Consideration
113 There is no doubt that appellate courts are loathe to overturn discretionary costs orders made by single judges. This reluctance reflects a history of caution expressed by appellate courts when asked to overturn discretionary judgments generally.
114 By applying the principles laid down in Decor Corporation Pty Ltd v Dart Industries Inc 33 FCR 397, we have come to the conclusion that the primary judge took the wrong approach to the question of the costs of the Trustee's proceedings in light of the abandonment of those proceedings by the Trustee. Had the appellant not had the benefit of the contractual indemnities given to him, it is very likely that substantial injustice would have been visited upon the appellant if his Honour's decision were allowed to stand in the sense that there would almost certainly have been a substantial shortfall between the amount of legal costs expended by him in defending the Trustee's proceedings and the claims made before those proceedings were commenced, on the one hand, and the amount of legal costs recovered by him under the existing order for costs made on 26 November 2007, on the other hand.
115 For these reasons, we would grant leave to the appellant to appeal from the costs order made by his Honour on 24 December 2008.
116 A party who discontinues a proceeding without the leave of the Court becomes liable to pay the costs of the other party or parties unless, in cases where the consent of the other parties is relevant, that consent provides otherwise. This is the effect of O 22 r 3 of the Federal Court Rules. That rule reflects a more general policy of the law to the effect that a party should always be permitted to discontinue its proceedings but, in the modern setting, should usually have to pay the costs of the other parties occasioned by the bringing of the proceedings and their subsequent abandonment.
117 In Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622, McHugh J discussed some general principles applicable to the award of costs in Australian courts. At 624, his Honour said that, after a hearing on the merits, as a general rule, the successful party is entitled to his or her costs. It is success in the action that usually controls the exercise of the court's discretion in respect of costs. At 624-625, his Honour also 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. The court cannot try a hypothetical action between the parties (Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201). 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 v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201). In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd [1971] QWN 133, the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans.
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 South East Queensland Electricity Board v Australian Telecommunications Commission (Unreported, Federal Court of Australia, 10 February 1989) where his Honour ordered the respondent to pay 80% 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 (footnotes omitted).
118 In Mineralogy Pty Ltd v National Native Title Tribunal [1998] FCA 1700, the Full Court accepted that, when this Court is considering the question of costs in relation to an application for leave to discontinue proceedings pursuant to O 22 r 2(1)(d) of the Federal Court Rules, the appropriate test to apply is that which was explained by McHugh J in Ex parte Lai Qin 186 CLR 622 at 625. The Full Court held that, in most cases where there has been no trial on the merits, it is not appropriate in determining an issue of costs to make a prediction as to the outcome of the hypothetical case. That approach was followed by Rares J in Clark v ING Life Limited [2007] FCA 1960 at [16]. See also O'Neill v Mann [2000] FCA 1680 at [11]-[13] (per Finn J) and J H Lever & Co Pty Ltd v Maniotis (2005) 215 ALR 773 at [3] (per Mansfield J).
119 In our judgment, the question of costs thrown up by the grant of leave to the Trustee to discontinue the Trustee's proceedings and the subsequent discontinuance of those proceedings was one which had to be determined in light of that discontinuance and having regard to the circumstances in play at the time that that discontinuance was put into effect. As at 28 July 2008, there had been no hearing of the appellant's Cross-Claim and no determination on the merits of the issues raised in that Cross-Claim. If the question of costs occasioned by the discontinuance of the Trustee's proceedings had been determined at that time, that question would have been considered in circumstances where there had been no hearing on the merits of the claims made by the Trustee in its proceedings and would have fallen squarely within the principles enunciated by McHugh J in Ex parte Lai Qin 186 CLR 622. In a case such as the present, it would have been inappropriate for a judge to enter into a detailed examination of all relevant facts and circumstances in order to determine whether or not the bringing and maintaining of the Trustee's proceedings up to 28 July 2008 had been reasonable.
120 It is but a happenstance that the question of the costs occasioned by the discontinuance of the Trustee's proceedings came to be decided at the same time as and in light of the appellant's Cross-Claim. That circumstance, however, does not, in our view, elevate the significance of his Honour's approach to the underlying liability of the appellant to the Trustee to produce the relevant documents in the context of determining the appellant's Cross-Claim to a point where, in effect, his Honour was entitled to approach the question of costs occasioned by the discontinuance of the Trustee's proceedings on the basis that:
(a) there had, in fact, been a hearing on the merits; and
(b) on the basis of that hearing, the Trustee had been successful.
In our view, the correct approach in the present case was to consider and determine the question of costs occasioned by the discontinuance of the Trustee's proceedings on the basis that there had been no hearing on the merits as at the date of that discontinuance and no justification for entering upon an inquiry as to whether the Trustee had acted reasonably in instituting and maintaining the Trustee's proceedings.
121 The primary judge erred in approaching the matter upon the basis, in effect, that there had been a hearing on the merits and that the Trustee had been successful. The result was unreasonable and plainly unjust.
122 For these reasons, we would allow the appeal in ACD 7 of 2009.
123 The appropriate order for costs consequent upon the discontinuance of the Trustee's proceedings is an order that the Trustee pay the appellant's costs of and incidental to the Trustee's proceedings as and from 27 November 2007 up to 28 July 2008 being the date when those proceedings were discontinued.
124 The Trustee made many detailed submissions in support of its contention that this Court should not interfere with the costs order made by the primary judge. We have not found it necessary to deal with many of those submissions as we have come to a firm view on the question of costs for the reasons which we have given. The Trustee's submissions will, of course, remain with the Court file.
125 The appellant has claimed his costs on an indemnity basis. No particular arguments were advanced in support of that special order and we would decline to make an order in those terms. The appellant will receive full indemnity for his legal costs, in any event, pursuant to the contractual indemnities which we have held he is entitled to invoke.