About Life Pty Ltd v Maddocks Lawyers

FACTS

1. Given some matters raised in Maddocks' submissions, it is necessary to set out the procedural history of this matter. These proceedings began on 30 May 2017, when Woolworths sought an interlocutory injunction against About Life to restrain it from assigning the lease of its Double Bay store to Harris Farm, on the basis of a right of first refusal granted by About Life to Woolworths three years' earlier. In June 2017, Harris Farm filed a cross-claim against About Life, seeking damages for breach of contract and pursuant to the Australian Consumer Law.
2. The proceedings were expedited and heard by Emmett AJA in July 2017, with judgment given in favour of Woolworths in August 2017: Woolworths Ltd v About Life Pty Ltd [2017] NSWSC 1117. In September 2017, Emmett AJA ordered About Life and Harris Farm to pay Woolworths' costs of the proceedings. In October 2017, Harris Farm filed an amended cross-claim against About Life, adding Ms Phillips, Mr Green and Mr Beecroft as cross-defendants. On 20 November 2017, About Life filed a cross-claim against Maddocks.
3. In March 2018, Maddocks filed its defence to About Life's cross-claim and, by consent, Emmett AJA ordered the first cross-claim (by Harris Farm) and second cross-claim (by About Life) be referred to mediation. In April 2018, perhaps at odds with the spirit of alternative dispute resolution, Maddocks filed a motion seeking security for costs of not less than $150,000. The parties mediated on 4 May 2018. Following the mediation, the directors filed cross-claims against Maddocks, seeking damages for breach of a duty of care or misleading and deceptive conduct, where the loss sought to be recovered was any liability the directors may have to Harris Farm.
4. On 20 June 2018, About Life proceeded to instruct accounting expert, Brian Morris. On 25 June 2018, the first of About Life's affidavits was affirmed, being by chief financial officer, Robert Ross-Edwards. On 1 August 2018, About Life obtained an expert report from property law expert, Peter Rosier.
5. On 13 August 2018, Parker J ordered About Life to provide security for costs of $250,000 in three tranches, failing which the proceedings would be stayed: Woolworths Ltd v About Life Pty Ltd (No 2) [2018] NSWSC 1340. In September 2018, directions were made for the About Life parties to serve their lay evidence by 2 November 2018, with Maddocks to serve its lay evidence by 21 December 2018. From 8 October 2018, About Life's cross-claim was stayed by reason of its failure to pay security. That appears to have been remedied. In November 2018, About Life's lay evidence was completed, comprising two affidavits by Ms Phillips, two affidavits by Mr Green, two affidavits by Mr Beecroft and an affidavit by About Life's previous solicitor, Gaurav de Fontgalland.
6. On 17 December 2018, About Life went into voluntary administration. In December 2018, Emmett AJA made directions extending the time for Maddocks to file its lay evidence to 28 February 2019, with the About Life parties to serve expert evidence by 27 March 2019. On 7 May 2019, Emmett AJA directed the About Life parties to file and serve all evidence on which they intended to rely by 18 June 2019.
7. On 7 June 2019, Maddocks filed a second motion seeking further security for costs of $700,000. In June 2019, further substantive affidavits were sworn by Ms Phillips and Mr Ross-Edwards. In July 2019, Mr Morris' expert report was served. In September 2019, Harris Farm's cross-claim against the directors was settled for $430,000. On 25 September 2019, Emmett AJA ordered About Life to provide further security of $250,000 by 9 October 2019, failing which the proceedings would be stayed. Maddocks was also directed to serve its expert accounting evidence by November 2019 and any other evidence by December 2019.

