Pentroth Pty Ltd v Kirschild Pty Ltd - [2006] SASC 356

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
PENTROTH PTY LTD v KIRSCHILD PTY LTD
[2006] SASC 356
Judgment of The Full Court
(The Honourable Justice Duggan, The Honourable Justice Gray and The Honourable Justice White)
24 November 2006
PROCEDURE - COSTS - APPEALS AS TO COSTS
Appeal against order of a master as to costs - respondent discontinued proceedings commenced in Supreme Court - master ordered that the respondent pay the appellant's costs for only part of the proceedings - appellant seeks order for costs for whole of discontinued proceedings - Supreme Court Rules 1987, r 52.03 - whether r 52.03 creates a presumptive entitlement in a defendant to costs of discontinued proceedings - whether master erred in failing to recognise existence of presumptive entitlement - whether master erred in the exercise of the discretion - whether master made an error of fact.
Held: r 52.03 does not create a presumptive entitlement - master did not erroneously fetter his discretion - master made no error of fact - appeal dismissed.
Supreme Court Act 1935 (SA), s 40, s 50; Supreme Court Rules 1987 r 52.01, r 52.03; Supreme Court Civil Rules 2006 r 281; Statutes Amendment (New Rules of Civil Procedure) Act 2006 (SA); Trade Practices Act 1974 (Cth), s 52; Uniform Civil Procedure Rules 2005 (NSW), referred to.
O'Neill v Mann [2000] FCA 1680; Fordyce v Fordham [2006] NSWCA 274; Re the Minister for Immigration and Ethnic Affairs, Ex parte Lai Qin (1997) 186 CLR 622, applied.
Mills & Anor v Rothmore Farms Pty Ltd (In Liq) [2002] SASC 134; Mills & Anor v Rothmore Farms Pty Ltd (In Liq) (2002) 221 LSJS 306; Boscaini Investments Pty Ltd & Ors v The Corporation of the City of Kensington and Norwood [1999] SASC 327; Wood v Heard [2001] SASC 276; Fraser v Chakravarti [2001] SASC 276; Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284; J H Leaver & Co Pty Ltd v Maniotis (2005) 215 ALR 773, considered.

PENTROTH PTY LTD v KIRSCHILD PTY LTD
[2006] SASC 356
Full Court: Duggan, Gray and White JJ

DUGGAN J: In my view the appeal should be dismissed. I agree with the reasons prepared by White J.
GRAY J: I would dismiss this appeal. I do not wish to add to the reasons of White J.
WHITE J: This appeal concerns the liability for costs of discontinued proceedings.
On 5 April 2006 the respondent to this appeal discontinued proceedings commenced in this Court on 14 April 2004 by which it sought an injunction and an award of damages. At the same time, it sought an order that each party should bear its own costs of the discontinued proceedings.
A master ordered that there be no order in respect of the costs incurred by either party up to and including 10 July 2005 but that the respondent pay the costs incurred by the appellant thereafter until the filing of the Notice of Discontinuance. The appellant appeals, contending that it should also have had an order for costs in its favour in respect of the period before 10 July 2005.
It is convenient to refer to the appellant and respondent by their original designations as defendant and plaintiff respectively.
Section 50(1a)(b)(ii) of the Supreme Court Act 1935 (SA), prior to its amendment with effect from 4 September 2006,[1] provided that no appeal should lie without the leave of a judge from any order as to costs only which by law are left to the discretion of the judge. However, relying on the decision of Lander J in Mills & Anor v Rothmore Farms Pty Ltd (In Liq),[2] the appellant contended that the leave to appeal was not required in this case. It was submitted that this appeal is governed by s 50(2) of the Supreme Court Act which, prior to 4 September 2006, provided:
Subject to the rules of court, an appeal shall lie to a judge against a judgment, order, direction or decision of a master.
[1] Statutes Amendment (New Rules of Civil Procedure) Act 2006 (SA), s 11.
[2] [2002] SASC 134. See also Mills & Anor v Rothmore Farms Pty Ltd (In Liq) [2002] SASC 265; (2002) 221 LSJS 306.
The plaintiff did not challenge the competence of the appeal, nor that the appeal lay appropriately to the Full Court rather than to a single judge. In those circumstances, I am prepared to proceed on the basis adopted by the parties. I note, however, that r 281 of the Supreme Court Civil Rules 2006 now requires permission to be obtained in all cases of appeals which concern questions of costs only.
