FEDERAL COURT OF AUSTRALIA

Sydney Equine Coaches Pty Ltd v Gorst [2017] FCAFC 34

ORDERS

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    The Appellants pay the costs of the Respondent.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    In May 2014 Sydney Equine Coaches Pty Ltd agreed to sell to Ms Susan Gorst a horse transport for $545,000. Subsequently, Ms Gorst commenced proceedings seeking the repayment of $545,000 or damages in the sum of $350,000 against Sydney Equine and Dean Douglas, who was its sole director and secretary. It is convenient to refer only to Sydney Equine in these reasons to cover its and Mr Douglas’ grounds of appeal and argument.

2    Ms Gorst took delivery of the horse transport in late July or early August 2014. But a dispute emerged. She claimed, in very summary form, that the horse transport could not lawfully be driven on public roads in Australia as it did not comply with the maximum mass requirements contained in the Heavy Vehicle National Regulation 2014 (the “maximum mass regulation”). Ms Gorst commenced proceedings in May 2015. Sydney Equine’s defence filed in July 2015 pleaded a denial of that claim.

3    Of immediate relevance for present purposes is the fact that in August 2015 Sydney Equine made an offer of compromise under Pt 25 of the Federal Court Rules 2011 (Cth) offering to compromise the proceeding by payment of $85,000 plus costs. That offer was not accepted.

4    The hearing commenced on 30 August 2016 but the proceeding was settled on the second day. The primary judge, by consent, entered judgment in favour of Ms Gorst in the sum of $36,000. The terms of the settlement also provided that Sydney Equine was to pay her costs up to 15 August 2015. However, the settlement left unresolved the question of costs subsequent to 15 August 2015.

5    Sydney Equine sought payment of its costs after 15 August 2015 on an indemnity basis pursuant to r 25.14(1)(b) of the Federal Court Rules.

6    Notwithstanding the fact that the proceeding was ultimately settled for an amount less than that previously offered, the primary Judge declined to make the indemnity costs order in accordance with r 25.14(1)(b) as had been sought by Sydney Equine. Instead, her Honour decided to order that Ms Gorst “should have her costs on the ordinary basis, up to and including, 8 March 2016, which was the date of filing of the engineer’s report, but that each party should bear its own costs of the proceedings thereafter”: Gorst v Sydney Equine Coaches Pty Ltd [2016] FCA 1067 at [20].

7    Sydney Equine has appealed from that order as to costs.

8    The appeal should be dismissed with costs for the following reasons.

The case as pleaded by the parties

9    Relevantly, Ms Gorst pleaded in her statement of claim that:

    the contract for sale provided (and Sydney Equine also represented) that the horse transport could be lawfully driven on public roads in Australia;

    the horse transport was not capable of being driven lawfully on public roads because, among other reasons, it did not comply with the maximum mass regulation; and

    Sydney Equine’s representations of commission and omission had failed to alert her to this defect.

10    Sydney Equine’s defence, while admitting that the contract contained a term that the horse transport could be lawfully driven on public roads in Australia, repeatedly asserted (without qualification) that the horse transport was in fact capable of being driven lawfully on public roads in Australia. The defence was that it could be lawfully driven on public roads, whether it was laden or unladen. That is, Sydney Equine’s defence denied that the horse transport did not meet the pleaded term of the contract, the maximum mass regulation or the representations.

11    The primary Judge found that an expert report which Sydney Equine filed and served in March 2016 contained an express acknowledgement, for the first time, that in certain circumstances (when the horse transport was not fully laden) it would not comply with axle load limits prescribed in the maximum mass regulation.

Rules 1.35 & 25.14

12    Rule 1.35 of the Federal Court Rules provides as follows:

Orders inconsistent with Rules

The Court may make an order that is inconsistent with these Rules and in that event the order will prevail.

13    Rule 25.14 of the Federal Court Rules provides as follows:

Costs where offer not accepted

(1)    If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer:

(a)    the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and

(b)    the respondent is entitled to an order that the applicant pay the respondent’s costs after that time on an indemnity basis.

