proceedings was not considered properly, or relevantly at all.

50 Consequently, I am of the view that the decision of the plaintiff to discontinue the proceeding following the conclusion of the September 2011 hearing in Geelong is to be regarded as a reasonable decision taken in the course of litigation properly brought and properly continued. Additionally, I think it is to be regarded as a responsible decision, particularly in light of the Civil Procedure Act 2010 provisions,[38] which avoids wasteful expenditure of time and money, at the cost of all concerned. It would, of course, have been open to the plaintiff to continue the proceedings to their ultimate conclusion. On the basis of the matters considered I think that if it were unsuccessful having followed this course it could not be assumed that this would have been likely to have had any costs consequences for it, apart from a costs order on the usual basis.

51 I turn now to the second ground raised by the defendants - that the plaintiff's conduct of the proceeding caused unnecessary cost and delay to the defendants. In this respect the defendants submitted that this ground was satisfied as a result of -

(a) The failure on numerous occasions by the defendants to comply with Court-ordered timelines for the completion of various interlocutory steps. Those failures, it was said, caused significant wasted costs occasioned by the correspondence generated about these issues, and unnecessary costs and wasted time to the Court and the parties in dealing with these issues at the numerous directions hearings that were necessary because of the plaintiff's conduct of the proceedings generally.

(b) The failure by the plaintiff to serve an amended reply until 31 August 2011 less than two weeks before the commencement of the trial and with no explanation for the delay in its service, particularly having regard to previous orders of the Court, by reference to which its service was substantially late. It was said by the defendants that the amended reply alleged for the first time that they acted in bad faith in purporting to terminate the Agreements and, further, that the plaintiff's case at trial, particularly in relation to the cross-examination of the defendants, focused almost exclusively on, what the defendants described as "this belatedly pleaded bad faith" case.

(c) The failure by the plaintiff to provide further particulars of loss and damage in accordance with various orders of the Court.

(d) The plaintiff's repeated failure to comply with its discovery obligations which resulted in various orders of the Court.

52 It was, however, conceded by the defendants that none of these delays caused any delay to the scheduled trial. Prior to the commencement of the trial in September 2011, as scheduled, the possibility of splitting the trial into liability and (if necessary) quantum hearings was foreshadowed. Although the actual decision to adopt this course was not made until the latter part of the hearing in September 2011 it was foreshadowed in earlier directions hearings, particularly in relation to the Amended Reply of 31 August 2011, which added extensive pleadings alleging, in summary, that the defendants had not acted in good faith in relation to the claimed termination of the Agreements.

53 It was also common ground that the interlocutory process did not result in unnecessary work preparatory to the trial - so there was no work thrown away in that respect. Rather the unnecessary work was the preparation for and attendance at various directions hearings and hearings in response to specific applications in relation to interlocutory matters. It must also be remembered that some of these directions hearings were ordered by the Court in the ordinary course of case management.

54 In the course of these interlocutory proceedings applications were made for costs orders. In some instances specific costs orders were made whereas in others costs were reserved. The defendants do not in the present application seek to revisit the specific costs orders but, rather, they seek special, indemnity, costs orders in the instances where costs were reserved.

55 The plaintiff, in response to this aspect, submitted that any issues of delay with respect to interlocutory matters were dealt with at the time the interlocutory applications were heard by means of specific costs orders or the, more general, order reserving costs which, it said, implied that costs would likely follow the result of the whole trial and lead to a costs order in favour of the successful party on a party and party basis.

56 More particularly, the plaintiff submitted that as a matter of legal principle, where the Court has already dealt with the parties' breaches of an interlocutory timetable by ordering it to pay costs or refraining from making any costs order, it should not revisit the issue and disturb its earlier decisions. In spite of the position of the defendants that it did not propose that any specific previous costs orders should be revisited the plaintiff's position was, as I understand it, that orders simply reserving costs should be treated on the same basis as they were to be treated as indicative of costs following the event, as indicated previously. In any event, in this respect reference was made to the decision of French J in Re Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd[39]. In that case the applicant (plaintiff) had discontinued the proceeding shortly before trial and provided no explanation for discontinuance. The respondent (defendant) sought its costs on a solicitor and client basis. One of the matters that the respondent relied upon to justify this application or the application for costs on this basis was the applicant's conduct of the proceeding which resulted in protracted interlocutory steps and a failure to comply with requests for particulars and orders for discovery. French J ordered the applicant to pay the respondent's costs on a party and party basis. In relation to the respondent's argument about the applicant's conduct of the case, his Honour said:[40]