Maddocks' only offer

1. On 16 March 2020, Maddocks' solicitors sent an open letter of offer to About Life's solicitors, noting that Maddocks had always maintained that About Life's case was "hopeless" and would "totally fail". The "litany of problems" faced by About Life and its directors were listed. Some parts of About Life's claim were said to be "nonsense". The directors' response to Maddocks' advice given moments before completion of the transaction were described as "errant". Maddocks offered to settle the claim on the basis of a verdict for Maddocks on the cross-claims brought by the About Life parties, with no order as to costs. If the offer was not accepted, "No further offer will be made, or counteroffer contemplated, by Maddocks. … the About Life parties should not assume that it will be made again. …" Maddocks reserved the right to bring the open offer to the attention of the Court during any hearing, interlocutory or otherwise, including if About Life sought an order for a further mediation "which we are instructed to oppose". I would like to think that this letter was not settled by counsel.
2. In May 2020, Mr Rosier prepared a second expert report. In June 2020, About Life served further lay evidence in reply, comprising two affidavits by Ms Phillips and an affidavit of Mr Ross-Edwards, together with an expert report by a banking expert, Robert Gordon. In July 2020, Mr Morris prepared a second expert report.
3. On 18 November 2020, About Life was ordered to provide a further $850,000 security for costs in two tranches, failing which Maddocks had leave to apply to the Court for the matter to be stayed. On 23 December 2020, Emmett AJA ordered that Maddocks' costs of the motion seeking further security be Maddocks' costs of the proceedings: About Life Pty Ltd v Kloczko [2020] NSWSC 1909. In total, About Life provided $1.35 million security for costs. In January 2021, Ms Phillips and Mr Ross-Edwards swore final affidavits.

Calderbank offer

1. This matter was listed for directions before Emmett AJA on 17 February 2021. The transcript records the following exchange: HIS HONOUR: I trust the parties have pursued mediation and resolution, as far as is rationally possible? … Having seen what I have seen, it seems to me that there must be some area where it would be reasonable for both parties to compromise. If there is anything I can do to facilitate that, I would be happy to do so. … I am not sure what I can do, but if the parties seem to think there is anything I can do, I would happily do that. LLOYD: Thank you, your Honour. I think the sensible course would be for both parties to take instructions about the matter that has just been raised, and talk to one another. …
2. On 22 February 2021, About Life's solicitors sent a Calderbank letter to Maddocks' solicitors, noting Emmett AJA's comments. Further: The recent delivery of joint reports by the expert witnesses means that the parties are now in the best position to consider their prospects of success and risks. Our clients remain of the view that they have good prospects of success and the joint expert reports have served to fortify their views; however they are willing to compromise. The proximity of the trial date allows little time to mediate as suggested. We have therefore sought our clients' instructions to put the settlement proposal outlined below. It is unclear whether the suggestion to mediate was that of his Honour or whether Maddocks' opposition to further mediation abated shortly before the trial.
3. The Calderbank letter then dealt succinctly with the subjects of liability, quantum and costs. As to liability, the Calderbank letter noted: There is little if any factual contest. The relevant conduct and (particularly on our clients' case) omissions of Ms Badcock are a matter of record. The main issue is the scope of the duty. And our clients' position is made out on the liability expert evidence of both experts.
4. Turning to quantum, the Calderbank letter noted: The apparent complexity of the forensic accounting evidence belies the singular overarching issue in this dispute: were the adverse developments in relation to undercapitalisation and operational matters attributable to the expansion retrievable? The inherently reversible nature of the adverse developments in the context of our clients established market position, experience and deep relationships with suppliers are cogent considerations in support of their case.
5. The various components of the damages claim were then itemised separately in respect of About Life's claim and the claim of its directors. The total value of the claims of the About Life parties was said to be in the vicinity of $30 million. Further: We have recommended that for the purpose of settlement our client concede significant discounts for the possibilities of a loss of chance assessment, contributory negligence and litigation risks.
6. The About Life parties offered to settle their claims for $13.5 million inclusive of interest plus costs as estimated, being $1.4 million, the offer being open for acceptance until 5.00 pm on 26 February 2021. Mr Connell was not favoured with a response. The trial began on 2 March 2021.

