Taree Pty Ltd v Bob Jane Corporation Pty Ltd & Anor [2008] VSC 228

1 This is an application for costs arising out of the trial of the principal matter in the proceeding.

2 The first defendant, Bob Jane Corporation Pty Ltd ("BJC"), is the franchisor under a national franchise enterprise for the sale and supply of motor vehicle tyres, wheels, batteries and associated motor vehicle products. Individual franchise businesses operated by franchisees within the enterprise are known as "Bob Jane T-Marts". The principal director and founder of BJC is the second defendant, Bob Jane.

3 The third plaintiff, Laree Jane, is the former wife of Bob Jane. The fourth plaintiff Natarsha Ryan is the sister of Laree Jane. Natarsha Ryan is married to the fifth plaintiff, Glenn Ryan.

4 The proceeding concerned two franchise businesses within the franchise chain operated by BJC as the franchisor - the Essendon T-Mart and the Taylors Lakes T-Mart.

5 The Essendon T-Mart was originally owned and operated by Jizitti Pty Ltd ("Jizitti"), an entity under the control of Greg Wheeler. Jizitti had entered into a franchise agreement for the Essendon T-Mart with the franchisor BJC, on 2 July 1990. The terms of this franchise agreement were subsequently varied by a deed of variation dated 21 October 2002. For the purposes of these reasons, the original franchise agreement for the Essendon T-Mart as varied by the deed of variation is referred to as "the Essendon Franchise Agreement".

6 In late 2005 the Essendon T-Mart came up for sale. Laree Jane and her sister Natarsha Ryan expressed interest in purchasing the business. They incorporated the first plaintiff Taree Pty Ltd ("Taree") to act as the vehicle for the purchase and as the subsequent operator of the business. Taree entered into an agreement for the purchase of the business by an agreement between it and Jizitti dated 23 November 2005. The directors of Taree were Laree Jane and Natarsha Ryan. Glenn Ryan acted as manager of the Essendon T-Mart.

7 As part of the sale transaction in relation to the Essendon T-Mart, the defendants' case was that a deed of guarantee and indemnity dated 1 December 2005 ("the Essendon Guarantee") had been entered into and signed by both Laree Jane and Natarsha Ryan. The Essendon Guarantee purported to guarantee to the franchisor BJC the performance by Taree of the Essendon Franchise Agreement which had been assigned to it. The Essendon Guarantee also purported to provide an indemnity to the franchisor BJC in respect of the Essendon T-Mart to be operated by Taree.

8 The Taylors Lake T-Mart was the subject of a franchise agreement which commenced on 1 December 2001 (the "Taylors Lakes Franchise Agreement"). The secondnamed plaintiff Latarsh Pty Ltd ("Latarsh") was the franchisee of the Taylors Lakes T-Mart, and Laree Jane, Bob Jane, Natarsha Ryan and Glenn Ryan were all covenantors under the Taylors Lakes Franchise Agreement. Glenn Ryan was also nominated under the agreement as the "Franchisee's Representative" and manager of the Taylors Lakes T-Mart.

9 It does not appear that the obligations of Latarsh under the Taylors Lakes Franchise Agreement was supported by a separate guarantee or indemnity, as was argued to be the case with regard to the Essendon T-Mart. However, pursuant to clause 4 of a deed of variation to the Taylors Lakes Franchise Agreement (undated), Laree Jane, Natarsha Ryan, Glenn Ryan and Bob Jane each agreed to become parties to, and be bound by, the terms of the Taylors Lakes Franchise Agreement.

10 At the centre of the dispute in the principal proceedings was the entitlement claimed by the franchisor BJC, arising from the alleged defaults of the franchisees Taree and Latarsh to make payments due to BJC under the franchise agreements, to take possession of the Essendon T-Mart and the Taylors Lakes T-Mart. BJC served notices of default dated 7 December 2006 on Taree and Latarsh, giving notice that unless the claimed defaults were remedied, the Essendon Franchise Agreement and the Taylors Lakes Franchise Agreement would be terminated on 24 January 2007.

11 The parties made efforts to resolve the matter during the course of the trial. On 26 May 2008 the parties requested an adjournment to undertake negotiations in the proceeding which was granted. On 27 May 2008 the Court was advised by senior counsel then appearing for the plaintiffs, Ms McMillan SC, that a draft deed of settlement had been prepared, but that some matters remained the subject of further discussion between the parties.

