FEDERAL COURT OF AUSTRALIA

Croft v Evertop Investments Pty Ltd [2014] FCA 1098

THE COURT ORDERS THAT:

1.    The order issued by the Court on 5 October 2012 be recalled and discharged.

2.    In lieu thereof there be orders as follows:

   (a)    This application by the first applicants against the respondents be dismissed.

   (b)    Any unsatisfied orders for costs as between the first applicants and the respondents be recalled and discharged.

   (c)    Subject to (2(b)) above, there be no order as to the costs of the application as between the first applicants and the respondents.

3.    There be no order as to costs on the respondents’ interlocutory application dated 11 April 2013.

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

THE COURT ORDERS THAT:

1.    The applicant pay the respondents’ costs of the proceeding to be taxed, if not agreed.

2.    The costs of the respondents shall not, however, include any of the costs of discovery and inspection in WAD 21 of 2005.

3.    There be no order as to costs in relation to the hearing of the application in respect of the costs payable in WAD 308 of 2006 following discontinuance of the proceeding by the applicant.

REASONS FOR JUDGMENT

1    In 2006, Nunagin Holdings Pty Ltd commenced proceeding WAD 308 of 2006 against the respondents, Evertop Investments Pty Ltd and Mr Kidd.

2    Nunagin claimed in its amended substituted statement of claim that:

    from April 1999 to December 2004 it operated the sporting goods retail store, trading as “Jim Kidd Sports Albany”;

    Evertop was a franchisor within the meaning of s 3 of the Schedule to the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) (Franchising Code of Conduct), as they then applied and was at all material times after about 8 March 2000 operating as a franchisor of sports retail stores under or using the business name “Jim Kidd Sports”;

    Mr Kidd was at all material times a proprietor or operator in his own right of sports retail stores under or using the business name “Jim Kidd Sports”, a franchisor under the Franchising Code of Conduct and after about 8 March 2000, the company secretary, sole director and sole shareholder of Evertop;

    Mr Grant Denning was at all material times engaged by the respondents as their accountant and authorised to act for them in relation to the transactions pleaded;

    at material times before about 8 March 2000, Mr Kidd, and after 8 March 2000, Evertop, owned and operated sports retail stores trading under the business name “Jim Kidd Sports” in Morley, Fremantle and Perth;

    at material times from about July 2001 until about December 2003, Evertop or Mr Kidd owned and operated a sports retail store under the business name “Jim Kidd Sports Clearance Store” in Perth;

    from about December 2003, Evertop or Mr Kidd owned and operated a sports retail store trading under the business name “Jim Kidd Sports” at West Perth, Harbour Town;

    the respondents engaged in misleading or deceptive conduct.

3    As a result of the alleged misleading and deceptive conduct Nunagin claimed it had suffered loss and damage. It further pleaded that representations were of an ongoing nature as a result of which it continued to suffer loss and damage.

4    Nunagin also claimed that Mr Kidd breached the Franchising Code of Conduct by not providing a copy of the Franchising Code of Conduct and a disclosure statement to it as a result of which Nunagin did not become aware that not all stores operating under the name “Jim Kidd Sports” were contributing equally towards the costs of advertising and that not all money that ought to have been contributed towards advertising was spent on advertising or promotion of the Jim Kidd Sports business name.

5    Nunagin said that if it had been provided with a copy of the Franchising Code of Conduct and disclosure statement it would not have entered into the franchise agreement, would have purchased a business being sold by Southern Stationery Pty Ltd and would not have continued to perform its obligations under the franchise agreement.

6    Nunagin pleaded loss and damage as a consequence. One of the particulars of loss and damage claimed was that set out in [10(v)]. Nunagin pleaded that:

    As at January or February 1999, the applicant was looking to invest in a business.

    As at that time Southern Stationery carried on a business as stationers which was advertised for sale and available for sale.

    Further, as at that time, Nunagin actively made inquiries and was interested in purchasing the stationery business.

    Had Nunagin not entered into the Jim Kidd Sports Albany agreement it would have purchased the stationery business.

    The stationery business generated profits.

7    Nunagin also pleaded a collateral agreement between it and Mr Kidd as well as an implied novation or alternatively a novation by conduct of the franchise agreement and of the collateral agreement; and breach of the collateral agreement.

8    Finally, Nunagin pleaded breach of fiduciary duty and breach of trust against the respondents, along with unconscionable conduct.

9    The respondents by their amended substituted defence denied the various claims made against them by Nunagin and further pleaded in answer to the whole of the claims made that they were in any event statute barred.

10    As to the misleading and deceptive conduct claims, the respondents made general denials. They simply said they “deny” [5], [6], [7A] (while repeating [2.3]).

11    As to [9] of the statement of claim and the alleged manner in which misleading or deceptive conduct was engaged in, the respondents admitted that not all stores contributed equally to the cost of advertising but otherwise generally denied that Mr Kidd was not contributing and did not contribute an equal amount contributed by each of the stores; that not all of the money that ought to have been contributed towards advertising was spent on advertising or promotion; and that Nunagin had paid a greater share of the actual costs of advertising than it should have.

12    The respondents also generally denied the loss and damage particularised in [10] of the statement of claim, which included the lost opportunity of buying the Southern Stationery business.

13    On 18 July 2012, the proceeding was listed for a ten day hearing to commence on 5 March 2013.

14    In late October 2012, the respondents’ solicitors provided Nunagin’s solicitors with a copy of a minute of proposed reamended substituted defence dated 19 October 2012.

15    From Nunagin’s point of view, whereas the respondents’ position had always been that the expenses described as “promotional support administration costs” were costs properly incurred by the advertising fund, in this proposed amended defence it appeared that they, for the first time, accepted that the costs were not properly chargeable against the advertising fund and that the expenditure of the advertising fund was limited to those expenses described in the financial statements as Print and Media Advertising.

16    The proposed pleading to [9] of the statement of claim was in these terms:

13    Paragraph 9 of the statement of claim is denied save to admit that:

13.1    No contribution had been made to the costs of advertising by Jim Kidd Sports Bunbury; and

13.2     The applicant was in some instances charged for stock purchased by the applicant from the Warehouse a margin exceeding 10% plus 5% on the cost price for the stock purchased.

