Susu Pty Ltd v M Marinos Pty Ltd (No 6) - [2010] SASC 29

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
SUSU PTY LTD v M MARINOS PTY LTD & ANOR (No 6)
[2010] SASC 29
Reasons of Judge Lunn a Master of the Supreme Court
17 February 2010
PROCEDURE
Application under 87R 59.06(1) to strike out the defence for failure to make proper discovery - discretion to strike out not exercised as document in question was not central to the plaintiff's case and defendants not shown to have acted contumeliously - application dismissed.

PROCEDURE
Application by plaintiff under 87R 52.03 that its discontinuance should be without costs - discretion to be exercised having regard to the extent of the costs at stake - related counterclaim to continue after discontinuance - held costs now being out of proportion to what is at stake is not a ground to deprive defendants of their costs on a discontinuance - application refused.

PROCEDURE
Costs - in action under 1987 Rules 6R 268 held to apply to make reserved costs payable to the defendants until a contrary order is made.

SUSU PTY LTD v M MARINOS PTY LTD & ANOR (No 6)
[2010] SASC 29
Reasons on plaintiff’s application to strike out the defence and for leave to discontinue without costs.

JUDGE LUNN: The plaintiff was the franchisee of the Trinity Gardens Cheesecake Shop. In April 2002 the prior franchisor assigned its reversionary interest in the franchise to the first defendant. The plaintiff alleges that prior to this assignment there was an understanding between itself and the then franchisor that it would be entitled to a further extension of the franchise upon its expiration. It alleges that the defendant bought the reversion in the franchise with knowledge and understanding of this and acquiesced in it. However, it refused to give any extension to the plaintiff and subsequently obtained possession of the premises. In this action, the plaintiff has sued the defendant for damages for not renewing the franchise and for wrongful eviction. (There is also a dispute whether the franchise term expired in April 2006 or April 2007). The first defendant has counterclaimed against the plaintiff and its directors for damages for failing to deliver up the premises at the proper expiration of the franchise term and for alleged breaches of agreements about the plant and equipment used in the business and the plaintiff’s duties in conducting the business.
The action has a long interlocutory history. There have been numerous arguments about injunctions, security for costs, pleadings and discovery. The costs to date are very substantial. The action is still governed by the Supreme Court Rules 1987.
By an application taken out on 29 September 2009 the plaintiff has sought orders that the defence be struck out and judgment entered for it and in the alternative that the Court give permission to it to discontinue the action with no order as to costs.
Application to strike out the defence.
This application is based on 87R 59.06(1) which states:
(1)Any party required by any Rule or order to make discovery of, or produce any document, who fails to comply with that Rule or order, shall be liable: …..
(bif a defendant, to have the defence struck out and judgment to be entered accordingly.
The application is grounded primarily on the first defendant not having discovered a cash-flow forecast which it had submitted to the National Bank (“the Bank”) in support of an application for finance on an unknown date. The defendant’s uncontradicted evidence is that it does not have a copy of this document. It belatedly first sought a copy of it from the Bank in early 2009. The Bank has said in correspondence, and in oral communications, that it cannot locate a copy of this cash-flow forecast. It has said that it has a policy of destroying such documents after seven years, but it has not said that it did so destroy the cash-flow forecast.
The principles for the application of 87R 59.06(1) are set out in the following passage from the Judgment of Mullighan J in Austrust Pty Ltd v Astley (1993) 60 SASR 354 at 382-383:
There is no doubting the power to dismiss the action of a plaintiff who fails to comply with rules of court or orders requiring discovery: R 59.06 of the Supreme Court Rules 1987. The principles to be applied upon an application to dismiss an action for such non-compliance were discussed in Birkett v James [1978] AC 297. Lord Diplock (at 318), expressed them as follows:
The power should be exercised only where the court is satisfied either (1) that the default has been intentional and contumelious, eg, disobedience to a peremptory order of the court or conduct amounting to an abuse of the process of the court; or (2)(a) that there has been inordinate and inexcusable delay on the part of the plaintiff or his lawyers, and (b) that such delay will give rise to a substantial risk that it is not possible to have a fair trial of the issues in the action or is such as is likely to cause or to have caused serious prejudice to the defendants either as between themselves and the plaintiff or between each other or between them and a third party.
This Court must also have regard to the principles set out in r 2 regarding positive case flow management and the efficient use of the court’s resources by the requirement that parties must be ready for trial.
…..