12 Then, on 28 May 2008, at the request of Ms McMillan SC, I granted leave to her instructing solicitor to file a notice that the solicitor had ceased to act for the plaintiffs. I granted this leave pursuant to rule 20.03(3)(b) of the Supreme Court (General Civil Procedure) Rules 2005 ("the Rules"). Following this step, Ms McMillan SC and her junior counsel retired from the case. The first plaintiff Taree and the second plaintiff Latarsh were no longer represented in the proceeding. Thereafter, the first and second plaintiffs took no further part in the proceeding and the third to fifth plaintiffs discontinued the proceeding but reserved their right to make submissions on costs. I then granted leave to the third plaintiff Laree Jane, the fourth plaintiff Natarsha Jane, and the fifth plaintiff Glenn Ryan to continue to represent themselves.

13 On the application of the defendants, and having heard the evidence presented during the trial to that point and some further evidence adduced by the defendants, the declaratory relief sought by the defendants in their counterclaim in the proceeding was granted. Two declarations were made: first, that the Essendon Franchise Agreement was terminated on 24 January 2007 pursuant to the notice of default dated 7 December 2006; second, that the Taylors Lakes Franchise Agreement was also terminated on 24 January 2007 pursuant to the notice of default dated 7 December 2006.

14 It was explained to the third to fifth plaintiffs that the effect of the declarations was to entitle the defendants to take possession of the two franchise businesses. The grant of the declarations was not opposed by the third to fifth plaintiffs. No submissions were made on the declaratory relief by the first and second plaintiffs.

15 Having made these declarations, and there being no other relief being sought by the defendants on their counterclaim other than costs, there followed a hearing on the submission of the defendants on costs.

16 The argument on costs commenced on 28 May 2008 and was completed on 29 May 2008. The defendants sought a special costs order against the plaintiffs on the basis of the terms of the contracts existing between the parties.

17 The defendants submitted that the appropriate order against the first four plaintiffs was that they pay the defendants' costs of the claim and the counterclaim on an indemnity basis, and as against the fifth plaintiff, Glenn Ryan, that he pay the defendants' costs on a party and party basis, together with one half of the difference between their indemnity costs and party and party costs.

18 In making this application for a special costs order against Laree Jane and Natarsha Ryan, Mr Collins SC, appearing for both defendants, relied in part upon the Essendon Guarantee, which purported to guarantee the performance of Taree's obligations to BJC under the Essendon Franchise Agreement.

19 The signatures of both Laree Jane and Natarsha Ryan on the Essendon Guarantee were identified by an executive of BJC, Alex Yung Le Chung. Mr Chung also recognised the signature of the witness to these signatures, Mr Geoff Williamson.

20 Under cross-examination, Laree Jane initially agreed that the Essendon Guarantee was signed by her. She also recognised the signature of her sister Natarsha Ryan in the execution clause of the Essendon Guarantee. However, she testified that she did not remember signing the Essendon Guarantee, and did not remember seeing the document until she saw it in the court book produced for these proceedings. In the course of her cross-examination she also denied signing the document and even alleged that it was a forgery.

21 I accept that the Essendon Guarantee was executed by the guarantors, Laree Jane and her sister Natarsha Ryan under the execution clauses of that document. The Essendon Guarantee was therefore binding upon both of them as guarantors according to its terms.

(e) the Guarantor [Laree Jane and Natasha Ryan] guarantees to the Franchisor [BJC] that the Franchisee [Taree] will duly perform and observe each and every warranty, undertaking agreement and other obligation on the part of the Franchisee or the Franchisee's Representative contained therein (notwithstanding any legal limitation or incapacity of or other circumstances relating to the Franchisee) including without limitation the payment of all money on the dates and at the times in the manner herein.

23 A guarantor may be liable for the costs incurred in enforcing the principal transaction, depending on the wording of both the guarantee and the principal transaction.[1] In this case, the franchisor BJC submitted that the liability of Taree for such costs arose directly under the terms of the Essendon Franchise Agreement. Reliance was placed on clause 13.7 of the Essendon Franchise Agreement which provided:

Upon the occurrence of an event of default by the Franchisee, the Franchisor will be entitled to recover from the Franchisee in addition to any applicable claim plus interest, legal fees, costs and expenses incurred by the Franchisor as a result of such default on an indemnity basis.[2]

24 It was submitted that the effect of clause 1(e) in conjunction with clause 13.7 was that the Franchise Agreement imposed a contractual obligation upon Taree to pay costs incurred by the franchisor in enforcing the Essendon Franchise Agreement, including the prosecution of this proceeding on an indemnity basis.

25 In my opinion, clause 1(e) of the Essendon Guarantee, when the text of the clause is considered alone, is broad enough to impose liability on the Guarantors Laree Jane and Natarsha Ryan for costs incurred by BJC in enforcing the Essendon Franchise Agreement against Taree under clause 13.7. This includes the costs of enforcing the Franchise Agreement in this proceeding on an indemnity basis.

