Australiawide Airlines Ltd v Aspirion Pty Ltd

NEW SOUTH WALES COURT OF APPEAL

CITATION: AUSTRALIAWIDE AIRLINES LTD v ASPIRION PTY LTD [2006] NSWCA 365

FILE NUMBER(S):
40887/2005

HEARING DATE(S): 13/10/2006

DECISION DATE: 15/12/2006

PARTIES:
Australiawide Airlines Ltd T/as Regional Express - Appellant
Aspirion P/L - Respondent

JUDGMENT OF: McColl JA Bryson JA Basten JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 2273/05

LOWER COURT JUDICIAL OFFICER: McLaughlin AsJ

COUNSEL:
Appellant’s counsel: J. Simpkins SC
Respondent’s counsel: M.J. Dawson

SOLICITORS:
Appellant’s solicitor: Allens Arthur Robinson
Respondent’s solicitor: TressCox Lawyers

CATCHWORDS:
COSTS – proceedings withdrawn or discontinued – respondent IAS contracted to do work to reduce charges incurred by appellant REX’s airline business for payments calculated by reference to costs savings – parties disputed amount payable – inconclusive reference to mediation under contractual terms – communications proceeded between a Director of IAS and Financial Controller of REX towards establishing whether there was any liability and its amount – concurrently another Director of IAS sent a letter of demand to Directors of REX, followed by Statutory Demand, to which REX did not respond – concurrent of communication were independent of each other – IAS then brought Winding-Up proceedings, REX produced full and clear accountancy evidence of solvency and applied for leave to oppose under Corporations Act s.459S – IAS consented to dismissal of Winding-up proceedings and parties argued costs before McLaughlin AsJ who ordered REX to pay IAS’ costs up to date of filing REX’s evidence of solvency and each party to pay own costs thereafter – on appeal, costs order set aside on ground of misdirection on UCPR 42.20 and other errors – on re-exercise by Court of Appeal, IAS ordered to pay REX’s costs. Consideration of operation of UCPR 42.20 with observations of McHugh J in Ex parte Lai Qin 186 CLR 622 at 625.

LEGISLATION CITED:
Civil Procedure Act 2005 (NSW) ss.56(1) & 98; Sch 6, cl 5(2)
Corporations Act 2001 (Cth) ss. 459C(2)(a), 459E, 459P, 459S
High Court Rules (Cth) O71 r39
Industrial Relations Act 1996 (NSW) s.179
Supreme Court Act 1970 (NSW) s.76
Supreme Court Rules 1970 (NSW) Pt.40 r.8; Pt.52A rr.11, 21
Uniform Civil Procedure Rules 2005 (NSW) Pt.42, Div.1, r.42.1; Pt.42 Div.5, rr.42.19 & 42.20

DECISION:
(1) Appeal allowed with costs
(2) Set aside the order for costs made by McLaughlin AsJ on 22 September 2005 and in lieu thereof order that the plaintiff pay the defendant's costs of the proceedings including the costs of the Interlocutory Process.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40887/2005
McCOLL JA
BRYSON JA
BASTEN JA
15 DECEMBER 2006

AUSTRALIAWIDE AIRLINES LIMITED T/as REGIONAL EXPRESS
v ASPIRION PTY LIMITED

Judgment

McCOLL JA: I agree with Bryson JA.

BRYSON JA: This is an appeal by leave earlier granted from an order for costs made by McLaughlin AsJ on 22 September 2005. His Honour ordered that Regional Express, defendant in the Equity Division, pay the costs of Aspirion Pty Limited, plaintiff in the proceedings, including the costs of Interlocutory Process, up to and including 11 May 2005 and that there be no order as to the costs of either party after that date. For convenience Regional Express is referred to as REX and Aspirion Pty Limited as IAS.
By Originating Process filed on 6 April 2005 IAS applied under s.459P of the Corporations Act 2001 (Cth) for winding up REX on the ground of insolvency. This claim was based on a Statutory Demand served on 8 March 2005 claiming payment of a debt of $223,580 which IAS alleged was then due and payable; REX did not comply with the Statutory Demand, and did not apply to the Court to set it aside. The debt was described as "Amount owing under Retainer Deed dated 29 April 2003 $223,580.00." The Statutory Demand was accompanied by an affidavit by Scott Gustetter, a director of IAS which verified the debt and stated Mr Gustetter’s belief that there was no genuine dispute about the existence or the amount of the debt. REX applied by Interlocutory Process filed on 3 May 2005 for leave to oppose the application pursuant to s.459S of the Corporations Act. On 11 May 2005 REX filed and served an affidavit of Mr K.W. Hutchison a chartered accountant and a partner of Ernst & Young, with Mr Hutchison's report on REX’s solvency as at 31 March 2005. The report expressed and strongly supported his opinion that REX was solvent as at 31 March 2005 and that this had not changed by 4 May 2005. IAS did not press on after taking note of Mr Hutchison's opinion, accepted that Mr Hutchison's report overcame the presumption of insolvency under s.459C(2)(a) of the Corporations Act and consented to the dismissal of the Originating Process (and also of REX’s Interlocutory Process) on 27 May 2005; and both were dismissed save as to the question of costs. The question of costs came before McLaughlin AsJ and was argued on 22 September 2005, and the costs order was then made for reasons stated ex tempore.

