Supreme Court New South Wales

• Medium Neutral Citation: Land Enviro Corp Pty Limited v HTT Huntley Heritage Pty Limited [2012] NSWSC 446
• Hearing dates: 6 February 2012 - 16 March 2012; costs argument 1 May 2012
• Decision date: 07 May 2012
• Jurisdiction: Equity Division
• Before: Stevenson J

Decision

Plaintiffs to pay costs of first, second and fifth defendants on ordinary basis; plaintiffs to pay costs of third and sixth defendants on indemnity basis from 2 September 2011

• Catchwords: Cost - indemnity costs - Calderbank offer - Offer of Compromise
• Legislation Cited: Civil Procedure Act 2005; Uniform Civil Procedure Rules 2005
• Cases Cited: Caine v Lumley General Insurance Limited (No 2) [2008] NSWCA 109; Land Enviro Corp Pty Limited v HTT Huntley Heritage Pty Limited [2012] NSWSC 382; Land Enviro Corp Pty Limited v HTT Huntley Heritage Pty Limited [2012] NSWSC 177; Leichhardt Municipal Council v Green [2004] NSWCA 341
• Category: Costs
• Parties: Land Enviro Corp Pty Limited (First Plaintiff); Sam Zdrilic (Second Plaintiff); Amy Zdrilic (Third Plaintiff); Amy Holdings Pty Limited (Fourth Plaintiff); HTT Huntley Heritage Pty Limited (First Defendant); Robert Renshall (Second Defendant); David Hickie (Third Defendant); Sentel Pty Limited (Fourth Defendant); Devubo Pty Limited (Fifth Defendant); Vocifa Pty Limited (Sixth Defendant); Michael Ansell (Seventh Defendant)
• Representation: Counsel: S A Wells (Plaintiffs); M L D Einfeld QC (First, Second and Fifth Defendants); G A F Connolly (Third and Sixth Defendants); Solicitors: Kemp Strang (Plaintiffs); Middletons (First, Second and Fifth Defendants); Bartier Perry (Third and Sixth Defendants)
• File Number(s): SC 2007/254173

Judgment

1 This matter proceeded before me for 30 days between 6 February 2012 and 16 March 2012.

2 On 20 April 2012 I delivered judgment (the Judgment) in which I reached the following conclusions: -

"The result is that, in my opinion, the plaintiffs' claims fail.

I am not satisfied that the representations pleaded induced the plaintiffs to enter the Heads of Agreement, or the Non-Dilution Deed, or to consent to the dismissal of the 2001 Proceedings.

I am therefore not satisfied that the plaintiffs were, or are, entitled to rescind either the Heads of Agreement and/or the Non-Dilution Deed, or to have the orders of 6 September 2004 set aside.

Even if the plaintiffs were, on 27 August 2004 or later, entitled to rescind the Heads of Agreement and/or the Non-Dilution Deed, any such right has been lost because the plaintiffs have affirmed the agreements, because restitution in integrum is not possible, and because the rights of third parties have intruded.

The Third Amended Statement of Claim should be dismissed.

It follows that the issues in the cross-claims do not arise for consideration. They should be dismissed.

Prima facie, costs must follow the event.

I will hear submissions from the parties as to the precise orders that should be made." (at [1000 - 1007])

3 On 27 April 2012, consistent with the Judgment, I made, inter alia, the following orders: -

(1) that the Third Amended Statement of Claim be dismissed;

(2) that the cross-claim filed by the first, second and fifth defendants be dismissed;

(3) that the cross-claim filed by the third and sixth defendants be dismissed;

4 The matter was stood over to 1 May 2012 for argument as to costs.

5 In this judgment, I shall use the same abbreviations as I used in the Judgment.

6 The HTT Defendants (that is, first, second and fifth defendants) seek an order that the plaintiffs pay their costs on an ordinary basis up to 26 January 2012 and on an indemnity basis thereafter.

7 The Hickie Defendants (that is, third and sixth defendants) seek an order that the plaintiffs pay their costs on the ordinary basis up to 1 September 2011, and on an indemnity basis thereafter.

8 The HTT Defendants and Hickie Defendants also seek orders that the plaintiffs pay interest on costs.

9 There is no dispute that the plaintiffs should pay costs, nor that the plaintiffs should pay interest on costs. There is agreement as to the form of the orders for interest on costs.