The Underlying Proceedings
The defendant is the operator of the Austral Hotel (“the Austral”) in Rundle Street. The Austral has a long history of staging performances of live music in the beer garden at the rear of its premises.
In 2002 the plaintiff commenced the development in Frome Street, Adelaide of premises now known as the Majestic Rooftop Garden Hotel (“the Majestic”). Issues arose concerning noise emanating from the live performances at the Austral. The parties (together with a third party involved in the development of an adjacent property in Bent Street) resolved those issues by agreement. This agreement was terminated in December 2002 by a second agreement (“the second agreement”) to which the plaintiff, the defendant and the developer of the adjacent property in Bent Street were parties. The second agreement contained covenants with respect to noise attenuation and an obligation on the defendant to construct, within a specified period, a canopy over its beer garden. It was common ground that the canopy was a noise attenuation measure. Both the plaintiff and the developer of the Bent Street property were to contribute a substantial sum to the cost of the canopy.
On 14 April 2004, the plaintiff commenced proceedings in this Court against the defendant. It alleged that, in breach of the second agreement, the defendant had failed to complete the construction of the canopy before 1 March 2004. In addition, the plaintiff alleged that certain representations made by the defendant’s agents constituted contraventions of s 52 of the Trade Practices Act 1974 (Cth) and that the noise being emitted from the Austral entitled it to damages for nuisance and/or an injunction.
On 19 April 2004, Bleby J issued an interim injunction restraining the defendant, in the period from 19 April 2004 until 23 April 2004, from allowing noise exceeding certain decibel levels from being emitted from the Austral at specified times. The plaintiff’s application for an interlocutory injunction pending trial was adjourned to 23 April 2004. However, the hearing on that day did not proceed. The application for the injunction was adjourned sine die upon the plaintiff giving to the defendant and to the court an undertaking as to damages, and upon the defendant giving to the plaintiff and to the court an undertaking that at specified times in the period between 23 April 2004 and 30 June 2004, it would not permit noise exceeding specified decibel levels to emanate from the Austral. Bleby J made an order reserving the question of costs.
In July 2004, the plaintiff alleged that the defendant had breached the undertaking concerning noise levels on each of 13 and 14 June 2004 and sought the issue by the Registrar of a summons for contempt. That application was never determined by the court and was withdrawn on 11 October 2004.
The defendant filed a defence denying any breach by it of the second agreement, denying the alleged contravention of s 52 and denying the alleged nuisance. On 11 July 2005, the plaintiff filed an Amended Statement of Claim in which it maintained its allegations of a breach by the defendant of the second agreement, contraventions of s 52, and of nuisance. As already noted, the plaintiff discontinued the proceedings on 5 April 2006.
The above summary is not a complete summary of the course of proceedings but it is sufficient, in my opinion, for a consideration of the issues in this appeal. In effect, the plaintiff, having obtained an interim injunction and then an undertaking from the defendant which operated for about seven weeks, discontinued its claim. The construction of the canopy seems to have been successful in resolving many of the noise issues. The court was never called upon to adjudicate the claims of the plaintiff.
Rule 52.03 and the Claim for Costs
Rule 52.01 of the Supreme Court Rules 1987, which was in force at the time of the discontinuance, provided that a plaintiff may, at any time before the making of the order that the action proceed to trial, discontinue its claim against the defendant. Rule 52.03 provided for the costs consequences of discontinuance. It provided:
Unless the Court otherwise orders or the parties consent, the party discontinuing or withdrawing shall pay the costs up until the date of delivery of the notice, of the party against whom the claim or defence was discontinued or withdrawn. No further order shall be required to enable the party against whom the claim or defence was discontinued to tax his costs.
As already noted, at the same time that it filed its Notice of Discontinuance, the plaintiff sought an order from the court that each party should bear its own costs of the proceedings.
