Disallowing costs as between parties

9.10 Where a party conducts discovery in an inefficient, wasteful and costly manner, and is ultimately unsuccessful in the litigation, then that party will bear much of the cost of their own waste and inefficiency. However, it could be argued that unsuccessful parties should not have to pay the discovery costs incurred arguably wastefully or unnecessarily by the opposing side.

9.11 The Federal Court cannot control how organisations (that might never appear before the Court) manage their records,^[8] but a company’s poor record-keeping practices might be one cause of high discovery costs over which the opposing party has no control. This was a matter of concern expressed in a number of submissions to this Inquiry. For example, the first issue in the Queensland Law Society’s list of ‘most significant issues that require addressing in relation to discovery’ was the ‘need for many clients to more effectively manage their records (so as to facilitate the early and efficient identification and gathering of potentially relevant records)’.^[9] E.law Asia Pacific submitted that discovery was becoming increasingly costly ‘due to the often disorganised way in which information is stored within organisations’:

Disciplined archiving practices are the exception rather than the rule, and when a party requests discovery, they could be faced with the possibility that potentially relevant information is stored in a number of disparate locations, in email repositories, on network drives, on local drives on notebook computers, portable devices such as iPhones, BlackBerries, USB memory sticks and the like. Therefore, the question is, should one party have to pay a premium because the other party has not archived its information in an organised way, or has not archived information at all?^[10]

9.12 As discussed elsewhere in this report, particularly in Chapter 6, poor record management is only one cause of disproportionately costly discovery—and only one potential target for costs orders. In considering whether the costs of allegedly wasteful discovery work should, in some circumstances, not be awarded to a successful party, it may be noted that judicial concerns have been expressed regarding comparable costs apportionment. In Cretazzo v Lombardi, Jacobs J noted that ‘trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issues of fact or law’:^[11]

The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues, however doubtful, which might be material to the decision of the case.^[12]

9.13 Although Jacobs J was dealing with costs after trial, a similar objection might be made to efforts to apportion discovery costs. Concerns may be raised that parties might be dissuaded from fully disclosing all relevant documents because of the risk of an adverse costs order.

Improperly, unreasonably or negligently incurred

9.14 The Federal Court may disallow, or direct the taxing officer to disallow, costs that have been ‘improperly, unreasonably or negligently incurred’ or ‘direct that a party whose costs are so disallowed shall pay to the other parties the costs incurred by those parties in relation to the proceeding in respect of which his costs have been disallowed’.^[13]

9.15 In a 1999 intellectual property case before the Federal Court, one party claimed that the other party ‘caused unnecessary prolongation of the case and the incurring of unnecessary expenditure in the course of discovery’ by maintaining unreasonably its denial that one design was consciously based on another design.^[14] In that case, Lehane J considered the Court’s power to apportion costs. After noting that the Court has a broad discretion that must be exercised judicially, and that ordinarily the appropriate order is that the unsuccessful party pay the costs of the successful party, his Honour said:

Special circumstances may warrant disallowance of certain of the costs incurred by the successful party (O 62 r 36(1) of the Federal Court Rules deals with particular circumstances of that kind). … Where a successful party’s conduct of the case unreasonably prolongs proceedings or where that party unreasonably persists in an allegation, or in maintaining a denial, for which there is no foundation, again some apportionment may be appropriate and it may be a proper exercise of the discretion to make the apportionment so as not merely to deprive the successful party of the appropriate proportion of its costs but notionally to require it to pay a portion of the costs of the unsuccessful party.^[15]

9.16 Justice Lehane noted ‘the difficulty, and no doubt the inappropriateness, of attempting to state rules or even firm guidelines for the exercise of the discretion’.^[16] Concerning this discretion, the Full Federal Court has said that, generally speaking,

the demands of the community for greater economy and efficiency in the conduct of litigation may properly be reflected in a qualification of the presumption that a successful party is entitled to all its costs.^[17]

Inconsistent with the overarching purpose

9.17 Section 37N of the Federal Court of Australia Act came into effect on 1 January 2010 and provides that parties to a civil proceeding before the Court ‘must conduct the proceeding … in a way that is consistent with the overarching purpose’.^[18] This overarching purpose, set out in s 37M(1), is to facilitate the just resolution of disputes ‘according to law’ and ‘as quickly, inexpensively and efficiently as possible’. It includes as an objective, ‘the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute’.^[19] More particularly, s 37N(4) provides that in exercising the discretion to award costs, the Court or a judge must take account of a party’s failure to comply with the duty to conduct the proceeding in a way that is consistent with the overarching purpose.^[20]