From time to time during the hearing counsel for REX made observations to the effect that particular matters asserted on affidavit were not challenged in cross-examination. Observations of this kind are not available; there was no cross-examination, and it would not have been appropriate for McLaughlin AsJ, if asked, to allow cross-examination. Where the court rules on costs without a trial on the merits, it is not the practice to embark on a trial for that purpose. See Re Minister for Immigration and Ethnic Affairs and anor; Ex parte Lai Qin (1997) 186 CLR 622 per McHugh J: “The court cannot try a hypothetical action between the parties (Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; 116 ALR 523 at 530).”

In his reasons McLaughlin AsJ set out the history of the litigation and of the application for orders for costs and referred to the written and oral submissions. IAS claimed an order that REX pay IAS's costs including costs of the Interlocutory Process, alternatively an order that REX pay the costs of IAS up to the filing of Mr Hutchison's affidavit on 11 May 2005. REX claimed an order that IAS pay REX's costs of the proceedings, on the indemnity basis, alternatively an order that IAS pay the costs of REX of the proceedings on the indemnity basis from the date of filing Mr Hutchison's affidavit.
McLaughlin AsJ’s reasons introduced exposition of the grounds of decision by the following passage (Red 16):
The court under s 76 of the Supreme Court Act 1970 has a wide discretionary power to make orders for costs. The general and normal principle concerning costs is that the unsuccessful party should pay the costs of the successful party. However that principle is subject to certain exceptions and although in the instant case the proceedings have been dismissed and to that extent the plaintiff may be regarded as the unsuccessful party, nevertheless the proceedings have been dismissed by consent of both parties and there has been no hearing upon the merits.
It is appropriate therefore that the court should consider the question of whether or not the proceedings which were instituted by the plaintiff can be regarded as having been justified.
Section 76 of the Supreme Court Act 1970 (NSW) had been repealed with effect on 15 August 2005 and provision for the powers of Courts including the Supreme Court to order costs was made by s.98 of the Civil Procedure Act 2005 (NSW) which took effect on that day; the terms of s.98(1) are closely similar to the earlier s.76(1) and they are:
98 Courts powers as to costs
(1) Subject to rules of court and to this or any other Act:
(a) costs are in the discretion of the Court, and
(b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and
(c) the Court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.
The Uniform Civil Procedure Rules 2005 (NSW) include, in Pt.42, Div.1 – Entitlement to Costs:
42.1 General rule that costs follow the event
42.1 Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.
Rule 42.1 is closely similar to Pt.52A r.11 earlier found in the Supreme Court Rules 1970 (NSW).
UCPR Pt.42 Div.5 as in force on 22 September 2005 was:
42.19     Proceedings discontinued (cf SCR Part 52A, rule 21; DCR Part 39A, rule 24; LCR Part 31A, rule 19)
(1)          This rule applies to proceedings that are discontinued by a plaintiff by means of a notice of discontinuance, as referred to in rule 12.1, in relation to a particular defendant.
(2)          Unless the court order otherwise or the notice referred to in rule 12.1(2) otherwise provides, the plaintiff must pay such of the defendant’s been incurred by the defendant in relation to the claim.
42.20     Dismissal of proceedings etc (cf SCR Part 40, rule 8)
(1) If the Court makes an order for the dismissal of proceedings, either generally or in relation to a particular cause of action or in relation to the whole or part of any claim, then, unless the Court orders otherwise, the plaintiff must pay the defendant’s costs of the proceedings to the extent to which they have been dismissed.
(2) If the Court makes an order striking out a defence, either generally or in relation to a particular cause of action or in relation to the whole or part of any claim, then, unless the Court orders otherwise, the defendant must pay the plaintiff’s costs of the proceedings in relation to those matters in respect of which the defence has been struck out.
Rule 42.19 has since been amended. Then and now it makes provision closely similar to earlier SCR Pt.52A r.21. Although it would be an ordinary and unremarkable use of language to say that IAS discontinued the proceedings, r.42.19 does not apply because the proceedings were not discontinued in the manner provided for by UCPR r.12.1; the proceedings were dismissed, by consent of both parties. Rule 42.20(1) does not continue any provision earlier made in Supreme Court Rules – contrast earlier SCR Pt.40 r.8. Where, as here, r.42.20(1) applies it is not general and normal principle, to which McLaughlin AsJ referred, which governs exercise of discretionary powers over costs, but the express provisions of r.42.20(1) which establish that "unless the court orders otherwise, the plaintiff must pay the defendant’s costs …”. Earlier practices, case law and judicial observations relating to costs where proceedings are discontinued or otherwise dismissed without hearing and decision on the merits should be considered carefully before they are treated as applicable to UCPR r.42.20(1), which has the effect that the plaintiff must pay the defendant's costs unless the Court otherwise orders, and the Court can only order otherwise if there is a discretionary decision to depart from what r.42.20(1) provides.
The question which McLaughlin AsJ addressed (Red 16) – “whether or not the proceedings which were instituted by the plaintiff can be regarded as having been justified" - is a relevant consideration for the exercise of the discretion to order otherwise than as provided in r.42.20(1). The question does not cover the whole ground of conceivably relevant matters, and it would not necessarily follow from a conclusion that the institution of proceedings was justified that the discretion should be exercised in the plaintiff's favour; it is a relevant consideration but no more than that.
It was contended on behalf of REX that McLaughlin AsJ misdirected himself in the passage I have set out at [6]. In my opinion there was a misdirection in that McLaughlin AsJ did not advert to the provisions of r.42.20(2). However his reasoning did not make any large departure from the approach required by r.42.20(1), under which it is the general principle that the unsuccessful party should pay costs, unless there is a discretionary exception. Ex tempore reasons should not be examined unduly narrowly or picked over; it is rare that extemporisation can entirely survive sustained hostile criticism. I will address more detailed criticisms which were directed by REX's senior counsel against factual matters to which McLaughlin AsJ referred before reaching his discretionary conclusion. As I do that I will review a number of matters of fact, and some references to case law which were put before us in the appeal.
REX conducts a regional airline known as Regional Express and as REX. IAS formerly named IAS Consulting Group Pty Ltd entered into a Retainer Deed with REX dated 29 April 2003 (Blue 225) under which IAS was to provide services set out in schedule 2 (Blue 242) as follows:
SCHEDULE 2 – SERVICES TO BE PROVIDED BY IAS