"[22] I accept that the interlocutory processes were unduly protracted and that the applicant must bear much of the responsibility for this. However, costs orders were made in favour of the respondent where the applicant was responsible for the wasted appearances. When, in an individual case, there is evidence of particular misconduct on the part of a party that causes loss of time to the Court and to other parties then an order for solicitor-client costs and/or costs to be paid forthwith may be made. In my opinion a global order of this kind is not warranted in this case."

57 The plaintiff submitted that in the present proceeding there is no evidence that the defendants have suffered any prejudice as a result of the aspects of the plaintiff's conduct of the case about which they complain. In this respect, it was said that the trial was not adjourned by reason of any conduct of the plaintiff and that by the commencement of the trial all interlocutory steps had been substantially completed. The defendants do not submit that they suffered any prejudice as a result of the plaintiff's conduct of the case. Consequently, the plaintiff submitted that although it had been late in completing some of the interlocutory steps it had not engaged in the kind of particular misconduct that French J stated, in Tetijo, was necessary in order to justify an order for costs on an indemnity basis. The point was emphasised that the Court has dealt with any breaches of the interlocutory timetable already and these matters ought not to be revisited. Further, it was said that there was nothing particularly egregious about the plaintiff's conduct that would justify revisiting the matter.

58 In my opinion the approach advanced by the plaintiff, is for the reasons indicated, the correct one and consistent with what has occurred and the authorities to which reference has been made, and particularly, in this respect the statements by French J in Re Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd.[41]

59 An additional point raised by the defendants with respect to the interlocutory aspects of the proceeding was that the failure by the plaintiff to provide particulars of loss and damage claimed in a timely manner was indicative of an ulterior motive in its commencing and continuing the proceedings. The plaintiff's response was that the timing of the provision of these particulars was not out of the ordinary in civil litigation; particularly in a proceeding like the present which was complex, both legally and factually. In any event, as indicated previously, the proceeding "was split" in terms of liability and damages issues so that no prejudice was caused by any delay in this respect.

60 Although the quantum of the monetary claim did vary significantly, as the defendants submitted, this is not unusual in a complex case. Further it was always clear that the plaintiff's claim was for loss and damages caused as the result of the loss of a valuable asset, the income flowing to the plaintiff as a result of the conduct of medical practices of the Clinic. Complex issues of causation and mitigation were bound to arise making accurate particularisation difficult.

61 These considerations and the absence of any evidence of any ulterior motive on the plaintiff's part - direct or by reasonable inference - lead me to reject any suggestion of ulterior motive. Consequently no issue arises with respect to the commencement or continuation of the proceedings on this basis.

62 For the preceding reasons I am not satisfied that the defendants have established any basis upon which it would be appropriate in granting leave to the plaintiff to discontinue this proceeding to require it to pay the defendants' costs other than on a party and party basis. I should emphasise that this position is subject to any costs orders made previously in these proceedings during the interlocutory stages.

63 Accordingly, I grant leave to the plaintiff under RSC 25.02(b) to discontinue the proceeding on the basis that it pay the defendants' costs, including reserved costs, on a party and party basis, subject to any orders for costs previously made.

64 At the conclusion of the hearing of this application the parties agreed that the costs of and in relation to this application would follow the event and be awarded on a party and party basis. This agreement was subject to the obtaining of further instructions and if those instructions were contrary to this position I would be informed accordingly by email. Following the hearing, the parties confirmed by email that the costs of the application follow the event and that they be assessed on a party and party basis.

65 The formal and final orders will follow accordingly.

[1] Signed by Dr Ward on 20 February 2007 and Dr Magarey on 3 April 2007.

[2] Plaintiff's Outline of Opening (11 September 2011), 4-5.