26 However, BJC cannot enforce the claim for costs founded on clause 1(e) of the Essendon Guarantee until such time as Taree defaults in its obligation to pay costs under clause 13.7. Until such event, no amount becomes due under clause 1(e) of the Essendon Guarantee. The terms of clause 1(e) of the Essendon Guarantee are not such as to impose on the guarantors Laree Jane and Natasha Ryan a liability to assume the primary obligation of Taree to pay any costs of the proceeding on an indemnity basis under the Essendon Franchise Agreement. The liability of the guarantors under clause 1(e) of the Essendon Guarantee is secondary in the sense that it is contingent on the default of Taree in meeting the costs of the proceeding under clause 13.7 of the Essendon Franchise Agreement, which has not occurred. No such costs have yet been either awarded or quantified.

27 However, the Essendon Guarantee also contains an indemnity clause in clause 1(f) as follows:

(f) The Guarantor [Laree Jane and Natasha Ryan] hereby indemnifies the Franchisor [BJC] and agrees that at all times hereafter keep (sic) the Franchisor indemnified from and against all damages, claims, costs, losses and expenses of whatsoever nature which the Franchisor may suffer or incur consequent upon or arising directly or indirectly out of any act, neglect or default whatsoever of the Franchisee [Taree] or any of its employees, Franchisees, officers or customers in connection with the Franchise or any breach or non-observance by the Franchisee of any of the obligations or conditions contained or implied in the Franchise Agreement which obligations the Franchisee is required to perform or observe provided always that this indemnity shall not create any liability of the Franchisee's Representative to third parties for product liability claims for Authorised Products.

28 Clause 1(g) of the Essendon Guarantee also provides:

(g) This indemnity will continue and the Guarantor will remain liable to the Franchisor under this indemnity notwithstanding that as a consequence of any breach or non-observance by the Franchisor has exercised any of its rights under the Franchise Agreement including its rights of termination and notwithstanding that the Franchise Agreement may for any reason whatsoever be unenforceable either in whole or in part.

29 In the usual case, under a contract of indemnity, the party providing the indemnity assumes a primary liability. This is true whether or not a third party, such as Taree in this case, is in default.

30 The indemnity clause 1(f) in the Essendon Guarantee is again drawn broadly. I construe the indemnity, standing on its own, as capable of applying to the expenses incurred by BJC in seeking to enforce the Essendon Franchise Agreement arising from the default of Taree. As such and when the text is considered standing alone, the indemnity clause of the Essendon Guarantee as drawn would have been capable of rendering Laree Jane and Natasha Ryan liable for the full costs on an indemnity basis of BJC in defending this proceeding and prosecuting its counterclaim.

Plaintiffs' Challenge to the Essendon Guarantee

31 The third to fifth plaintiffs, through their representative Glenn Ryan, presented a case on costs which sought to challenge the Essendon Guarantee and the indemnity contained within it. In essence, the third to fifth plaintiffs submitted that:

(a) the Guarantee was critical to the issue of costs in the matter;

(b) there was considerable doubt as to the authenticity of the Guarantee;

(c) the Guarantee was not witnessed by Geoff Williamson in the presence of Laree Jane on 30 November 2005;

(d) Geoff Williamson was not present on 30 November 2005;

(e) Laree Jane denies that the content of the Guarantee "matches any document she signed".

32 On the second day of the costs hearing, on 29 May 2008, Mr Collins SC, who appeared on behalf of the defendants, developed a second basis for a special costs order. Mr Collins sought to rely upon the deed of variation which had been entered into in respect of the "Taylors Lakes T-Mart". The covenantors under the deed of variation included the third plaintiff, Laree Jane, the fourth plaintiff, Natarsha Jane, and the fifth plaintiff, Glenn Ryan. Also included as a covenantor was the second defendant, Bob Jane. The execution page of the deed of variation was signed by all four covenantors. The covenantors were also expressed in the deed of variation to be parties to the deed. Clause 4 of the deed of variation provided:

The covenantors and the parties agree by this deed that the covenantors will be added as parties to the franchise agreement (as varied by the new terms and conditions) and bound by the terms therein.

33 The relevant franchise agreement is the franchise agreement referred to in recital A and specified in the schedule to the deed of variation. The franchise agreement was defined in the schedule to be the franchise agreement between the franchisor, the franchisee and the franchisee's representative dated 1 December 2001 ("the Taylors Lakes Franchise Agreement"). That franchise agreement was annexed to the deed of variation. The defendants relied upon clause 13.7 of the Taylors Lakes Franchise Agreement, which is identical to clause 13.7 of the Essendon Franchise Agreement. It is expressed in the following terms:

Upon the occurrence of an event of default by the Franchisee, the Franchisor will be entitled to recover from the Franchisee in addition to any applicable claim plus interest, legal fees, costs and expenses incurred by the Franchisor as a result of such default on an indemnity basis.[3]

34 Further and significantly, clause 19 of the Taylors Lakes Franchise Agreement provided:

(a) The Covenantors agree and acknowledge that they have asked the Franchisor to enter into this Agreement.