SUBMISSIONS

1. About Life seeks an order that Maddocks pay its costs on an indemnity basis from the date of the Calderbank offer. The making of a Calderbank offer is a matter that the Court may take into account in exercising the discretion under UCPR rule 42.1 to award indemnity costs. In Leichhardt Municipal Council v Green [2004] NSWCA 341, Santow JA said at [14]: ... the practice of Calderbank letters is allowed because it is thought to facilitate the public policy objective of providing an incentive for the disputants to end their litigation as soon as possible. Furthermore, however, it can be seen as also influenced by the related public policy of discouraging wasteful and unreasonable behaviour by litigants.
2. The About Life parties submitted that the Calderbank offer was "a genuine offer of compromise": Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375. The substantial disparity between the offer and the damages and interest ultimately awarded by the Court reflected the reasonableness of the offer. The offer was not expressed in non-negotiable terms; but rather as a "genuine attempt to promote meaningful discussion towards a settlement with a view to avoiding the consequences of further costs and delay." Maddocks did not respond. This may be characterised by the Court as "wasteful and unreasonable behaviour" by a litigant, particularly in circumstances where they were informed of the views of expert witnesses and must have been aware of the risks and costs of proceeding to trial. Maddocks had sufficient information and was afforded an adequate opportunity to consider and respond to the offer; there was no request by Maddocks for further time to consider their position before responding. Maddocks was fully appraised of the evidence to be adduced at trial and had received the joint reports of the liability and quantum experts, but did not respond. Maddocks' refusal to make any offer beyond the 'walk away' offer made in March 2020 was unreasonable in all of the circumstances and justified the exercise of the Court's discretion to award indemnity costs from the date of the Calderbank offer.
3. Maddocks submitted that the Calderbank offer was made on Monday 22 February 2021 and expired on Friday 26 February 2021. The trial commenced on Tuesday 2 March 2021. The offer was for a very substantial proportion of About Life's claim. Given the complexity of the matter and the suggested absence of any analysis as to why the offer was an appropriate compromise, it was said that no attempt was made to explain why the offer was reasonable having regard to the strengths and weaknesses of each party's case: Perisher Blue at [18]. Where significant questions in the trial would turn upon the credibility of About Life's lay witnesses, it was said that it was not unreasonable for Maddocks' advisers to conclude that Maddocks' prospects of achieving a result at trial that was equal to or more favourable than an overall award to the About Life Parties in the order of $15 million were sufficiently strong at the time the offer expired to warrant rejection of the offer. The offer was open for five business days and made at a time when Maddocks had already incurred the bulk of the costs of preparing the matter for hearing. In the circumstances, the Court should conclude that it was not unreasonable for Maddocks to reject the offer, notwithstanding the fact that About Life ultimately achieved a better result at trial.
4. Maddocks submitted that, as in Broadway Plaza Investments Pty Ltd v Broadway Plaza Pty Ltd; In the matter of Combined Projects (Arncliffe) Pty Ltd (No 3) [2021] NSWSC 1537 at [85], "it would not have been unreasonable for [Maddocks] to have considered there were reasonable prospects of success … though how that would translate in terms of an overall judgment would not have been so clear", which supports "it being not unreasonable, at the time the offer was made (particularly when much of the cost of preparation of the proceeding had already been incurred), for [Maddocks] to continue with the litigation", especially bearing in mind that the amount offered, though a compromise, was a very substantial sum.
5. Maddocks submitted that About Life had failed to discharge its onus to prove that Maddocks' rejection of the offer was unreasonable: Broadway Plaza Investments at [25]. Maddocks' walk-away offer of 16 March 2020 was said to be based on Maddocks' careful assessment of the merits of the About Life parties' claims at that point in time; as much was said to be apparent from the detailed observations set out in the letter conveying the offer. The fact that the About Life parties achieved a better result at trial did not itself make Maddocks' decision to make a walk-away offer unreasonable. It was said to be evident on the face of the parties' correspondence that both the About Life parties and Maddocks endeavoured to resolve the dispute over a period of several years. Unfortunately, the parties' differing views of their respective prospects were such that no agreement could be reached. This did not bespeak unreasonable conduct on the part of Maddocks, nor justify the exercise of the Court's discretion to award indemnity costs.

