Preliminary discovery applications: don’t forget about the costs

The first step in many a civil litigation is an application for preliminary discovery. One aspect of preliminary discovery that is often overlooked is the question of costs, both the costs of the application and the discovery itself. While courts have a broad discretion to order costs in particular cases, a recent Supreme Court judgment provides an excellent resource for practitioners interested in how courts are handling the question of costs following successful preliminary discovery applications.

Gooley & Ors v Breda Pty Ltd & Ors (No. 2) [2017] NSWSC 1505

The Gooley family owns several family companies with substantial assets. A dispute arose about the management of these companies, which caused two family members to consider whether to bring claims under the Corporations Act 2001 (Cth) against the remaining family members and companies. In June 2016, the plaintiffs sought preliminary discovery under rule 5.3 of the Uniform Civil Procedure Rules 2005 (‘UCPR’) for various documents relating to seven separate transactions entered into by the family companies. In Gooley & Ors v Breda Pty Ltd & Ors [2017] NSWSC 817, Justice Slattery made orders for preliminary discovery in several of the categories sought and in the subsequent judgment, his Honour answered the following questions about costs.

Should a costs order be made following a contested but successful preliminary discovery application?

The defendants argued that when a preliminary discovery application is made, a defendant is entitled to test the case in a manner that is not truly adversarial and in such circumstances; the costs of the application should not follow the event. The Court rejected this argument, noting that the preliminary discovery application had in fact been exceptionally hard fought. The defendants, in lieu of simply handing over the documents sought, deployed every available argument to resist orders for preliminary discovery.

Did the plaintiffs have sufficient success?

The plaintiffs noted that they obtained orders for preliminary discovery in respect of six of the seven impugned transactions and argued, unsurprisingly, that they were entitled to the costs of their application. The defendants submitted that no costs should be ordered because various applications made in the initial summons, including applications to inspect the defendant companies’ books under s 247A of the Corporations Act, were abandoned or unsuccessful.

The Court concluded that several of the abandoned applications were alternative routes to obtain the same documents for which preliminary discovery was ordered, and it considered that the assessment of costs should be approached on a global basis reflecting the plaintiffs’ predominant success (Leading Edge Events Australia Pty Ltd v Kiri Te Kanawa (No 2) [2007] NSWSC 568). In the absence of clearly severable issues, the Court found the appropriate order was that the defendants pay 85 per cent of the plaintiff’s costs in the preliminary discovery application.

Should costs orders be contingent on commencement and outcome of subsequent proceedings?

While costs orders are at the discretion of the individual judge, the Federal Court and Supreme Court take different approaches to the above question. The Federal Court often defers making costs orders for preliminary discovery applications until the initiation and even the outcome of any proceedings that are commenced following production. A common form of order is for the applicant to pay the respondent’s costs of the application unless the applicant commences proceedings within a certain period; in those cases the costs of preliminary discovery become costs of the subsequent proceeding (see SmithKline Beecham plc v Alphapharm Pty Ltd [2001] FCA 271).

The Supreme Court tends to make costs orders immediately, recognising that the plaintiffs may never commence proceedings and in such circumstances it is better to deal with costs by making an order having immediate rather than contingent operation (see Steffen v Australia and New Zealand Banking Group Limited [2009] NSWSC 883 and Andrews Advertising Pty Ltd v Andrews [2011] NSWSC 244). In Gooley, the Court considered that the appropriate approach was to make immediate orders for costs, but noted that an application could be made following the filing of any subsequent proceedings for those orders to be varied.

Should costs orders be made immediately or after preliminary discovery has occurred?

Rule 5.8 of the UCPR provides the Court with a broad power to order plaintiffs to compensate defendants for the costs of complying with a preliminary discovery order. In the present case, the plaintiffs submitted that an order under rule 5.8 should not be made until preliminary discovery had been completed. They argued that an entitlement to costs does not arise until costs are incurred and that in line with the legal requirements for costs orders in respect of subpoenas, costs should not be ordered until the parties have made a genuine attempt to seek agreement in respect of the amount of those costs.

While this approach found favour in Yes Family Pty Limited v Sphere Healthcare Pty Ltd [2016] NSWSC 917, Justice Slattery rejected the plaintiffs’ submission and made orders that they pay the defendants’ costs of compliance with the preliminary discovery orders. His Honour concluded that while costs can’t be assessed and recovered until after preliminary discovery, there is no requirement to wait until then to make rule 5.8 costs orders. Furthermore a contested preliminary discovery application is unlike a subpoena where the recipient is generally unrepresented and there is a preference for parties to negotiate agreed costs before approaching the court. In most contested preliminary discovery applications, including Gooley, the parties have engaged lawyers and would have a reasonable idea of the burden and costs of production. In these circumstances the Court considered it efficient for a costs order to be made immediately.

Should the timeframe to provide preliminary discovery be shortened given potential limitation period issues?

Finally, the plaintiffs raised concerns about whether their prospective claims under the Corporations Act in respect of the impugned transactions would become statute-barred while preliminary discovery was being provided or while the documents were being considered. The Court stated that until the documents are discovered, such claims are speculative, but that if the plaintiffs’ claims became statute-barred while the defendants were actively opposing the production of documents that established the existence of the plaintiffs’ claims, the plaintiffs may well have a compelling argument for extension of any otherwise applicable limitation period on the grounds of active concealment of the cause of action.

Conclusion

Costs claims following successful preliminary discovery applications raise a number of distinct issues, including when such orders are made and if they are contingent on subsequent proceedings. The Supreme Court and Federal Court have taken quite different approaches to these issues so this something for parties to bear in mind when deciding where they will commence proceedings.

Nicholas Smith is the principal of Nicholas Smith IP and Litigation.