Phase 1: (approximately 2 weeks)	IAS will analyse the market and REX’s financial data to ascertain current Charges. Evaluation of market information in order to determine objectives and targets in reducing Charges.
Phase 2: (approximately 3 weeks)	Development of campaign materials to support the case for reduced charges. Development of arguments used within presentations to support the case for reduced charges.
Phase 3: (approximately 8 weeks)	The preparation of presentations to Suppliers in order to reduce Charges for REX. Negotiate the reduction or relief of Charges with each Supplier. The preparation of letters of agreement and contracts documenting any Cost Savings. Reporting to REX and the provision of a list of Cost Savings achieved.
Phase 4: (approximately 2 months)	Finalisation of any remaining agreements and following up on any outstanding issues.

The services were to be provided for a term of 12 months from 29 April 2003. IAS was to receive payment for services calculated by reference to costs savings, defined as follows (Blue 228):
1.            DEFINITIONS
1.1          In this Deed unless the context otherwise requires:
…
(e)          “Cost Savings” means the savings in Charges:
(i)    negotiated by either REX or IAS; or
(ii) that can be offset, reduced or recovered, through additional funding or revenue by REX;
which are achieved from the Services provided during the Term;
Clause 6 of the Deed (Blue 231-232) contains complex provisions for determining the amounts of payments. There was to be a Fixed Component of Cost Savings of $60,000; until Cost Savings equalled $60,000 REX was to pay IAS an amount equal to the Cost Savings generated, to be paid in arrears by monthly instalments on or before the tenth business day of each calendar month until $60,000 had been paid. After the Fixed Component had been paid, REX was to pay IAS a Variable Component of 20% of the Cost Savings which exceeded the Fixed Component; the Variable Component was to be paid in accordance with cl.6.6 by monthly instalments on or before the tenth business day of each calendar month for 12 calendar months commencing the month the Variable Component took effect. There were elaborate provisions in cl.6 for calculation of Cost Savings and for provision of information relevant to the calculations.
By cl.8 of the Deed IAS had entitlements to payment of business expenses and provision of air travel. By cl.9.3 (Blue 233):
9.3REX will submit to an audit of the payment for Services process if requested by IAS.
Schedule 1 to the Deed contained a number of further provisions including paragraph 16 relating to dispute resolution (Blue 241):
16. DISPUTE RESOLUTION
16.1Unless a party has complied with clauses 16.2-16.6, that party may not commence court proceedings relating to any dispute under this Deed, except where that party seeks urgent interlocutory relief.
16.2If a dispute arises out of or relates to this Deed, or its breach, termination, validity or subject matter, or as to any claim in tort, in equity or pursuant to any domestic or international statute or law, the parties to the Deed and to the dispute expressly agree to endeavour in good faith to settle the dispute by mediation administered by the Australian Commercial Disputes Centre (“ACDC”) before having recourse to arbitration or litigation.
16.3A party claiming that a dispute has arisen, must give written notice to the other party to the dispute specifying the nature of the dispute.
16.4On receipt of the notice specified in clause 16.3 the parties to the dispute must within 7 days after receipt of the notice, seek to resolve the dispute.
16.5If the dispute is not resolved within 7 days or within further such period as the parties agree then the dispute must be referred to ACDC.
16.6The mediation must be conducted in accordance with the ACDC mediation guidelines which set out the procedures to be adopted, the process of selection of the mediator and the costs involved and which terms are deemed incorporated in this clause.
The nature of the obligations undertaken was such that IAS could not perform the services, and the Cost Savings and hence the Fixed Component and the Variable Component could not be ascertained without continuing co-operation between the parties. If IAS was not satisfied with what REX asserted, the terms of the Deed indicated paths which IAS could take: IAS could request an audit, and could take a dispute to mediation. The provisions of cll.16.1 and 16.2 could not bar access to the courts for any legal remedy to which a party might be entitled, but they have significance for any appraisal of whether the conduct of the parties, before or in the institution of proceedings, was reasonable, and are relevant to the question McLaughlin AsJ regarded as significant, whether the institution of the proceedings can be regarded as having been justified.
On 9 November 2004 TressCox Lawyers representing IAS sent a letter to Mr Lim Kim Hai, Executive Chairman of REX referring to the Retainer Deed and the payments received from REX under it, making a number of observations and expressing complaints. The complaints included that monthly payments fell short of the amounts which should have been paid in accordance with cl.6 of the Deed, that a number of ports (meaning airports at which REX did business and incurred costs) had not been included in the calculation, and that not all Cost Savings had been included. The letter called for a full reconciliation statement showing the evidence and the basis on which all amounts paid by REX under the Deed were calculated. It asserted there was a shortfall as a result of omissions of at least $162,678. The letter complained that no invoice had been received or payment made for several recent months, and that the payments made for April 2004 were $18,173 less than the amount payable according to REX’s invoice. There were assertions that sums were due for interest and that there were errors in calculation. The letter called on REX to pay $232,084.53 and provide a reconciliation statement and outstanding invoices within seven days. The letter also said (Blue 189-190):
Unless payment together with outstanding invoices and a reconciliation statement satisfactory to Aspirion, are received by Aspirion within the stated time our client will:

record your debt to Aspirion with Baycorp Advantage as being overdue, and
refer the dispute to the Australian Commercial Disputes Centre for mediation in accordance with clause 16 of the Deed. Accordingly, please treat this letter as a notice of dispute referred to in clause 16.3 of the Deed in respect of the 5 matters listed above.