INDEMNITY COSTS

1. In considering the cross-claimants' application, I note the comments of Allsop P in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (No 2) [2009] NSWCA 12 at [5]: Three things need be borne in mind in a judgment such as this on costs: the desirability of avoiding unnecessary recitation of cases (abounding as they are in this area); the desirability of not restating, in different terms, approaches to the broad discretion that have been well settled; and the desirability of dealing with the arguments without over-elaboration, if this is possible.
2. The principles in determining whether a special costs order should be made on the basis of a Calderbank offer were recently considered by Ward CJ in Eq in In the matters of Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in liq) (No 2) [2021] NSWSC 1161 at [93]-[99], which summary I gratefully adopt.
3. The Calderbank letter was brief, being a little shorter than Maddocks' 'walk away' offer. The parties were then in final preparations for the commencement of the trial and, indeed, both served their opening submissions the next day on 23 February 2021. This fact permitted the About Life parties to set out their offer succinctly. I do not doubt that Maddocks was able to understand the thinking behind the offer in order to form its own assessment of whether the offer represented a reasonable compromise or not.
4. Putting to one side the costs element of the $30 million claim, the About Life parties' claim was $28.6 million. In offering to accept $13.5 million, the About Life parties offered to accept 45% of their claim, being a global discount to reflect the risks posed on a number of fronts, including valuation of About Life's loss of chance, the extent to which the damages suffered by the About Life parties would be discounted for contributory negligence and litigation risk generally. On its face, the Calderbank offer constituted a genuine offer of compromise. The extent of the discount is not diminished by any suggestion that About Life's claim was without a proper basis and that large discounts on a spurious claim mean little. Rather, About Life's case on damages was supported by lay and documentary evidence together with the expert report of Mr Morris.
5. The period of time for which the Calderbank offer was open was necessarily brief given the impending trial. The Calderbank letter appears to have been issued at a time when either Emmett AJA or Maddocks suggested that the parties mediate, being a course which Maddocks had earlier opposed, and where proximity of the trial date allowed little time to do so. Thus, the offer was an efficient way to try and settle the matter in the limited time available. I have no doubt that Maddocks was able to understand and assess the offer in that time frame given the intimate familiarity of Maddocks' legal representatives with About Life's case and Maddocks' defence.
6. I consider that it was unreasonable to reject the offer and, further, to not even reply. Nor I do not accept that any explanation or analysis by About Life as to why the offer was an appropriate compromise would have convinced Maddocks to change its mind as to its prospects of success. Explaining why the offer was reasonable having regard to the strengths and weaknesses of each party's case - beyond the explanation already given in the Calderbank letter - would have been telling Maddocks what it already knew about the perception of the About Life parties and, likely, a waste of time.
7. It is no answer to say that much turned on the credibility of About Life's witnesses. That may be said for any case. There is no doubt that Maddocks had formed a dim view of Ms Phillips' credibility. But Maddocks ran the risk that its view may not be shared by the Court. Maddocks also ran the risk that About Life may succeed in full and be awarded damages of $28.6 million. Nor is it any answer to say that Maddocks had already incurred the bulk of the costs of preparing the matter for hearing. That may also be said in any case. By not accepting the offer, Maddocks ran the risk of 'throwing good money after bad' by expending considerably more money defending About Life's claim. More importantly, Maddocks put About Life to the additional expense of establishing its claims, which would have been avoided if the offer was accepted.
8. Reduced to its essence, About Life's claim and Maddocks' defence were each complicated and involved large sums of money. As in any commercial litigation, the Court expects the parties to act reasonably in settling disputes by compromise, having regard to the risk that each party faces. As Sackar J observed in Bryant v Hawkesbury Radio Communication Co-operative Society Ltd [2014] NSWSC 848 at [157]: Whilst the system of justice administered by courts in this state is adversarial, in the modern era in my view parties have a distinct and clear obligation to cooperate with each other and the court to achieve a quick and inexpensive solution to their grievances including in my view good faith settlement discussions. See also ET Petroleum Holdings Pty Ltd v Clarenden Pty Ltd (No 2) [2005] NSWSC 562 at [21] per White J.
9. Whilst About Life did engage in this exercise, Maddocks did not. As may be divined from Maddocks' 'walk away' letter of 16 March 2020, together with its non-response to the Calderbank offer, Maddocks appeared to consider it faced no risk in defending a $30 million professional negligence claim. I consider that Maddocks' refusal of the Calderbank offer was unreasonable in the circumstances of this case and About Life is entitled to indemnity costs from the date of the Calderbank letter.