(b) In consideration of the Franchisor entering into this Agreement, the Covenantors:

(A) the Franchisee and the Franchisee's Representative will honour and perform all of their obligations under this Agreement and any other agreement between the Franchisor and the Franchisee; and

(B) the Franchisee's Representative will exercise its powers as a director or shareholder of the Franchisee (as the case may be) to ensure the Franchisee honours and performs all of its obligations under this Agreement and any other agreement between the Franchisor and the Franchisee,

(ii) indemnifies the Franchisor and agrees to keep the Franchisor indemnified against all loss, damage, costs and expenses suffered by the Franchisor (including, without limitation, any legal costs and disbursements on a solicitor and own client basis) if any of the Guaranteed Obligations cannot be enforced against the Franchisee or the Franchisee's Representative, or are not performed for any reason, including, without limitation:

(A) any lack of authority or lack of power, any legal limitation, disability or incapacity of or affecting any person;

(B) the Franchisee's or the Franchisee's Representative's obligation to perform the Guaranteed Obligations being void, voidable or otherwise unenforceable (whether or not the Franchisor knew of the matters or facts relating thereto); or

(C) any of the events referred to in clauses 13.1 to 13.3 (inclusive) occur.

(c) The Covenantors agree and acknowledge that the guarantee and indemnity in Clause 19.1(b):

(ii) continues notwithstanding any extension or renewal of this Agreement; and

(iii) continues notwithstanding any assignment or sub-contracting of this Agreement. [4]

35 An identical contractual regime in respect of the obligation to pay legal costs arising from the default of the franchisee also existed under the Essendon Franchise Agreement pursuant to clauses 13.7 and 19.1(b)(ii). The obligations applied, however, only to the third plaintiff, Laree Jane, and the fourth plaintiff, Natarsha Ryan, who were covenantors under the Essendon Franchise Agreement. The obligation to pay legal costs did not arise in respect of Glenn Ryan, who was not a party to or a covenantor under the Essendon Franchise Agreement in relation to the Essendon T-Mart.

36 In my opinion, the provisions as to costs under the two suites of documents comprising the Essendon Franchise Agreement and the Taylors Lakes Franchise Agreement contain internal contradictions as to the liability to pay costs incurred as a result of enforcing the franchise agreements. Clause 13.7, which is common to both franchise agreements, purports to require these costs to be paid on an "indemnity basis". On the other hand, clause 19.1(b)(ii), which is also common to both franchise agreements, imposes an obligation to pay these costs on "a solicitor and own client basis". Further, the Essendon Guarantee, by its indemnity clause 1(f), as I have found, is also capable of rendering the guarantors liable to paying costs on an indemnity basis, although it is expressed in a different form to the common clause 19(1)(b)(ii) of the franchise agreements.

37 The Rules draw a clear distinction between costs awarded on a solicitor and client basis and costs awarded on an indemnity basis.[5] Although costs awarded on a solicitor and client basis under Rule 63.28(b) will be more generous than costs awarded on a party and party basis, they stop short of providing a complete indemnity as provided for under Rule 63.28(c). The difference is significant.

38 In cases such as this, the general rule is that, in the absence of an agreement to the contrary a successful party or parties such as the defendants in this case are entitled to costs on a party and party basis. However, the general rule may yield to the position where an alternative basis is shown "either on some well-recognised principle, or under some contract plainly and unambiguously expressed".[6]

39 The New South Wales Court of Appeal reinforced the principle in Kyabram Property Investments Pty Ltd v Murray.[7] Beazley JA (with whom Hodgson and Ipp JJA agreed) set out the following principles:

(i) It is well established that a mortgagee may rely upon its contractual entitlement to costs so as to claim an order other than on a party/party basis. In Re Adelphi Hotel (Brighton) Limited [1953] 2 All ER 498, Vaisey J at 502 observed that the prima facie rule was that costs were awarded on a party/party basis unless some alternative basis was shown "either on some well-recognised principle, or under some contract plainly and unambiguously expressed". The New Zealand Court of Appeal applied the rule to the payment of a mortgagee's legal costs in a recovery action: ANZ Banking Group (NZ) Limited v Gibson (Court of Appeal) [1986] 1 NZLR 556 at 566, 569.

