Foti v Foti - [2009] SASC 177

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
FOTI v FOTI & ORS
[2009] SASC 177
Judgment of The Honourable Justice White
26 June 2009
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - CONDUCT OF PARTIES
Following the filing of a Notice of Discontinuance by the plaintiff against the 8th to 11th defendants (the former defendants), the former defendants brought an application seeking their costs on an indemnity or, alternatively, a solicitor/client, basis.
Whether good reason exists to depart from general rule that costs be awarded on a party/party basis - whether plaintiff's claims against the former defendants foredoomed to fail - whether conduct of the former defendants militates against costs being awarded on indemnity or solicitor/client basis.
Held: plaintiff's claims against the former defendants were not strong - conduct of former defendants caused additional costs to be incurred by plaintiff unnecessarily - plaintiff to pay costs of former defendants on a party/party basis.
Trade Practices Act 1974 (Cth) s 52, s 53, s 58; Corporations Act 2001 (Cth); Supreme Court Civil Rules 2006 r 38, r 107, r 264, r 269; Corporations Rules 2003 r 2.4, referred to.
Huntsman Chemical Co Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242, discussed.
Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; Pascoe Ltd (in liq) v Lucas (1999) 75 SASR 246; Maclaw No 469 Pty Ltd v Ilana Accessories Pty Ltd [2001] VSC 563, considered.

FOTI v FOTI & ORS
[2009] SASC 177
WHITE J:

This decision concerns the costs payable following the discontinuance by the plaintiff of the claims which she brought against four of the 12 defendants to this action (the 8^th, 9^th, 10^th and 11^th defendants). I will refer to these four defendants as the “former defendants”.
The former defendants seek an order that the plaintiff pay their costs on an indemnity basis, or, in the alternative, on a solicitor/client basis as, in their submission, the plaintiff, properly advised, should have realised from the outset that the claims made against them were foredoomed to fail. The plaintiff submits that costs should be awarded to the former defendants on a party/party basis only.
The Claims Against the Former Defendants
The plaintiff commenced the action on 4 August 2008. The statement of claim accompanying the summons was amended on 5 December 2008. It is the amended statement of claim filed on 5 December 2008 to which I refer in these reasons. The plaintiff filed a notice of discontinuance against the former defendants on 8 April 2009.
It is not easy to summarise succinctly and without over-simplification the claims which the plaintiff made in the statement of claim. I emphasise that in attempting a summary, I am referring to matters which were pleaded and which were therefore allegations only. My summary is not to be understood as containing findings of fact about the matters alleged.
The proceedings have their origin in concerns which the plaintiff has about the operation of three family trusts associated with the Foti family. The first defendant, Cosimo Foti, who is the plaintiff’s brother, is a director of the corporate trustees (D4, D7 and D12) of the three family trusts, a director of a company (D5) which is one beneficiary of one of the trusts, a director of a company (D6) through which one trust held investments, and a director of companies (the former defendants) in or through which one or other of the trusts, with a 50/50 shareholder, made investments.
Each of the former defendants was a company which either owned a shopping centre in or adjacent to metropolitan Adelaide or was a trustee of a trust which operated a shopping centre on land owned by that defendant. As indicated, the Foti family had, beneficially, a 50 per cent interest in each of the former defendants.
Cosimo Foti (D1) is an accountant by profession. The plaintiff alleged that he controlled, or was the de facto controller of, each of the corporate defendants (including the former defendants) and that he was in a position to, and did, influence the commercial decisions of his sister and mother (D2 and D3).
The plaintiff alleged that D1 and D2, with the knowledge and assistance of other defendants, had pursued a strategy (described as a “squeeze out” strategy) to disadvantage the plaintiff by distributing monies from the various investments of the trusts away from her and, ultimately, towards D1, D2 or D3 or interests associated with them.
