Malaugh Holdings (No 2) Pty Ltd v Seal & Ors - [2006] SASC 17

SUPREME COURT OF SOUTH AUSTRALIA
(Appeals to a Single Judge: Civil)
MALAUGH HOLDINGS (NO 2) PTY LTD v SEAL & ORS
Judgment of The Honourable Justice Besanko
27 January 2006
PROCEDURE - DISCOVERY AND INTERROGATORIES - DISCOVERY AND INSPECTION OF DOCUMENTS - COSTS
Appeal from a decision of a judge in the District Court confirming an order of a master to award costs in favour of the plaintiffs - costs awarded in relation to applications made by the plaintiffs for further and better discovery - the master ordered that the defendants attend court for cross examination as to their affidavits of discovery and later that they make further discovery of certain financial documents - defendants did not appeal these orders - further discovery failed to produce any substantial documents - issue as to which party was successful on the application - consideration as to the characterisation of 'event' in District Court Rules, r 101.02(1) - HELD: The relevant 'events' for the purposes of r 101.02(1) were the outcomes of the respective applications and in that respect the plaintiffs were successful - appeal dismissed.
District Court Rules 1992 rr 58A.10, 58.04(e), 58A.04, 101.02(1); District Court Act 1991 s 42(1); Supreme Court Act 1935 s 40; Supreme Court Rules 1987 r 101.02(1), referred to.
Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd (1984) 157 CLR 149; Southern Resources Ltd v Residues Treatment and Trading Co Ltd (1990) 56 SASR 455; Copping v ANZ McCaughan Ltd (1995) 63 SASR 523, applied.
Malaugh Holdings & Ors v Seal & Ors [2005] SADC 146, discussed.

MALAUGH HOLDINGS (NO 2) PTY LTD v SEAL & ORS
[2006] SASC 17
Appeal from a Judge of the District Court

BESANKO J: On 1 March 2005, a master of the District Court made the following order in an action in that Court.
In relation to the issue of costs on the applications dated 13 July 2004 and 26 July 2004 I award to the plaintiffs in action 1388/03 their costs of and incidental to those applications including costs of cross-examination and the subsequent arguments concerning discovery, otherwise costs of today costs in the cause.
The defendants appealed against that part of the order which awarded the costs of the applications dated 13 July 2004 and 26 July 2004 to the plaintiffs. A judge of the District Court dismissed their appeal (Malaugh Holdings & Ors v Seal & Ors [2005] SADC 146).
On 11 November 2005, a single judge of this Court granted leave to appeal to this Court.
The facts may be briefly stated. There are two actions in the District Court involving the parties to the present appeal or at least some of them. The main action was commenced in 2003 (Action No 1388 of 2003) and is between Patricia Mary Seal, Ian Douglas Seal and Pinnipedia Pty Ltd (a company controlled by Mr and Mrs Seal) as plaintiffs (whom I refer to as “the Seals”) and Richard John Pearce, Barbara Anne Pearce and Malaugh Holdings (No 2) Pty Ltd (a company controlled by Mr and Mrs Pearce) as defendants (whom I will refer to as “the Pearces”). The other action which was commenced in 2002 (Action No 1453 of 2002) involves some of the same parties and relates to an alleged loan agreement which seems to have formed part of the same transaction.
The dispute between the parties in the actions relates to the sale and purchase of a petrol station business comprising land, a business, certain chattels and a petroleum licence by the Pearces to the Seals. It is alleged that, in the period leading up to the sale, the Pearces engaged in misleading or deceptive conduct in relation to the sale and purchase of the business in that they made certain statements about the average level of fuel sales, the average margin in relation to fuel sales, the average turnover in the shop business and the average margin on turnover in the shop business in the months prior to settlement. Settlement on the sale and purchase agreement took place in or about May 1997.
The trial of the actions was recently heard by a judge of the District Court and judgment has been reserved.
Prior to trial, there was a dispute between the parties as to the adequacy of the discovery of documents made by the Pearces. A brief summary of that dispute, sufficient for present purposes, is as follows:
1In terms of the history, it is sufficient to start in May 2004 when the Pearces filed a third further list of documents.
2Correspondence between the solicitors for the parties followed, with the Seals claiming that the Pearces had not made proper discovery of documents.
