Failure to take genuine steps to resolve a civil dispute can result in a costly stumble

In this Bulletin, we explore the new obligations on the parties to a dispute, to take steps to resolve their dispute before commencing proceedings.  Failure to do so may cost the parties more than any amount the subject of the dispute.

A statutory demand is a notice served on a debtor company demanding that it pay a debt alleged to be due.  The debtor company has a period of 21 days within which to pay the debt or file in Court and serve an application seeking an order that the statutory demand be set aside. 

By the time a statutory demand comes to the attention of directors of a company it is often the case that an application to set aside a statutory demand must be prepared urgently leaving little if any time for the parties to attempt to settle the matter. 

The Federal Court of Australia has recently held that an applicant seeking to set aside a creditor’s statutory demand issued against it, was obligated to file a “genuine steps statement” stating that it had taken steps to try to settle the dispute before commencing proceedings.

The legislation

The Civil Dispute Resolution Act 2011 (Cth) (“the Civil Dispute Act”) came into force in August 2011.  The object of the Civil Dispute Act is to ensure that, as far as possible, people take genuine steps to resolve disputes before certain civil proceedings are instituted. 

The Civil Dispute Act provides that:

• an applicant who institutes civil proceedings in an eligible Court “must file a genuine steps statement at the time of filing the application”; and

• that a respondent “must file a genuine steps statement before the hearing date specified in the application”. 

The genuine steps statement must specify the steps that have been taken to try to resolve the dispute or set out the reasons why no such steps were taken.

The case

The recent Federal Court Case of Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys [2012] FCA 282 concerned an application to set aside a statutory demand served by the defendant on one of its former clients. 

In this case the statutory demand claimed an amount of only $10,706.33 but the plaintiff filed more than 300 pages of affidavit material and the defendant filed almost 150 pages. As a result the costs of the proceedings on both sides were well in excess of the amount in dispute. No attempt to resolve the dispute had been made by either party prior to the commencement of the proceedings and no “genuine steps statement” had been filed pursuant to the Civil Dispute Act.

The statutory demand was ultimately set aside which would normally mean that the applicant would be entitled to an order that the respondent pay its costs of the proceedings.

However in this case the Judge held that the parties’ failure to comply with the Civil Dispute Act should be taken into consideration in determining the question of costs of the proceedings. His honour was critical of both parties and their legal representatives for failing to comply with their obligations to advise and assist their clients in relation to the requirements of the Civil Dispute Act.

A Court has the power to order a lawyer to bear legal costs personally in certain circumstances.  This prospect raised a likely conflict between the interests of the clients and that of their respective lawyers.  Accordingly, the Judge directed that each of the lawyers provide a copy of his reasons to his respective client and advise it to seek independent legal advice on the question of costs of the proceedings.  The lawyers concerned were also joined as parties to the proceedings for the limited purpose of determining the questions of costs.

The proceedings were then adjourned to allow the independent advice to be sought by the parties. At the time of writing the actual costs orders are yet to be published in this matter.

Implications

Pursuant to the provisions of the Civil Dispute Act it is now mandatory in many instances for parties to take “genuine steps” to try to settle disputes prior to commencing litigation

In practice the existence of a dispute is generally evident well before the matter escalates to the point where litigation is contemplated. Businesses should make genuine efforts to try to resolve disputes on a commercial basis at an early stage given that such steps will need to be taken prior to legal proceedings being commenced in any event.