Battye & Battye v Shammall (No 2) No. Scciv-03-573

BATTYE AND BATTYE v SHAMMALL (NO 2)
[2003] SASC 317
Magistrates Appeal: Civil

BESANKO J: This is an appeal pursuant to s 40 of the Magistrates Court Act 1991 (“MCA”) against an order for costs made by a Magistrate in a civil action. The plaintiffs brought a civil action against the defendant. They were unsuccessful, and the Magistrate made an order dismissing the plaintiffs’ claim against the defendant. The plaintiffs appealed against the Magistrate’s order dismissing their claim. On 26 August 2003, I made an order dismissing the plaintiffs’ appeal (Battye and Battye v Shammall [2003] SASC 290).
The order for costs which is challenged by the plaintiffs is an order for costs in favour of the defendant in the following terms:
“I order that costs be taxed upon the scale applicable to judgments in the range of $20,001 to $80,000. I further direct that MCR 52 apply. For purposes of calculation of costs, the ‘judgment sum’ will be treated as the amount claimed.”
I will call this order, the costs order.
The amount claimed by the plaintiffs in their Claim was the sum of $13,794. On the evidence called at the trial, the plaintiffs’ claim was for the sum of $10,000.
It is convenient to continue to refer to the appellants as the plaintiffs, and the respondent as the defendant.
The defendant submits that the plaintiffs’ appeal against the costs order is not competent. He referred to s 40(2) of the MCA. That subsection provides as follows:
“If the rules of the Supreme Court provide that an appeal from a judgment of a particular class can only be brought by leave of that Court, the right of appeal is limited accordingly, but in any other case an appeal lies as a right.”
He also referred to s 50 of the Supreme Court Act 1935 which provides (among other things) that no appeal shall lie without the leave of the Judge from any order as to costs only which by law are left to the discretion of the Judge. The defendant acknowledged that this section did not by its terms apply to a Magistrate, but he argued (as I understood him) that the position in relation to an order for costs made by a Judge should be applied by analogy to an order for costs made by a Magistrate. The leave of the Magistrate was required, and it had not been obtained. I reject the defendant’s argument. The plaintiffs are given a right of appeal against any judgment in their action by s 40 of the MCA. Section 3 of that Act defines “judgment” to mean:
“a judgment, order or decision and includes an interlocutory judgment or order”.
The costs order made by the Magistrate is a judgment, and the plaintiffs have a right of appeal against that order.
The Magistrate’s Reasons
The Magistrate gave detailed written reasons for his decision to make the costs order.
The Magistrate noted that the defendant had not certified “that the nature of the action entitles the parties to costs on the relevant scale in the third schedule as a complex action” within r 106(7) of the Magistrates Court (Civil) Rules 1992 (“MCCR”). In the third schedule to the MCCR there are three scales, one for routine actions, a second for complex actions and a third for minor civil actions. The amounts specified in the scale for complex actions are greater than the amounts specified in the scale for routine actions. The Magistrate said that the defendant’s failure to utilise the provisions of r 106(7) to certify the nature of the action as a complex action did not preclude him from making an application for costs to be awarded on a higher scale or level than that which would normally apply.
The Magistrate noted that affidavits had been put before him, and that those affidavits contained details of offers to settle made by the respective parties.
The Magistrate considered that it was an appropriate case to depart from the general rule whereby the defendant’s costs would be taxed in accordance with the amount claimed, namely, $13,794. Rule 106(1) of the MCCR provides that subject to the rules or an order of the Court, a successful defendant is entitled to costs on the relevant scale in the Third Schedule applicable to the sum claimed. The Magistrate decided to make an order displacing the rule in r 106(1) for two reasons. First, he noted that the plaintiffs had alleged fraudulent conduct on the part of the defendant. The Magistrate said that there was no need for them to do so. They could have alleged that the representations were made negligently, or indeed, alleged no more than that the representations were made, leaving the defendant to plead the defence contained in s 7(3) of the Misrepresentation Act 1972 (SA). The critical part of the Magistrate’s reasoning on this point is contained in the following passage:
“The plaintiffs made and persisted in an allegation of fraud and thereby put the defendant in a particularly difficult position in terms of arriving at any settlement that was acceptable. It is not surprising, given the plaintiffs’ persistence in this allegation that the defendant felt the need to defend the matter to the bitter end. Had this aspect of the plaintiffs’ claim not been persisted with, the prospect of a settlement as between the parties would have been increased.
