Costly consequences of not taking Genuine Steps
A recent decision of the Federal Court of Australia signals the importance of parties to disputes and their legal representatives complying with their obligations under the Civil Dispute Resolution Act 2011 (Cth) (CDR Act).
The decision, Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys  FCA 282, was handed down by Justice Reeves of the Federal Court of Australia on 23 March 2012.
The case concerned an application under section 459G of the Corporations Act 2001 (Cth) to set aside a statutory demand on the basis that there was a genuine dispute between the parties regarding the existence of the debt to which the demand related.
The party who brought the application was ultimately successful in its application to have the demand set aside. Normally this would mean that the applicant would be entitled to an order that its costs be paid by the other party to the dispute. In this case, a failure by the parties to comply with their obligations under the CDR Act resulted in a very different outcome.
Genuine Steps requirements
The key requirements under the CDR Act are that:
- when a party commences proceedings in the Federal Court or Federal Magistrates Court they must file with the court a genuine steps statement setting out either genuine steps that have been taken to seek to resolve the dispute, or the reasons why no such steps have been taken;
- if a respondent to proceedings is given a genuine steps statement, the respondent must file their own genuine steps statement in response, either stating that they agree with the other party’s genuine steps statement, or explaining in what respects they disagree with it; and
- lawyers acting for a party who is required to file a genuine steps statement under the Act must advise their client of the requirement and assist them to comply with it.
Failure to comply
Justice Reeves noted that, contrary to their obligations under the CDR Act:
- the parties had not filed a genuine steps statement;
- the lawyers acting for the parties had not complied with their duty to advise their clients of the requirement that they file a genuine steps statement and assist them to comply with that requirement.
Under the CDR Act the potential consequences of not filing a genuine steps statement and not taking genuine steps to resolve a dispute are that a court may take such actions into account in:
- performing any function or exercising any powers in relation to a proceeding; and
- exercising its discretion to award costs.
Furthermore, when exercising its discretion to award costs a court may take into account any failure by a lawyer to comply with their obligation to advise and assist their client in relation to the requirements of the Act. If a lawyer is ordered to bear costs of proceedings personally, the Act prohibits the lawyer from recovering those costs from their client.
In addition to the parties’ failure to comply with the CDR Act, Justice Reeves found that the way in which the case had been conducted, including reliance upon voluminous affidavit material which he considered to be irrelevant to the case, amounted to “the absolute antithesis of the overarching purpose” of achieving just resolution of disputes “as quickly, inexpensively and efficiently as possible”. This overarching purpose is set out in out in the Federal Court of Australia Act 1976 (Cth) (FCA Act).
Justice Reeves stated that, having put the parties and their lawyers on notice that he intended to have regard to the requirements of the CDR Act and FCA Act he would give them an opportunity to make submissions as to how he should deal with the issue of costs. Then, in a clear indication that the lawyers acting in the case might be held personally liable for the costs incurred by their clients in the proceedings, Justice Reeves directed that the lawyers acting for each party:
- provide a copy of his judgment to their client and advise their client to seek independent legal advice on the question of costs; and
- be joined as parties to the proceedings for the purpose of determining the question of costs.
He also stated that he intended to direct the Registrar of the Court to provide a copy of his reasons for judgment to the Queensland Law Society, the Bar Association of Queensland and the Legal Services Commission to enable those bodies to take whatever action they consider appropriate in respect of the lawyers involved in the case.
In circumstances where the CDR Act applies, its requirements are mandatory and a failure to comply with it will be relevant to the decisions the court makes about the proceedings and the costs incurred by the parties in relation to them. As this decision illustrates, it is extremely important that parties to disputes and the lawyers acting for them pay close attention to their obligations under the CDR Act.
For further details about the legislation please see our guide to the CDR Act.