It is unnecessary to mention the many cases which discuss the principles to be applied when considering whether an action should be dismissed as an abuse of the process of the court. It is clear that the circumstances which will justify such a course must be rare and exceptional. ….. Furthermore, I am bound to have regard to R 3.01 …..
…..
It is unnecessary to mention the many cases which discuss the principles to be applied when considering whether an action should be dismissed as an abuse of the process of the court. It is clear that the circumstances which will justify such a course must be rare and exceptional. ….. Furthermore, I am bound to have regard to R 3.01 …..
…..
Even if the late discovery was due to the disobedience of rules of court or orders or contumacy in relation to an order, and I am not satisfied that it was, I think R 3.01 requires that the drastic step of dismissing an action should be avoided unless justice admits of no other course, which accords with the principles to be applied in civil actions where an abuse of the process of the court is alleged due to failure to make discovery. I think it is very likely that in view of the vast amount of documentation in the possession or control of the plaintiff, the late discovery was due to the lack of appreciation by legal advisers of many documents and not wilfulness or contumacy. I decline to dismiss the plaintiff’s action for failure to give discovery.
It is not necessary to go into the convoluted history of the plaintiff’s efforts to obtain this document from the defendant. I am satisfied that this case is not one of the rare cases in which the Court should strike out the defence for the following reasons:
Firstly, because the cash-flow forecast is not a document which is shown to be central to the plaintiff’s case. The plaintiff was never given a copy of it and does not know its contents. It surmises that its contents may show that the first defendant expected to renew the plaintiff’s franchise on its expiration and thus be evidence it was aware of the understanding with the prior franchisor. However, whether it has any weight as evidence on the point is unclear and it is only one piece of evidence on the topic. If the plaintiff could establish that the defendants were party to any deliberate destruction of this document so that it would not be available as evidence, it would have the benefit at the trial of a strong presumption that its contents would not have assisted the defendant: Research in Motion Ltd v Samsung Electronics Australia Pty Ltd (2009) 255 ALR 508. There is no particular likelihood that there could not be a fair trial of the action if the defendants have not done what they should have done to have discovered the cash-flow forecast.
Secondly, the plaintiff has not shown that the defendants were party to any contumelious destruction of the cash-flow forecast. In the hearing of this application it relied upon 87R 59.08(1) which provided:
(1)Subject to (3) below where a party has had in his possession or power a document:
(a)of which he or some other person acting as his agent was the author;
(b)of which he no longer has any true copy in his possession or power:
(c)which would be discoverable in the action in Part 1 of the first schedule of his list of documents if it was still in his possession or power; and
(d)of which he may reasonably expect to obtain a copy from some other person upon request and the payment of a reasonable fee;
He shall as soon as reasonably practicable, and in any event by no later than when he files his list of documents, take all proper steps to obtain a copy of that document.
I need not go into whether subr (1)(d) was satisfied. I will assume that this Rule applied to the first defendant in respect of the cash-flow forecast. However, while the first defendant may have been dilatory or negligent in not making an earlier request under this Rule, it has not been shown that it was contumelious in not doing so. The plaintiff’s counsel argued that by not making a request under the Rule to the Bank until after the seven years for which the Bank expected to keep the document had expired, the defendant was a party to the destruction of it by the Bank. However, there is no evidence that the defendants knew of such a policy by the Bank and intentionally delayed their request so that the document would be first destroyed by the Bank. Furthermore, there is no evidence that even if the request had been made earlier, it would have resulted in the production of the document by the Bank. On the evidence there is a reasonable possibility that the Bank has misplaced the document and it was not intentionally destroyed by it.
Thirdly, the plaintiff did not raise the operation of 87R 59.08(1) when it pursued its application of 16 August 2007 that the defendants produce the cash-flow forecast. On 5 October 2007 I dismissed that application on the grounds that it was not shown that the document was in the possession, custody or power of the defendants. Although there was no transcript of the argument, it is highly unlikely that this Rule was referred to. If it had been referred to, it is almost certain I would have adjourned the application for the first defendant to have made the request to the Bank under that Rule. Having not relied on that Rule on 5 October 2007 the plaintiff cannot now seek to use it against the defendants.
Fourthly, there is no other evidence that the defendants have acted contumeliously in not making proper discovery. The plaintiff’s counsel pointed to some other instances of where the defendants had sworn that they had no documents in particular categories. He asserted it was unlikely that was correct. I am not prepared to draw any such inference. The plaintiff has not sought to challenge the defendants’ affidavit documents under 87R58.04A. The presumption is that such affidavits are conclusive as to their contents: Mulley v Manifold (1959) 103 CLR 341.