An allegation of fraud is not to be made lightly. This allegation was made and has not been substantiated. That, in itself, is a good reason for departing from the usual order as to costs.”
In this context, it is important to mention an issue addressed by the Magistrate later in his reasons. The defendant had submitted that the plaintiffs should pay his costs on an indemnity basis or on a solicitor and client basis. The Magistrate rejected that argument. He said that such an order(s) would suggest improper conduct or motive by the plaintiffs. The plaintiffs had alleged fraudulent conduct on behalf of the defendant, and they had failed to make good that allegation. However, the Magistrate noted that he had not made a finding that the plaintiffs were aware of that or that they deliberately or consciously concocted a claim of fraud. In those circumstances the Magistrate did not consider it appropriate to make an order for costs either on an indemnity basis or on a solicitor and client basis.
Secondly, the Magistrate noted that there had been informal offers which would have led to a resolution of the matter on a basis more favourable to the plaintiffs than the ultimate result. The Magistrate said that he did not need to consider whether the letters constituted “Calderbank” letters. The Magistrate said that the Court could take into account informal offers, and he referred to the decision of this court in Bates v Nelson (1973) 6 SASR 149 per Mitchell J at 158. The Magistrate referred in particular to an offer made by the defendant on the last day of trial whereby the parties “completely walk away from all issues in dispute between them and leaving items of common property to the party then in possession of it”.
The Magistrate then noted that the case was one in which the cost penalty provision in the MCCR applied, namely, r 52, and that this had the consequence that the ordinary cost entitlement of the defendant on the scale would be doubled after taxation.
In addition to his order concerning r 52, the Magistrate considered that he should make an order that the costs be taxed upon the scale applicable to judgments in the range of $20,001 to $80,000 and he made an order accordingly.
Grounds of Appeal
The grounds of appeal are as follows:
“1.     The grounds of appeal are that the learned Magistrate erred in:
1.1    Applying MCR 52 to this matter in circumstances where the plaintiffs’ claim was dismissed.
1.2    Taking account of without prejudice offers put to the plaintiffs by the defendant which in fact were not offers relevant to the issues before the Court and would not have amounted to a settlement of the issues between the parties.
1.3    Taking account of the plaintiffs continuing with a plea of fraud and their failure to make out such a plea.
1.4    Failing to have regard either adequately or at all to the defendant’s conduct prior to and in the litigation.
1.5    Failing either or at all to give weight to the principle that a party shall not be deterred in enforcing their legal right in fear of a costs order if they are unsuccessful.
1.6    Failing to apply the appropriate scale with reference to the amount claimed namely the ordinary scale applicable to judgments in the range of $1 to $20,000.
2.The Magistrate should have ordered that the plaintiff pay the usual party to party costs of the defendant (save for the costs of the argument concerning discovery which were the plaintiffs’ costs) on the ordinary scale applicable to a claim in the sum of $13,794.”
It is clear that an appellate court will not lightly interfere with an exercise of discretion by a trial Judge on a question of costs. The trial Judge has a wide discretion and an appellate court will only interfere if it is satisfied that the exercise of the discretion was so unreasonable or unjust as to require it to substitute its own discretion (Southern Resources Ltd & Ors v Residues Treatment and Trading Co Ltd & Ors (1991) 56 SASR 455).
Rule 52 of the MCCR provides as follows:
“52.   (1)     This Rule applies to an action (other than a minor civil action) in which a party obtains a final judgment (other than by consent) for a sum of money being less than 50% of the amount claimed by the party at either ‑
(a)     the expiration of 21 days from the date of issue of a notice of trial;
or
(b)     the date of a conciliation conference,
whichever is earlier ("the operative date").
(2)     The costs to which the party is finally entitled will, unless at the time of giving judgment the Court orders otherwise, be calculated in accordance with the formula:
CE = (2 x C x SJ)
  SC
where CE is the costs to which the party is finally entitled
C is the costs of the party (as agreed or taxed)
SJ is the sum of money awarded by the judgment (exclusive of costs and interest)
and SC is the amount claimed at the operative date.
(3)    Where leave is granted to a party at a conciliation conference to amend the amount claimed by the party to a specified sum, such amendment will, for the purposes of this Rule, be taken to be effective forthwith.”