10 The dispute is as to whether the orders for indemnity costs sought by the HTT Defendants and Hickie Defendants should be made.

11 In my opinion, the order for indemnity costs sought by the HTT Defendants should be refused, and that sought by the Hickie Defendants should be allowed.

12 The principal reason for my conclusion that there should be a different result for the HTT Defendants on the one hand, and the Hickie Defendants on the other is the timing and form of the offers. The HTT Defendants rely on a Calderbank offer made a week before the hearing commenced. The Hickie Defendants rely on an Offer of Compromise made under the rules on 29 August 2011.

The HTT Defendants' Calderbank Offer of 27 January 2012

13 The HTT Defendants rely upon a Calderbank Offer made by letter from the solicitors for the HTT Defendants to the solicitor for the plaintiffs dated 27 January 2012. Subsequently, and during the course of the hearing, further Calderbank letters were sent. However they were not relied on during the argument as to costs.

14 The relevant letter was sent after close of business on 27 January 2012. 27 January 2012 was a Friday. The trial was scheduled to commence on Monday 6 February 2012. The offer was expressed to remain open until 9.30 am on 6 February 2012.

15 That letter was expressed to be "without prejudice except as to costs" and was in the following terms: -

"In my clients' view, the Court will not readily find that the representations asserted by Mr Zdrilic were in fact made to him, particularly having regard to the principles identified in Watson v Foxman (2000) 49 NSWLR 315 at 318-9.

If made, the evidence demonstrates that the representations were not relevantly relied upon by LEC to induce its entry into the Heads of Agreement on 13 May 2004 and the Deed of Non-Dilution and Merger on 27 August 2004, let alone to consent to the dismissal of the 2001 proceedings on 1 September 2004

I refer to your letter of 24 January 2012 conceding that 'the plaintiffs' evidence on damage has been falsified'.

Your assertion that the content of my clients' lay evidence could somehow 'falsify' the plaintiffs' expert's evidence in relation to the proper assessment of loss and damage is remarkable. In my clients' view, the plaintiffs' case in relation to damages has always been misconceived and will fail.

Notwithstanding, my clients are mindful of the substantial expense which will be incurred successfully defending a 3 week hearing. My clients are prepared to resolve the proceedings on the following basis:

(a) the proceedings be dismissed;

(b) the parties bear their own costs of the proceedings;

(c) the parties enter into a Deed of Settlement containing mutual releases in relation to all claims made in the proceedings and in relation to all costs orders made to date.

This offer is open until 9.30am on Monday, 6 February 2012 (the first day of the hearing).

This offer is made in accordance with the principles set down in Calderbank v Calderbank (1975) 3 ALL ER 333. While expressed to be without prejudice, I reserve my clients' rights to refer to this letter on any issue of costs which may arise in the future in the proceedings.

Please obtain your clients instructions and revert to me.

I look forward to hearing from you." (emphasis in original)

16 It is agreed between the parties that the reference in the letter to the plaintiffs evidence on damages being "falsified" is not material to the matter I must consider.

17 In effect, the offer of the HTT Defendants was a "walk away" offer on the basis that the HTT Defendants would bear their own costs.

18 The plaintiffs' solicitors responded to the Calderbank letter on 6 February 2012 by stating: -

"The proposal contained in your letter dated 27 January 2012, a week prior to the trial commencing, is not a genuine offer made for the purpose of attempting to settle the litigation. If your clients wish to forward a genuine offer to settle the litigation, then, as was requested in the dated 13 July 2010 from TressCox, we invite them to do so."

19 There is no dispute as to the principles I must apply.

20 Non-acceptance of a Calderbank Offer will not necessary or automatically entitle the successful party to indemnity costs. The court's discretion is to be exercised having regard to all the circumstances of the case: Leichhardt Municipal Council v Green [2004] NSWCA 341 at 19 per Santow JA.

21 The two substantive requirements are that: -

1) the Calderbank Offer represents a genuine offer of compromise; and

2) it was unreasonable for the offeree not to accept it.

See Leichhardt Municipal Council v Green at [23] - [24], [40] and [46].

Genuine offer of Compromise?

22 In my opinion, the HTT Defendants' offer of 27 January 2012 was a genuine offer of compromise rather than, as the plaintiffs submit, a demand that the plaintiffs capitulate.