(ii) The application of the principle is well recognised in Australia: see Inglis and Anor v Commonwealth Trading Bank of Australia (1973) 47 ALJR 234 at 235. In AGC (Advances) Limited v West (1984) 5 NSWLR 301, Hodgson J stated (at 304-305) that at general law a mortgagee was entitled to party/party costs only but that the general law was subject to the precise terms of any provision of the mortgage. Cole J accepted this to be correct in Sandtara Pty. Limited & Others v Australian European Finance Corporation Ltd & Others (1990) 20 NSWLR 82, at 97.[8]

40 Nevertheless, even where a contractual term for the payment of costs on a basis other than the usual party and party basis exists and is expressed in plain and unambiguous language, the Court continues to have a discretion in relation to making orders for the payment of such costs. In Kyabram, the mortgage agreement expressly stated that the mortgagee should be liable to pay costs on a solicitor/own client basis. Nevertheless, the Court held[9] that, even where such an agreement exists, the order for costs continues to be at the discretion of the Court.

41 Similarly in the case of Russo v Buck (No. 2)[10] Doyle CJ observed that the "provisions of the mortgage is a factor supporting the exercise of my discretion ... [but the] provision does not require me to exercise my discretion ...".

42 The principles are not confined to the relationship of mortgagor and mortgagee. In Abigroup Ltd v Sandtara Pty Ltd[11] the Court of Appeal of the Supreme Court of New South Wales considered the position of a guarantor, Abigroup Ltd, in respect of a lessee's obligations under a lease of commercial premises. The lessee failed to pay the rent due under the lease and subsequently went into liquidation. In a period between 1991 and 1998 the parties were involved in a series of proceedings in the Supreme Court of New South Wales. Various orders as to costs were made in those proceedings from time to time. The lessor brought separate proceedings in the District Court of New South Wales seeking to recover its costs and expenses incurred in the Supreme Court proceedings on a solicitor and client basis. The District Court Judge held that the lessor was entitled under its indemnity to recover costs on a solicitor and client basis. Abigroup, as the guarantor, appealed this decision to the Court of Appeal. The Court of Appeal upheld the entitlement of the lessor to claim costs on a solicitor and client basis against the guarantor.

43 A second principle firmly established in the case law is that the discretion to award costs in the case where there is a contractual right to those costs will ordinarily be exercised so as to reflect that contractual right. Gomba Holdings (UK) Ltd & Ors v Minories Finance Ltd & Ors (No. 2)[12] was another case involving a claim for costs based on the provisions of a mortgage. The Court of Appeal set out the principles which in its view emerged from the cases, and was relevant to the consideration of a contractual right to a special costs order in cases which do not rely upon the equity of redemption in a mortgage. The principles are that:

(a) An order for the payment of costs of proceedings by one party to another party is always a discretionary order.

(b) Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right.

44 To like effect is the South Australian case of Citibank Savings Ltd v Nicholson & Ors[13] where Williams J, speaking for the Full Court of the Supreme Court of South Australia said that:

the terms of any costs order in favour of a successful mortgagee should ordinarily reflect the terms of any special bargain contained in the mortgage contract.

45 The defendants in their submission sought to exclude the operation of the principles in Port of Melbourne Authority v Anshun[14] and persuade me to exercise my discretion in favour of granting the special costs order sought. They argued that awarding costs on a party and party basis in this proceeding, would not preclude them from suing for the balance of those costs on an indemnity basis founded on their contractual causes of action. This was raised as a compelling reason to exercise the Court's discretion in accordance with the contractual entitlement in this proceeding, because not to do so would be an exercise in futility.

46 In putting this argument, reliance was placed on Abigroup Ltd v Sandtara Pty Ltd.[15] In that case, the appellant, Abigroup, submitted that, because the lessor failed to proceed upon its contractual right in the Supreme Court proceedings, it was estopped from doing so in later proceedings. In so doing, the appellant argued that the bringing of such a claim in separate proceedings offended the principle enunciated in Port of Melbourne Authority v Anshun Pty Ltd.[16] Stein JA took the view that the appellant's submission that the respondent's failure to proceed upon its contractual right in the Supreme Court proceedings estopped it from doing so in later proceedings, was misconceived. His Honour reasoned that the lessor's right to enforce its contractual right in Court had not yet crystallised before the Supreme Court proceedings were completed. Accordingly, it could not proceed in those proceedings to enforce its contractual indemnity and it did not fail to bring all of its claims in those proceedings. It was therefore not estopped by the principles of Anshun.[17] Further, the possibility of conflicting judgments did not arise because no judgment in the Supreme Court pronounced the respondent's rights to indemnity under the guarantee. As such, it was not relevant that in one case before the Supreme Court, the lessor had asked for the contractual indemnity to be taken into account in the exercise of the discretion as to costs. As Stein JA said:[18]

The authorities discussed earlier make it clear that Sandtara's contractual right of indemnity for all costs remains independently of the court's orders. By seeking costs in the Supreme Court, the respondent did not lose or surrender its contractual rights.