The Magistrate ordered that for the purposes of the calculation of costs, the “judgment sum” will be treated as the amount claimed. The effect of the Magistrate’s order is that the defendant is entitled to twice the amount of his costs, as agreed or taxed.
It is not entirely clear whether the Magistrate took the view that r 52 applied according to its terms or whether, although it did not apply according to its terms, it was appropriate to incorporate its provisions into the costs order which he made.
I do not think that r 52 applies according to its terms. There is no party to this action who has obtained a final judgment for a sum of money (subrule (1)). The plaintiffs’ claim against the defendant was dismissed. It follows that there is no item which fits the description of “SJ” in subrule (2). It seems to me that the rule is restricted in its operation to the case of a plaintiff who obtains a judgment for a sum of money which is less than fifty percent of the amount claimed by him. The effect of the application of the formula referred to in subrule (2) is that a plaintiff’s costs will be reduced by a figure proportionate to the amount by which the amount he claimed exceeded the amount he was awarded by judgment.
I turn now to consider whether the Magistrate erred in incorporating r 52 into the terms of the costs order.
The normal order for costs is for the costs to be taxed on a party and party basis. The Magistrates Court may, for proper cause, make an order for costs on a solicitor and client basis (r 106(4)). I assume, without needing to decide, that the Magistrates Court could make an order for costs on a solicitor and own client or indemnity basis. The circumstances which may justify orders of this nature have been discussed in a number of cases. With respect, a useful summary of the relevant principles is contained in the reasons for judgment of Shepherd J in Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225. It may be said somewhat loosely that a party the subject of such orders is “penalised” in the sense that he must pay a larger amount than that which he would pay under the normal order (ie costs on a party and party basis). However, orders of this nature are designed to compensate the successful party in relation to costs that he has paid or is liable to pay.
Rule 52 of the MCCR is designed to deal with a particular situation. It “penalises” a plaintiff who inflates his or her claim. It is designed to deter a plaintiff from inflating his or her claim and to ensure plaintiffs are realistic about the amount of their claims. If plaintiffs are realistic about the amount of their claims, then the prospects of settlement without proceeding to trial are increased. The application of the formula reduces the plaintiff’s entitlement to costs by reference to the extent to which he or she has over inflated the claim. It is a provision which penalises a plaintiff in that the plaintiff recovers less than the costs he or she has paid or is liable to pay.
The primary purpose of an award of costs is to compensate a party for costs paid or for which there is a liability to pay. There are circumstances in which a party will recover more or less of his party and party costs because of the circumstances of the particular case. The well-established principles relating to an award of costs on a solicitor and client basis or a solicitor and own client or indemnity basis are examples of the former, and r 52 of the MCCR is an example of the latter. However, both classes of orders are directly related to the amount of costs paid or for which there is a liability to pay. I note that r 53 of the MCCR which penalises a defendant who makes an inadequate offer provides that the sum payable by the defendant under the formula cannot exceed the actual costs of the party on a solicitor’s own cost basis. There is no justification for an order for costs which is not related to the costs paid or for which there is a liability to pay. There is no justification for an order that the plaintiff pay twice the amount of the defendant’s costs because such an order bears no relation to the actual costs paid or to be paid by the defendant. I am not aware of any case in which such an order has been made. The effect of the Magistrate’s order that r 52 apply is that the plaintiffs must pay twice the amount of the defendant’s costs. In my opinion, the Magistrate had no power to make such an order. An order for costs might have the effect that a party recovers twice the costs he would recover on a party and party basis, but he is still recovering his costs and that is simply the effect of the order. Under an order for costs and absent a statutory provision or rule of court, a party cannot recover a sum greater than the costs he has paid or is liable to pay.
It follows from what I have said that, in my opinion, r 52 does not apply according to its terms. It also follows that insofar as the costs order incorporated r 52, the Magistrate erred in making such an order.
The plaintiffs submit that the Magistrate also erred in ordering that the defendant’s costs be taxed upon a scale applicable to judgments in the range of $20,001 to $80,000. The plaintiffs submit that he should have ordered that the relevant scale was that applicable to judgments in the range of $1 to $20,000. The plaintiffs did not argue that the Magistrate did not have the power to make the order that the higher scale apply. Their argument was that there was no proper basis for such an order.