23 In Leichhardt Municipal Council v Green, Santow JA (which whom Bryson and Stein JJA agreed) recognised that a "walk away" offer can, in a particular case, be a "genuine offer of compromise"; at [36].

24 As his Honour stated at [25-26]: -

"The position of a defendant without a cross-claim is analytically quite distinct [from the position of a plaintiff]. First, a defendant by definition is not the claiming party, and is thus not before the Court voluntarily. If it reasonably disputes liability and has a firm belief in the strength of its case, the best solution it can hope for - the claim is dismissed - is not a monetary one. It will in economic terms be no better or worse off for its victory by way of successful defence, costs aside. Thus, unlike a plaintiff, it cannot discount its optimum return by way of compromise. It does not need the same sorts of incentive as a plaintiff does to compromise...

Therefore the only option for a defendant is not an attractive one; to 'buy off' the claim by offering to pay unmeritorious claimants a sum of money to discard the litigation...Second, a defendant will know that if it looses on liability, the general rule will result in costs be awarded in favour of the successful plaintiff on a party and party basis... This means that a defendant already has less of an incentive to offer a compromise by conceding liability or quantum or both. As far as costs are concerned, a defendant who disputes liability and has a firm belief in the strength of its case will generally expect to reap no more than party and party costs in its favour. It will still be out of pocket to the tune of the difference between party and party costs and solicitor/client costs. What can such a defendant offer by way of compromise, in furtherance of the policy of the law of early settlement of disputes?"

25 The costs and disbursements incurred by the HTT Defendants at the time of the 27 January 2012 offer (which the offer required them to surrender) were significant - something in the order of $1.824 million.

26 By offering to "walk away" the HTT Defendants were offering to bear those costs (a significant proportion of which the plaintiffs would have to pay were the HTT Defendants successful, and will have to pay now that the HTT Defendants are successful).

27 In my opinion, such an offer was a genuine offer of compromise.

Unreasonable rejection?

28 The HTT Defendants accept that the fact that the plaintiffs failed does not, itself, render unreasonable their rejection of the settlement offer.

29 The Calderbank letter pointed to two asserted deficiencies in the plaintiffs case.

30 The first was an assertion that the plaintiffs would not establish reliance on the representations pleaded. The second was an assertion that the plaintiffs' case in relation to damages was "misconceived and will fail".

31 In the Judgment I concluded that I was not satisfied that any of the representations pleaded induced the plaintiffs to enter into the critical transactions: see in particular par [482] - [491] and par [800] - [811] of the Judgment.

32 So far as concerns the plaintiffs' damages claim, that claim was founded exclusively on the evidence of Dr Ferrier. For the reasons set forth in my judgment of 5 March 2012 ([2012] NSWSC 177) I rejected the tender of that evidence.

33 It is true, as Mr Einfeld QC, who appears for the HTT Defendants submitted, that to a very large extent my findings against the plaintiffs on the issue of reliance were based on objective, indisputable evidence of facts that were known to the plaintiffs and, in particular, to Mr Zdrilic, the principal witness for the plaintiffs.

34 Those objective, indisputable facts included Mr Zdrilic's e-mail of 18 June 2004 (Judgment at [506 - 508]), Mr Bennett's letter of 8 July 2004 (Judgment at [532]), and Mr Zdrilic's e-mail of 21 July 2004 (Judgment at [545 - 550]).

35 Those objective, indisputable facts also included the failure of Mr Hilliard and Mr Zdrilic to make any enquiry concerning the arrival of funds before consenting to the dismissal of the 2001 Proceedings on 6 September 2004 (Judgment at [783 - 799]). As I have explained in the Judgment, I found that failure to be of high significance in my assessment of the issue of reliance. Whether or not Mr Zdrilic knew of Mr Hilliard's failure to make any enquiry, he must have known that he made no enquiry himself.

36 So far as concerns the question of damages, it is true that, after two days of argument, and a judgment extending to some 141 paragraphs, I rejected Dr Ferrier's reports.

37 Although I came to a firm view in my judgement on 5 March 2012, I did not regard the matter as being free of difficulty. It does not, in my opinion, pay due deference to the arguments advanced on behalf of the plaintiffs by Mr Jucovic QC, who appeared at the hearing for the plaintiffs, to describe them as being "misconceived".

38 Further, a significant element of the plaintiffs' claim did not relate to a claim for damages at all, but rather, the setting aside of the 6 September 2004 orders which had the effect of causing the dismissal of the 2001 Proceedings.