The Decision of the Master
The master was satisfied that it was appropriate to “otherwise order” in respect of the period before 10 July 2005, and he ordered that there be no order in respect of the costs incurred in that period. However, he considered the plaintiff’s pursuit of its claims after 11 July and in particular by the filing of an Amended Statement of Claim was not reasonable. Hence he ordered the plaintiff to pay the defendant’s costs incurred after 10 July 2005. It is clear enough that the master determined that no order should be made in respect of the costs incurred before 10 July 2005 because he was satisfied that the institution of the proceedings by the plaintiff, and their continuance to that date, had been reasonable. So much appears from the following passage in the master’s reasons:
The ordinary consequence of a discontinuance in this Court is that the party discontinuing pays the costs of the party against whom the action has been brought. That rule in my view covers circumstances where the party discontinuing has not obtained any relief either interlocutory or otherwise but has brought an action which, by discontinuing, it effectively acknowledges to be futile. To bring a futile action or to maintain an action which has become futile cannot be said to be reasonable. That is not the case in this particular matter. There is clear authority to enable the Court in actions where further proceedings are moot to make orders for costs between the parties that reflect the soundness and reasonableness of the actions taken by both plaintiff and defendant. Here the plaintiff in its initial action achieved undertakings and a confinement of the escape of noise from the defendant’s premises. The actions of the plaintiff in instituting the proceedings and the defendant in defending them are in my view reasonable. Bleby J made no order for the costs of that process. In my view no order for costs should be made in respect of that part of the action.
Rule 52.03 and a Presumptive Entitlement to Costs
Mr Robertson, who appeared for the defendant, submitted that the master’s decision with respect to the costs incurred before 10 July 2005 was affected by two errors of principle, and by one error of fact. He submitted that the master should have found that the plaintiff’s discontinuance of the proceedings was a recognition by it of the futility of its claims, so that the plaintiff should have been required to pay all of the defendant’s costs.
Mr Robertson submitted that r 52.03 created a presumptive entitlement in a defendant to the costs of discontinued proceedings. The existence of the presumptive entitlement displaced the usual unfettered discretion of the court with respect to costs. In exercising the discretion which r 52.03 undoubtedly vested in him to order otherwise, the master had failed to recognise the existence of the presumptive entitlement and to recognise that his discretion had to be exercised having regard to that presumptive entitlement. It was submitted that this was the first error of principle.
The submission as to the effect of r 52.03 rested on its language. The effect of the first sentence in r 52.03 was, it was submitted, to create a liability (and a corresponding entitlement) subject only to the ability of the court in an appropriate case to deny that liability/entitlement. That naturally suggested that the rule established a presumptive entitlement so that when asked to order otherwise, the court should approach the matter by considering whether that entitlement should be denied.
An alternative construction of r 52.03 is to construe it as simply establishing a position with respect to costs which is to apply in the absence of any order of the court, but without impinging at all on the court’s discretion when it is required to exercise it. Construed in this way, r 52.03 does not establish a norm, in the sense of a position which is to apply unless displaced in special circumstances. All it does is to establish the position which applies in the absence of any court order to the contrary.
Section 40 of the Supreme Court Act contains the court’s powers with respect to costs. Section 40(1) provides that subject to any statutory provisions and to “the rules of court” the costs of proceedings are in the discretion of the court. Thus, s 40(1) contemplates that the court’s discretion with respect to costs may be confined by rules of court. For Mr Robertson’s argument to succeed, this Court would have to be satisfied that r 52.03 is to be construed as confining the general discretion with respect to costs vested in the court by s 40(1).
Rule 52.03 is not expressed, at least explicitly, in terms which limit the court’s general discretion. It does not, for example, provide that the court may “order otherwise” if satisfied that special or unusual circumstances exist. One might have expected express words if a limitation on the general discretion with respect to costs was intended. The circumstances in which parties may discontinue the whole or part of proceedings, and therefore the circumstances in which the court may be required to exercise the discretion with respect to costs, are diverse. That diversity suggests that r 52.03 should not readily be construed as containing an intention by the court that its discretion with respect to costs should be confined As to the need for flexibility in cases of discontinuance, Finn J in O’Neill v Mann[3] has said in relation to the counterpart rules of the Federal Court:
It properly can be said that there is an “underlying policy” in the Rules that the discontinuing party should be liable for the other party’s costs unless the court orders otherwise … But so various can be the reasons for, and circumstances of, discontinuance that that policy cannot safely be said to have hardened into a “usual rule” where leave is granted such as exists where there has been a determination of a claim on its merits … The conduct of the parties in the matter and the reasons for the discontinuance can bear heavily on the exercise of the discretion as to costs. ...[4]
[3] [2000] FCA 1680.