Application for leave to discontinue without costs.
87R 52.03 provides:
Unless the Court otherwise orders ….. the party discontinuing ….. shall pay the costs up to the date of delivery of the notice of the party against whom the claim ….. was discontinued …..
The plaintiff seeks that this Rule should not operate against it. Normally an order is only made under it after a notice of discontinuance has been filed, but here the plaintiff by its counsel undertook that a discontinuance would be filed if it failed on its application to strike out the defence. On the basis of this undertaking I agreed to deal with the application before the discontinuance was filed. (It is not a case in which leave to discontinue is required).
The relevant legal principles were laid down by the Full Court in Penroth Ltd v Kirkschild Pty Ltd (2006) 96 SASR 129. For the purpose of this application they are:
·There is no presumption that the defendant is entitled to costs.
·In determining the appropriate order for costs the Court exercises its ordinary jurisdiction under s 40 of the Supreme Court Act in ordering costs.
·The Court will look to all of the relevant circumstances including the reasonableness of the conduct of the parties and the reason for the discontinuance.
·The fact the discontinuance is not in itself to be treated as an acknowledgement by the plaintiff that the proceedings were futile.
Although it was not referred to in argument, the exercise of the discretion under the Rule needs to be viewed in the context of the consequences for the parties if the plaintiff’s application that there should be no order as to the costs of the action succeeds. The extent of any potential injustice to a party from such an order depends to a significant degree on the amount of the costs at stake.
Although I cannot find any authority on the point, it is trite that the effect of 87R 52.03 that there should be no order for the costs of the action does not override the costs orders which have already been made in the action. (A discontinuance does not constitutes an “event” under 6R 263(1) so that all of the costs of the action which have not otherwise been dealt with are determined by virtue of that event). Thus in exercising the costs discretion under 87R 52.03 the Court does not take into account the effect of the costs orders already made (although that may be relevant in assessing the merits of the respective cases).
An interesting question arises, which was not addressed in argument, about what effect a discontinuance has upon costs which had previously been expressly reserved. This action is being dealt with under the 1987 Rules. Those Rules made no provision about what was to happen to reserved costs if the action was discontinued. However, 6R 8(2) provides that Chapter 12 of the 2006 Rules is to apply to actions commenced under the 1987 Rules. Chapter 12 includes 6R 268, which provides:
If the Court reserves the costs of an application or other proceeding incidental to an action, the costs of the application or other incidental proceeding follow the event of the action unless the Court later orders to the contrary.
There was no equivalent of this Rule in the 1987 Rules. However, by 6R 8(2) it now applies in this action. It means that unless the Court orders to the contrary the reserved costs would be payable to the defendant on a discontinuance by virtue of 87R 52.03 unless the Court orders otherwise under that Rule. However, its operation is also subject to any contrary order under 6R 268. There are several instances of reserved costs for the interlocutory proceedings in this action. I consider that the justice of the case can be met by allowing the plaintiff to make any application which it wishes to make under 6R 268 concerning reserved costs before it is required to file its notice of discontinuance. If it does not make any successful application under that Rule, then the effect of my order on the present application will be that it is required to pay those reserved costs.
An unusual and significant feature in this matter is that when the plaintiff discontinues the action the first defendant will still be pursuing its counterclaim. Some, but not all, of the evidence which would have been likely to have been given on the trial of the action will be required to resolve the counterclaim. The plaintiff cannot rely on factors primarily arising from the counterclaim in seeking that there be no order for costs on the action.
The plaintiff submitted that a relevant factor was that the defendants had not complied with their discovery obligations thus forcing the plaintiff to make unnecessary applications. This is not a significant factor on the discontinuance. Insofar as the defendants have been at fault in complying with their discovery obligations the plaintiff has been entitled to seek orders for costs against them, and where granted, they will still have the benefit of these orders after the discontinuance. As stated below, insofar as there are unresolved interlocutory costs issues I will give the plaintiff an opportunity to pursue them before it is required to discontinue.
The plaintiff submitted that much time and costs had been involved in the defendants’ unsuccessful attacks on its pleadings. However, much of the costs and delay was caused by the plaintiff having initially not properly pleaded its case, and thus having to amend it. Although the plaintiff’s appeal against my order striking out part of its statement of claim was successful, Debelle J on the appeal still required the plaintiff to make some amendments to the pleading which I had struck out. The fact that the plaintiff was not wholly in the right in this pleadings dispute is reflected by Debelle J on 7 April 2008 having made no order as to the costs of the appeal except for attendances on two particular occasions.
