Advanced National Services Pty Ltd v Daintree Contractors Pty Ltd

The facts

1. The proceeding commenced on 23 August 2017. About a month before that event, on 28 July 2017 the then solicitors for DC (TressCox Lawyers) sent two letters to the solicitors for the ANS (Fontgalland Lawyers). At this stage, a draft statement of claim had been supplied to the defendant, and the two letters were responsive to this document. The lengthier letter did a number of things: it disputed the quantum of the unpaid invoices claimed; it justified the DC's decision to terminate the subject agreement on account of the ANS' failure to provide contracted cleaning services; it cited other matters which, it said justified the defendant's decision to terminate the contractor agreement (including its treatment of its workers); it cited a range of provisions in the agreement (cll 3.3, 4.5 and 7.2-7.3) which, it says, entitled it to be indemnified for losses suffered; it foreshadowed a cross-claim and intimated that it would seek security for costs.
2. TressCox' shorter letter to Fontgalland Lawyers of 28 July 2017 referred to the longer letter of that date and set out a proposal for resolution of the dispute. The letter supplied a certain formula used, for the purposes of DC's internal calculations, to assess its potential liability after factoring in the defendant's apprehended potential exposure to third party claims against it. That figure was $75,413.57 and DC offered to pay that sum to ANS in full and final settlement of the latter's claim.
3. In the first iteration of its Defence (filed on 29 September 2017) DC pleaded several defences to the claim for unpaid invoices. Relevant parts were as follows: "(10) In answer to paragraph 10 of the Statement of Claim, the defendant:- ……. (f) says it was a further term and condition of the Contractor Agreement that the plaintiff was not entitled, without the prior written approval of the defendant, to assign or sub-contract any portion of the Contractor Agreement to any other person or entity and should such .. sub-contracting occur the defendant was entitled to terminate the Contractor Agreement immediately without notice, and with no obligation to compensate the plaintiff from that date, as well as being entitled to seek damages from the plaintiff … ….. (l) says that in further breach of the terms and conditions of the Contractor Agreement pleaded in paragraph(s) … 10(f) .., the plaintiff: …… (v) engaged some cleaners as subcontractors without the approval of the defendant; ……. (14) In answer to paragraph 14 of the Statement of Claim, the defendant:- (a) repeats paragraph 10 ….. above; …… (b) says that, in the circumstances, it has no liability to pay the amount claimed or any other amount to the plaintiff."
4. Although it may not have been pellucidly clear from its pleading, a close and considered analysis of this Defence would (or should) have made it apparent to ANS that DC was, from its initial pleading setting out, as one ground for its refusal to pay the unpaid invoices, that ANS had not complied with its obligation not to use sub-contracted labour. DC's Defence did not materially change thereafter. That said, the Defence pleaded a large number of other grounds upon which DC resisted ANS' claim. Those grounds were maintained throughout the trial, and as is apparent from the principal reasons, they led to much factual inquiry.
5. After the matter had been set down for hearing, on 3 August 2018, DC's solicitors (who by then had changed to HWL Ebsworth) sent further correspondence to Fontgalland Lawyers. The letter chastised ANS for its failure to make a counter offer and pointed out that DC would "not be bidding against itself". On the same day, Mastercare's Managing Director, Mr Walker, sent a letter to Mr Klimowicz, of ANS, inviting mediation. No further offer of settlement was made on DCs behalf on this date.
6. On 23 August 2018, Mr Fontgalland (Fontgalland Law) responded to Mr Walker's letter of 3 August 2018 with a letter to HWL Ebsworth. The gist of this letter was to explain why ANS did not wish to participate in the mediation at that point. The letter also explained ANS' reasons for rejecting the earlier settlement offer made on DC's behalf. One of those reasons was ANS' view, which I subsequently found to be erroneous, that even if ANS breached the contract agreement by employing subcontracted labour, that circumstance would not disentitle ANS to payment of its invoices.
7. DC emphasises, correctly, that ANS asserted (and would continue to assert right through the hearing) that it was entitled to receive the value of its unpaid invoices in full even if it breached the contractor agreement by using sub-contractor labour
8. Correspondence indicates that mediation did in fact occur on 22 October 2018, but was unsuccessful in resolving the dispute.
9. On 13 December 2018, HWL Ebsworth made another offer of settlement, this time expressly purporting to be based upon Calderbank v Calderbank principles. The gist of this letter was to offer ANS the sum of $225,000 in full settlement of the claim. This amount was derived as the difference between the amount that DC had paid ANS ($265,639.53) and the total amount of worker expenses ANS had paid (including to sub-contractors and franchisees) being ($491,622.45). This difference, DC said, represented the amount by which DC had been left 'out of pocket' by ANS.
10. The offer did not make allowance for interest and costs. In this regard, DC explained that it remained exposed to claims from third parties and cited ANS' alleged earlier failure to engage with DC for the resolution of the dispute before commencing the litigation. This offer expired on 3 January 2019, having left DC three weeks' to consider the offer.
11. An important aspect of this letter is what DC's lawyers said about ANS' claim and what it did not say. The relevant part of what it said was as follows: "..It appears to us that Advanced faces a major hurdle in successfully prosecuting the claim when it plainly (based on the evidence filed by each party) did not comply with the contract it now seeks to enforce. Our client remains considerably aggrieved as to Advanced's failure to comply with the contract which it now seeks to enforce. This includes in particular the fact Advanced sub-contracted work to third parties in breach of its contractual obligations…"
12. This statement in the correspondence was consistent with the way that DC had pleaded its Defence from the outset (see paragraph 10 above). The letter referred to a Deed of Settlement that could be entered if ANS accepted the settlement sum offered.
13. What the letter did not say was what would happen to DC's cross-claim which, three months' later, upon the commencement of the trial, DC had valued (as revealed in its Schedule of Damages) at over $200,000.
14. By this stage, the parties had all served their affidavit evidence. In ANS' case, it had served 10 affidavits; 3 of which were in reply.
15. Further, the parties had also participated in mediation. They were, or should have been, fully apprised of the merits of their cases.
16. DC submits that ANS would have been better off accepting the settlement sum contained in its 13 December 2018 Calderbank offer than what it would obtain from judgment.
17. The correspondence indicates that on 22 January 2019 ANS had conveyed an offer of settlement to DC. However, the terms of that offer were not put before me.
18. On 8 February 2019, a final settlement offer was sent on DC's behalf, again in accordance with Calderbank v Calderbank principles. This offer reiterated the matters referred to in the HWL Ebsworth letter of 13 December 2018. The main difference was that in this particular letter, the settlement sum offered was $250,000. It was open for 14 days. The offer expired on 22 February 2019.
19. There is no indication, subsequent to the service of the Calderbank offers in December 2018 or February 2019, that ANS' lawyers indicated that they did not have sufficient time to consider the offers, or that they were unable to estimate what amount of the judgment might be recovered after deducting costs incurred up to the date when those offers were made.

