Legal costs – discontinuing by consent in the Federal Court

Discontinuing proceedings as a litigant in the Federal Court of Australia can be a costly decision.  Where an applicant has commenced proceedings in the Federal Court and then seeks to discontinue, the default position is that a respondent is awarded its costs, and in some circumstances may be awarded indemnity costs.

When can proceedings be discontinued in the Federal Court?

Stringent rules exist for when an applicant may discontinue a proceeding.  The Federal Court Rules 2011 (Cth) allow for a party seeking to discontinue a matter pursuant to rule 26.12 listed below:

“(1)   A party claiming relief may discontinue a proceeding in whole or in part by filing a notice of discontinuance, in accordance with Form 48.

(2)   The party may file the notice of discontinuance:

         (a)    without the leave of the Court or the other party’s consent:

          (i)    at any time before the return date fixed in the originating application; or

         (ii)    if the proceeding is continuing on pleadings — at any time before the pleadings have closed; or

              (b)    with the opposing party’s consent — before judgment has been entered in the proceeding; or

             (c)    with the leave of the Court — at any time.

(3)   The notice of discontinuance must:

        (a)    state the extent of the discontinuance; and

       (b)    if the discontinuance is by consent — be signed by each consenting party.“

The above subparagraphs to rule 26.12 requires, in short, that a litigant seeking to discontinue their claim file a notice of discontinuance stating the extent to which the claim is discontinued and whether the opposing party has consented to the discontinuance.  The consent element is important as it determines the last point at which a claim can be discontinued without the leave of the Court.

Who bears the costs of discontinued proceedings?

Rule 26.12 continues to provide:

(7)   Unless the terms of a consent or an order of the Court provide otherwise, a party who files a notice of discontinuance under subrule (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.

The above rule establishes the usual position that the party discontinuing proceedings is liable to pay the costs of the other party(s).  However, the award of costs remains in the discretion of the Court pursuant to the Federal Court of Australia Act 1976 (Cth) s 43(2).  In fact, previous judicial consideration on the issue of costs has considered, albeit under different though similar legislation, that the discontinuance of proceedings does not attract an automatic award of costs.^[1]  Rather, and perhaps the more critical consideration, is that “[t]he conduct of the parties in the matter and the reasons for the discontinuance can bear heavily on the exercise of the discretion as to costs.”^[2]

It seems that the Courts will not be quick to award costs, whether on the standard or indemnity basis, merely because one party has determined to discontinue their claim.  More needs to be shown.  The decision of McHugh J in the case of Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 143 ALR 1 demonstrates this point at pages 3 – 4:

Para 7 The award of costs is also in the discretion of the Court: Federal Court of Australia Act 1976 (Cth) s 43(2). Discontinuance pursuant to leave granted under O 22 r 2(1)(d) does not attract an automatic award of costs against the discontinuing party. As Finn J observed in O’Neill v Mann [2000] FCA 1680 (“O’Neill“) at [13]:

“[t]he conduct of the parties in the matter and the reasons for the discontinuance can bear heavily on the exercise of the discretion as to costs.“

“If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the Court will make no order as to the cost of the proceedings.“

Therefore, the Courts will be most concerned with whether a party has acted reasonably in the litigation broadly and, in particular, in deciding to discontinue their claim.  Where both or all parties have acted reasonably it might be the case that the Court sees fit to order that each party bear their own costs in the proceeding.  But what happens when a litigant acts particularly unreasonably?

Indemnity costs for a discontinued claim

The decision of Colgate Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 at page 233 considered in detail the circumstances in which, generally, an award for indemnity costs might be made.  Those general principles may be relevant where a party discontinues their claim.  Those principles are as follows:

• the making of false or irrelevant allegations (of fraud);
• evidence of misconduct that causes loss of time to the Court and to other parties;

If costs are to be awarded, as a general rule they are awarded on a party and party basis.  As noted above, however, the respondents seek an order that their costs be paid by Harvey Norman on an indemnity basis.

In Harvey Norman Holdings Limited v Fels [2002] FCA 13  when considering the issue of whether the ACCC was entitled to and aware of costs on an indemnity basis, Stone J cited Colgate Palmolive Company v Cussons Pty Limited [1993] FCA 536; (1993) 46 FCR 225, where Sheppard J considered the authorities relevant to the question of when the Court ought to award costs other than on a party and party basis.

• commencing the proceedings for an ulterior motive or in wilful disregard of known facts or clearly established law;
• making allegations that ought never have been made or undue prolongation of a case by groundless contentions; and
• imprudent refusal of an offer to compromise.

Factors to be considered by the Court in determining the question of costs

Commencing the proceedings for an ulterior motive or in wilful disregard of known facts or

Further, it was held in Norman at [13] that:

“The decision whether to award costs, whether indemnity or party and party costs, therefore requires a consideration of all the relevant circumstances of this case. It is necessary to determine, among other things, if these proceedings were reasonably commenced, whether the matter was diligently and efficiently pursued and whether the application to discontinue was made in a timely way.”

Of the above principles, those which might be most common are misconduct leading to delay and commencing (or delaying) proceedings for an ulterior motive.  Where proceedings have been commenced for the fulfilment of an ulterior motive to the honest and reasonable ventilation of a dispute before the Courts, such ‘should result in full compensation to the other party for the costs incurred’.^[3]  A further situation which might lead to an award for indemnity costs is where the litigation is considered ‘a fishing expedition’ undertaken to identify sensitive information of another.^[4]

Takeaways

Where a party discontinues a claim the default position is that they will pay the other parties costs in the proceeding which they have discontinued.  If, however, the Court considers the discontinuing party has acted reasonably it might be ordered that each party bear their own costs.  If it is the case that a party has acted unreasonably and then decides to discontinue proceedings such party can expect to pay a substantial indemnity costs order.

Links and further references

Legislation

Federal Court of Australia Act 1976 (Cth) s 43(2)

Federal Court Rules 2011 (Cth) r 26.12

Cases

Harvey Norman Holdings Limited v Fels [2002] FCA 13

O’Neill v Mann [2000] FCA 1680

Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 143 ALR 1

Further information about discontinuing proceedings

If you need advice on discontinuing proceedings in the Federal jurisdiction, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1]               Harvey Norman Holdings Limited v Fels [2002] FCA 13, [7].

[2]               O’Neill v Mann [2000] FCA 1680, [13].

[3]           Vector Corrosion Technologies Limited v E-Chem Technologies Ltd [2022] FCA 519, [38].

[4]           Harvey Norman Holdings Limited v Fels [2002] FCA 13, [25].

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