The statement of claim indicated that the plaintiff sought a range of remedies. It is not necessary to describe them all. The plaintiff alleged that some of the defendants, in particular D1, had engaged in breaches of trust, breaches of fiduciary duty, breaches of director’s duties and a breach of the common law duty of care. As against the corporate defendants, the plaintiff alleged breaches of duty, including statutory duties arising under the Corporations Act 2001 (Cth). I repeat that this is not intended to be an exhaustive statement of the relief sought by the plaintiff.
Many of the references to the former defendants in the statement of claim were in the context of allegations made against D1, ie, as part of the particularisation of his conduct which was impugned by the plaintiff.
In paragraphs [52] and [53] the plaintiff pleaded contraventions of ss 53 and 58 of the Trade Practices Act 1974 (Cth) (TPA) by the former defendants by reason of certain conduct of D1. Sections 53 and 58 proscribe certain conduct in relation to the supply by a corporation of goods and services. The pleading concerning ss 53 and 58 was not altogether clear but on the basis of the bare allegations in the statement of claim, it is not easy to see how those provisions had any application at all to the relationship between the plaintiff and the former defendants. The statement of claim did not include a pleading of any material facts indicating that any of the former defendants had engaged in activities of the kind to which ss 53 and 58 were directed.
Counsel for the plaintiff contended that the statement of claim also contained an allegation of a breach of a duty of care owed by the former defendants and, or alternatively, a plea that the former defendants were vicariously liable for breaches of a duty of care owed by D1.
The former contention cannot be sustained. The statement of claim does not contain an allegation that the former defendants owed the plaintiff a duty of care; only an allegation that D1 owed such a duty.[1] Further, the allegations in the statement of claim of a breach of duty were directed to D1 and not to the former defendants. In saying that, I am not overlooking that the statement of claim alleges that various conduct engaged in by D1 in relation to the former defendants was a breach of his duty of care.
[1] Paragraph [21] of the Amended Statement of claim filed 5 December 2008.
The statement of claim did contain an allegation that the defendants other than D1, including the former defendants, were vicariously liable for the conduct of D1.[2] This pleading was put at a level of considerable generality. On my present understanding of the statement of claim, the allegation that the former defendants were vicariously liable for the conduct of D1 impugned by the plaintiff rested very much on D1 being the accountant and director of the former defendants and the day-to-day manager and controller of their funds. There was no other allegation of material facts by which the impugned conduct of D1 should be attributed to any one of the former defendants.
[2] Paragraph [17.6] of the Amended Statement of Claim filed 5 December 2008.
The plaintiff’s counsel acknowledged that the claims pleaded against the former defendants were “novel”. He also acknowledged that he was unable to cite any authority indicating the vicarious liability of a defendant in the position of the former defendants in relation to the kind of conduct alleged against D1.
The plaintiff’s statement of claim also contained a plea of a breach of s 52 of the TPA. However, the statement of claim did not contain a pleading of conduct engaged in by any of the former defendants which could be said to be misleading or deceptive. Again, it seems that the plaintiff sought in some way to attribute the conduct of D1 to the former defendants.
Apart from relief in relation to the TPA causes of action, the only relief sought against the former defendants was a tracing order concerning funds and assets moving between various entities within the Foti Group and the former defendants, and an order for an inquiry and account as to profits made by various of the defendants, including the former defendants. It seems that the plaintiff sought that relief against the former defendants as an incident to the relief which she sought against her brother, sister, mother and the trustees of the three family trusts.
Rule 38(4) of the Supreme Court Civil Rules 2006 (the 2006 Rules) requires that some persons should be named as defendants even if no relief is sought against them. It requires every person whose interests may be “directly and adversely affected by the terms of a judgment, and whose presence before the Court is required for a judgment to be entered in those terms”, to be made a defendant to the action.
The plaintiff did not suggest that r 38(4) warranted the joinder of the former defendants as defendants to the action. If any documentary material of the former defendants was necessary for a tracing order, or for an order for inquiry and account to be carried into effect, that material could be obtained by way of non-party disclosure or by subpoena.