3On 1 June 2004 the Seals received affidavits from Mr Pearce and Mrs Pearce, respectively, verifying discovery. That was done in compliance with orders of the court, which had been made previously.
4The Seals continued to claim that the Pearces had not made proper discovery.
5On 13 July 2004 the Seals issued a notice for specific directions seeking the following orders (relevantly):
That Richard John Peace attend before this Honourable court for cross-examination on his affidavit sworn on 1 June 2004.
That Barbara Anne Pearce attend before this Honourable court for cross-examination on her affidavit sworn on 1 June 2004.
Those orders were sought under r 58.04A of the District Court Rules 1992 which applied to the actions by reason of r 58A.10.
The grounds of the application were set out in an affidavit filed in support of the notice of specific directions and were as follows:
21.The documents discovered by the defendants in the within action and in Action No 1453 of 2002 do not disclose the takings received by the defendants from the service station business immediately before the purchase by the plaintiffs on 16 May 1997. In particular, the cash takings have not been disclosed.
22.It is the plaintiffs’ position that it is reasonable to assume that the defendants have or have had in their possession, custody or control, a record of the cash transactions in the service station business, immediately prior to the sale to the plaintiffs. The defendants have failed to discover any such documents and (if they no longer have them in their possession, custody or power) provide an explanation as to what happened to any such documents. The affidavits sworn by the second and third defendants do not indicate what enquires [sic] the defendants made in producing their lists of documents exhibited to those affidavits.
Other orders were sought in the notice for specific directions, including orders for leave to issue subpoenas, or, in the alternative, for third party discovery in relation to financial records.
6On 26 July 2004 the Seals issued another notice for specific directions seeking orders for leave to issue a subpoena addressed to Mr Terry Caldow for the production of certain documents, or, alternatively, that he produce the specified documents to the Seals. Mr Caldow is said to be a chartered accountant.
7The applications came on for argument before the master on 10 August 2004, and, on 13 August 2004, he made a number of orders including the following order:
That Richard John Pearce and Barbara Anne Pearce attending [sic] before the court at the commencement of trial on 24 August 2004 for cross-examination on their affidavits of discovery of 1 June 2004 and that this cross-examination proceed before the trial commences.
The master was satisfied that there were reasonable grounds to suspect that the Pearces had not made full and proper discovery of documents in the actions. Relating this criterion to the facts, it seems that the master was satisfied that there were reasonable grounds to suspect that there would be discovery of documents in relation to quantities of petrol and diesel sold, purchases of petrol and diesel, shop turnover and shop cost, and yet this had not occurred.
There was no appeal by the Pearces against the above order.
The master made other orders on 13 August 2004, including orders granting leave to serve subpoenas on third parties. On appeal, the focus of the Pearces’ submissions was the orders that were made against them which were said to have been the main subject of the arguments before the master.
8Cross-examination of the Pearces took place before the master on 23 August 2004. The trial of the actions was adjourned for reasons which I need not set out. The transcript of the hearing on 23 August 2004 suggests that shortly prior to 23 August 2004, the Pearces filed a fourth list of documents.
At the conclusion of the cross-examination, the Seals made an oral application for the following orders:
1.That Mrs Pearce properly swear an affidavit of discovery setting out the basis for her assertion that there had been full discovery.
2.That there be discovery of trust deeds in relation to the H K Tan Trust and the Pearce No 3 Trust, that discovery be made of financial statements made in respect of Hidel Pty Ltd and Malaugh Holdings (No 2) Pty Ltd in respect to the financial years 1996-97 and 1997-98, that further and better discovery be made of banking records, including deposit slips, not confined to deposit slips in relation to the bank account maintained by Hidel Pty Ltd with the Commonwealth Bank held in account number 10186495 for the period 1 April 1997 to 31 May 1997.
9On 6 October 2004, the master refused to make the order sought in paragraph 1. He invited the parties to make further submissions in relation to the order sought in paragraph 2.
