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What happens to costs where no hearing on merits?

costs

In litigation, broadly speaking, 80% of matters settle before trial or at the latest during a trial. But what happens if the parties during their negotiations to settle prior to the hearing nut out a deal in respect of the primary issues resulting in a settlement but cannot reach an agreement on the question of costs. For example, one party gets its access orders on an interlocutory basis but no final hearing on the issues is ever determined. Or one side may assert to the other that because the other party capitulated late in the day that the capitulating party should pay the likely successful party’s costs on an indemnity basis.

Paul Taylor discussed in-depth this dilemma in his recent podcast that you can listen to here.

A dilemma along these lines came before the Supreme Court of NSW in Dymocks Franchise Systems (NSW) Pty Ltd v Chapter Three Pty Ltd [2022] NSWSC 35, in what his Honour Stevenson J noted from the outset that this issue of costs without an adjudication was one that was a “ familiar, and often difficult, the problem of determining what orders should be made for the costs of proceedings, now dismissed, but where there has been no adjudication on the merits of the proceedings.”

His Honour cited the well-established principles as follows:

  1. the court cannot try a hypothetical action between the parties;
  2. nonetheless, in an appropriate case, the 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;
  3. an example of such a case is where the court is able to conclude that one of the parties has acted so unreasonably as to justify a costs order against it;
  4. in other cases, the court may be able to conclude that one party would almost certainly have succeeded;
  5. a distinction needs to be drawn between a case in which one party, after litigating for some time, effectively surrenders to the other on the one hand; and cases where some sort of supervening event or settlement so removes or modifies the subject of the dispute that no issue remains between the parties except as to costs, although no party can be said to have won; and
  6. if both parties have acted reasonably in commencing and defending proceedings, and the conduct of the parties continued to be reasonable until the litigation was settled or the further prosecution became futile, the proper exercise of the court’s discretion will usually mean there should be no order as to costs

The relevant background facts in the Dymocks case are that Dymocks, as a well-known book retailer, entered a franchise agreement with the first defendant Chapter Three Pty Ltd.  Despite the terms of the franchise agreement which prohibited the sale of assets, such as inventory and other chattels (the “assets”), without first getting permission from Dymocks, Chapter Three purported to do just that and entered into an agreement with a third party to purchase the assets of the bookstore run by Chapter Three.

It was that action by the First Defendant that resulted in Dymocks commencing proceedings in the Supreme Court of NSW by a summons.  Dymocks obtained an ex parte restraining order preventing Chapter Three from dealing with the assets and orders requiring Chapter Three to provide information to Dymocks about the location of the assets.

Shortly thereafter it was revealed that the sale of the assets was to a company, Prosper Global Pty Ltd, of which the sole director and shareholder was the husband of the Second Defendant, Ms Kapuria, the director and shareholder of Chapter Three who had guaranteed the obligations of Chapter Three to Dymocks.  As a result, Prosper Global was joined to the proceedings though the solicitors for Chapter Three and Prosper Global stated that neither entity asserted it had any priority over any entitlement of the Dymocks in respect of the assets.

At this stage, there are Supreme Court proceedings underway, and the Defendants had not challenged the legal basis on which Dymocks was entitled to get an injunction to get the assets back, but no final hearing on the actual contract was ever determined.

Dymocks thereafter succeeded in obtaining possession of the assets.  Those assets being secured on 3 December 2021 Dymocks summons was dismissed, save for the question of costs.  Dymocks then argued for its costs.

The primary argument on costs by Dymocks was that it was entitled to its costs on an indemnity basis pursuant to the terms of the franchise agreement.  Relevantly that clause provided for payment of all legal costs, on a full indemnity basis…incurred by Dymocks in connection with a claim.  Such a claim extended to Dymocks exercising or attempting to exercise its rights under the franchise agreement.

His Honour found that the relevant construction of the clauses of the franchise agreement providing for indemnity costs was “wide enough to cover Dymock’s costs of “attempting” to exercise its rights.  Chapter Three’s obligations under this clause arise even if there is an unresolved dispute about those rights.”  Even so, Dymock’s in arguing for costs on an indemnity basis under the terms of the franchise agreement, conceded that costs were at the discretion of the court.

His Honour noted that the Court of Appeal decision in Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 that: “Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right.”

His Honour found that notwithstanding the fact that there was no adjudication on the merits it was an appropriate case to make a costs order in favour of Dymocks noting at [31] to [35] of his Judgment:

  1. As against Chapter Three and Ms Kapuria, I am satisfied that the proceedings were necessitated by the unreasonable positions adopted by them concerning Dymocks’ requests and enquiries in relation to the Assets.
  2. At no time prior to 10 November 2021 did Chapter Three or Ms Kapuria provide any confirmation as to Dymocks’ entitlement to the Assets. It was not until 10 November 2021 that Chapter Three and Ms Kapuria indicated, for the first time, that they would complete the sale of the Assets to Dymocks.
  3. As against Prosper Global, although, shortly after the proceedings were commenced, Chapter Three’s solicitors stated that Prosper Global did not assert any priority over the Assets as against Dymocks, Prosper Global did not respond to Dymocks’ requests for assurances concerning that position and only acceded to Dymocks’ position once joined as a defendant.
  4. Finally, I see there is substance in Dymocks’ contention that each of the defendants have changed their position, and in effect acceded to the substance of Dymocks’ claims, only after the commencement of proceedings.
  5. Although Dymocks has compromised, to some extent, in effect it has emerged as a “clear winner”….

Take Away

The threshold to obtain a costs order is a high bar when there has been no hearing on the merits. Even with a well-drafted indemnity clause for costs in its franchise agreement Dymocks still had to demonstrate that the facts and behaviour of the defendants fell into the category of certainly succeeding or the defendants acted so unreasonable as to justify a costs order.

Whilst such a contractual basis to obtain costs order greatly assisted Dymocks, that of itself may not be sufficient unless it can be demonstrated that the conduct of the defendants justified the making of the order.  In most cases, such factual circumstances will not be as strong as the facts in this matter.  If there is no hearing on the merits unless the behaviour of the defendant is so unreasonable or one party can demonstrate to the court that it was a clear winner then the court is likely to not make a cost order in favour of one party over the other.

In summary:

  • review your contractual rights to costs in agreements and terms and conditions.
  • Don’t assume you will obtain a costs order if you settle the proceedings. If you do not get an agreement on costs then parties need to consider running the matter.
  • If you are going to argue that an order for costs should be made without a hearing, the applicant will need to be able to point to evidence of unreasonable behaviour of the other party and/or a case that was a “clear winner”.
  • consider whether concessions should be made in open correspondence which gives rise to unreasonable conduct.
  • if such concessions are to be made then action should be taken to liaise with the other side to limit issues in dispute and costs and where necessary bring the matters to the court’s attention to avoid costs consequences as in the Dymock’s.

Pattison Hardman has assisted parties in submissions on costs, appeared on costs arguments and in assessing bills considered many a basis on which costs are ordered. Pattison Hardman can assist if there are considerations about the basis and construction of costs orders.