Key Takeaways

Where litigation resolves when one party essentially gives the other party what they were seeking but an agreement cannot be reached on costs, the court will step in to decide costs if asked. However, it will not usually order indemnity costs because without a full hearing the court will not be able to determine whether a party’s case was truly hopeless (although such circumstances may exist in rare cases).

Where this is particularly relevant to life insurers is in situations where an insurer pays a TPD claim in the middle of legal proceedings. In such circumstances, costs will generally be payable by the insurer on the ordinary basis, but unless the insurer was completely without any reasonable argument (which will be rare) then the court should not award indemnity costs.

Brief Facts

Mr Molnar was the 30% shareholder in Good Mood Food Pty Ltd (GMF), and Mr Philipsz controlled the remaining shareholding. Following an acrimonious breakdown in his relationship with Mr Philipsz, Mr Molnar commenced proceedings in the FCA against GMF to enforce a direction he gave under the Corporations Act to GMF to prepare an audited financial report (the Substantive Proceedings).

The Substantive Proceedings were initially defended by GMF but it eventually capitulated, agreeing to provide the requested financial report but costs could not be agreed upon, with Mr Molnar demanding costs on an indemnity basis, resulting in further proceedings (the Costs Proceedings).

In the Costs Proceedings, Mr Molnar submitted that he should be entitled to costs of the Substantial Proceedings paid on an indemnity basis because GMF’s defence was hopeless.

Judgment

Jackson J held that no party was entitled to indemnity costs in either the Substantive or Costs Proceedings, and no party was entitled to any costs at all in the Costs Proceedings. The only costs order made by his Honour was for GMF to pay Mr Molnar’s costs – on the ‘ordinary’ basis – of the Substantive Proceedings.

In reaching this decision, his Honour noted that ‘where a matter is resolved without a trial, it will not usually be possible or appropriate for the court to award costs on the basis of any firm determination as to who would have succeeded in the issues in dispute’ although clearly an exception was made in this case.

Specifically, quoting principles set out by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin, Jackson J stated that the reason for the party-party costs order against GMF in the Substantive Proceedings was that Mr Molnar ‘achieved substantial victory’ in those proceedings and ‘GMF behaved unreasonably in resisting the application’ (on the basis that the purported costs saving from not complying with the financial report request paled in significance to the legal costs incurred in defending that position).

However, Jackson J did not make any indemnity costs orders at all, as requested by Mr Molnar, for two key related reasons:

• the Substantive Proceedings resolved through compromise, meaning that no adverse findings from a contested trial were made – ‘the court does not even have the benefit of hindsight’; and
• in the absence of a trial on merits, it would be inappropriate for the Court to conclude that GMF’s case was hopeless and doomed to fail – i.e. that it acted unreasonably, which is an essential element in making an indemnity costs order. In other words, while GMF’s position didn’t look hopeful, only a trial on merits could possibly lead to the conclusion that its position was unreasonable to the standard required for an indemnity costs order.

Mr Molnar argued that it was possible to make such a conclusion in this case, because the only real basis for GMF’s resistance to the Substantive Proceedings was an abuse of process claim. Mr Molnar tried to demonstrate why that argument was doomed to fail (citing case law in support) however; his Honour canvassed some possible reasons why it was not necessarily doomed to fail. In short, because there was a reasonable possibility of GMF’s argument succeeding, then the absence of a trial meant that the argument could not be hopeless.

In terms of the legal costs of the Costs Proceedings, his Honour awarded no costs to either party because a) GMF did not resist the original ordinary costs order; b) the approach by both parties to the costs proceeding was ‘disproportionate and misconceived’; and c) ‘so as to mark the court's disapproval of satellite litigation of this kind.’

Implications

What does this mean for litigated life insurance cases?

If an insurer admits a TPD claim midway through proceedings, and the plaintiff’s lawyers claim indemnity costs, Molnar suggests that the plaintiff should not be entitled to such costs because the insurer has not had the benefit of a contested trial. No matter how hopeless an insurer’s position may seem to be, it is almost always impossible to conclude with certainty that it really is hopeless, until it goes to trial. The lack of hopelessness means an insurer should very rarely agree to an indemnity costs order in these circumstances.

The key takeaway from this case is that – in the vast majority of circumstances – only the benefit of a contested trial can reveal whether an insurer’s position was truly, incontrovertibly unreasonable, and therefore give rise to an indemnity costs order.