39 It is true that my findings in relation to reliance were also fatal to the plaintiffs' claim in respect of the 6 September 2004 order.

40 Despite these matters, I am not satisfied that it was unreasonable of the plaintiffs to reject the HTT Defendants Calderbank offer.

41 As early as 13 July 2010 (over 18 months before the hearing began), the plaintiffs, through their then solicitor had, indicated their willingness to enter settlement discussions.

42 Nonetheless, it was not until 27 January 2012 that the offer was made.

43 The hearing was to commence at the beginning of the following week. It must have been obvious to all parties that the case would take at least the three weeks allocated to it, and quite possibly more time. The Court Book comprised 15 folders, running to some 6000 pages. The witness statements on both sides were several hundred pages in length.

44 In effect, the plaintiffs had only the last week and weekend prior to the commencement of the hearing to consider the offer. This at a time when all of the resources available to the plaintiffs must have been devoted to preparation for the hearing.

45 I have held that the offer represented a genuine compromise. Nonetheless it was a "walk away" offer, proper consideration of which would have required a detailed, and doubtless time consuming, analysis of the possible deficiencies in the plaintiffs' case at a time when it is highly likely that all members of the plaintiffs' legal team were wishing to devote all their time to preparation for the commencement of the hearing.

46 The making of a "walk away" offer so close to the hearing in effect invited the plaintiffs to divert themselves from the task of preparation and consider whether they should consent to the dismissal of the case, albeit without payment of the HTT Defendants' costs.

47 It must be remembered that a significant element of the plaintiffs' case was to seek to set aside the 6 September 2004 orders pursuant to which the 2001 Proceedings had been dismissed. The plaintiffs' case (which, ultimately, I did not accept) was that they had been induced to consent to the dismissal of the 2001 Proceedings upon the basis of the representations alleged in these proceedings. It would no doubt have been a significant distraction from the preparation of this case to persuade the plaintiffs, and Mr Zdrilic in particular, to for the second time, consent to the dismissal of proceedings brought by his interests in respect of the Land and the Project.

48 The onus is on the HTT Defendants to persuade me that it was unreasonable for the plaintiffs to reject the 27 January 2012 offer.

49 For the reasons I have outlined, I am not satisfied. I decline to make the order for indemnity costs sought by the HTT Defendants.

The Hickie Defendants

50 On 29 August 2011, the Hickie Defendants made Offers of Compromise pursuant to Uniform Civil Procedure Rules 2005 ("UCPR") r 20.26.

51 Each of the offers provided for a verdict for the Hickie Defendants and for the parties to bear their own costs, as specifically provided for by UCPR r 20.26(2).

52 The plaintiffs did not respond to the Offers of Compromise made by the Hickie Defendants.

53 In these circumstances, by reason of UCPR r 42.15A, the Hickie Defendants are entitled to indemnity costs from the beginning of the day following the day upon which the offers were made unless the court "otherwise orders".

54 In Caine v Lumley General Insurance Limited (No 2) [2008] NSWCA 109 McColl JA said (at [34-35]): -

"In Morgan v Johnson (1998) 44 NSWLR 478 (at 581 - 582), Mason P (with whom Sheller JA agreed) summarised the rationale for the rules relating to offers of compromise as follows relevantly:

'...(1) The purpose of the rule is to encourage the proper compromise of litigation, in the private interests of individual litigants and the public interest of the prompt and economical disposal of litigation: Maitland Hospital (at 725-726); Hillier (at 421, 431).

(2) The aim is to oblige the offeree to give serious thought to the risk involved in non-acceptance: Maitland Hospital (at 724).

(3) The prima facie consequence of non-acceptance will be that the rule will be enforced against the non-accepting party: NSW Insurance Ministerial Corporation v Reeve (at 102); Hillier (at 422). This is because, from the time of non-acceptance 'notionally the real cause and occasion of the litigation is the attitude adopted by [the party] which has rejected the compromise': Maitland Hospital (at 724); see also Hillier (at 420).