I do not accept the plaintiff’s submission that it is relevant on the present application that after the first defendant had obtained possession of the premises by Order of this Court on 18 May 2006 it then shortly afterwards abandoned those premises and the lease. The plaintiff’s claim has been one for damages and not one for specific performance of an obligation to grant an extension of the franchise. It has not been directly prejudiced by the first defendant having subsequently abandoned the premises and the business. It was a commercial decision which the first defendant was apparently entitled to make.
The plaintiff submitted that the first defendant had made assertions that it was not a properly performing operator of the franchise, but this was without foundation. This is an issue on the pleadings in the counterclaim. In any event, merely because the plaintiff’s directors have been subsequently employed in other similar franchises by the Australian master franchisor for Cheesecake Shops does not prove that the allegations were without foundation. It will be an issue for the Court on the counterclaim. It is not for me to take it into account.
The plaintiff submits that the financial position of the defendants has substantially deteriorated since the action was commenced and it is no longer commercially realistic for it to incur further costs in the action with the risks of a pyrrhic victory if any judgment cannot be recovered from the defendants. While there is evidence that the financial position of the first defendant has deteriorated in that it no longer has the Master Cheesecake Shop Franchise for South Australia, and has no other apparent assets, there is no evidence to suggest that the financial position of the second defendant is such that he could not meet any orders for costs or damages made against him. I need not consider the interesting, and novel, question of whether a significant deterioration in the financial ability of the defendant to satisfy a judgment is a good ground to allow a discontinuance without costs under 87R 52.03. It does not arise here on the proved facts.
The plaintiff complains that it has suffered loss and prejudice because an injunction taken out by the defendants against it preventing it from disposing of the plant and equipment from the business, which was later discharged, caused it to incur a substantial loss on the ultimate sale of that plant and equipment. The first defendant obtained the injunction in support of its counterclaim that it was entitled to the plant and equipment. It is not material on what I have to decide as the issue relates to the counterclaim and not to the action.

The plaintiff adduced evidence of a number of offers which it had made to settle the action which had been rejected by the defendants. The defendants’ rejections of the offers apparently were based in part upon their assessment that they have a strong defence to the action. I am not in a position to say whether this is right or wrong. Thus I cannot find the defendants to have been unreasonable in refusing these offers of settlement. The plaintiff has the right under 87R 41 to make formal offers of settlement which, if well founded, would probably give it an ultimate award of solicitor and client costs against the defendants.
Both parties have incurred substantial costs in the interlocutory proceedings in this action. It may well be that if the plaintiff had foreseen the extent of such costs it might not have pursued the action. However, having pursued the action to a point where the costs may in its view be out of proportion to what is at stake, it cannot deprive the defendants of their right to recover costs from it if they are ultimately successful by now deciding it does not wish to pursue the action. This is not a case where there has been a change of circumstances outside the control of the plaintiff which substantially alters for it the economics of the litigation. The fact that the franchise business no longer exists is not directly relevant to the plaintiff’s claim for damages. The delays and substantial interlocutory costs which have been incurred, which while probably much greater than had initially been anticipated, are not so attributable to the defendants, as distinct from the plaintiff, that it makes it just that the plaintiff should be allowed to withdraw from the litigation without liability for costs to the defendants. In short, merely because the costs of the litigation have escalated beyond the initial anticipation, and the plaintiff no longer wishes to expend further money to recover its alleged damages, is not a proper basis for the defendants to be deprived of recovering their costs from the plaintiff. While the plaintiff can now stop the action by a discontinuance the price of doing so is a liability to pay the defendants’ costs of the action.
Accordingly, I refuse the plaintiff’s application to vary the costs consequences of a discontinuance under 87R 52.03. However, I will allow it 14 days to make any application for orders about the costs of any particular interlocutory issues. If it does not do so, it must then file the discontinuance. I will set a further directions hearing to give directions for any applications made by the plaintiff for particular costs orders and about the furtherance of the counterclaim.
I have today made the following orders:
1Application to strike out the defence is dismissed.
2Application that the plaintiff not be liable for costs on a discontinuance is refused.
3Costs of FDN 73 as agreed or adjudicated are to be paid by the plaintiff to the defendants.
4Fit for counsel.
5Liberty to the plaintiff to make any applications for interlocutory costs orders returnable for the adjourned hearing.
6If no application is filed by the plaintiff for costs such orders within 14 days, the plaintiff is to file its notice of discontinuance forthwith.
7Directions hearing to be held on Tuesday 9 March 2010 at 9.30 am.