The letter referred to earlier attempts to obtain resolution and concluded (Blue 190):
However, unless you will comply with your legal obligations under the Deed as requested above within the time stipulated, Aspirion will take action to enforce the terms agreed by REX in the Deed.

Ms Kelly Irvine has been the financial controller of REX since June 2004. She gave evidence on affidavit which showed that when she took up employment REX was already in dispute with Aspirion over the amount of payments due under the Deed; that REX had paid Aspirion $459,091.00, and that she was involved in communications and discussions with the representative of Aspirion as late as 12 April 2005 in an attempt to agree on how much if anything was outstanding under the Deed. She produced communications, starting with a message she sent to Aspirion on 7 January 2005 in which she asked Aspirion (Blue 46) "Please forward invoices and calculations, preferably in electronic format, to support these claims."
In reply Mr Bill Meeke, a director of IAS, sent Ms Irvine a message on 11 January 2005 (Blue 47) which said that it had been necessary for IAS to calculate its claim on the basis of estimates, reasonable assumptions and information contained in emails from Mr Van Pelt and others because REX had refused to furnish the necessary information. He said that IAS was willing to share its calculation with REX on a without prejudice basis. He asserted that REX intended to protract the matter by forcing IAS into litigation so as to force renegotiation of the contract terms. He said that the contract required submission to mediation, that he had made an application to ACDC for the appointment of a mediator and (Blue 47) "If mediation is unsuccessful, the matter can then be escalated in the appropriate jurisdiction." He called for REX to communicate its consent to mediation to ACDC.

Ms Irvine referred Mr Meeke's message of 11 January 2005 to Mr Lim Kim Hai in Singapore with observations including (Blue 7) “My suggestion is that we ask, via ACDC, for a copy of their workpapers so we can dispute their claim."
Ms Irvine sent a message to ACDC on 25 January 2005 (Blue 48) and asked ACDC to provide information supporting IAS’s claim. ACDC replied on 25 January 2005 (Blue 49) with formal information relating to mediation. About 25 January 2005 Ms Irvine telephoned Ms Franik of ACDC. Mr Meeke gave evidence on affidavit (Blue 218-219) to the effect that he spoke to Ms Franik by telephone on 1 February 2005 and that Ms Franik told him that Ms Irvine had told Ms Franik (Blue 219) "… that there is no dispute about the existence of the debt and therefore REX will not be participating in the mediation." This passage in Mr Meeke's affidavit was admitted in evidence before McLaughlin AsJ on a limited basis so as not to be evidence of the truth of the facts asserted by Ms Franik. Ms Irvine gave an altogether different account of what she had told Ms Franik and specifically denied on affidavit that she had spoken to Ms Franik in the terms attributed. IAS did not do any more to advance the mediation; no mediator was appointed and no appointments were made. Nothing further happened in the mediation; on the other hand, there was no distinct event which brought IAS’s reference to mediation and communications with ACDC to a recognisable conclusion, and Mr Meeke did not tell Ms Irvine that he was no longer proceeding to mediation.
In the course of his reasoning McLaughlin AsJ said (Red 18) "The plaintiff had attempted to invoke the procedures relating to a mediation without recourse to litigation in the courts. The defendant did not cooperate in such mediation procedures." Senior counsel for REX contended that this was an erroneous finding. It is not known on what the finding was based; however Mr Meeke's evidence of what Ms Franik told him Ms Irvine had said was not available as a basis for finding that REX did not cooperate in mediation procedures, because of the limited basis on which the evidence was admitted. If the finding should be attributed to REX’s not having done anything more relating to mediation after the conversation of 25 January 2005, it must be observed that IAS took no other significant step relating to mediation either. In my opinion there was no evidentiary basis for the finding that REX did not cooperate in mediation procedures, and the finding was erroneous.