The Rules Regime
Rule 107(4) of the 2006 Rules provides for the usual costs order on a discontinuance. It provides that:
(4)Unless the parties agree or the Court orders to the contrary, the party against whom the action, or a claim or defence in the action, is discontinued is entitled to costs arising from the action, or the claim or defence (as the case may require) up to the time of receiving notice of the discontinuance.
Rule 264 of the 2006 Rules is also pertinent. Subrules (1), (2) and (4) provide:
(1)The Court may, in the exercise of its discretion as to costs, award costs on any basis the Court considers appropriate.
(2)As a general rule, however, costs are awarded as between party and party (that is, on the basis that the party entitled to the costs will be reimbursed for costs reasonably incurred by the party in the conduct of the litigation to an extent determined by reference to the scale of costs in force, under these rules or the previous rules, when the costs were incurred).
…
(4) The Court may depart from the scale if there is good reason to do so.
Example—
The Court might allow a fee greater than allowed by the scale for a pleading if satisfied that the fee is justified by the difficulty of the case.
Consideration
As noted earlier, the principal ground upon which the former defendants sought an order for indemnity costs was their assertion that the proceedings against them were misconceived and without merit. Further, they contend that the plaintiff must have known that the proceedings were without merit and that she persevered with her claim for some ulterior purpose. In this respect the former defendants refer to the judgment of Rolfe A-JA in Huntsman Chemical Co Australia Ltd v International Pools Australia Ltd,[3] concerning the late abandonment of an appeal:
In my view the action of the appellants in abandoning the appeal indicates they had no faith in the possibility of its success and, therefore, it was not an appeal which should have been brought or, having been brought, prosecuted after reasonable time for consideration. To that extent, although it was not fought out to the end, it constituted a form of abuse of process of the Court. This, in the particular circumstances of the case, warrants, in my view, an order in favour of International that its costs of the appeal be paid on an indemnity basis.[4]
[3] (1995) 36 NSWLR 242.
[4] Ibid at 272.
It should not be thought that it is every action, or every appeal, which is discontinued which constitutes a form of abuse of process of the court. Parties discontinue proceedings for a variety of reasons, including a reconsideration of their prospects of success, or of the expense involved in continuing the litigation, or because of a waning of interest in obtaining the relief sought in the litigation, or because of a reconsideration of the need for particular defendants to be made parties to the proceedings. The passage in the judgment in Huntsman Chemical to which the former defendants referred was a conclusion by Rolfe A-JA on the factual circumstances then before the Court, and not a statement of generally applicable principle.
Both parties also referred to several other authorities concerning the circumstances in which a departure from the usual order of party/party costs is appropriate.[5] It is not necessary to recite passages from these authorities. The relevant principles are not in doubt. The general rule, reflected in r 264(2) and (4), is that costs are generally awarded on a party/party basis, and good reason is required for departure from that general rule. That good reason may be found in a variety of circumstances such as the making of an allegation of fraud knowing it to be false or irrelevant to the issues before the court; making allegations for an ulterior motive; misconduct causing a loss of time and inconvenience to the parties and to the court; proceeding in a wilful disregard of known facts or established law; and the making of wild and contumelious allegations.[6]
[5] Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; Pascoe Ltd (in liq) v Lucas [1999] SASC 519 at [313]; (1999) 75 SASR 246 at 279; Maclaw No 469 Pty Ltd v Ilana Accessories Pty Ltd [2000] VSC 563.
[6] Maclaw No 469 Pty Ltd v Ilana Accessories Pty Ltd [2000] VSC 563 at [15].
The claims which the plaintiff made against the former defendants do not appear to have been strong. On the basis of the bare allegations contained in the statement of claim, I do think it can be concluded that the prospects of success of the claims based on ss 52, 53 and 58 of the TPA were slim.
Similarly, on the basis of the bare allegations contained in the statement of claim, the plaintiff’s allegations of a breach of duty of care and of vicarious liability do not appear to have been strong.