Nor can the respondent's proceedings in the District Court be seen as an abuse of process. The proceedings did not seek to reverse the decisions of the Supreme Court, contrary to the appellant's submission, but merely sought to enforce the respondent's contractual rights. The respondent's contractual right was simply not an issue before the Supreme Court.

In the course of his reasoning, Stein JA said further:[20]

It is, of course, correct that a court is not bound to give effect to any extra curial contract as to costs when exercising its discretion to award costs. It does not follow, however, that the discretion takes over from the contract and the exercise of discretion against giving effect to the contract precludes enforcement of the contract as to costs. As Salter J said in Mansfield v Robinson [1928] 2 KB 353 at 359, agreements as to costs are common practice and perfectly valid and enforceable. Gomba did not overrule Mansfield, as seems to have been suggested by the appellant. Although Scott LJ noted that some of the dicta in Mansfield was not easily reconcilable, the judgment of the court is consistent with Mansfield, see for example at 194-195. For other relevant examples see In Re Shanahan (1941) 58 WN (NSW) 132 at 134; Maher v Network Finance Ltd (1986) 4 NSWLR 694; and Elders Trustee & Executor Co Ltd v Eagle Star Nominees Ltd (1986) 4 BPR 9205. The contractual right simply stands independently of the curial power and order.

Young CJ in Eq in agreeing with Stein JA added:[21]

As M H McLelland J said in Elders Executors and Trustees & Executor Co Ltd v Eagle Star Nominees Ltd (1986) 4 BPR 9205, 9209, "A contractual stipulation as to how costs in future litigation are to be borne between the parties is not vitiated by an inconsistent order for costs in that litigation."

47 Pursuant to s.24 of the Supreme Court Act 1986 and Order 63.02 of the Rules, the Court has a discretion over the basis upon which it may order the costs of a proceeding before it. Where the parties to an action are also parties to a contract which, by its terms, provides in plain and unambiguous language that costs will be paid on a special basis, ordinarily the Court will exercise its discretion in a manner which is consistent with the contractual provisions.

48 However, in this particular case, by reason of the internal contradictions in the franchise agreements as to the basis upon which the plaintiffs would be liable to BJC for the costs it incurred in enforcing those agreements, I find that the obligation to pay such costs is not provided for in plain or unambiguous language. For this reason, in the exercise of my discretion under the Rules, I decline to award costs against the plaintiffs on any basis other than on a party and party basis.

49 Further, even if I am wrong about the internal contradictions in the franchise agreements as being a basis for dismissing the defendants' claim for indemnity costs, I would in the exercise of my discretion also dismiss the claim on other grounds.

50 The first ground is that, if the first defendant had intended to claim costs on other than a party and party costs basis in these proceedings, it should have done so in its pleadings. It is to be noted that in Kyabram the Court ultimately exercised its discretion to deny indemnity costs on the basis that the mortgagor had only claimed for "costs" on its statement of claim, which would conventionally be interpreted to mean costs on a party and party basis. This may be contrasted with the position in a more recent case in New South Wales, National Australia Bank Ltd v Landy Chen-Conway & Anor[22] in which Einstein J ordered costs to be paid to a mortgagee on an indemnity basis where the plaintiff mortgagor expressly sought relief in the proceeding which included costs on a solicitor and client (or indemnity) basis.

51 In this proceeding the first defendant filed a counterclaim seeking relief against all the plaintiffs, which included in each case, a claim merely for "Costs". On its face, there is nothing in the counterclaim to indicate that costs would be claimed other than on the usual party and party basis, nor that the first defendant would rely upon any contractual terms in support of its claim for indemnity costs made under the Rules. Further, the second defendant filed no counterclaim in the proceeding seeking any relief against the plaintiffs by way of costs or otherwise.