(2)    If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant’s proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent’s costs:

(a)    before 11.00 am on the second business day after the offer was served—on a party and party basis; and

(b)    after the time mentioned in paragraph (a)—on an indemnity basis.

(3)    If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant’s costs:

(a)    before 11.00 am on the second business day after the offer was served—on a party and party basis; and

(b)    after the time mentioned in paragraph (a)—on an indemnity basis.

The legislative scheme

14    The power conferred by r 1.35 is discretionary and is expressed in general terms. It is, however, subject to the overarching purpose of the civil practice and procedure provisions of the Rules and any legislation with respect to the Court’s practice and procedure, including under Pt VB of the Federal Court of Australia Act 1976 (Cth) (the “Federal Court Act”). That overarching purpose is to facilitate the just resolution of disputes according to law, as quickly, inexpensively and efficiently as possible: s 37M(1). The civil practice and procedure provisions (including all of the Rules) must be interpreted and applied, and any power that they confer must be exercised, in the way that best promotes the overarching purpose: s 37M(3). Moreover, s 37N(1) of the Act imposes a duty on the parties to a civil proceeding in this Court to conduct proceedings, “including negotiations for settlement of the dispute to which the proceeding relates”, in a way that is consistent with the overarching purpose.

15    In The Queen v Australian Broadcasting Tribunal; Ex parte 2HD Pty Ltd (1979) 144 CLR 45 at 50, Stephen, Mason, Murphy, Aickin and Wilson JJ said of a provision expressed similarly to r 1.35 is:

The general rule is that a discretion expressed without any qualification is unconfined except in so far as it is affected by limitations to be derived from the context and scope and purpose of the statute.

16    Here, the context, scope and purpose of the discretion conferred by r 1.35 to make an order inconsistent with the Rules includes not only r 25.14 itself but also the overarching purpose of the civil practice and procedure provisions prescribed in Pt VB of the Federal Court Act.

17    Rule 1.35, moreover, is a discretionary power conferred on this Court and any exercise of that discretion must be consistent with the principle identified in cases such as FAI General Insurance Co Ltd v Southern Cross Exploration NL (1988) 165 CLR 268 at 283-284 per Wilson J (with whom Brennan, Deane and Dawson JJ agreed), 291 per Gaudron J and Owners of the Ship “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404 at 421, where Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ said:

It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words.

18    Nonetheless, such broadly construed powers conferred on a court must be exercised judicially (i.e. not arbitrarily or capriciously), as Gaudron J explained in Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 205 in a passage approved by Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ in Mansfield v Director of Public Prosecutions (WA) (2006) 226 CLR 486 at 492 [10] and 496 [25].

19    The provisions of r 1.35 are remedial in character. They, like r 1.34, enable the Court to make an order that is inconsistent with the Rules. The purpose of the broad power in a provision such as r 1.35 is to relieve against injustice: FAI 165 CLR at 283. Parties can expect that r 25.14(1) provides for the costs consequences that in the ordinary course of litigation will flow from the non-acceptance of an offer of compromise made under Pt 25 of the Rules where the offeree obtains a less favourable result than the one made in the offer. Nonetheless, the purpose of r 1.35 is to allow the Court to make an order that is inconsistent with what r 25.14 prescribes would otherwise occur, so as both to meet the justice of the case or to prevent injustice and to give effect to the Court’s broad discretion to make orders for costs conferred in s 43(2) of the Federal Court Act.

20    Justice Hely said in Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) [2004] FCA 1437 at [17], (2004) 212 ALR 281 at 284 that:

Once an offer is made, and a judgment no less favourable obtained, a rebuttable presumption in favour of indemnity costs is created. It then becomes incumbent on the defendant to show reason why the presumption should not crystallise. … the prima facie position should only be departed from for proper reasons which, in general, only arise in an exceptional case.

21    In Lodestar Anstalt v Campari America LLC (No 2) [2016] FCAFC 118 at [27] Allsop CJ, Greenwood, Besanko, Nicholas and Katzmann JJ said:

… the power to make an order inconsistent with the Rules should be exercised for proper reasons which will generally only arise in exceptional circumstances.