It was Ms Irvine's evidence, not disputed in Mr Meeke's affidavit, that around 25 January Mr Meeke telephoned her and told her (Blue 41) "I can send through working calculations so you can see what the dispute of non-payment relates to". Ms Irvine said (Blue 41): “That would be great. I can work through them and get back to you once I have established what your claim is for.” Mr Meeke said: “Yes, I'll get them to you shortly."
On 8 February 2005 when Ms Irvine had not received documents and calculations she sent Mr Meeke a message (Blue 50) stating that she had not received that material. Mr Meeke replied on 8 February confirming that he had not sent the papers yet and was waiting for Scott Gustetter to get back from overseas to get the latest up-to-date version of the spreadsheets, and hoped to send them the next day. On 10 February 2005 Mr Meeke sent Ms Irvine a detailed spreadsheet which he said (Blue 52) "… outlines what we consider to be the correct payment entitlement … based on the information of which we are aware". He asked to be told what REX considered to be the correct figures and the evidence on which REX's figures were based. He also forwarded other information relating to calculation methodology which he said had been forwarded on 10 August 2004. The documents enclosed were about 38 pages of detailed calculations. On 25 February 2005 Mr Meeke sent Ms Irvine a revised spreadsheet (Blue 131), to replace the one sent on 10 February 2005; this document also comprised 38 pages. He expressed his hope to meet Ms Irvine to discuss any problems she might have with the calculations. Ms Irvine responded by message on 3 March 2005 (Blue 131) acknowledging the spreadsheet and saying "I will get back to you by the end of next week". She sent Mr Meeke another message on 21 March 2005 (Blue 132) saying that she was working through the calculations which took longer than expected, said she would forward the workings when differences between the worksheets had been identified and "I will be in touch with an update shortly".
It was Ms Irvine's evidence (Blue 43) that on 12 April 2005 she had a telephone conversation with Mr Meeke and told him "I still have 2 ports to finalise. Do you want to see what I have completed?". She went on to explain her work. Mr Meeke said "I am happy for you to send me the calculations but I don't think it would be prudent to do so. Are you aware that two legal letters have been forwarded to Shae Calissa? I feel that it is only fair to advise you that legal action is pending". Ms Irvine did not know of the legal letters and said so. At the conclusion of the conversation she told Mr Meeke that the calculation showed that REX owed about $50,000 but this could change. Mr Meeke said "It can't be that amount. You should go and to talk to Shae Calissa about the legal action."
This brought to an end the communications between Ms Irvine and Mr Meeke with which evidence deals. However consideration by REX, probably by Ms Irvine, of IAS’s entitlement must have continued. In a letter of 20 April 2005 (Blue 27) from REX’s solicitors to IAS's solicitors in which it was contended that the Statutory Demand was issued in bad faith, REX made an offer of settlement, which it said would be referred to on the question of costs, in which among a number of other things REX proposed to remit $47,088.00 to IAS subject to adjustment upon final resolution, with an alternate proposal in which $47,088.00 was to be paid in full and final settlement. Later, in an affidavit of 9 June 2005 (Blue 39), Ms Irvine produced calculations which she said she made on 26 April 2005 and she concluded that REX had overpaid IAS by $35,077.74 (Blue 44). So far as evidence shows the final entitlement has not been objectively established.
On 21 April 2005 Ms Irvine again contacted ACDC (Blue 44) and spoke to Miss Williams of ACDC on 21 April and was given information about the inconclusive events relating to mediation. Mr Meeke had not further referred to the mediation in the interval since 25 January 2005.
Concurrent with these communications between Mr Meeke a director of IAS and Ms Irvine (who lived in Junee and worked in Wagga) were other events involving Mr Gustetter who was also a director of IAS and Ms Shae Calissa Teo, the company secretary of REX, who worked at REX’s registered office at Botany. On 28 February 2005 Mr Gustetter sent a letter (Blue 194) to the directors of REX at Botany. He referred to previous correspondence, in particular TressCox’s letter of 9 November 2004 to which he said there had been no response. He enclosed a spreadsheet setting out the calculation of the amounts payable by REX to IAS under the Retainer Deed; this could well have been the same spreadsheet Mr Meeke sent to Ms Irvine on 25 February 2005. His letter concluded "If you dispute these amounts due, please urgently provide us with details of which amounts you dispute and the basis of your dispute. If we do not receive a response satisfactory to us by 5pm on 7 March 2005, we will proceed to enforce our right to payment." So far as evidence showed there was no response to this letter.
Senior counsel for REX observed to the effect that the reference to enforcing the right to payment was an indication that in the events stated IAS would go to mediation, as had been indicated in the concluding passage of the TressCox’s letter of 9 November 2004. In my opinion this is not a reasonable or correct reading of the reference to enforcing the right to payment, and the letter could not reasonably be understood as indicating that what IAS might do was limited to taking up mediation.
On 8 March 2005 the Statutory Demand, verified by Mr Gustetter, was served on REX at its registered office at Botany and came to the attention of Ms Teo the company secretary. Ms Teo took no action either to apply to set aside the Statutory Demand or to comply with it; and she did not inform Ms Irvine, the financial controller who operated at Wagga, of the Statutory Demand. Ms Teo’s inaction in these respects is remarkable. She explained her inaction on affidavit by saying (Blue 4): “So whilst I read and understood the terms of the Statutory Demand, I was confident that [IAS] would not (and, by virtue of clause 16 of the Retainer Deed, could not) take any action against REX if [REX] did not pay the amount claimed in the Statutory Demand within the 21 day period." She went on to refer to her awareness of REX's financial position which she said made her able to say "… that at all relevant times, REX has been able to pay its debt (if any) to [IAS] as and when they fall due, and could (if it was obliged to do so) pay the amount claimed in the Statutory Demand."
On 6 April 2005 IAS commenced the winding up proceedings.
In the context of the communications which were proceeding between Mr Meeke and Ms Irvine, delivery of the Statutory Demand and commencement of the proceedings were not reasonable steps to take. The position would be altogether different if it were established that REX and Ms Irvine in particular were not sincerely participating in consideration of whether and how much money should be paid by REX to IAS. Although temporisation by Ms Irvine and REX is an available interpretation of the events, the indications in the circumstances which support it are slight and I regard it as improbable; and Mr Meeke's conduct does not suggest that he saw his communications with Ms Kelly in that way. Indeed he took his own time to take steps, offered explanations and apologies for doing so, and invited consideration of the spreadsheets he forwarded. When addressing the question which McLaughlin AsJ regarded as important, that is, whether the proceedings instituted by IAS can be regarded as having been justified, the events in the communication between Mr Meeke and Ms Irvine, their exchange of information and the time given to its consideration are strongly adverse to concluding that IAS was justified in commencing winding up proceedings.