10The master considered the further written submissions lodged by the parties and on 24 January 2005 he made the following order:
I order further discovery by Malaugh Holdings (No 2) Pty Ltd, Richard John Pearce and Barbara Anne Pearce of trust deeds in relation to the H K Tan Trust, the Pearce (No 3) Trust, financial statements in respect of Hidel Pty Ltd and Malaugh Holdings (No 2) Pty Ltd in respect of the financial years 1996-1997 and of 1997-1998, and of banking records, including deposit slips, in relation to the bank account maintained by Hidel Pty Ltd with the Commonwealth Bank held in account number 10186495 for the period 1 April 1997 to 31 May 1997.
It seems that that order was made under r 58.04(e) of the District Court Rules 1992.
In the course of his reasons, the master said:
However in their amended defence and in the Statement of Claim in the Seal action, Mr and Mrs Seal (and Pinnipedia Pty Ltd) contend that representations were made by Mr and Mrs Pearce as to the operations of the business, its turnover, etc. Furthermore, the Reply in the Malaugh action (4.2) and the Defence in the Seal action (4.2) put in issue the subject of the negotiations. It is clear, furthermore, that other identities appear to be associated with Malaugh Holdings (No 2) Pty Ltd, namely the H K Tan Trust, the Pearce (No 3) Trust and Hidel Pty Ltd. The bank accounts were conducted on the Hidel Pty Ltd bank account, and loan funds seem to have been put through the accounts of the H K Tan Trust.
It is clear from the Pearces’ evidence that “till tapes” – which would constitute primary evidence of the business’ takings – no longer exist.
Accordingly, other documents which show how much was received by the business would, in my view, be directly relevant and should be discovered.
The master said that even if he was wrong and the documents were not directly relevant, he would make an order for their discovery on the ground that it was in the interests of justice to do so (r 58A.04).
The Pearces did not appeal against the order made by the master on 24 January 2005.
11On 10 February 2005, the Pearces filed a further affidavit of Mr Pearce, to which was annexed a document entitled “Fourth List of Documents of the Defendant”. Relevantly, that document provides as follows:
1. The documents which are at present in the possession, custody or power of such parties and directly relevant to any issue arising on the pleadings (or the subject of an order of the Court):
(a)for which privilege is not claimed are:
36.deed of trust for the Pearce No 3 Trust dated 28 January 1985;
(b)for which privilege is claimed are:
No further documents
2.The documents which have been, but are no longer in possession, custody or power of the said parties and directly relevant to any issue arising on the pleadings (or the subject of an order of the Court) are:
2.3deed of trust for the HK Tan Trust which was, until some date after January 1985 within the possession, custody or power or the defendants, but cannot now be located and is presumed lost;
2.4bank statements for Hidel Pty Limited for Commonwealth Bank account number 10186495 for the period 1 April 1997 to 16 May 1997 which cannot now be located and are presumed lost; and
2.5deposit book for Hidel Pty Limited for Commonwealth Bank account number 10186495 for the period 1 April 1997 to 21 April 1997.
3.The Defendants, by this list of documents, have now fully discharged the obligations of such Defendants, as at the date of delivery of this list, regarding discovery of documents in this action.
In his affidavit, Mr Pearce states that financial statements in respect of Hidel Pty Ltd and Malaugh Holdings (No 2) Pty Ltd in respect of the financial years 1996-1997 and 1997-1998 do not exist and have never existed.
12On 1 March 2005, the master made the order that is the subject of the appeal ([1] above).
Issues on appeal
The submission put by the Pearces to the judge of the District Court, and repeated in this Court, was that ultimately they were successful in relation to the applications because the substance of what they said in correspondence from their solicitors to the Seals’ solicitors prior to the issuing of the application dated 13 July 2005 proved to be correct, namely, that there were no further documents. In other words, the orders obtained by the Seals for cross-examination and then for further discovery did not result in the discovery of further documents by the Pearces, and the pre-application assertions by the Pearces proved to be correct. The Pearces submitted that the master should in fact have ordered that the Seals pay their costs of the applications.
It is well-established that an appellate court is slow to interfere with the exercise of a discretion as to costs: Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd (1984) 157 CLR 149 at 176 per Brennan J (as he then was); Southern Resources Ltd v Residues Treatment and Trading Co Ltd (1990) 56 SASR 455 at 480 per Jacobs ACJ, Prior and Mullighan JJ. The Pearces acknowledged the hurdle they faced, but submitted that the master erred as a matter of principle because the costs order that he made was not a costs order which followed the “event”. The Pearces submitted the “event” was the correctness or otherwise of the position outlined by them in the correspondence from their solicitors and, in that regard, it was submitted that they had been successful.
