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A Costly Refusal: The Price of Prolonged Litigation in Family Law

Introduction

The case of Nakahara & Nakahara [2024] FedCFamC1F 875 highlights the consequences of unnecessarily prolonging family law proceedings and rejecting reasonable settlement offers. The central issue before the Federal Circuit and Family Court of Australia was whether the husband should bear the wife's legal costs following the final property settlement orders. The Court ultimately ruled against the husband, ordering him to pay the wife’s legal costs on a party-party basis from 4 August 2023, primarily due to his conduct during the proceedings, including his refusal to accept a reasonable settlement offer and his unsuccessful pursuit of an add-back claim.

Facts and Issues

Facts

  1. The wife commenced proceedings on 10 November 2021, seeking property settlement orders.
  2. The parties attended mediation on 12 May 2023, where the wife offered a settlement based on an equal division of assets. The husband initially agreed but later reneged.
  3. The husband pursued an add-back claim, arguing that certain assets should be notionally included in the property division, which would have favored him by approximately $600,000.
  4. On 4 August 2023, the wife made a written offer to settle in terms almost identical to the final consent orders made on 6 August 2024. The husband refused this offer.
  5. The case proceeded to trial in August 2024, where the husband ultimately abandoned his add-back claim.
  6. The wife then sought indemnity costs, arguing that the husband’s conduct led to unnecessary litigation and expenses.

Legal Issues

  1. Should the husband be ordered to pay the wife’s legal costs?
  2. If so, should those costs be awarded on an indemnity basis (higher costs) or a party-party basis (standard legal costs)?
  3. Did the husband’s conduct during the proceedings justify a departure from the general rule that each party bears their own costs under section 117(1) of the Family Law Act 1975 (Cth)?

Application of the Law

General Rule on Costs

Under section 117(1) of the Family Law Act 1975 (Cth), each party in family law proceedings is expected to bear their own legal costs. However, section 117(2) allows the Court to make a costs order if justified by circumstances, considering factors listed in section 117(2A), such as:

  • The parties' financial circumstances;
  • The conduct of the parties during proceedings;
  • Whether a party has been wholly unsuccessful;
  • Whether a reasonable offer to settle was rejected.

Conduct of the Husband

The Court found that the husband’s conduct justified a departure from the usual costs rule due to:

  1. Failure to comply with Court orders – He failed to file necessary documents on time, leading to unnecessary delays and additional legal expenses for the wife (paragraphs 20-21).
  2. Pursuing an unsuccessful claim – His add-back claim lacked evidence and was ultimately abandoned at trial (paragraph 26).
  3. Rejection of reasonable offers – The wife made multiple settlement offers, including the 4 August 2023 offer that matched the final orders, which the husband refused without justification (paragraphs 27-32).
  4. Financial capacity – The husband was in a stronger financial position and could afford to pay costs, further supporting the justification for a costs order (paragraph 18).

Indemnity vs. Party-Party Costs

The wife sought indemnity costs, arguing that the husband's refusal to settle and his conduct during litigation warranted the higher costs order. The Court applied the principles from Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 and Munday v Bowman (1997) FLC 92-784, which outline circumstances where indemnity costs may be awarded, such as:

  • Pursuing a case with no reasonable prospects of success.
  • Making allegations that should never have been made.
  • Rejecting reasonable offers to settle.

While the husband’s conduct was found to be unreasonable, the Court determined that it did not rise to the level required for indemnity costs but was sufficient to justify a party-party costs order (paragraph 36).

Analysis of the Judgment

Why the Court Ordered Party-Party Costs

  1. The husband's failure to accept a reasonable settlement offer significantly influenced the decision. Courts encourage parties to resolve disputes without prolonged litigation. Rejecting a fair offer, only to later accept the same terms in final orders, is a strong ground for a costs order.
  2. The add-back claim was meritless and prolonged the proceedings unnecessarily, increasing legal costs for the wife.
  3. The Court emphasized the overarching purpose of the Federal Circuit and Family Court of Australia Act 2021 (Cth)—to conduct proceedings "quickly, inexpensively, and efficiently." The husband’s conduct contradicted these principles (paragraph 35).

Key Precedents Cited

  • Penfold v Penfold (1980) FLC 90-800 – Confirmed the broad discretion of the Court in making costs orders under section 117(2) of the Family Law Act 1975 (Cth).
  • Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 – Established that indemnity costs should only be awarded in "exceptional circumstances," such as improper conduct or frivolous litigation.
  • Munday v Bowman (1997) FLC 92-784 – Provided examples of when indemnity costs might be awarded, including when a party pursues a baseless case or rejects reasonable settlement offers.

Take-Home Lesson

This case serves as a crucial reminder in family law disputes: unreasonably rejecting settlement offers can be costly. If a party refuses an offer that is later reflected in the final orders, they may be ordered to pay the other party’s legal costs. The Court encourages parties to act reasonably, comply with procedural obligations, and avoid unnecessary litigation.

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