17    The proposed pleading also dealt expressly with [9(a)] and [9(b)] of the statement of claim. In particular, Mr Kidd proposed to plead that the amount expended by him and licensed stores in relevant financial years was a particular sum. Thus, a positive case was proposed to be pleaded in that regard.

18    So far as the purchase of the Jim Kidd Sports Albany business was concerned, the respondents proposed to plead that Nunagin had decided to proceed with the purchase of the business before the meeting pleaded in [5] and [6] of the statement of claim, that is to say before the alleged representations concerning the respondents were made.

19    Subsequently, the respondents abandoned their proposal to plead the positive case concerning advertising costs, but maintained the evidentiary point in relation to the Jim Kidd Sports Albany business.

20    The proceeding in WAD 308 followed the earlier, 2005 proceeding in WAD 21 of 2005 in which Mr and Mrs Croft and others, including Nunagin, commenced proceedings against Evertop and Mr Kidd for pre-trial discovery of documents relating to the matters that were subsequently litigated in WAD 308, they having been foreshadowed by affidavit evidence in WAD 21. Discovery and inspection were ordered and given. As to the costs of the proceeding in WAD 21, on 29 August 2006, French J made orders as follows:

1.    In the event that the applicants have not by 1 November 2006 commenced proceedings against the respondents they shall pay the respondents' reasonable costs of and incidental to the provision of the discovery affidavit and inspection of documents in compliance with orders made in these proceedings.

2.    In the event that such proceedings are commenced by 1 November 2006 the costs shall, subject to the following order, be costs in the cause.

3.    In the event that the applicants commence proceedings by 1 November 2006 which are not brought by all of the applicants or against both respondents, and in respect of all causes of action referred to in the affidavit filed by the applicant in support of this application the respondents shall be at liberty to apply to the Court for appropriate costs orders.

21    In the event, Nunagin, by WAD 308, and the other applicants in WAD 21 relevantly commenced proceedings against the respondents.

22    As a result, in regard to the order made by French J above, the costs of WAD 21 became “costs in the cause”, which must have meant, costs in the cause of the subsequent proceedings, such as WAD 308.

23    Subsequently after about seven years of litigation, on 5 October 2012, by consent, the following orders were made in WAD 21:

1.    The applicants’ application be dismissed.

2.    Any unsatisfied orders for costs be recalled and discharged.

3.    Subject to 2 above there be no order as to the costs of the application.

24    Then, about four months later, on 18 February 2013, Nunagin was granted leave to discontinue proceeding WAD 308, without any separate order for costs on discontinuance then being made.

25    By interlocutory application in WAD 21 dated 11 April 2013 made on behalf of the respondents, the following rectification orders were sought by the respondents in respect of the consent order:

1.    The order issued by the Court in this application on 5 October 2012 be recalled and discharged.

2.    In lieu of the orders issued there be orders as follows:

(a)    This application by the first applicants against the respondents be dismissed.

(b)    Any unsatisfied orders for costs as between the first applicants and the respondents be recalled and discharged.

(c)    Subject to (b) above, there be no order as to the costs of the application as between the first applicants and the respondents.

3.    The fourth applicant (Nunagin) pay the respondents’ costs of this application.

26    Nunagin opposes the making of this order although, as dealt with below, it is at greater pains to submit that the terms of settlement between Mr and Mrs Croft and the respondents (which led to the consent orders of 5 October 2012 being made in WAD 21) have the effect of exonerating Nunagin for any costs in WAD 21.

27    Rectification, if made, would not affect the interests of Mr and Mrs Croft.

28    The respondents also submit that there should be an order that Nunagin pay their costs in WAD 308, as follows:

(1)    In WAD 308 such costs to include the respondents’ costs of giving discovery and inspection in WAD 21; and

(2)    The respondents’ costs in WAD 21, other than those encompassed in the preceding subparagraph;

(3)    Such costs to be taxed.

29    Alternatively, the respondents submit there should be an order that Nunagin pay the respondents’ costs:

(1)    In WAD 308; and

(2)    One-quarter of the respondents’ costs in WAD 21.

30    The one-quarter proposed obviously is intended to reflect the fact that Nunagin was but one of four applicants in WAD 21.

31    Nunagin says there should be no order as to costs in WAD 308, including in respect of the discovery and inspection in WAD 21.

32    There are then a number of related issues that arise concerning the costs in WAD 21 and WAD 308.

33    The issues broadly are:

(1)    Whether the respondents’ interlocutory application to rectify the consent order made on 5 October 2012 should be granted.

(2)    Whether the terms of settlement between Mr and Mrs Croft and the respondents have the effect of exonerating Nunagin for any costs which it may be liable in WAD 21.

(3)    Whether Nunagin should be liable for costs in WAD 308 and, if so, on what terms.

should the respondents’ application to rectify the consent order made 5 October 2012 in wad 21 be granted?

34    What ultimately happened in relation to the actions that were maintained by Mr and Mrs Croft and Nunagin is as follows.

35    On about 5 October 2012, the respondents entered into a deed of settlement and release with Mr and Mrs Croft in WAD 21 and other proceedings involving them.

36    At cll 5 and 6 of the deed of settlement, comprehensive releases were given to Mr and Mrs Croft in relation to what are described as the Evertop Claims and the Kidd Claims.

37    These claims are defined in cl 1 in similar terms as meaning all claims by Evertop or Mr Kidd against the Crofts as at the date of the deed and including claims that could have, but have not been made by Evertop or Mr Kidd against the Crofts which claims relate to the matters in any of the actions or the underlying facts as alleged in the actions.