INTEREST ON COSTS

1. There was no dispute that the Court has the power under section 101(5) of the Civil Procedure Act 2005 (NSW) to order that interest on costs run from the date on which the costs were paid. This was confirmed in South West Helicopters Pty Ltd v Stephenson (No 2) (2018) 98 NSWLR 96; [2018] NSWCA 99 at [33] per Basten, Leeming and Payne JJA.
2. About Life submitted that it had incurred and paid substantial legal costs and disbursements in the four years since the proceedings were commenced. An order was sought for interest on costs in accordance with section 101 of the Civil Procedure Act from the date of payment of those costs in accordance with the principles outlined by Brereton J in Grace v Grace (No 9) [2014] NSWSC 1239 and Hoeben CJ at CL in Richtoll Pty Ltd v WW Lawyers (in Liquidation) Pty Ltd (No 3) [2016] NSWSC 1010.
3. Maddocks relied on the Court's observation in Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 at [80], "The award of interest on costs is discretionary: Civil Procedure Act 2005 (NSW), s 101(4). … [T]he payment of interest is intended to be compensatory, on the basis that the person entitled to costs has been wrongly required to spend money on litigation to enforce established rights". The Court observed in Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd (No 2) (2013) 84 NSWLR 436; [2013] NSWCA 211 at [38], "A party who contends that there should be an order for interest on costs must do more than point to the fact that the proceedings were protracted and that it had to outlay moneys on its own costs over a long period. The reasons for the protracted nature of the proceedings are of obvious relevance." While this approach has been said to be in conflict with that taken in the earlier decision of Drummond & Rosen Pty Ltd v Easey (No 2) [2009] NSWCA 331 (see for example Grace v Grace (No 9) at [60] and Richtoll Pty Ltd v WW Lawyers (in liq) Pty Ltd (No 3) at [12] and the cases there cited), in Grace v Grace (No 9), Brereton J (as his Honour then was) accepted that discretionary factors may weigh against an order for interest on costs: see at [66]-[67]. Such factors may include delay (though it is accepted that, as Brereton J observed at [69] delay is "usually immaterial").
4. Maddocks submitted that the fact that the About Life Parties have been kept out of their costs for an extended period was in large measure referable to the conduct of the About Life parties. While About Life's proceedings were commenced against Maddocks in November 2017, by June 2018, no evidence had been served. The proceedings were stayed by reason of About Life's failure to comply with security orders for some six months between October 2018 and April 2019. A significantly amended pleading, being the proposed second further amended second cross-claim was served by About Life on 1 May 2019, but was only filed almost three months later, on 24 July 2019. While the About Life Parties served a report of Mr Morris on around 2 July 2019, that report was almost entirely superseded by a further report from Mr Morris served over a year later, on around 31 July 2020. In those circumstances, the Court should not exercise its discretion to award the About Life Parties interest on their costs from the date on which those costs were incurred.
5. The problem with this submission is that it is, by and large, unsupported by evidence. Whilst I was the trial judge, I was not involved in the case management of these proceedings, which was the province of Emmett AJA and Parker J. Thus, I cannot necessarily accede to this submission without evidentiary support. The Court file is very large. I have reviewed it. It does certainly appear that the proceedings did not progress substantively for a period, and was waylaid with applications for security for costs and the amendment of pleadings. But the Court file does not reveal who was responsible for the delay, nor can I glean the necessary detail to support Maddocks' submission in respect of the amendment of About Life's pleading.