[3] Section 7(1).

[4] Section 8(1).

[5] Section 9.

[6] Section 9(2)(c).

[7] Section 9(2)(e).

[8] Section 18(d).

[9] Section 20.

[10] Section 24.

[11] Section 25.

[12] Section 26(1).

[13] Section 28(2).

1. [14] [2011] VSC 441 at [8]- [12]. See also Auswest Timbers Pty Ltd v Secretary to the Department of Sustainability & Environment (No. 2) [2010] VSC 513 (Croft J) at [6]-[10]; Tremaine Developments Pty Ltd (in liq) v Courtney Developments Pty Ltd [2011] VSC 112 (Croft J) at [13].

[15] Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [67]- [69] (McHugh J).

[16] [1993] FCA 536; (1993) 46 FCR 225 at 233-234; and see also Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 189 at [7].

[17] [1988] FCA 202; (1988) 81 ALR 397 at 401. This passage has been cited with approval in many subsequent decisions, including by French J (as he then was) in J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers Western Australia (unreported, Federal Court of Australia, 9 February 1993), and in the Supreme Court of Victoria in Murdaca v Maisano [2004] VSCA 123 at [40]; Aljade and MKIC v OCBC [2004] VSC 351; and Macedon Ranges Shire Council v Thompson [2009] VSCA 209 at [15].

[18] [2009] VSCA 209 at [15] (Redlich JA and Beach AJA).

[19] Unreported FCA, 9 February 1993 (French J).

[20] Hurtsville Municipal Council v Connor (1991) 24 NSWLR 724; Monitronix Ltd v Michael (1992) 7 WAR 195; Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 189, [18] (Harper J); Clarke v Deputy Commissioner of Taxation [2002] FCA 75; (2002) 50 ATR 173.

[21] Aljade and MKIC v OCBC [2004] VSC 351.

[22] [1993] FCA 536; (1993) 46 FCR 225 at 233-234; and see above paragraph 9; and see Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 189, at [7] (Harper J); also Auswest Timbers Pty Ltd v Secretary to the Department of Sustainability & Environment (No 2) [2010] VSC 513 at [7] (Croft J).

[23] [1991] FCA 187 at [21]- [22].

[24] Plaintiff's Outline of Submissions for the hearing on 25 October 2011, para 7.

[25] [2000] VSC 140 at [21]- [24].

[26] UFH Holdings Pty Ltd v Ord Minnett Corporation Finance Ltd (SC Vic - Chernov J, No 2020/1998, 26 June 1998, unreported) referred to by McDonald J in Thomson Land Ltd v Lendlease Shopping Centre Development Pty Ltd [2000] VSC 140 at [22], set out above.

[27] [2000] VSC 140 at [26].

[28] [2004] VSC 351 at [36] and [37].

[29] Love v Victoria (No 2) [2009] VSC 531; and also Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 289.

1. [30] ASC v Aust-Home Investments Ltd [1993] FCA 585 and Ferny Sky Pty Ltd v Capital Finance Australia [2006] VSC 366 at [25] (Whelan J).

[31] Ferny Sky Pty Ltd v Capital Finance Australia [2006] VSC 366 at [25] (Whelan J).

[32] Plaintiff's outline of submissions for the hearing on 25 October 2011 paragraph 22.

[33] Plaintiff's outline of submissions for the hearing on 25 October 2011, paragraphs 26 and 27.

[34] Mr Smith is employed by Idemeneo (No 123) Pty Ltd which, as noted previously, is a subsidiary company of Primary Health Care Limited.

[35] An email dated 5 August 2011 from Mr Noel Smith to Ms Sarah Weinberg containing notes responding to issues of concern as to the operation of the Clinic raised by Dr Magarey in his letter of 11 May attached to Mr Smith's primary witness statement (August 2011), 4**.**

[36] See Plaintiff's Outline of Submissions for the Hearing on 25 October 2011, paragraph 29.

[37] Plaintiff's Outline of Submissions for the hearing on 25 October 2011, paragraphs 38 to 41.

[39] [1991] FCA 187.

[40] [1991] FCA 187, [22].

[41] [1991] FCA 187, [22].