38    The relevant actions are defined in cl 1 as WAD 168 of 2004, WAD 21, WAD 310 of 2006 and CIV 2735 of 2006.

39    Clause 3.3 of that deed provided that simultaneously with the execution of the deed the parties and/or their solicitors would execute and file a minute of agreed orders in each of the actions referred to providing as follows:

1.    The claim be dismissed.

2.    Any cross-claim or counter-claim be dismissed.

3.    Any unsatisfied orders for costs be recalled and discharged.

4.    There be no order as to costs.

40    As a consequence of the implementation of this agreement, two steps were taken.

41    First, a minute of agreed orders signed by Mr and Mrs Croft and the solicitors for the respondents was lodged on 5 October 2012 in WAD 21. Second, as a consequence of that minute, a consent order was signed and issued by the Court on 5 October 2012, in the following terms:

1.    The applicant's application be dismissed.

2.    Any unsatisfied orders for costs be recalled and discharged.

3.    Subject to 2 above there be no order as to the costs of the application.

42    Nunagin now says that the language of the deed with the Crofts is unambiguous and on its proper construction its effect is to discharge a joint and several obligation on the applicants, including Nunagin, to pay costs in WAD 21.

43    It is submitted that there was no express reservation of rights against Nunagin in relation to the costs in WAD 21 and accordingly, there is no room to construe the releases as covenants not to sue.

44    It is further submitted that the consent orders made on 5 October 2012 reflect the terms of the deed and the application to discharge the order of 5 October 2012 now made on behalf of the respondents should be dismissed with costs.

45    The respondents, however, say that they are entitled to relief on their interlocutory application in WAD 21 made 11 April 2013 in which they seek the recall and discharge of the consent order of 5 October 2012 and orders in lieu set out above.

46    In my view, the interlocutory orders sought by the respondents should be granted.

47    It will be noted that the consent order extracted in (1) referred to the “applicant’s application” being dismissed. It was not and not intended to be a reference to the applicants, in plural form, in WAD 21.

48    The minute of agreed orders was with a heading between Mr and Mrs Croft and the respondents and did not refer to any of the other applicants in WAD 21.

49    The minute of agreed orders was signed only by Mr and Mrs Croft and the solicitors for the respondents.

50    To the extent that the consent orders might suggest that the consent order made was in respect of the costs position in relation to all the other applicants in WAD 21, including Nunagin, such a view, in my view, is entirely misplaced.

51    For those reasons, the earlier order made by consent should be recalled and discharged and orders made in the terms requested by the respondents in order to avoid any ambiguity and confusion, save that there should be no order as to costs on the interlocutory application as Nunagin is not, in my view, responsible for the sequence of events that led to the order which now requires correction.

Did the terms of settlement between the crofts and the respondents exonerate Nunagin from any liability for costs in WAD 21?

52    Nonetheless, on behalf of Nunagin it is submitted as I understand it that, quite independently of the terms of the order made by consent on 5 October 2012, the determination of costs as between Mr and Mrs Croft and the respondents in relation to proceedings between them including the costs position in relation to WAD 21 had the effect of removing the costs liability that the various applicants in WAD 21 shared jointly, so that the discharge of the costs liability by the respondents against one of the applicants in WAD 21 had the effect of releasing all the applicants, including Nunagin, of the costs liability that they might otherwise have borne in that proceeding by virtue of the orders of French J of 29 August 2006.

53    In my view, in the event that the applicants had not by 1 November 2006 commenced proceedings against the respondents, then the costs order made by French J on 29 August 2006 in (1) would have been a liability borne by those applicants jointly and severally, from the respondents’ point of view. However, (1) did not come into play.

54    Further, in my view, as stated above, there was no requirement that all the applicants commence a single proceeding together. This is acknowledged by counsel for Nunagin in this proceeding before me. In the event, Nunagin commenced its own separate proceeding by WAD 308.

55    The result is, order (3) of 29 August 2006 of French J does not apply here, but (2) of those orders does apply such that the costs are to be costs in the cause of the proceeding subsequently commenced. The cause as I would understand it, and the parties do not suggest otherwise, is the cause of the new proceeding commenced by the relevant applicant, not WAD 21.

56    As it transpires, the proceeding commenced by Nunagin in WAD 308 did not go to trial and the cause was not heard and determined by the Court.

57    Rather, on 18 February 2013, Nunagin was given leave, pursuant to R 26.12(2) of the Federal Court Rules 2011 (Cth), to discontinue the proceeding.

58    Rule 26.12(7) provides that a party discontinuing will, unless the Court otherwise orders, be liable to pay the other party’s costs of the proceeding.

59    The discontinuance does not of itself, as the respondents acknowledge, mean that the costs of WAD 21 thereby became payable under the terms of the orders made by French J on 29 August 2006.

60    Rather, as the respondents submit, the costs of the proceeding in WAD 21, including the costs of giving discovery and inspection, are costs in the cause, in this case, of WAD 308.

61    The question is, what is the costs position in WAD 308 in light of Nunagin’s discontinuance? In my view, unless the Court orders otherwise under R 26.12(7) Nunagin is liable to pay the respondents’ costs of that proceeding, which on the face of it should include the relevant costs of WAD 21 in respect of discovery and inspection.

62    In my view there is nothing in the terms of the deed of settlement between Mr and Mrs Croft and the respondents that has the effect of discharging any liability that Nunagin has to pay the costs in WAD 21.

63    I have set out the way in which I consider the August 2006 costs order in WAD 21 operates. There is no joint and several liability or merely joint liability in respect of which a settlement with one of the applicants in WAD 21 results in a release or discharge of the costs liability that another applicant in that proceeding may have pursuant to (2) of the order made.

64    I reject, therefore, the argument to the contrary advanced on behalf of Nunagin.

65    That then leaves the question of what costs order, if any, should be made in WAD 308.

What costs order, if any, should be made in WAD 308?

66    Rule 26.12(7) of the Rules provides that, unless the terms of consent or an order of the Court provide otherwise, the party who files a notice of discontinuance under sub-rule (2) is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued. That then is the starting point. There is something of a presumption that the party who has the benefit of the discontinued proceeding will have their costs paid.

67    So far as the costs following the discontinuance of WAD 308 are concerned, the parties accept that it is not the function of the Court to make a prediction as to the outcome of a hypothetical case when exercising the Court’s costs discretion following the discontinuance of a proceeding. See Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 at 624-625 (McHugh J); Clark v ING Life Limited [2007] FCA 1960 at [19] (Rares J).