On the other hand the other chain of events was proceeding, in which Mr Gestetter, taking up the letter of 9 November 2004 which, he said, had not been replied to, threatened enforcement action on 28 February 2005 and received no reply, served a Statutory Demand on 9 March 2005 and received no response and then commenced proceedings. The nature and possible consequence of a Statutory Demand should be well understood by any company secretary and are clearly stated in the Demand itself; the opportunity to apply to set the Demand aside existed only for a limited time and the possible adverse outcome of not taking that opportunity, even if there were grounds for thinking little of the Demand, were clear. Mr Meeke's conduct made it reasonable for Ms Irvine to think and act on the basis that she was participating in a cooperative process on a detailed subject and she behaved appropriately for one engaged in that process; Mr Gustetter’s conduct indicated clearly to Ms Teo that winding up proceedings might well be commenced if the Statutory Demand were not complied with, and she did not respond appropriately. Neither side behaved reasonably in maintaining two concurrent chains of communication without either chain influencing the other.
Throughout the relevant events, that is from November 2004 to April 2005 public statements and references in the Press indicated that REX, after earlier adverse business experience, had made significant profits in 2004. A reserved reception of information of this kind, which must emanate from the company itself, can be understood; but there was no other indication. Non-compliance with the Statutory Demand was, I suppose, an indication of a kind that REX might be insolvent, and gave rise to rebuttable evidence of insolvency. In the light of the continuing communications between Ms Irvine and Mr Meeke it would not have been reasonable for IAS to believe, on the basis of non-compliance with the Statutory Demand, that REX was unable to pay the debt which IAS claimed, or was otherwise insolvent.
McLaughlin AsJ said of Mr Gustetter’s letter of 28 February 2005 (Red 17): "The statutory demand in the instant case was served upon the defendant after the intimation and notice in that regard was given to it by correspondence from the solicitors for the plaintiff foreshadowing the service of such a demand. The defendant chose to ignore that correspondence". Counsel for REX complained that this was a wrong finding of fact. It is wrong only in the respect that it was not the solicitors for IAS who gave the indication; their letter of 9 November 2004 does not foreshadow service of a Statutory Demand. Mr Gustetter's letter did not indicate what action would be taken "to enforce our right to payment"; but what he said was broad enough to justify a finding that it foreshadowed service of a Statutory Demand. The effect of Mr Gustetter's indication of enforcement action was altogether blunted by the communications which were taking place between Mr Meeke and Ms Irvine; those communications indicated, unmistakably, that both were working towards determination of the amount if any which REX should pay; and were doing so on the footing that the amount to be paid was reasonably open to consideration. This deprives the matter to which McLaughlin AsJ here referred of any real force.
McLaughlin AsJ said (Red 17-18):
When the demand was served upon the defendant, although the appropriate officer of the defendant was aware of the consequences of the failure to comply with such a demand, she was of the belief that the plaintiff would not in fact rely upon that demand and would not attempt to embark upon the procedures which would result from non-compliance with the demand. The evidence does not disclose any reasonable basis for such a belief being held on the part of the defendant. There is no explanation as to why the defendant did not respond to the correspondence which was sent to it by the solicitors for the plaintiff foreshadowing the intention of serving such a demand.
If, as appears likely, McLaughlin AsJ treated the absence of response of Mr Gustetter's letter as relevant to the question whether proceedings instituted by IAS can be regarded as being justified, his Honour was in error; in all the circumstances, not responding to Mr Gustetter’s letter did not have that force, because communications were proceeding between Mr Meeke and Ms Irvine. While Ms Teo’s inaction on the Statutory Demand is remarkable, particularly as she did not tell Ms Irvine about it, her inactivity does not support a conclusion that institution of the proceedings was justified; this is so because the continuance of communications between Mr Meeke and Ms Irvine was inconsistent with any understanding that IAS seriously intended to start winding up proceedings. Directing my attention not to evaluation of REX’s response but to whether there is justification for IAS’s commencing proceedings, non-compliance with the Statutory Demand does not, in my opinion, furnish any such justification.
McLaughlin AsJ said (Red 18-19):
The defendant submits that the deed which gave rise to the asserted indebtedness of the defendant to the plaintiff, being the retainer deed dated 29 April 2003, made express provision concerning the procedure which should be adopted in the event of any dispute in cl 16 of that deed. It did not emerge with any clarity from the evidence that the defendant in fact considered that there was any dispute as to the claim of the plaintiff. The failure of the defendant to take positive steps to refer – whatever be the nature of the plaintiff’s claim, whether it be disputed or not – to the Australian Commercial Disputes Centre in accordance with the provisions of cl 16 of the deed, rather suggests that the defendant did not consider that there was such a dispute but that the defendant was merely looking to the calculations of its indebtedness to the plaintiff.
In relation to the issue which his Honour addressed, that is whether IAS can be regarded as having been justified in commencing the proceedings, the express provisions of the Retainer Deed requiring mediation (which was to be entered on in good faith) and not litigation are quite important. It is altogether clear that there was a dispute; the demands made in the letter of 9 November 2004 and the absence of compliance with them plainly show that there was a dispute, the referral by IAS to ACDC took place on the basis that there was a dispute, and the chain of communications between Mr Meeke and Ms Irvine showed clearly that IAS’s claim was disputed; Mr Meeke's participation cannot be understood on any other basis. IAS’s not following the contractual dispute procedure is a significant adverse matter on the issue of justification for instituting the proceedings.
McLaughlin AsJ 's consideration concluded (Red 19):
It seems to me that the defendant embarked upon an extremely risky course in ignoring the correspondence which it had received from the plaintiff’s solicitors foreshadowing the service of the statutory demand, or an even riskier course of disregarding that demand. I consider that the plaintiff was entirely justified in instituting the present proceedings.
It is correct that REX took risky courses in these ways, but in the circumstances, and for reasons I have indicated, this did not justify the commencement of the proceedings.
In my view the exercise by McLaughlin AsJ of the costs discretion was flawed in the respects that; (1) the Trial Judge did not clearly or correctly direct himself on the relevant operation of r.42.20(1); (2) the Trial Judge’s conclusion on the question he posed himself about whether commencement of winding-up proceedings was justified depended on evaluations of the significance of conduct of REX, and of IAS, which in part were wrong and in part did not have the significance attributed to them for the conclusion under consideration; (3) the question which the Trial Judge considered, that is whether the institution of the proceedings was justified, was relevant to the exercise of the discretion as to costs; but the Trial Judge gave it an inappropriate place in his consideration as his Honour treated it as the test or standard for decision, and addressed all other subjects which his Honour considered in relation to it. The exercise of the costs discretion should be set aside and the Court of Appeal should itself embark on decision.