9.18 The relevant Explanatory Memorandum stated that:

The Court currently has power in the Court Rules to make disciplinary costs orders where costs have been incurred improperly or without reasonable cause, or are wasted by undue delay or by any other misconduct or default. (Order 62, Rule 9) This new provision will give legislative support to these powers and will make it clear that the court can order costs in a way other than costs against the unsuccessful party.

In connection with the amendments to section 43 of the Federal Court [of Australia] Act, the Court will have the discretion to award costs against a party to the proceeding for conduct that breaches the duty, or against a party’s lawyer personally for failing to assist the party to comply with the duty …

Examples of the type of conduct that the Court might consider to be a breach of this duty, and therefore impose costs, include the following (this is a non-exhaustive list that applies equally to the behaviour of applicants and respondents):

• unreasonably refusing to participate in conciliation, mediation, arbitration or other alternative dispute resolution opportunities, because alternative dispute resolution provides a mechanism for the parties to resolve their dispute early, quickly and cheaply;

• failing to act in good faith in attempting to resolve or narrow issues in the proceedings;

• unreasonably rejecting an offer of settlement of part or whole of the proceeding; or

• pursuing issues in the proceeding that had no reasonable prospect of success. This might include issues that were vexatious or frivolous.

The intention of this amendment is to bring about a cultural change in the conduct of litigation so that the Court and the parties are focussed on resolving disputes as quickly and cheaply as possible. Parties who act consistently with this duty will be able to avoid cost orders being made against them and overall, their litigation costs should be reduced.^[21]

9.19 Section 37N(4) seems to require the Court or a judge to take into account any failure to comply with the duty to conduct the proceeding in a manner consistent with the overarching purpose—whether or not costs have been found to have been ‘improperly, unreasonably or negligently incurred’ under O 62 r 36 of the Federal Court Rules.

Failing to comply with court directions

9.20 Section 37P of the Federal Court of Australia Act concerns the power of the Court to give directions about practice and procedure in a civil proceeding. Sections 37P(6)(d) and (e) provide that, if a party fails to comply with a direction given by the Court about the practice and procedure to be followed in relation to the proceedings, the Court may, among other things, award costs against a party or order that costs awarded against a party are to be assessed on an indemnity basis or otherwise.

9.21 The Court may, therefore, award costs against a party for failing to comply with a discovery order—and if the order contained a detailed discovery plan, for failing to conduct proceedings in accordance with the discovery plan.

ALRC’s views

9.22 Discovery is a vital part of litigation that should be conducted in accordance with the overarching purpose in s 37M of the Federal Court of Australia Act. Where parties do not conduct discovery in this way, the Court should take this into account in awarding costs—particularly where discovery is conducted in breach of a court order.

9.23 For example, the Court may consider whether the parties complied with any discovery plan order when awarding costs.^[22] The ALRC considers that a party’s poor record-keeping and archiving, or perhaps a party’s grossly inefficient method of discovering documents, may also be matters relevant in considering the extent to which a party conducted litigation in accordance with the overarching purpose. The Court’s broad discretion in awarding costs should enable it to address this concern, at least partly, when making costs orders.

9.24 Judicial training and education, discussed in Chapter 7, should reinforce for judges the need to consider these matters when awarding costs. The training might also provide broad guidance on how compliance with the duty might be reflected in costs orders. However, practitioners should also be prepared to address the court on these matters. Accordingly, the ALRC recommends that Federal Court practice notes provide that the Court will expect practitioners to address, among other things, whether the parties have complied with this duty in the conduct of discovery. Such guidance in practice notes should lead to a more consistent and predictable application of s 37N of the Federal Court of Australia Act, and should also alert litigants to the likely cost implications of wasteful discovery practices.

9.25 As discussed above, a note to O 62 r 9 of the Federal Court Rules has been amended to refer to s 37N of the Act. The ALRC suggests that a similar note be added to O 62 r 36, to further alert the Court and judges to the need to consider compliance with the overarching purpose when awarding costs.