68    Nonetheless, Nunagin says the conduct of the respondents is such that the Court should order otherwise and refrain from making a costs order in their favour in this case. Nunagin primarily relies on the affidavit of Mr Kimball John McIntyre sworn 25 March 2013 and the affidavit of Ms Hermien Bouman sworn 25 March 2013 to establish relevant disentitling circumstances.

69    It submits that disentitling conduct relates to what it calls a significant change in position by the respondents in October 2012 in relation to the types of expenses they say were properly chargeable to an advertising fund set up to promote the Jim Kidd Sports brand.

70    Nunagin says it and other franchisees were previously in dispute with the respondents in relation to the advertising fund going back to late 2003 and early 2004. It says audited financial statements for the advertising fund were provided amongst others to Nunagin in response to an even earlier proceeding in the Court in WAD 168 of 2004.

71    Nunagin says the audited financial statements disclosed the respondents’ position in relation to the advertising fund which was very significant expenditure said to be incurred under the descriptor promotional support administration costs. It says there was further dispute between Nunagin and other franchisees, on the one hand, and the respondents, on the other, in relation to, amongst other things, those costs, including whether they were of a type that could be properly charged to the advertising fund.

72    Nunagin says that the application for pre-action discovery was then made by the franchisees in WAD 21 which was directed in part to the promotional support administration costs and that significant discovery and inspection were provided in relation to that issue on the orders made.

73    Nunagin and the other franchisees then engaged Pitcher Partners to prepare an opinion in relation to, amongst other things, the proper level of expenditure of the type described in the audited financial statements as promotional support administration costs. That opinion, contained in a report of September 2006, was that those costs were not properly chargeable against that fund or were overstated.

74    It was against that background, Nunagin says, that WAD 308 was commenced in October 2006 and a minute of amended statement of claim was filed in July 2007, in which, at [9(b)], Nunagin pleaded in effect the conclusions reached in the Pitcher Partners’ report in relation to the advertising fund.

75    Nunagin says that the respondents did not file a defence in the proceeding until 10 December 2007 and when it did so, the response to [9(b)] was a bare denial of the allegations made. Nunagin says no substantive defence was advanced until the minute of proposed re-amended defence was given to it in late October 2012, some few months before trial was due to commence in March 2013 and six years after the proceeding in WAD 308 had been commenced. Nunagin notes that despite the respondents having been ordered to provide an amended defence by 19 May 2012, they failed to comply with that order until much later.

76    Nunagin says that in the minute of proposed amended defence in October 2012, for the first time the respondents raised a substantive defence, in relation to which Nunagin then sought further particulars. It was not until 16 January 2013 that a response was obtained, at which time the respondents said the proposed amendments would, in fact, not be pursued. Nunagin says no explanation was received as to why that was so.

77    Nunagin says that in subsequent correspondence between solicitors for the parties, the respondents confirmed that they no longer advanced a case that the promotional support administration costs were properly chargeable to the advertising fund.

78    Nunagin says the respondents’ change in position worked significant prejudice against it.

79    Nunagin says that it has wasted expenditure in the order of $80,000 dealing with, what turned out to be, a false issue. The prejudice to Nunagin, however, it says, goes beyond simply wasted expenditure. It says false issues inevitably delayed the proper progress of the proceeding. From commencement it took over six years before the trial was due to commence and part of the delay related to the parties dealing with the promotional support administration costs.

80    Nunagin says that the dispute between it and other franchisees had been ongoing for almost nine years before the respondents disclosed their true position. If that position had been known from the beginning there is a prospect that these proceedings (and those in WAD 21) would never have been commenced.

81    Nunagin says it is a small family company. Its directors were going to borrow money secured against their home to fund the trial. It says the failure by the respondents to plead a substantive defence in a timely fashion meant that the true issues in the case did not emerge until very late, and certainly not until after the occurrence of a mediation conference in late 2012. This meant that Nunagin did not have the benefit of knowing the case it had to meet at the mediation and this impacted on the failure to reach a settlement at mediation.

82    For all those reasons, Nunagin submits the appropriate costs order is that there be no order as to costs. Alternatively, it says the respondents should not receive the costs associated with the promotional support administration costs and they should be ordered to pay Nunagin’s costs on that issue.

83    The respondents seek to cast a different light on the circumstances in which discontinuance of WAD 308 occurred, suggesting Nunagin capitulated. The respondents reject the submission made by Nunagin that its proceeding was abandoned because the respondents decided to replead their case so that they no longer wished to assert that all costs of operating the warehouse were costs payable as advertising expenses.

84    The respondents submit the effect of the proposed amendments was that the respondents ultimately made a concession in favour of Nunagin; a concession which it now says caused it to abandon its claim. The respondents submit this is a surprising proposition and analysis and requires consideration of the events.

85    The respondents note that on 21 October 2012, the respondents’ solicitors sent Nunagin’s solicitors the minute of proposed re-amended substituted defence. In the document:

(1)    The respondents sought to plead to each of the allegations in [9(b)(i)-(v)] of the statement of claim. In those paragraphs, Nunagin alleged that Mr Kidd had not made his required contributions to the cost of advertising in the years ending 30 June 2000 to 2004.

(2)    The respondents proposed to plead that the respondents had made a financial contribution towards advertising costs and a Non-Cash contribution in the form of Mr Kidd’s time and the time of his employees, which it was alleged were worth $150,000 in each year.

86    Then, on 24 October 2012, the respondents’ solicitors sent an email to the applicant’s solicitors in the following terms:

Please see attached document which I assume was prepared by your client. On the last page of the document it is stated that in ‘January 1999’ your client ‘made an offer for Jim Kidd Sports Albany which was accepted’. That statement calls into question whether your client had made a contract to purchase before he met Denning and Jim Kidd. Your client’s discovery included only the first page of a contract to purchase the business Jim Kidd Sports Albany so that in looking at the document I was unable to see when it was made. Will your client discover the document in its entirety?

87    The respondents note that on 15 November 2012, the solicitors for Nunagin then wrote to the solicitors for the respondents as regards the minute of proposed re-amended substituted defence. Further particulars were sought as regards proposed [16]-[20].