52 Indeed, the pleaded paragraphs in the first defendant's counterclaim, if anything, point away from a special costs order as being the basis on which costs would be claimed. A number of terms of both franchise agreements are pleaded in the counterclaim and breaches of the terms are alleged. For example, it is pleaded that Laree Jane, Natarsha Ryan and Glenn Ryan were covenantors under the Taylors Lakes Franchise Agreement. In each case, the guarantees and indemnities under clause 19 of the franchise agreements are pleaded as obligations of the covenantors, including the obligation that the covenantors will:

indemnify and agree to keep indemnified the franchisor against all loss, damage, costs and expenses suffered by the franchisor (including, without limitation, any legal costs and disbursements on a solicitor and own client basis) if any of the franchisee's obligations are not performed for any reason.[23]

Further, in relation to the Essendon T-Mart, it is pleaded in the counterclaim that Laree Jane and Natarsha Ryan are each liable under the indemnity contained in clause 19 for the payment of certain sums due to the first defendant, BJC, being sums payable by the franchisee Taree to BJC under the Essendon Franchise Agreement. Similar claims against Laree Jane, Natarsha Ryan and Glen Ryan in respect of alleged defaults on the part of the franchisee Latarsh under the Taylors Lakes Franchise Agreement are also made. Nowhere is it claimed that any of the plaintiffs are liable to pay costs other than on a party and party basis, let alone on the indemnity basis now claimed.

53 If the defendants intended to seek costs against the plaintiffs other than on the usual party and party basis it would have been essential in this case to define with clarity in the pleadings precisely what costs orders were sought, in favour of which of the defendants such orders were sought, against which of the plaintiff parties the orders were sought and to define which contractual terms were relied upon to support a special costs order. In this case, the absence of pleadings on the point was more than of mere theoretical significance because of the internal inconsistencies within the contractual documentation as to the basis upon which the plaintiffs could be liable for costs in the exercise of the discretion under the Rules.

54 Another matter of concern is that the basis of the claim for a special costs order should have been specifically pleaded in the counterclaim if it was to have been pursued. This shortcoming is well illustrated in this case. On the first day of the costs hearing, the second defendant proved the Essendon Guarantee in respect of the Essendon T-Mart. This guarantee was admitted into evidence. Mr Ryan, who advanced the case on behalf of the third to fifth plaintiffs on the costs issue, then proceeded to challenge the Essendon Guarantee on a variety of grounds which occupied most of the day in court on 28 May 2008. On the next day of the costs hearing, Mr Collins SC said that, having looked at the documents more closely, the factual issue concerning the Essendon Guarantee did not assume great importance because the first defendant was also placing reliance on the terms of the franchise agreements, to which the relevant plaintiffs were parties, in order to make out the claim for special costs orders. Time spent in Court on sounding the issues surrounding the execution of the Essendon Guarantee, which occupied most of the first day of the costs hearing, may well have been avoided, or at least significantly curtailed, had the basis on which the first defendant wished to proceed on its cost claims under the Rules been made clear in the pleadings in its counterclaim.

55 Further, in this particular case, as was made known to the Court, the parties were involved in extensive negotiations which occupied some two days of Court allocated time in an endeavour to resolve the litigation. The costs of this case are likely to be considerable. The plaintiffs were entitled to know during the course of their negotiations to settle the matter precisely what they were facing in terms of costs as disclosed in the pleadings. Perhaps even more critically, the plaintiffs were entitled to full particulars of their potential exposure to liability to pay costs pursuant to a special costs order before abandoning the litigation and dismissing their lawyers. I am not at all sure that the third to fifth plaintiffs understood their full potential exposure to costs founded on the franchise agreements, until it was explained to them by me in Court after the plaintiffs had abandoned their claims. Had the contractual basis relied upon to support an order for costs being made under the Rules on an indemnity basis been pleaded by the first defendant in the counterclaim, the position may well have been different.

56 In my opinion, the third to fifth plaintiffs were entitled to be put on notice of the full claim made against them in the counterclaim. If any other claim was intended to be pressed against them, it should have been pleaded. In this case, a failure to do so would contravene Order 13.07(1)(b) of the Rules which requires a party, in any pleading subsequent to a statement of claim to plead specifically any fact or matter which, if not pleaded specifically, might take the opposite party by surprise. In my opinion, in the context of the counterclaim as pleaded, and in the context of the plaintiffs being unrepresented during the costs hearing, the present claim for payment of costs on the indemnity basis under the Rules, unless pleaded specifically not only might have, but in all likelihood would have, taken the third to fifth plaintiffs by surprise.

57 Another matter to be dealt with concerns the second defendant, Bob Jane. The second defendant would not be entitled to claim his costs of the proceeding on a contractual basis against any of the plaintiffs in any event. Any such remedy, if it was available, was confined to the franchisor, BJC. Bob Jane had no contractual entitlement under the franchise agreements to have any costs which he might personally incur, arising from or related to the enforcement of those agreements, paid on any basis other than the usual party and party costs basis. In this regard, it is to be noted that Bob Jane filed a separate defence to the statement of claim filed by the plaintiffs, and did not seek any relief by way of counterclaim. Indeed, Bob Jane, as a co-covenantor along with Laree Jane, Natarsha Ryan and Glenn Ryan under clause 4 of the undated deed of variation to the Taylors Lakes Franchise Agreement, may well be liable to his co-covenantors for a portion of any special costs orders awarded under that agreement, in the event that any such orders were to be made against them which did not include Bob Jane. Accordingly it was not possible to make any order in favour of Bob Jane for his costs to be paid on an indemnity basis under the Rules, in reliance on the contractual terms.