[4] Ibid at [13].
Furthermore, r 52.03 should be read as a whole. The second sentence in the rule, which provides that no further order shall be required to enable the party against whom the claim or defence was discontinued to tax its costs, indicates that the rule has a facilitative function. That is, when the discontinuing party does not seek any “order otherwise”, the other party is entitled to proceed to enforce its entitlement to costs without the necessity of approaching the court for any further order. Effect can be given to that facilitative purpose without construing the rule as, in addition, confining the general discretion of the court with respect to costs. These considerations count against acceptance of Mr Robertson’s submission.
The question of whether a rule like r 52.03 gives rise to a presumptive entitlement has been considered in New South Wales. In Fordyce v Fordham[5] McColl JA, with whom Beazley JA agreed, rejected a submission that r 42.19 of the Uniform Civil Procedure Rules 2005 of New South Wales (a counterpart of r 52.03) created a presumption that the discontinuing party should pay the other party’s costs. It was held that r 42.19 was a relevant but not determinative consideration in the exercise of the discretion with respect to costs. McColl JA reviewed a number of authorities indicating that generally the discretion with respect to costs on a discontinuance was not confined and should be exercised having regard to “the whole landscape comprising the course of the proceedings”.[6] However, Santow JA expressed his conclusion in a way which would support Mr Robertson’s submission:
I consider the fact of discontinuance is likely to be a factor of some weight in exercising the discretion to determine whether the discontinuing party should be ordered to pay the other party’s costs. While it is true the Court may otherwise order, the onus remains on the discontinuing party to justify such an order by reference to the circumstances said to justify exception to the normal cost outcome in such event. That the Court retains a discretion to accommodate such circumstances does not alter their character as being by way of exception nor the consequence in terms of onus. That said, the discretion remains to otherwise order.[7]
[5] [2006] NSWCA 274.
[6] Ibid at [79] citing Giles JA in Abigroup Contracts Pry Ltd v ABB Service Pty Ltd (formerly ABB Engineering Construction Pty Ltd) [2004] NSWCA181.
[7] Ibid at [3].
Despite the support which Mr Robertson’s submission derives from this passage in the judgment of Santow JA, I prefer the view that r 52.03 does not confine the court’s discretion by creating a presumptive entitlement. I reach that conclusion having regard to the matters already mentioned and by reference to the majority position in Fordyce. Accordingly I do not consider that the master made the first error of principle for which the defendant contended.
A Fetter on the Discretion
In the passage in the master’s reasons quoted above, the master said that the usual practice of the court in requiring the discontinuing party to pay the costs of the other “covers circumstances” in which party discontinuing has not obtained any relief, either interlocutory or otherwise and has in effect, by the discontinuance, acknowledged the proceedings to be futile. Mr Robertson submitted that the words emphasised indicated that the master had, incorrectly, considered that that usual practice was limited to cases in which no relief, interlocutory or otherwise, had been obtained and in which the futility of the proceedings had, in effect, been acknowledged. Such a limitation was inappropriate, it was said, as there are a number of other circumstances in which a discontinuing party should be required to pay the other’s costs. Thus it was said that the master had, in this second way, erred in principle by fettering the exercise of his discretion.
If the master did intend to convey that a discontinuing party should be required to pay the costs of the other party only in circumstances in which it had not obtained any relief and in which there had been an effective acknowledgement of futility, then he was, in my respectful opinion, in error. I agree with the submission of Mr Robertson that the circumstances in which a discontinuing party may be required to pay the costs of the other are not confined to those mentioned by the master. However, I do not consider that is what the master was intending to convey. The passage impugned by Mr Robertson is consistent, in my opinion, with a statement by the master that the exercise of the discretion requiring the discontinuing party to pay costs includes circumstances in which the discontinuing party has not obtained any relief or has, in effect, acknowledged the futility of its proceedings. I consider it appropriate to read the master’s reasons in that way. Accordingly, I am not satisfied that the master has made the second error of principle for which the defendant contended.
An Error of Fact

As already noted, on 23 April 2004 when the parties exchanged undertakings, Bleby J made an order reserving the question of costs.