88    Then on 29 November 2012:

    Early in the day the solicitors for the respondents sent an email to the solicitors for Nunagin as follows:

I refer to our meeting last week when you informed me that your client could not locate the second page of the contract to purchase the business which traded as Jim Kidd Sports Albany. Please have your client swear an affidavit of discovery to confirm what you told me and ensure that the affidavit is filed in the next ten days.

    Before midday, the solicitors for the respondents sent a second email as follows:

Attached by way of ongoing discovery is a copy of the contract between your client and Top Spot Investments Pty Ltd for the sale of the sport business in Albany. My client obtained the document within the last 24 hours from Mr Poliwka. This document suggests that your client was obliged to purchase the business from 6 January 1999 which was before Mr McIntyre had any dealings with Mr Kidd or Mr Denning and on that basis I will be reformulating my client’s defence.

89    Then on Friday, 30 November 2012, early in the working day, the solicitors for the respondents sent a further email to the solicitors for Nunagin as follows:

I refer to the email below and the attached document.

In your client’s affidavit sworn 27 May 2005 he deposed that he first met Grant Denning in January or February 1999 [par 9]. It seems more likely to have been February but in any event it was after he had agreed to purchase the business from Top Shot (sic). The only relevant condition in the contract was that the licence agreement be assigned to Nunagin which required the consent of Mr Kidd.

The agreement required no renegotiation of the terms of the licence agreement so your client was committed to the purchase before he met Mr Denning or Mr Kidd. By reason of the matters above it seems to me that your client’s claim for damages based on the purchase of the business Southern Stationery cannot succeed. Do you agree? If so, that part of the claim should be formally abandoned before my expect (sic) witness devoted more time to this work.

90    The respondents note that on Tuesday, 4 December 2012, in the morning, the solicitors for Nunagin sent the respondents’ solicitors an amended offer of compromise for WAD 308, Magistrates Court actions 2004-021389 and 2005-0050 and WAD 21. The offer was for the first three actions to be discontinued with no orders as to costs and the offer was said to be inclusive of the costs, including the costs of WAD 21.

91    On 5 December 2012, in the morning, the solicitors for the respondents sent an email to Nunagin’s solicitors rejecting the offer made and making a counter-offer.

92    Then on 10 December 2012, in the early afternoon, the solicitors for Nunagin sent the respondents’ solicitors an amended offer of compromise for WAD 308 and WAD 21. The offer was for the actions to be discontinued with no orders as to costs.

93    The respondents say that on each of 13 December 2012 and 15 January 2013, the solicitors for Nunagin sent the respondents’ solicitors a letter referring to the “unresolved” pleadings. The respondents say that, in light of later events, the letter was just tactical because it was clear that Nunagin was not going anywhere near a trial. The response from the respondents’ solicitors sent 16 January 2013, advised that the respondents would no longer advance the proposed [16]-[20].

94    After 16 January 2013, the respondents say it was understood they no longer sought to make a case in answer to [9(b)] of the statement of claim. Instead, they now sought to plead that the applicant made the Jim Kidd Sports Albany agreement with Top Spot Investments Pty Ltd before Mr McIntyre met Mr Denning or Mr Kidd and so before the relevant, alleged representations were made.

95    On 7 February 2013, the respondents note that the solicitors for Nunagin informed the respondents’ solicitors that Nunagin would seek leave to discontinue.

96    In these circumstances, the respondents contend the overwhelming inference is that Nunagin abandoned its case because the contract with Top Spot was made on 6 January 1999. When this was revealed Nunagin sought to settle on advantageous terms. The respondents’ amendment to abandon its proposed pleadings simplified Nunagin’s case and could not have been the reason why its claim was abandoned.

97    Responding to the respondents’ chronology, counsel for Nunagin sought to make a number of points. First, that back in 2004 expenditure on advertising was one of the significant issues. Second, the respondents’ position was that various administration costs were proper advertising expenses. Third, that was in issue between the parties. Fourth, the difficulty with the pleadings up until October 2012 was that there was nothing more than a bare denial, and a significant amount of time and costs had been devoted to dealing with those types of costs in various proceedings and WAD 21. Fifth, towards the end of 2012 the respondents’ position had changed. Sixth, the position then became that those costs were not properly chargeable to the advertising fund. Seventh, that was not finally confirmed until about 22 January 2013, about six weeks before the trial was due to commence and nine years after the issue first arose between the parties.

98    Counsel for Nunagin submitted that the consequence of all that was that the very significant amount of time and costs that was spent dealing with those issues was wasted on a false issue.

99    Counsel submitted all that this highlights is the dangers of pleading a defence which is no more than a bare denial, because the real issues do not emerge until many years later. The opportunity to settle through two mediation conferences was as a consequence lost.

100    Nunagin refers to the affidavits of Ms Lucy Heather Westwood sworn 28 September 2005 and 29 August 2006, Ms Karene Elaine Primrose sworn 29 August 2006 and Mr Kidd sworn 27 October 2005. Ms Westwood’s affidavit sworn 29 August 2006, it says, shows the quantum of work done in the pre-action discovery in WAD 21. Categories B and F were the discovery categories that related to the overhead type expenses. Something like 100,000 pages of documents were discovered.

101    Nunagin also relies on the affidavit of Mr McIntyre sworn 25 March 2013 and Ms Baumon sworn 25 March 2013. The respondents reasonably object to much of the affidavit of Mr McIntyre, on the basis that it involves comment and argument. I should say that I consider most of those objections to be well taken and in that regard place little or no reliance on those portions of the affidavit objected to.

102    As to the non-contentious parts of the affidavit, particularly the annexures, counsel for Nunagin draws attention to:

    The historical correspondence between the parties dating back to 2004.

    The application to the Court of 20 July 2004 in relation to orders pursuant to s 80 of the Trade Practices Act 1974 (Cth).

    The statement of claim in those early proceedings.

    The audited accounts provided for the financial years ending 2000, 2001 and 2002.

103    Counsel also draws attention to Mr Kidd’s affidavit of 13 August 2008 to emphasise the expenditure in relation to these overhead type costs.