I have already set out the Magistrate’s findings and his reasons for making the order. The plaintiffs submit the Magistrate gave no reasons for ordering that the higher scale apply. I reject that submission. I think the two reasons referred to earlier (ie the fact that allegations of fraud were made and the informal offers of settlement) were the basis upon which the Magistrate ordered that the higher scale apply. The plaintiffs also submit that any general power to award costs on a higher scale “should be exercised only where the action is certified as complex, or where the circumstances of the case are unusual”. I think the Magistrate was entitled to conclude that had the plaintiffs not persisted in the allegation of fraud, the prospect of a settlement would have been increased. I think the Magistrate was entitled to take into account the two matters he identified in considering whether the higher scale should apply and that he did not err in doing so.
Nevertheless, the costs order must be set aside because of the error made in relation to r 52. I must exercise afresh the discretion as to costs. I have considered whether the order for costs should be made on a basis other than a party and party basis. I was told by counsel for the defendant that if an order was made that the plaintiffs pay the defendant’s costs on a solicitor and client basis then that would mean that the plaintiffs would have to pay the actual costs incurred as between solicitor and client, or costs as between solicitor and client on the Supreme Court scale.
There are three factors which are possibly relevant to the question of whether costs should be awarded on a basis other than a party and party basis. The first matter is the fact that the plaintiffs alleged that the defendant made the representations fraudulently, that is, knowing them to be false. A party who makes allegations of fraud knowing them to be false, or knowing them to be irrelevant to the issues in the action, may be ordered to pay costs on a solicitor and client basis. In this case, although the Magistrate found that the representations were not made, he did not find that the plaintiffs had made the allegations of fraud knowing them to be false. He left open the possibility that the plaintiffs honestly believed that they had been misled by the defendant. It may be observed that the Magistrate appears to draw no distinction between a belief as to whether representations were made and a belief as to whether the defendant’s conduct was misleading. Nevertheless, I am not prepared to interfere with the Magistrate’s finding on this topic, and in fact I did not understand the defendant to invite me to do so. I do not think that the fact that allegations of fraud were made and were not proved justifies an award of costs on a solicitor and client basis. That fact is relevant to which scale applies. Secondly, there is the fact that informal offers were made by the defendant. The Magistrate does not deal with these offers in great detail. Whilst I think the fact that they were made is relevant to which scale applies, I am not satisfied that the fact that they were made justifies an award of costs on a solicitor and client basis. The third matter identified by the defendant is the fact that the plaintiffs persisted with what the defendant says was a hopeless case. The defendant submits that by the end of the evidence of the male plaintiff it should have been apparent to the plaintiffs that they could not succeed. In my opinion, it would certainly have been apparent to the plaintiffs and their advisers by the conclusion of that evidence that there were significant difficulties with the plaintiffs’ case, but I do not think that the plaintiffs’ case could be described as so hopeless at that stage as to justify an award of costs on a solicitor and client basis.
In exercising afresh the discretion as to costs, I would not make an order that the plaintiffs pay the defendant’s costs on a solicitor and client basis or on a solicitor and own client or indemnity basis. At the same time, I think that the case did call for an award of costs higher than might otherwise be the case. I have reached that conclusion because I think it is appropriate to take into account the two matters the Magistrate identified. In other words, I think it is appropriate to take into account the fact that had the plaintiffs not persisted with an allegation of fraud, the prospect of settlement between the parties would have increased. I think it is appropriate to take into account the informal offers which would have led to a resolution of the matter upon a basis reasonably favourable to the plaintiffs as compared with the final result. Exercising the discretion afresh, I think it is appropriate that the defendant’s costs be taxed upon the scale applicable to judgments in the range of $20,001 to $80,000.
Conclusions

The Magistrate made an order that the plaintiffs pay the defendant’s costs of the action subject to an exception relating to an argument concerning discovery and that those costs be taxed upon the scale applicable to judgments in the range of $20,001 to $80,000 and that r 52 of the MCCR apply. I set aside that order and in lieu thereof I make an order that the plaintiffs pay the defendant’s costs of the action (save and except for the argument concerning discovery) and that those costs be taxed upon the scale applicable to judgments in the range of $20,001 to $80,000.
I will hear the parties as to the costs of this appeal.

[2003] SASC 317

10 September 2003