22    It follows that there is power to make an order inconsistent with r 25.14 where there is reason to do so, including in those cases where the application of r 25.14 would lead to or cause injustice or not meet the justice of the case. Such an order inconsistent with r 25.14 would, in such circumstances, be an “exception” to the prima facie presumption. Care must nevertheless be exercised to ensure that the use of such phrases as “proper reasons” or “exceptional circumstances” do not operate as a gloss to constrain the otherwise broad discretionary power conferred by r 1.35: Shin Kobe Maru 181 CLR at 421. Rather, expressions such as “exceptional” or “show reason why” that Hely J and other judges have used in explaining occasions on which it is open to a Court to make orders inconsistent (under r 1.35) or relieving compliance (under r 1.34) with the provisions of the Rules, should be understood as simply conveying the notion that a reason or reasons must be shown for departing from the prima facie position set forth in r 25.14. That is because, unless there is a feature of the occasion that calls for an exception to be made, the prima facie position prescribed by r 25.14 will apply.

23    As Rares, Jagot and Bromberg JJ said in Visscher v Teekay Shipping (Australia) Pty Ltd (No 2) [2014] FCAFC 19 at [7], “r 25.14 operates on an offer of compromise at all stages of the proceedings, whatever the state of the evidence when it is served”. But, that does not entail that a material change in the litigation that occurs after an offer under Pt 25 is made, including change caused by evidence that later comes to light, is incapable of enlivening the power under r 1.35 to make an order for costs inconsistent with the operation of r 25.14.

24    Rule 25.14 largely reflects the principles which had been developed under the former O 23 r 11(5) of the now-repealed Federal Court Rules 1979 (Cth): cf. Elecspess Pty Ltd v LED Technologies Pty Ltd [2013] FCAFC 116, (2013) 215 FCR 95 at 105 [22]-[24] per Besanko and Jessup JJ. The purpose of the rule is to promote the settlement of proceedings by the making of offers of settlement involving genuine compromise. If an offer does not involve any genuine compromise, the rule will not be enlivened: Anchorage Capital Partners Pty Ltd v ACPA Pty Ltd (No 4) [2016] FCA 218 at [11] per Perram J.

An Order inconsistent with a prima facie presumption

25    The question posed for resolution before the primary Judge was whether there was reason to depart from the prima facie presumption under r 25.14(1)(b) that Ms Gorst should pay Sydney Equine’s costs on an indemnity basis after 15 August 2015 resulting from her failure to accept its offer under Pt 25.

26    The amount for which the proceeding in this case was ultimately settled, namely $36,000, was certainly less than the amount offered, namely $85,000. However, her Honour considered that this question should be resolved primarily by reference to the expert report of Peter Gillard that Sydney Equine filed on 8 March 2016 (the “Gillard Report”).

27    The primary Judge concluded that that Report contained an “express acknowledgment” that in “certain circumstances … the vehicle would not comply with statutory axle load limits …”. Her Honour found:

[5]    … In evidence filed on 8 March 2016 but dated 25 February 2016, an engineer specialising in heavy vehicles provided an affidavit on behalf of the respondents. In his report, there was an express acknowledgment for the first time that in certain circumstances (where the vehicle was not fully laden) the vehicle would not comply with statutory axle load limits on the front axle, with the consequence that the vehicle could not be driven on a public road in that condition.

[6]    This evidence for the respondents, accordingly, conflicted with the defence which the respondents had filed. …

The primary Judge went on to conclude that Mr Gillard’s Report proposed a solution involving rectification work and little cost, as follows:

[6]    … In addition however, the engineer proposed that the non-compliance with the front axle load limits could be rectified by placing counterweights towards the rear of the vehicle, secured to the underside of the chassis. The appropriate counterweight required could be up to 1200 kilograms, and, it was said, “could be accommodated without affecting the ability of the vehicle to transport up to six horses and four persons and without exceeding statutory axle load or vehicle mass limits or the structural capacity of the vehicle’s chassis”. He estimated that the cost of installing a smaller counterweight would be in the order of $8000, but otherwise did not estimate the costs of the other counterweights which he recommended.