In concluding that the conduct of the plaintiff had been reasonable the master referred to the fact that the plaintiff had, on 19 April 2004, obtained an interim injunction and had later obtained undertakings with a confinement of the escape of noise from Austral. The master then noted that Bleby J had made no order for the costs of the proceedings before him. Mr Robertson submitted that the master had misunderstood the effect of the order made by Bleby J as being that there should be no order as to costs instead of, as was the case, an order reserving the question of costs. It was submitted that this error had influenced the master to his decision that the plaintiff’s conduct had been reasonable. As I understand it, the submission was that the master must have thought that Bleby J had taken the view that the plaintiff had conducted itself reasonably, in order to come to the conclusion on 23 April 2004 that no order as to costs was appropriate.
In my opinion, there is no substance in this submission. It is quite apparent that the master did not misunderstand the effect of the order made by Bleby J. The master simply noted that Bleby J had not made any order in respect of the plaintiff’s action in instituting the proceedings and the defendant’s conduct in defending them. That left the way clear for the master to make a decision with respect to that part of the costs of the action.
Interference with the Discretion of the Master
It is not necessary presently to review the authorities concerning the exercise of the discretion with respect to costs on discontinuance of the whole or part of an action. Those principles have been reviewed in a number of recent decisions of this Court including Boscaini Investments Pty Ltd & Ors v The Corporation of the City of Kensington and Norwood;[8] Wood v Heard,[9] and Fraser v Chakravarti, [10] to which the master referred. In addition, reference may be made to a number of decisions in the Federal Court in respect of the counterpart to r 52.03 in the Federal Court Rules, including O’Neill v Mann,[11] Gribbles Pathology Pty Ltd v Health Insurance Commission,[12] and J H Leaver & Co Pty Ltd v Maniotis.[13]
[8] [1999] SASC 327.
[9] [2001] SASC 217.
[10] [2001] SASC 276.
[11] [2000] FCA 1680.
[12] (1997) 80 FCR 284.
[13] [2005] FCA 252; (2005) 215 ALR 773.
The master was correct, in my opinion, in approaching the exercise of his discretion in the manner suggested by McHugh J in Re the Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin:[14]
In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.
In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. …
Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. …
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. [Citations omitted][15]
[14] (1997) 186 CLR 622.
[15] Ibid at 624-5.
This approach suggests that the court should not, in effect, try an action simply for the purposes of determining an appropriate outcome for costs. There may be cases in which the court considers that a party’s conduct in commencing the litigation, or in continuing it, was unreasonable or in which it can, conveniently, form a view as to the probable outcome. In such cases, an order that the discontinuing party pay costs may be appropriate. Much may depend on any explanation provided to the court for the discontinuance, as well as the circumstances surrounding its commencement and continuance generally. However, when the court is satisfied that the conduct of the parties has been reasonable, it will usually be appropriate for the court to make no order as to costs.
The master referred to the passage in the judgment of McHugh J in Lai Qin quoted above. It was the application of the approach outlined by McHugh J which led the master to consider the reasonableness of the plaintiff’s conduct in commencing and continuing the litigation to 10 July 2005.
In my opinion, the conclusion of the master that the conduct of the plaintiff was reasonable in the period up to 10 July 2005 has not been shown to be wrong. It was not reasonably possible for the master to determine the likely outcome of the plaintiff’s claims of a breach of the second agreement, or of a contravention of s 52, or of nuisance. The fact that the plaintiff did obtain an interim injunction on 19 April 2004 is some (albeit slight) evidence of that reasonableness. In addition the plaintiff did on 23 April 2004 obtain undertakings from the defendant with respect to the emission of noise, which undertakings operated for a seven week period. The completion of the construction of the canopy which occurred after the institution of proceedings seems also to have assisted in resolving the issues between the parties
Conclusion
During the hearing of the appeal the court was informed that no separate order for costs had been made in respect of the application for the issue of a contempt summons which the plaintiff had subsequently withdrawn. It was not suggested that this indicated an error of approach by the master. In addition, the court was informed that the defendant is seeking an assessment of damages pursuant to the plaintiff’s undertaking as to damages given on 23 April 2004. While it may have been appropriate for the determination of the costs of the discontinuance to have been deferred pending the resolution of the defendant’s claim to damages, it was not contended that the master was in error in proceeding to determine the plaintiff’s application concerning costs at the time that he did.
For the reasons given above, my opinion is that this appeal should be dismissed.