Costs discretions are truly discretionary and are not closely confined by appellate authority; see Oshlack v Richmond River Council (1998) 193 CLR 72 at 84 [31], discussion by Gaudron and Gummow JJ at 81-89 and particularly at 88 [40], and their Honours’ observation on there being no absolute rules. The approach to discretionary powers taken in Oshlack and in Latoudis v Casey (1990) 170 CLR 534 contrasts markedly with the prescriptive view taken in an earlier age appearing from the judgment of Atkin LJ in Ritter v Godfrey [1920] 2 KB 47 at 54 to 62.
In a passage which may well have influenced McLaughlin AsJ’s formulation of the exception to the general and normal principle, McHugh J. said in Lai Qin at 625:
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.
His Honour went on to refer by way of example to six earlier decisions.
This passage from Lai Qin is not readily applicable to decision under r.42.20(1). UCPR r.42.20 is not entirely consistent with McHugh J.'s observation that the proper exercise of the costs discretion will usually mean that the Court will make no order as to costs. Justice McHugh's observations were directed to the discretionary power in O71 r39 of the High Court Rules (Cth), set out in Lai Qin at 623, which was discretionary overall, whereas in contrast r.42.20(1) creates a starting point by requiring “… the plaintiff must pay the defendant's costs of the proceedings …” unless that outcome is displaced by a discretionary decision. It should in my opinion no longer be said that if the moving party, or if both parties have acted reasonably in commencing and defending proceedings the proper exercise of the costs discretion will usually mean that the Court will make no order as to the costs of the proceedings; observance of the starting point under r.42.20 will make this outcome less usual than it earlier was.
Justice McHugh’s observation acknowledges the discretionary nature of the power, and does not purport to limit the way the discretion is to be exercised. The usual outcome which McHugh J. indicated is the usual end point, not the starting point, for the exercise of discretion. Cases including Australian Securities Commission V Aust-Home Investment Ltd (to which McHugh J. referred) at 200-202 indicate a range of considerations and outcomes.
In One.Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 at 553 Burchett J. said:
[6] In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court’s discretion otherwise than by an award of costs by the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs.
This passage was cited with approval in Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 by Davies AJA at [5]: Mason P and Meagher JA agreed. Adopting this classification, there is no element of a supervening event defeating IAS’s claim; although IAS surrendered early, the circumstances are closer to what Burchett J. referred to as an effective surrender. The conduct of REX in disregarding the Statutory Demand should not be said to have precipitated the litigation: see Ritter v Godfrey, Hifu Electronics Pty Ltd v Fujian Pacific Pty Ltd FCA 1 December 1998 (Burchett J. unreported).
Newcastle Wallsend Coal Co. Pty Ltd v Industrial Relations Commission of New South Wales [2006] NSWCA 129 was not an appeal but a decision in exercise of the Court of Appeal's discretionary power as to costs where the claims in the proceedings were overtaken by the decision of the Court of Appeal in Powercoal Pty Ltd v Industrial Relations Commission of New South Wales (2005) 64 NSWLR 406 which established that a major aspect of the claimant’s arguments in the Court of Appeal could not succeed. Powercoal was followed by amendments to s.179 of the Industrial Relations Act 1996 (NSW) which had the effect that the claimant’s claim, which faced difficulties before, could clearly not be maintained and the claimant had no choice but to discontinue. The Court of Appeal considered the question of grant of leave to discontinue and costs together, without express reference to r.42.19. Justice Tobias (with whom Mason P and Basten JA agreed in this respect) reviewed case law relating to the discretionary powers to order costs including Lai Qin. In my understanding Tobias JA treated the legislation as a supervening event and was of the view that each party should bear its own costs; whereas the majority (Basten JA with whom Mason P agreed) were of the view that the claimant should be taken to have failed because of the adverse disposition in Powercoal of questions on which their claim depended. I respectfully say that I see the divergence in conclusions as an illustration that more than one discretionary decision was available.
Rule 42.20(1) would be overstated if described as creating a presumption about the disposition of costs. It goes no further than to state the first point of consideration; there is no presumption which must be outweighed; what the rule says is what the order for costs is to be unless there is a discretionary decision to order otherwise. At the discretionary stage the matters to be considered are little altered: cf Fordyce v Fordham [2006] NSWCA 274 at [87] (McColl JA):
[87] Once it is recognised, however, that the costs discretion conferred by UCPR 42.19 and 42.20 is unconfined, the matters referred to in the Lai Qin line of authority are plainly pertinent, although, again, not necessarily determinative.
Although in the law before r.42.20 was made the Court would have approached the question of costs where proceedings had been discontinued or dismissed with the consent of the moving party with an initial disposition towards ordering that costs follow the event, as provided by r.42.1 and earlier by Pt.52A r.11, the decision was discretionary and the outcome of exercise of that discretion was not closely controlled by judicial authority. The provisions of r.42.20, which appear to operate to the exclusion of r.42.1 in the case with which r.42.20(1) deals, enhance the initial disposition towards ordering the plaintiff to pay the defendant's costs; but there is no close control over the discretion of the Court to order otherwise. As is generally the case with discretionary powers, the power must be exercised in good faith for a purpose relevant to the purpose for which power to make orders for costs is conferred, and there must be some sound positive ground or good reason for departing from the ordinary course.
In my own address to the exercise of the costs discretion I observe that the evidence on which IAS launched the proceedings was no more than a formal conclusion, based on the absence of an appropriate response to its Statutory Demand, that there was evidence of insolvency. Communications in which Mr Meeke the director of IAS was engaging before and even after the Statutory Demand indicated that IAS regarded its debt and the amount of its debt as in dispute and subject to continuing communications directed to resolution. These communications were taking place on a basis which appears to show that Mr Meeke recognised their sincerity. While it cannot be said that IAS had no basis for commencing winding up proceedings in insolvency, its basis for doing so was very slight. Non-compliance with the Statutory Demand provided only a shred of support for IAS’s case, and there was nothing else to indicate that REX was unable to pay its debts. REX produced evidence of its solvency promptly and in overwhelming force early in the litigation and its appropriate victory was soon conceded.
There would have been no need for the Interlocutory Process if REX had applied in due time to set aside the Statutory Demand. However the application had to be made in one way or the other, and there cannot have been any increase in the costs which it involved.
There are in my opinion no grounds for taking the question of costs out of the ordinary course indicated by r.42.20(1).