28    Faced with this proposed solution, the primary Judge summarised Ms Gorst’s submissions as follows:

[10]    The applicant says that the change in the respondent’s position and the admission (however informal) through the evidence of the engineer is critical, because from that time onwards only it was common ground that the vehicle did not comply with statutory load limits and could not be driven on a public road if unladen. Further, it was only at this time that any possibility of rectifying the problem was put forward by the respondents’ engineer and, thereafter, could be considered by the applicant.

29    In resolving the competing positions advanced on behalf of Ms Gorst and Sydney Equine, the primary Judge reasoned as follows:

[15]    At all times before 8 March 2016 – being the date of the filing of the engineer’s report – the respondents’ position was that the vehicle complied with all statutory requirements. It was not until 8 March 2016 that a different position emerged. The position that emerged was that the vehicle the respondents had built and sold to the applicant for a purpose that must have included driving on a public road while unladen did not comply with statutory axle load requirements in that condition and, as a result, the vehicle could not be driven on any public road in accordance with the law while unladen.

[16]    This acceptance by the respondents’ engineer and the suggestion of a counterweight was critical because it acknowledged for the first time that the vehicle was not able to be driven on a public road if unladen, and that something significant had to be done to bring it into compliance with legal requirements. The issue for the applicant then was whether something practical could be done and whether she wished to retain the vehicle in that different condition from which it had been sold to her. In these circumstances, it is not only that the applicant’s failure to accept the offer within the time prescribed from its receipt on 13 August 2015 was reasonable, it is that the entire basis of the dispute between the parties changed on 8 March 2016. It is only from that time onwards that anything might reasonably be expected of the applicant, in terms of contemplating a possible solution involving a counterweight (and even then only if the applicant was willing to retain the vehicle with a large counterweight under the rear, which was different in a substantial way from the vehicle she had initially purchased).

[17]     Accordingly, while the judgment sum is less than the $85,000 proposed in the offer of compromise in August 2015, I consider that there is a proper basis in this case, and that justice demands, that the applicant not be subjected to an order that she pay the respondents’ costs calculated on an indemnity basis on and from 15 August 2015. In accordance with r 1.35, I am satisfied that I should not order indemnity costs in favour of the respondents from 15 August 2015. The circumstances of this case, while perhaps not exceptional, provide a compelling reason to depart from the ordinary application of the rules as to costs. The applicant was sold a vehicle which she could not lawfully drive on a public road in an unladen condition. The only solution to the illegality is to attach a large counterweight to the rear of the vehicle. That is not the vehicle the applicant agreed to purchase.

The challenge advanced – the absence of any admission as to the vehicle being defective

30    Sydney Equine challenged her Honour’s understanding of Mr Gillard’s Report. In particular, Sydney Equine submitted that her Honour “erred in finding that there had been a change in the position of [Sydney Equine’s] case and/or that the Gillard Report admitted that the truck could not be lawfully driven on a public road and was illegal”.

31    In seeking to bolster this submission, Sydney Equine relied upon the detailed contents of Mr Gillard’s Report and the acknowledgments in it (inter alia) that:

    the truck had been “constructed specifically for the purpose of transporting horses” and it was “therefore expected that horses would be on board the vehicle for all but a very small proportion of its annual use” and when the truck was being used for “transporting horses and competitors to events the scenarios modelled do not result in a statutory overload of any axle or the vehicle as a whole” (at [7.5]);

    there was “no evidence that the Vehicle is in breach of a heavy vehicle standard, unless it is loaded incorrectly” (at [9.2]);

    “expertise had been used to design and construct the vehicle so that it could, with appropriate load management be compliant with the statutory axle load limits” (at  [10.1]); and

    “It would be possible for the driver to ensure that neither the front or rear axle (group) or vehicle as a whole was overloaded in all likely usage scenarios. The onboard weight indication system aids this” (at [10.2]).