6. I do note, however, that About Life's inability to prosecute these proceedings with dispatch, if that is what happened, is itself likely referable to Maddocks' negligence. The impact of the late-discovery of Woolworths' right of first refusal on About Life is charted in my earlier judgment at [423]-[495]. In short, About Life had sold the Double Bay store as it was then in financial extremis. Woolworths' suit interrupted a quick sale of the store to Harris Farm for $10 million and thus the receipt of much-needed funds into the business. The uncertainty which the legal proceedings cast on the receipt of the proceeds of sale affected negotiations then underway with The Natural Grocery Co to sell About Life's remaining stores, alarmed About Life's suppliers - with 'knock-on' effects for About Life's store inventory and, therefore, sales and cashflow - and prompted About Life's bank to move the About Life account to its enforcement arm. About Life's financial difficulties presumably also prompted Maddocks' application for security for costs in April 2018. Further applications for security for costs were made in June 2019 and November 2020.
7. In addition to the About Life parties dealing with the company's financial difficulties and external administration, together with providing $1.35 million security for costs for Maddocks' costs of the proceedings, outlaying funds to pay About Life's own legal costs must have imposed a significant burden upon the company and those who stood behind it. Where Maddocks' failings were a substantial contributor to the financial position in which the About Life parties found themselves, it may be thought ungenerous for Maddocks to oppose the order now sought. That aside, Brereton J described the discretionary considerations in Grace v Grace (No 9) at [67]: Interest on costs, like prejudgment interest, is compensatory, not punitive. It compensates the party entitled for being out of money for the time it was held out of that money, and deprives the party liable of the benefit of having held the funds when it ought not have done so: absent such an order, the sum of money in question fructifies in the wrong pocket. In the absence of countervailing factors, it is ordinarily appropriate that an order for interest on costs be made, so as to compensate the party entitled for being out of pocket in respect of the costs that party has paid …
8. His Honour observed that the circumstances in which a claim for interest can be refused are rare: at [69]. In particular, delay - and responsibility for delay - is usually immaterial, because the money is still fructifying in the wrong pocket: at [69]. Where it is said that interest should be refused because the plaintiffs were responsible for protracting the proceedings, at [71]: … even if the protraction of the proceedings was substantially the responsibility of the plaintiff, that does not mean that the defendants should retain the benefit of the money fructifying in their pockets in the meantime. That is because interest does no more than reflect the time value of money, and that the party liable has held the money and derived the benefit of it while the party entitled has been out of pocket in the meantime. Whatever the extent of the plaintiff's responsibility for delay, the defendants enjoyed the benefit of the money of which the plaintiff was out of pocket in the interim. As explained above, the plaintiff's responsibility for the delay does not somehow make it just that the defendants should retain that benefit.
9. The evidence before the Court does not enable me to conclude that the About Life parties were responsible for the protraction of these proceedings but, even if they were, the compensatory purpose of the power to award interest on costs paid, together with the part played by Maddocks in the impecuniosity of About Life and thus any inability to prosecute the proceedings with dispatch, has the result that I consider it appropriate in the circumstances of this case that the About Life parties have interest on their legal costs from the date of payment of those costs.

ORDERS

1. For these reasons, I make the following orders. 1. Vary Order 3 made on 28 October 2021 as follows: Cross-defendants to pay the cross-claimants' costs of the second cross-claim on a party and party basis until 21 February 2021 and on an indemnity basis from 22 February 2021. 1. Vary Order 5 made on 28 October 2021 as follows: Cross-defendants to pay the cross-claimants' costs of the third, fourth and fifth cross-claims on a party and party basis until 21 February 2021 and on an indemnity basis from 22 February 2021. 1. Pursuant to section 101 of the Civil Procedure Act 2005 (NSW), order the cross-defendants to pay the cross-claimants' interest on costs from the date of payment of those costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 December 2021