The former defendants put the plaintiff on notice of the weaknesses which they perceived in the claims she made against them. They did so by letters to the plaintiff’s solicitors dated 10 September 2008, 28 October 2008, 30 October 2008 and 27 January 2009. In addition, on 8 September 2008 the former defendants filed an interlocutory application seeking either summary judgment against the plaintiff or, alternatively, a striking out of the allegations in the statement of claim concerning them. In the same application, the former defendants sought, in the alternative, orders for provision of security for costs, and further particularisation of the plaintiff’s statement of claim.
These matters, considered by themselves, indicate that the claim by the former defendants for costs to be awarded on either an indemnity or a solicitor/client basis may be well-founded. However, there are some countervailing considerations arising from the former defendants’ own conduct of the proceedings which make it unnecessary to express a concluded view about that aspect of the matter.
First, I am not satisfied that it was necessary at the present stage of the proceedings for the former defendants to be represented separately from the other defendants in the proceedings or, at least, at the various directions hearings. Counsel for the former defendants said that separate representation was appropriate because they were not members of the Foti Group. This was because each of the former defendants is half owned by interests which are not related to the Foti family. Counsel accepted, however, that there was not any conflict of interest between the former defendants, on the one hand, and the remaining defendants, on the other in relation to the application of 8 September 2008. By reason of his position in each of the former defendants, it can be inferred that Cosimo Foti has been involved in the giving of instructions on behalf of the former defendants. It is likely that he has also been involved in the giving of instructions on behalf of the remaining defendants. To date, the interests of all defendants appear to have coincided. It is of course possible to identify potential conflicts of interest which could have arisen in the future between the former defendants, on the one hand, and the remaining defendants, on the other. However, at the present time, such conflicts are potential rather than actual. That means that, at least for the time being, it would have been practical for the former defendants to have been represented by the solicitors appearing for one of the other groups of defendants.
The Court is concerned about costs being incurred unnecessarily by the over-representation of parties with a common interest. That concern is reflected in r 269 of the 2006 Rules.
If an award for indemnity or solicitor/client costs is made, it would mean that the former defendants would be compensated for all the costs which they have incurred even though it should have been possible for them to have protected their position more economically. In my opinion, that counts against an order for indemnity costs, or solicitor/client costs, being made.
Secondly, shortly after the proceedings were commenced, the former defendants drew the plaintiff’s attention to r 2.4 of the Corporations Rules 2003. That rule requires, in the absence of a contrary court order, an originating process to be accompanied by an affidavit. The former defendants insisted that the plaintiff provide such an affidavit and sought an order to that effect in their application of 8 September 2008. In response to that application, the plaintiff did file an affidavit on 5 December 2008, ie, at the same time as filing her amended statement of claim.
In my opinion, in the particular circumstances of this case, the provision of the affidavit has served no useful purpose. The plaintiff had filed a statement of claim and the defendants were seeking summary judgment, the striking out of the statement of claim, or an order for further particularisation. It is plain that the attempt to provide a proper articulation of the plaintiff’s claims was being made by pleadings, and the affidavit could not add to that articulation. Further, the claims involving breaches of the Corporations Act hardly involved the former defendants at all. The former defendants’ insistence on compliance with r 2.4 of the Corporations Rules simply required the plaintiff to incur additional costs in the preparation of the affidavit.
On the hearing of the argument concerning costs, counsel for the former defendants said that they wanted the affidavit because they thought it may enhance the application for summary judgment. I note that that was not a purpose which was communicated to the plaintiff at the time. In any event, the former defendants made the application for an order with respect to the affidavit as an alternative to the summary judgment application. The former defendants could have proceeded with their application for summary judgment leaving it to the plaintiff to put such evidence, if any, before the Court on that application as she saw fit.

In all the circumstances, I consider it inappropriate that the former defendants should be able to recover indemnity costs or solicitor/client costs when they have, by their conduct in the action, caused the plaintiff to incur additional costs unnecessarily.
The two matters which I have mentioned lead me to conclude that despite the apparent weakness of the claims made by the plaintiff against the former defendants, there does not exist “good reason” for the Court to depart from the general rule that costs should be awarded on a party/party basis.
Conclusion
The order of the Court is that the plaintiff pay the costs of the former defendants on a party/party basis.