32    The submissions advanced on behalf of Sydney Equine, however, overlooked those parts of the Gillard Report which acknowledged that:

    there were scenarios in which the horse transport could have been driven when it was over the axle limit prescribed in the maximum mass regulation (e.g., Table 7.2 and [7.3]);

    when the horse transport is used “as a motorhome for four people without any horses” this “would cause the front axle to exceed the statutory limit by up to 500kg (in a worst case low fuel condition)” (at [7.6]);

    “It is unusual that a heavy vehicle would exceed a statutory axle load limit when it was empty other than for the driver, as is the case here” (at [8.1]);

    “… the issue that complicates the legal use of the vehicle on the road is the front axle load exceeding the statutory maximum of 6500kg when there are no horses in the vehicle.

There is expected to be an occasional need to use the vehicle without horses on board. For example taking the vehicle for maintenance or repair is likely to require a single occupant, the driver. It may also be necessary to deliver the vehicle with a near empty fuel tank (say 50 litres only) loaded rear and empty front water tanks. Assuming the driver is heavier than the 68kg allowed by the ADR and in fact allowing twice that, the front axle load has been modelled at approx 6800kg. This exceeds the statutory limit by 300kg” (at [8.2]).

33    The submissions of Sydney Equine also failed to take account of the fact that Mr Gillard’s Report was the first occasion where a solution was proffered by Sydney Equine which was ultimately acceptable to Ms Gorst.

34    The solution proffered in that Report was as follows (at [7.9]):

[7.9]    Addition of permanent ballast to the rear of the vehicle (secured to the underside of the chassis) could be used to ensure the front axle was not overloaded in the lightly laden scenarios that have been modelled. The addition of a 520kg counter weight, centred 600mm from the rear of the truck would resolve all of the scenarios other than that noted in paragraph 6.6 above. A heavier counterweight could be used if it was necessary to also cater for the use of the vehicle as a mobile home with no horses or any other item loaded in the rear.

Such an addition would not limit the trucks ability to carry six horses and associated equipment along with a driver and three passengers, full loads of water and ancillaries. I have analysed the chassis’s capacity to support such a counterweight load, in addition to a full load of horses and other items and found it to have abundant capacity.

35    The ex tempore reasons did not set out the parts of Mr Gillard’s Report to which her Honour referred as:

    “an express acknowledgment for the first time that in certain circumstances … the vehicle would not comply with statutory axle load limits”;

    “certain circumstances (where the vehicle was not fully laden)”; and

    a proposal to place “counterweights towards the rear of the vehicle”.

However, the examples set out above provided a sound evidentiary foundation for her Honour’s findings.

Consideration

36    The challenge advanced on behalf of Sydney Equine should be rejected.

37    First, the challenge proceeded from a misunderstanding as to the primary Judge’s reasons for decision. Her Honour did not find that Mr Gillard’s Report constituted an “admission” as to the horse transport not being able to be driven lawfully on public roads when it was unladen. Rather, her Honour used the word “admission” in summarising Ms Gorst’s submissions: [2016] FCA 1067 at [10]. Her Honour recognised that, by filing Mr Gillard’s Report, on 8 March 2016, Sydney Equine’s case changed. That was because the case now relied on what Mr Gillard had written, which was substantially different to the pleaded defence in two important respects. Her Honour explained her reasoning at [15]-[17] (see [29] above). The changed basis upon which the parties conducted the proceeding was, after service of Mr Gillard’s Report, that it was now “common ground that the vehicle did not comply with statutory load limits” in certain circumstances. What was also of importance to her Honour was the fact that the Gillard Report for the first time set forth “the suggestion of a counterweight”: [2016] FCA 1067 at [16]. It was the combination of these factors that her Honour found had caused “the entire basis of the dispute between the parties” to change: [2016] FCA 1067 at [16].

