VCAT’s no costs presumption is more elastic in some parts of the tribunal than in others.

In building cases, the losers commonly pay the winners’ costs. In retail tenancies disputes the losers very rarely do. But the winner paying the loser’s costs? Calderbanks and their equivalents aside, it is almost unheard of  anywhere at VCAT or beyond it.

So imagine the winner’s chagrin in the retail tenancies case of 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd [2015] VCAT 596 when it won the liability stoush, produced an expert report seeking just over $3m in damages and then received nothing but an order to pay the ostensible loser’s costs.

The case is an illustration of one of the hazards of compartmentalising a single business within separate corporate vehicles.

24 Hour Fitness Pty Ltd was the tenant. A gym operated on the premises. Unremarkably, the landlord understood that the tenant owned the gym.

Back in 2013, the tenant claimed the landlord had breached a provision of the lease. VCAT agreed. The matter was eventually relisted three years later for an assessment of damages the tenant had suffered by reason of the landlord’s breach.

But in March this year, on day 1 of what was to have been a five-day hearing, the evidentiary penny dropped.

The tenant had never owned or operated the gym (or even any other business). Instead, a company associated with the tenant, ran the gym business. That associated company was a complete stranger to the lease. It occupied the premises and operated the gym entirely without the landlord’s knowledge or permission. Its business might have suffered by reason of the landlord’s non-compliance with the lease but, being a stranger to the lease, it couldn’t recover from the landlord for that contractual breach.

And because the ostensible tenant had no direct interest in the business which claimed to have suffered the financial loss, it could not show any compensable loss referable to the landlord’s breach either.

In the costs decision published last month, Judge Jenkins took a dim view of the tenant conflating itself, its associated company and the associated company’s business for the purposes of the VCAT litigation.

Necessarily, her starting point was s. 92 of the Retail Leases Act 2003. That section proscribes costs orders in VCAT retail tenancy disputes unless a party has “conducted the proceeding in a vexatious way that unnecessarily disadvantaged the other party to the proceeding”. (The other exception, refusal to participate sufficiently in mediation or ADR, did not arise.)

What does “vexatious” mean? The tribunal’s answer includes a handy survey of authorities dealing with exceptional costs orders in both courts and tribunals and (at para 19) this checklist of matters to be taken into account when considering whether to order indemnity costs:

1.  Whether a party has been forced to take legal proceedings entirely through the wrongful or inappropriate conduct of the other party;
2. Whether an action has been commenced or continued in circumstances where the applicant, properly advised, should have known he had no chance of success;
3. Where a party persists in what should, on proper consideration, be seen to be a hopeless case;
4. Whether the party against whom indemnity costs are sought has made a false allegation of fraud;
5. Particular misconduct that causes a loss of time to the Court and the parties;
6. Commencing or continuing proceedings for an ulterior motive or in wilful disregard of known facts or clearly established law; 
7. Making allegations which ought never to have been made or undue prolongation of a case by groundless contentions; and
8. An imprudent refusal of an offer of compromise.

Judge Jenkins found five of the eight matters on that list present in the case before her. She ordered the tenant to pay the landlord’s costs relating to the preparation of the damages hearing dating all the way back to 2013.

The tenant did have one minor win. The landlord had asked for indemnity costs but failed. Judge Jenkins found there was insufficient evidence to justify an inference that the tenant was motivated in its claim by an ulterior motive. She held that indemnity costs were reserved “for the most exceptional circumstances” and that solicitor and client costs (which she suggested were similar if not equivalent to standard basis costs) would suffice.

The lesson? If a lease (or any other type of contract for that matter) has been breached but the resulting loss has been suffered by a stranger to that agreement, any resulting commercial litigation might not be very commercial at all.

ADDENDUM: The Court of Appeal subsequently upheld Judge Jenkin’s decision. See my brief blog on the appeal decision here.