58 In this case, I do not accept that the exercise of my discretion should be swayed by the submission that, by the principles in Anshun, the first defendant will not be precluded from commencing a subsequent action claiming indemnity costs against the first to fifth plaintiffs founded on the contractual causes of action and for this reason it would be futile for the Court to order costs merely on the party and party basis.

59 In this regard, it is to be noted that I have not finally pronounced upon the rights of the first defendant to a special costs award based upon the contracts comprised in the franchise agreements. The quantum of the claim for costs on an indemnity basis has not yet crystallised, nor could it crystallise before the action is finally disposed of. It was therefore not possible in this proceeding to finally determine the first defendant's full claim to costs, founded on any contractual claim, even if I was minded to do so. Further, although I have found that the common clauses 13.7 and 19(1)(b) in the franchise agreements and clause 1(f) of the Essendon Guarantee are contradictory, and therefore ambiguous, I have made no finding as to the meaning of those clauses when read together as a whole. Neither have I made any finding as to the liability of any of the plaintiffs to BJC for the payment of costs, other than that it should be on a party and party basis. Further, I have made no finding as to whether these clauses are so uncertain when read together, that none of them are capable of providing a contractual basis for a claim for costs beyond the usual party and party basis. My findings have been limited to determining that there is such ambiguity in the application of these clauses, that, in the exercise of my discretion as to costs under the Rules, I ought not to award costs against the plaintiffs on a basis other than a party and party basis.

60 However, there remains the possibility that a judgment in any subsequent action in favour of the first defendant for costs founded on the terms of the contracts, over and above the costs awarded on a party and party basis in this proceeding would conflict with my findings that the relevant contractual provisions are contradictory and give rise to the ambiguity which I have described. The first defendant was entitled to make a fresh claim in a separate and subsequent proceeding for its additional costs on a contractual basis.[24] However, it elected to proceed with its claim for costs in this proceeding, seeking to rely upon contractual provisions in support of its claim for a special costs order under the Rules. In so doing it put the contractual provisions, in particular the certainty with which those contractual provisions were expressed, in issue. Having taken the course it did in this case, the first defendant would, in my opinion, be estopped under the principles in Anshun from proceeding to make any further claim for costs based on the contractual terms in the franchise agreements.

61 Even if I am wrong about the principles of Anshun being enlivened to estop the defendants from pursuing their contractual claim in a further and subsequent proceeding, this would not render any order I would make against the plaintiffs to pay costs of the first defendant on a party and party basis futile. As is made clear in Abigroup Ltd v Sandtara Pty Ltd,[25] whatever contractual rights the first defendant may have to claim costs against any of the plaintiffs on an indemnity basis, are independent of orders as to costs which are made by the Court under its Rules. The possibility of the first defendant pursuing any rights to claim additional costs on an indemnity or other basis founded on contractual terms in a subsequent proceeding, would not thereby render the making of a costs order on the usual basis under the Rules in these proceedings futile.

62 Accordingly, I put to one side the submission of the defendants founded upon the futility of an order for payment of costs on a party and party basis, as a factor in the exercise of my discretion.

63 For these reasons, I dismiss the application of the first defendant as to the award of costs of the proceeding on a basis other than party and party costs.

64 I order that the plaintiffs pay the costs of the defendants of the proceeding, including reserved costs, and that they do so on a party and party basis. I also order that the costs of the proceeding which the plaintiffs are ordered to pay are not to include the costs of the failed application of the defendants for a special costs order, including the costs of the hearing on 29 May 2008 and so much of the hearing on 28 May as was devoted to the costs issue.

[1] Cf Hoole Urban District Council v Fidelity and Deposit Co of Maryland [1916] 1 KB 25.

[5] See Rule 63.28(b) and (c), Supreme Court (General Civil Procedure) Rules 2005.

[6] Re: Adelphi Hotel (Brighton) Ltd [1953] 2 All ER 498 per Vaisey J at 502.

[7] [2005] NSWCA 87.

[10] [2007] SASC 157.

[11] [2002] NSWCA 45.

[12] (1993) Ch 171.

[13] [1998] SASC 7096.

[14] (1981) 147 CLR 559.

[16] [1981] HCA 45; (1981) 147 CLR 589.

[22] [2008] NSWSC 485.

[24] Abigroup Ltd v Sandtara Pty Ltd, above.