Senior Counsel for REX contended that REX should recover an order for its costs in the Equity Division, and that those costs should be assessed on the indemnity basis. The existence of evidence in support of the application for winding up in the form of the Statutory Demand and non-compliance, the absence of a timely application by REX to set aside the Statutory Demand although overwhelming grounds were available that REX did not bring forward then, and the unreasonable conduct of both parties in maintaining separate chains of communication which did not interact furnish reasons why the order for costs should not be on the indemnity basis. IAS’s action in commencing the proceedings was soon exposed as unwise, but there is no reason to find that IAS was delinquent in commencing the proceedings, or for deciding on any other ground that an order for indemnity costs against IAS is appropriate.
In my opinion the Court of Appeal should make the following orders:
(1) Appeal allowed with costs.
(2) Set aside the order for costs made by McLaughlin AsJ on 22 September 2005 and in lieu thereof order that the plaintiff pay the defendant's costs of the proceedings including the costs of the Interlocutory Process.
BASTEN JA: I agree with the orders proposed by Bryson JA at [59].
As Bryson JA notes, the conduct of these proceedings has curious features. Thus, one senior officer in the Respondent (“Aspirion”) thought it appropriate to serve a statutory demand under s 459E of the Corporations Act 2001 (Cth), specifying the debt and its amount, whilst another senior officer was negotiating with the Appellant (“REX”) in an attempt to reach agreement as to the amount. On the other hand, having received a statutory demand, REX failed to take the appropriate steps to set it aside.
Procedural curiosities have continued in this Court. As Bryson JA correctly states, the matter appears to be governed by UCPR r 42.20(1). However, that rule did not provide the basis for the submissions in this Court or, presumably, before the primary judge. Because the proceedings were commenced before the commencement of the UCPR, it might have been argued that the Supreme Court Rules, as in force prior to 15 August 2005, should have been applied: see Civil Procedure Act 2005 (NSW) Sch 6, cl 5(2). However, no application was made under that provision.
The primary judge noted that the “general and normal principle” was that the unsuccessful party should pay the costs of the successful party. Applying general principles, his Honour held that where proceedings have been dismissed by consent, with no hearing upon the merits, a different test should apply:
“It is appropriate therefore that the court should consider the question of whether or not the proceedings which were instituted by the plaintiff can be regarded as having been justified.”
Rule 42.20(1) provides that, in the case of a dismissal of proceedings, “the plaintiff must pay the defendant’s costs of the proceedings”. The Court is given power to order otherwise, being a power which would usually be exercised on the application of the plaintiff, on the basis that the statutory rule would not do justice between the parties: see Civil Procedure Act, s 56(1). However, the mere fact that the plaintiff was “justified” in commencing proceedings, or that the parties acted “reasonably in commencing and defending the proceedings” would not necessarily warrant interference with the statutory order: c.f. Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 625 (McHugh J).
In order to avoid the statutory order, it was necessary for the plaintiff to show more than justification, in the sense that it commenced proceedings in the exercise of a statutory right available to it. It would have needed to show some additional factor, such as that conduct of the defendant led it to the reasonable belief that litigation would be necessary to enforce its right to payment in a timely fashion or that winding up the defendant was an appropriate means of obtaining payment. As Bryson JA has shown, by detailed reference to the facts before the Court, Aspirion was unable to demonstrate any such basis for the Court to otherwise order.
It follows that the exercise of the power conferred on the primary judge to make some different order miscarried and that, in the circumstances, no other order should be made. The operation of the rule therefore requires the orders proposed by Bryson JA.

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LAST UPDATED: 05/02/2007

[2006] NSWCA 365

15 December 2006