104    Counsel notes that Mr Kidd gave evidence that his solicitors provided Mr McIntyre’s solicitors with a breakdown of receipts of the advertising fund.

105    Counsel particularly notes that under expenses there are print media advertising expenses in The West Australian newspaper and others totalling $616,414. He also noted the promotion support administration costs which appear to range from wages, rent and depreciation to security and transport, in a total of $444,098.

106    Counsel submits that the issue between the parties was whether or not those administration costs were properly chargeable to the advertising fund simply because Mr Kidd had said that they were. Nunagin, on the other hand, has always denied that they were proper advertising expenses chargeable against that fund.

107    Counsel noted by reference to Ms Westwood’s affidavit the time taken up in dealing with discovery. In her affidavit of 28 September 2005, at [8], 320 hours is mentioned; and at [16] another 215 hours.

108    Counsel further noted that discovery categories B and F were dealt with in Mr Kidd’s affidavit of 27 October 2005. Counsel suggested that a close examination shows that of the 889 items that were in the discovery up to the point from Mr Kidd’s affidavit, one can work out that 612 relate to categories B and F, which are the advertising expenditure – about 69% of the volume.

109    Counsel referred to the huge volume of materials in boxes that constituted the discovery, which is not in dispute.

110    By reference to Ms Westwood’s affidavit of 29 August 2006 alone, counsel said that somewhere between $250,000 to $300,000 had been spent on pre-trial discovery by the respondents.

111    Counsel also referred to the Pitcher Partners’ report and the portion that dealt with the statement of receipts and expenses for the financial years 2002 to 2004, being the amounts claimed by the respondents. Again there was a huge number of receipts.

112    Counsel emphasised that it was the Pitcher Partners’ statement of opinion that led to the plea in [9(b)] of the statement of claim.

113    In those circumstances, Nunagin says there were real issues about the advertising expenses, and suddenly, for the first time, to have a pleading of a positive case in late 2012, instead of a bare denial concerning those overhead expenses, was of significance. For the first time it was pleaded that the amount expended by the second respondent for advertising in the year 30 June 2000 was $616,414.

114    Counsel then notes that requests for particulars were made. Following that counsel says that solicitors were then advised that the proposed new positive pleading would no longer be advanced.

115    Counsel for Nunagin accepts that at that point other issues were at play. Counsel says it has never been Nunagin’s submission that the only reason it discontinued the proceeding was because of the change of position. It is only a factor.

116    As to the respondents’ emphasis on the Jim Kidd Sports Albany sale evidence and its alleged capitulation following it, counsel said that this was simply a claim for damages on a lost opportunity basis. It was in relation to the timing and terms of the contract to purchase the sports store business that the defence recently came forward concerning the contract being unconditional at the time. In effect, the respondents have said that Nunagin had an unconditional contract and so there was no opportunity lost.

117    Counsel for Nunagin says that, while that might be the case, it had never been tested and only goes to quantum and not liability.

118     Counsel then submitted:

And your Honour will see there are a large number of causes of action. Some of them relate to the time – it’s like the stationery store business – to things at the time that their transaction was entered into, but a number of the causes of action relate to the ongoing conduct of the advertising fund over time. So it only goes to quantum, doesn’t go to liability and it only goes to one part of the quantum claim. Now, it certainly was a relevant factor … but it’s one of the risks of litigation that you take into account.

119    Counsel for Nunagin emphasised again the fact that a bare denial suddenly, in late 2012 was turned into a positive case, which was then soon after abandoned. He said:

This has turned into being a big, expensive case that, for whatever reason, has taken a very long time to progress to the stage of where it was entered and going to trial. It was listed for 10 days and, inevitably – I think it’s common experience that when you have big discoveries in actions it inevitably leads to them taking longer, being more complex and being consequently more expensive. Now, Mr McIntyre gives evidence that Nunagin spent about $290,000 on 308/2006, looking at a 10-day trial, and again I’m sure your Honour will be aware that the setting-down fee and the hearing fee alone for a trial, a 10-day trial, in this court is the best part of $30,000. The directors were going to have to borrow money to fund the hearing and that money was going to have to be secured against their family home.

120    Counsel again emphasised that the real issues in the case did not emerge until later in the piece, with the amended defence in October 2012, six years after the proceeding commenced and after two mediation conferences had taken place.

121    Counsel again said Nunagin did not say that it made its offer to settle because of the change of position. In December it made a formal offer to walk away with each side bearing their own costs. The company is a small family company and it was concerned about the costs of litigation. What Nunagin does say is that the change in position of the respondents was a factor in discontinuing.

122    Thus, Nunagin submits the appropriate order is that there be no order as to costs or that the respondents, as an alternative, be deprived of the costs of dealing with those false issues they created and that they pay Nunagin’s costs on those issues.

123    Counsel for the respondents in reply emphasised that the order of French J of 29 August 2006 dealt with the issue of costs in WAD 21 so that the costs of the proceeding would be costs in the cause of the action commenced. That is to say, costs in the cause in WAD 308. Counsel submits that orders cannot now be made in WAD 308 that would have the effect of countermanding that order.

124    Counsel submits that Mr McIntyre has been less than frank with the Court and there is no attempt to explain why the offer to abandon the claim was made four days after the applicant was provided with a copy of the contract between the applicant and Top Spot. He submits the inescapable inference is that the claim was more than likely to fail on the basis that the contract was made before representations pleaded as having been the inducement to enter into the agreement with the respondents had been made, and the representations pleaded in [5] and [6] of the statement of claim, by their nature, were always questionable. In the face of that evidence, Nunagin’s position simply became untenable and that is why Nunagin offered to capitulate, suggesting that the parties bear their own costs.

125    Counsel further submits that when one comes to the wasted expense that has been incurred, regard must be had to the fact that each of the applications in the various four actions that were instituted after the combined action for pre-action discovery in WAD 21 were in relation to different licence agreements between different parties.