(4) Lying behind the rule is the common knowledge that 'litigation is inescapably chance': Maitland Hospital (at 725). For this reason, the ordinary provision is expected to apply in the ordinary case: ibid NSW Insurance Ministerial Corporation v Reeve (at 102-103). The mere fact that it was reasonable for the litigant to take the view that he or she did in rejecting the offer is not enough to displace the rule: NSW Insurance Ministerial Corporation v Reeve (at 102). As Clarke JA expressed it in Houatchanthara (at 2-3):

'The rule lays down the general principle that should be applied, and the order provided for in that rule should only be departed from for proper reasons which, in general, only arise in an exceptional case. It is clear that if the rule operates, the plaintiff will be significantly disadvantaged, but that disadvantage flows naturally from the risks of litigation. The idea behind the rule is to encourage settlement or compromise of proceedings, and more specifically, to encourage litigants to give serious consideration to the settlement of proceedings. Where an order is made by a defendant to a plaintiff, the latter is put on notice that unless he or she accepts that offer, there is a significant risk that the order provided for by the rule may follow. In declining to accept the order, the plaintiff undertakes the risk and the consequences that flow naturally from that risk.'

(5) The discretion to displace the rule is a judicial one, requiring the private and public purposes of the rule to be borne in mind: Maitland Hospital (at 725-726). Reasons must be given for 'otherwise ordering': Hillier (at 419); Quach.' (my emphasis)

The onus is on the respondent to demonstrate why the Court should not order the respondent to pay the appellants' costs on an indemnity basis. In particular, the respondent must establish that it had given serious thought to the risks involved in not accepting the offers, had assessed the appellants' case properly and in the context of the relevant rules and the achievement of their purpose as outline in Morgan. Generally, exceptional circumstances are required to justify such an order denying the appellants' entitlement: South Eastern Sydney Area Health Service v King [2006] NSWCA 2 (at [82]) per Hunt AJA (Mason P and McColl JA agreeing)." (emphasis in original)

55 As the Offer of Compromise was made in accordance with the rules, the Hickie Defendants are entitled to indemnity costs from the time of the making of the offer unless the plaintiffs can point to "exceptional circumstances".

56 In that regard, Mr Wells, who appeared on this application for the plaintiffs, repeated the submission that he made in respect of the offer by the HTT Defendants, that the offer made by the Hickie Defendants was not a genuine offer, and amounted to no more than an invitation to the plaintiffs to capitulate.

57 For the reasons I have set out above in relation to the offer of the HTT Defendants, I do not accept this submission.

58 Mr Wells also pointed to evidence that suggested that some of the Hickie Defendants' costs had been paid by the HTT Defendants.

59 In my opinion, that is not a matter that is relevant to the question of whether I should "otherwise order" (although it may be relevant to any assessment which is made of costs). In any event the evidence does not permit a conclusion that all, or indeed most, of the costs of the Hickie Defendants have been paid by the HTT Defendants.

60 Further there is no evidence before me as to what, if any, arrangements exist between the Hickie Defendants and the HTT Defendants in relation to such costs as have been paid by the HTT Defendants.

61 I am not satisfied that the plaintiffs have made out "exceptional circumstances", or indeed, any good reason why I should "otherwise order".

62 It follows that, in my opinion, by operation of the UCPR r 42.15A, the Hickie Defendants are entitled to indemnity costs from 2 September 2011.

Final orders

63 I make the following further, and I think, final orders: -

(1) that the plaintiffs pay the costs of the first, second and fifth defendants of the proceedings, including reserved costs;

(2) that the plaintiffs pay the third and sixth defendants' costs of the proceedings, including reserved costs, on the ordinary basis up to 1 September 2011 and on an indemnity basis thereafter;

(3) that:

(a) the plaintiffs pay interest on the costs ordered to be paid by them pursuant to Orders 1 and 2 in accordance with s 101 of Civil Procedure Act 2005 at the rate prescribed by r 36.7 of the UCPR on the Allowed Percentage (as calculated in accordance with the formula set out in Order (b) below) on each amount of costs paid by the defendants from the date of payment by the defendants of each such amount until such time as the costs due to the defendants under Orders 1 and 2 are paid;

(b) In this Order the Allowed Percentage equals (X/Y) x 100)%, where:

X: equals the total amount of costs and disbursements agreed or allowed on assessment to that party in connection with these proceedings.

Y: equals the total amount of costs and disbursements which the relevant party has paid or is liable to pay to that party's legal representatives in connection with these proceedings.

(4) I grant the parties liberty to apply on 24 hours notice to my Associate in regard to the form of these orders.

(5) I direct that these orders may be entered forthwith.

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Decision last updated: 07 May 2012