The Pearces referred to correspondence between the solicitors for the respective parties before the application dated 13 July 2004. In particular, they referred to letters from the Seals’ solicitors dated 14 May 2004 and 2 June 2004 and responses from the Pearces’ solicitors dated 28 May 2004 (a letter and an e-mail) and 3 June 2004. Generally speaking, I think it is right to say that, in the correspondence, the Pearces were asserting that the requested documents did not exist, or, if they did, the Pearces did not have them.
As far as the documents which were discovered in Mr Pearce’s affidavit sworn on 10 February 2005 are concerned, whilst it cannot be said that nothing further was discovered by the Pearces, it is substantially correct to say that the applications by the Seals did not produce any further documents.
Where the submission of the Pearces breaks down is in characterising the “event” as the correctness of their assertions about the existence of documents. In my opinion, the “event” is the outcome of the application and the successful party is the party who succeeds on the application.
Rule 101.02(1) of the District Court Rules provides as follows:
Subject to these Rules, the costs of and incidental to a proceeding shall follow the event unless the Court otherwise orders.
Section 42(1) of the District Court Act 1991 provides as follows:
(1)Subject to subsection (2) and the rules, costs in any proceedings in the Civil Division will be in the discretion of the Court and may be awarded against any person (whether a party to or a witness in the proceedings or not)
For present purposes, s 42(1) of the District Court Act 1991 is in similar terms to s 40 of the Supreme Court Act 1935. The interaction between s 40 of the Supreme Court Act 1935 and r 101.02(1) of the Supreme Court Rules 1987 (which is in the same terms as r 101.02(1) of the District Court Rules) was considered by King CJ (with whom Mohr and Nyland JJ agreed) in Copping v ANZ McCaughan Ltd (1995) 63 SASR 523. King CJ said (at 527):
The existence of s 40 is also an important, even controlling factor, in the construction of the rule. It is true that the section is expressed to be "subject to the rules". Nevertheless the legislative intention is plainly to confer on courts and judges an unfettered discretion as to costs. A construction of a rule of court which practically negates the statutory provision is not lightly to be adopted. It may well be that the rule, so construed, would be invalid. Where a statutory provision is made subject to Rules of Court, the rules may prescribe procedures which condition the operation of the statutory provision or limit the mode of its operation. They may even modify or exclude its operation in defined circumstances. But a general provision in a Rule of Court which substitutes a different rule across the board for that prescribed by the statute would seem to me to be invalid as repugnant to the statute.
There is a strong presumption against construing the rule in such a way and it is unnecessary to do so. Where costs are in the discretion of the court, the discretion must nevertheless be exercised judicially. A successful party has a reasonable expectation of obtaining his costs. The judge ought not to exercise his discretion against a successful party on grounds wholly unconnected with the cause of action: Donald Campbell & Co Ltd v Pollak [1927] AC 732. I think that r 101.02(1) does no more than express in the rules that well established principle. The reference to costs following the event is an expression of the general expectation that the successful party will get the costs.
It was not argued in this case that it was not open to the master to award costs to the successful party; rather, the argument was as to who was the successful party, or, put another way, what was the relevant “event” for the purposes of the applications. As I have said, in my opinion, the “event”, for the purposes of r 101.02(1), is the outcome of the relevant application and, in that regard, the Seals were successful. Clearly, the master considered that there were reasonable grounds to suspect that full and proper discovery of documents had not been made under r 58.04A and then after the cross-examination of Mr and Mrs Pearce that there were grounds to order further and better discovery under r 58.04(e). The orders made by the master following these two decisions were not the subject of appeals by the Pearces, and there is no reason to conclude that it was not open to him to make the orders at the time he made them. The relevant “events” for the purposes of r 101.02(1) were the outcomes of the respective applications and a costs order has been made awarding costs to the successful party.

For these reasons, the appellants’ submission must be rejected and the appeal must be dismissed.
Conclusion
The appeal is dismissed.