126    So, it is submitted, in the case of Mr and Mrs Croft, the licence agreement actually said that whatever the licensees paid as a contribution towards the advertising expenditure, Mr Kidd would make a corresponding payment. The same term was not in the Nunagin licence agreement. There is nothing comparable in the Nunagin licence agreement. In relation to the Pitcher Partners’ report, counsel submits that the vast majority of it had nothing to do with this claim by Nunagin. Rather, the report was based on the Croft’s licence agreement. Counsel says that the amounts involved in the sale into the exclusive territories is quantified at p 6 of that report and it will be seen that the total for Albany was $23,465. So, it is said, all of the work for the Pitcher Partners’ report ultimately had no relevance to the claim that the applicants sought to promote. The proposition that the respondents’ change in position somehow brought it to decide not to pursue the claim is, it is submitted, incomprehensible in the context of the respondents having effectively conceded that the expenditure was not referable to advertising and ultimately adopting the position that they would offer no evidence on that pivotal allegation of the applicant’s case. The fact that there was previously a bare denial, counsel for the respondents submits, virtually gave the applicant a “free run” to put what evidence they wished on that point.

127    Counsel, who also drafted the October 2012 amended defence, said that what was sought to be achieved by that pleading was to alert Nunagin and Mr McIntyre to the reality that he had carefully scrutinised the licence agreement to the extent that he reverted to Mr Denning and said that the exclusive territory was deficient and he wanted a larger territory – so he understood the document to the extent of that fine detail but nevertheless had never taken issue with anything that had been said about these alleged contributions to the advertising fund.

128    In addition, after the licence agreement had been signed, there had been a dispute between the parties in relation to Mr McIntyre failing to make his contribution to the advertising fund, which had been resolved by a payment by him and correspondence which confirmed the terms of the licence agreement as the basis of his contribution. In other words, he was not paying what was pleaded in the statement of claim to have been the representation as to what he should pay. So the proposition that the defence as amended in January 2013 brought about a great transformation in the respondents’ case was rejected.

129    Counsel for the respondents submitted that, in substance, in this case Nunagin was an opportunistic applicant who threw its lot in with three other applicants, who may have had good claims, and then at the last minute, after the other applicants had fallen away, decided it was not prepared to take its case further.

130    In further submissions, counsel for Nunagin emphasised that the document that the respondents gave great attention to goes to the lost opportunity case but not to the question of liability. Counsel submitted that it is difficult to see how the document discovered late in the piece would cause the claim to fail unless some credit issue was sought to be raised by the respondents against Mr McIntyre.

131    He also said that the Pitcher Partners’ report was equally applicable to Nunagin’s claim, in relation to them falsifying the representations. There was also a plea in relation to the terms of the licence agreement that it was partly oral and partly in writing.

132    Counsel also emphasised, that when it came to the exercise of discretion Nunagin had made an offer to walk away and that taking into account the size of the litigant, what was at risk, the act of doing so should not have the consequence of the applicant now being visited with a costs order.

133    In my consideration of the question whether the Court should provide otherwise under R 26.12(7) in respect of costs in favour of the respondents, it is appropriate to note first that by the proceeding in WAD 21, four applicants including Mr and Mrs Croft and Nunagin (of which Mr McIntyre was the principal) successfully obtained an order for pre-action discovery and inspection. Each of the applicants was a franchisee of a sports business from the respondents.

134    It appears that each of the applicants operated its franchise under a separate contractual arrangement or licence agreement with the respondents. It seems, however, that not all of these contractual arrangements were identical.

135    Nonetheless each of the applicants had it seems common concerns, about the operation of the advertising fund.

136    It also appears from affidavit evidence placed before me on the hearing of these applications that there was an enormous quantity of documents produced by virtue of the pre-action discovery and inspection orders made by French J in WAD 21 that required considerable professional review. I accept that the affidavit evidence in that regard referred to by Nunagin provides a reasonable indication of the extent and professional value of the discovery and inspection.

137    So far as the costs of the pre-action discovery proceeding were concerned, on 29 August 2006, French J made orders as follows:

1.    In the event that the applicants have not by 1 November 2006 commenced proceedings against the respondents they shall pay the respondents' reasonable costs of and incidental to the provision of the discovery affidavit and inspection of documents in compliance with orders made in these proceedings.

2.    In the event that such proceedings are commenced by 1 November 2006 the costs shall, subject to the following order, be costs in the cause.

3.    In the event that the applicants commence proceedings by 1 November 2006 which are not brought by all of the applicants or against both respondents, and in respect of all causes of action referred to in the affidavit filed by the applicant in support of this application the respondents shall be at liberty to apply to the Court for appropriate costs orders.

138    In the event, all applicants brought proceedings, but not jointly or in the one proceeding. There plainly was no requirement that they bring a single action.

139    Nunagin, for example, relevantly instituted proceeding WAD 308.

140    The result of doing so was that (1) of the orders of French J of 29 August 2006 had no relevant application to Nunagin.

141    However, order (2) thereby became relevant.

142    The timely commencement of a proceeding by Nunagin meant that from that applicant’s point of view, (1) of the costs order was satisfied, (2) applied and (3) was redundant.

143    On behalf of the respondents it is submitted in effect that the respondents are entitled to the pre-action costs because the orders made by French J should not be ignored. However, it does not follow from that order that the costs in WAD 21 should automatically be awarded in the case of the discontinuance of WAD 308. This is because the cause in WAD 308 has not been determined in order to give that costs order any automatic application.

144    The power to award costs upon the discontinuance of WAD 308 is different from the broad power of the Court to award costs (usually) to the successful party at the conclusion of a trial of an action. Under R 26.12(7) the party discontinuing will be liable for the costs of the other party in the proceeding, unless the Court otherwise orders. The Court in that regard has a discretion, to be exercised judicially, as to whether or not the circumstances surrounding the discontinuance suggest that the liability of the discontinuing party to pay the costs of the proceeding of the other party should in any respect be altered. There is, in effect, a presumption that the notionally successful party, being the one who has the benefit of the discontinuance, should have their costs. The Court may, however, form a different conclusion depending on the circumstances surrounding the discontinuance.