38    Until service of Mr Gillard’s Report, Sydney Equine had asserted, without any qualification, that the horse transport was capable of being driven lawfully on public roads in Australia. Sydney Equine argued that the Report did not change matters because the horse transport could be lawfully driven if, as Mr Gillard asserted, there was “appropriate load management” through adding loads to the vehicle. But, this argument ignored the fact that, unladen, it did not comply with the maximum mass regulation requirements. In other words, the fallacy of Sydney Equine’s argument was that, unless Mr Gillard’s suggestion of altering the vehicle by adding ballast were used, the only way the unladen non-compliance could be solved was by loading the vehicle.

39    Second, her Honour’s decision was a discretionary one made pursuant to r 1.35. The application of r 25.14(1) involved no difficulty. The consent judgment that Ms Gorst obtained was “less favourable” than the August 2015 offer. The difficulty arose when considering whether an order should be made pursuant to r 1.35 “inconsistent” with the operation of r 25.14(1). In resolving that difficulty, her Honour could have regard to all of the circumstances and was not limited to a simple comparison of the quanta of $85,000 as opposed to $36,000. The circumstances included the changed position that had emerged in March 2016.

40    The factual scenario that confronted Ms Gorst when Sydney Equine made its Pt 25 offer in August 2015, was that Sydney Equine in substance asserted, without giving any basis, that the horse transport when unladen could be lawfully driven. In addition, there was then no contemplation of Mr Gillard’s later suggestion of a simple structural alteration that could solve that defect. Ms Gorst’s expert evidence to that point suggested that the repairs necessary to bring the horse transport into compliance with the maximum mass regulation for an unladen vehicle and other contractual requirements would cost in the order of $350,000. Moreover, there was no evidence that Sydney Equine had made any offer after service of the Gillard Report.

41    Ultimately, the question is whether, in all the circumstances, it was open to the primary Judge to exercise the discretion under r 1.35 to make an order inconsistent with r 25.14(1)(b) to prevent injustice or to meet the justice of the case: FAI 165 CLR at 283-285. For the reasons above, it was open to her Honour to find that the circumstances, as at March 2016, “provide[d] a compelling reason to depart from the ordinary application of the rules as to costs” and to find that “the entire basis of the dispute between the parties changed on 8 March 2016”.

42    There is no ground within the principles that Dixon, Evatt and McTiernan JJ explained in House v The King (1936) 55 CLR 499 at 505 on which an appellate court can interfere in her Honour’s exercise of discretion. Sydney Equine did not demonstrate that her Honour acted on a wrong principle, allowed extraneous or irrelevant matters to guide or affect the decision, mistook the facts or failed to take into account some material consideration. Nor did Sydney Equine establish that the result at which her Honour arrived was unreasonable or plainly unjust: House 55 CLR at 505. Accordingly, it is not possible for the Full Court to set aside her Honour’s orders.

43    Moreover, ss 37M and 37N of the Federal Court Act provide that the overarching purpose of the civil practice and procedure provisions, including r 1.35 and Pt 25, includes the conduct of negotiations for settlement of the dispute (s 37N(1)) and the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible (s 37M(1)). Her Honour found, as was open on the evidence, that Sydney Equine’s defence filed in July 2015 conflicted with the evidence it later served in March 2016 which revealed a substantively different case and a new solution that had not been suggested beforehand. No doubt that is why the primary Judge found that:

[16]    … In these circumstances, it is not only that the applicant’s failure to accept the offer within the time prescribed from its receipt on 13 August 2015 was reasonable, it is that the entire basis of the dispute between the parties changed on 8 March 2016. It is only from that time onwards that anything might reasonably be expected of the applicant, in terms of contemplating a possible solution involving a counterweight (and even then only if the applicant was willing to retain the vehicle with a large counterweight under the rear, which was different in a substantial way from the vehicle she had initially purchased).

44    For the reasons above, that finding was open to her Honour and provided a sufficient, indeed compelling, reason for making an order for costs under r 1.35 inconsistent with the presumptive provisions of r 25.14(1)(b).

CONCLUSION

45    Accordingly, the appeal should be dismissed with costs.

Associate:

Dated:    2 March 2017