145    As can be seen from the submissions of the parties, Nunagin in effect makes two broad submissions as to why the costs of the proceedings should not be the respondents’. First, it is submitted that it was not until very late in the piece in 2012 that a historic general denial of the allegations made about the advertising costs in dispute was altered. Given that history of the matter, Nunagin says an appropriate exercise of the judicial discretion would be to order otherwise when it comes to the respondents’ costs in the proceeding, or at least part of the costs.

146    Secondly, the broad submission is made that, in circumstances such as these, taking all of the background to the proceeding into account, and the fact that Nunagin is a small family company responding to lengthy and costly litigation, an appropriate judicial exercise of discretion would see Nunagin not having to pay all the respondents’ costs.

147    Consequently, Nunagin submits the appropriate costs orders in WAD 308 should be no order as to costs. Alternatively, that the respondents should not receive the costs associated with the promotional support administration costs and they should be ordered to pay Nunagin’s costs on that issue.

148    The respondents, on the other hand, submit Nunagin should pay their costs in WAD 308, including the costs of giving discovery and inspection in WAD 21 and that the costs in WAD 21, other than those encompassed above, be taxed. Alternatively, that Nunagin should pay the respondents’ costs in WAD 308 and one quarter of the respondents’ costs in WAD 21 (recognising it was one of four applicants in that proceeding).

149    The difficulties courts have in dealing with costs application upon an application for leave to discontinue a proceeding or in consequence of discontinuance of a proceeding are well known. In the absence of a hearing and determination by a court, it is difficult to say where the merits of a particular proceeding actually lay when discontinuance occurs. The observations of McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Quin are apposite. This case is proof positive of the observation.

150    There are some circumstances in which discontinuance quite apparently has occurred because one party has capitulated. In those circumstances the assessment of the merits and where the costs should fall is perhaps easier. There is no apparent reason why the Court should contemplate ordering otherwise under R 26.12(7).

151    In some other circumstances, the conduct of the party discontinuing might be considered not to be blameworthy and no costs order will be made. A decision to that effect may perhaps be found in Clark.

152    The particular circumstances now before me do not obviously reflect those of Clark. But nor do they, in my view, immediately suggest a complete capitulation on a key issue, as suggested by the respondents.

153    Nunagin, following the positive case proposed by the respondents in late October 2012 which was later not pursued, and having been put on notice about the serious weakness in the lost opportunity claim, and no doubt on advice and making a broad assessment of the cost implications if it pressed on to trial in the proceeding (considering it was a small family company and the costs were great) considered that discretion was the better part of valour and that it should attempt to settle the proceeding without costs. When that failed, it discontinued.

154    The fact that Nunagin then discontinued, knowing of its exposure to costs under R 26.12(7), suggests a degree of capitulation. But discontinuance occurred only at the end of about six years of litigation in which the advertising costs issues – in WAD 21 and WAD 308 – were, in my view, relatively significant drivers of the litigation; although by no means the only cause of action.

155    Nunagin had been but one of four applicants in WAD 21. The pre-action discovery plainly was in respect of a huge volume of documents that went to the question of advertising costs. That issue has never been determined in Court. And it never will be because of the discontinuance of this proceeding and the resolution of the other proceedings involving other applicants. The respondents, however, by their proposed amendments in late 2012 and later abandonment of those proposed changes did not agitate the issue. But by those steps they certainly muddied the waters. It may be said, with some justification, that if their final position in early 2013, before trial, had been clarified years earlier – instead of relying on a general denial of [9(b)] of the statement of claim, the chances of a successful mediated outcome of the proceeding, rather than two failed endeavours, would have been increased. The pleading conduct of the respondents in my view cannot be ignored when it comes to determining a just costs order following discontinuance by Nunagin. Perhaps recognising this, in part, as an alternative order, the respondents submit that they should be entitled to their costs in WAD 308 and to one quarter of the costs of WAD 21.

156    Undoubtedly, from the viewpoint of Nunagin, an order requiring them to pay the costs of WAD 308 upon discontinuance and one quarter of the discovery and inspection costs of WAD 21 would seem harsh. Nunagin, however, appears to have recognised it had serious difficulties with its case, not just the lost opportunity claim, as well as with the expense of trial. Those realities ordinarily do not result in a party who seeks to withdraw a proceeding for such reasons being exonerated of the need to meet the costs of the other party which it has engaged in the litigation.

157    The question of the long agitation of the advertising costs, however, remains, in my view, a real issue. The respondents bear some real responsibility for it being drawn out in the way that it was. The general denial right up to the apparent change of position in October 2012, meant that Nunagin was always going to have to prove its case and it undoubtedly would have played a part and an impediment to the prospects of any successful mediation for the proceeding. In that regard, the matter went to mediation on two occasions. I am satisfied that the general denial in respect of the advertising costs issue maintained by the respondents over many years was of significance in relation to the conduct of the proceeding. Not long before trial, however, it ceased to be so.

158    In the event, I am satisfied that a just costs order in this case should see Nunagin paying the costs of the respondents in WAD 308. However, the costs recovered should not include the costs of the discovery and inspection in WAD 21.

159    In the circumstances, I would also not make any order for costs in respect of the hearing of the costs issues in WAD 308.

Orders

160    In those circumstances, I would make the following orders.

161    In relation to the interlocutory application of the respondents in WAD 21, dated 11 April 2013:

1.    The order issued by the Court on 5 October 2012 be recalled and discharged.

2.    In lieu thereof there be orders as follows:

   (a)    This application by the first applicants against the respondents be dismissed.

   (b)    Any unsatisfied orders for costs as between the first applicants and the respondents be recalled and discharged.

   (c)    Subject to (2(b)) above, there be no order as to the costs of the application as between the first applicants and the respondents.

3.    There be no order as to costs on the respondents’ interlocutory application dated 11 April 2013.

162    In relation to WAD 308:

1.    The applicant pay the respondents’ costs of the proceeding to be taxed, if not agreed.

2.    The costs of the respondents shall not, however, include any of the costs of discovery and inspection in WAD 21 of 2005.

3.    There be no order as to costs in relation to the hearing of the application in respect of the costs payable in WAD 308 of 2006 following discontinuance of the proceeding by the applicant.

Associate:

Dated:    10 October 2014