Principles

1. The Court plainly has a wide discretion to award costs under section 98 of the Civil Procedure Act 2005. The defendant accepts that ordinarily costs follow the event and on that basis, the usual course would mean that ANS would be entitled to its costs (r 42.1 of the Uniform Civil Procedure Rules).
2. However, the defendant submits that an unreasonable failure to accept a genuine offer of settlement, expressed to be based upon the principles of Calderbank v Calderbank [1976] Fam 93, provides a valid reason for qualifying the usual rule.
3. ANS raised for my consideration observations made in the Court of Appeal in Elite Protective Personnel Pty Ltd v Salmon (No.2) [2007] NSWCA 373, about the efficacy of Calderbank offers expressed to be inclusive of costs. Doubt was expressed, most strongly by McColl JA (at [111]-[115]) as to whether such offers could be effective, in facilitating the award of costs on an indemnity basis, as the recipient may not be able to meaningfully evaluate an offer as it would not know what its likely recoverable costs would be on the ordinary basis at the point of time the offer is made, and would not know until assessment had been reached. However, as Basten JA said (at [143], at the point when an inclusive offer is made, the recipient should be able to obtain a reasonable estimate from his or her lawyer's as to what amount of the judgment might be left, in the client recipient's hand, after (estimated) costs have been deducted. What is, at least, clear from the decision is that, whatever practical difficulties might arise, there is no 'rule' against Calderbank offers, expressed to be inclusive of costs, being utilised by a party on the question of the Court's discretion: it depends upon the terms of the offer.
4. In Commonwealth of Australia v Gretton [2008] NSWCA 117, the Court of Appeal considered the circumstances in which rejection of Calderbank letters may sound in an order qualifying the general rule that costs follow the event. The decision noted that the two primary considerations that lie in favour of an order for indemnity costs - that the offeree acted unreasonably in rejecting a genuine offer of settlement and that the offeror obtained a no less favourable result than the terms it had offered - are not conclusive in obtaining an order for indemnity costs. It is not sufficient to establish that the offeree acted unreasonably simply because it rejected a reasonable offer and that the settlement sum offered exceeded the judgment sum: per Beazley JA at [81]. It remains necessary for the offeror to establish that it is fair that the Court exercise the discretion in the offeror's favour, and relevant to that might be the responsibility of the parties for the incurring of costs: per Hodgson JA (at [121]) (with whom Mason P generally agreed, and Beazley JA agreed on this point at [85]).
5. That is to say, even if the two primary considerations I have referred to apply in favour of the offeror, it still remains necessary for the offeror to establish that (all of) the circumstances require departure from the ordinary rule: SMEC Testing v Campbelltown City Council [2000] NSWCA 323 at [37]; Jones v Bradley (No.2) [2003] NSWCA 258 at [8].
6. One important additional circumstance, as pointed out by Hodgson JA in Gretton, is the responsibility of the parties for costs of litigation being incurred (see also Council of City of Liverpool v Turano (No.2) [2009] NSWCA 176 at [54]). Another circumstance is that where there may be a range of potential outcomes from the Court's adjudication, and whilst the terms of an offer may be reasonable, it may not be unreasonable for the offeree to reject the offer. Both of these circumstances were present in Gretton.
7. A further consideration is sourced in two, related public policies: first, the inherent desirability of the discretion to award costs being exercised in a way that (a) vindicates the expectations of litigants when they make reasonable offers (rejected by their opponent) that they may be entitled to a costs order on an indemnity basis (Gretton, per Beazley JA at [73]); and (b) encourages litigants in future matters to engage in sensible attempts to compromise a dispute (see Leichhardt Municipal Council v Green [2004] NSWCA 341 per Santow JA at [14]). Secondly, there is the statutory imperative upon the Courts to exercise the discretion in a way consistent with the case management objects in s 56 of the Civil Procedure Act. Litigants and their legal advisers are bound to assist the Court to fulfil the case management objects. Timely acceptance of reasonable and genuine offers of settlement, or, the service of reasonable counter-offers is a familiar way in which parties discharge that obligation. In saying this, I consider that imperative is stronger in the case of rules offers made pursuant to Part 26, which (in combination with Part 42) has its own self-contained regime for shaping the Court's exercise of discretion on costs applications; and accordingly limits the scope for disputation on costs.

The parties' contentions

1. DC relies upon its offers of settlement. It says that they were genuine and reasonable offers, and that ANS acted unreasonably in rejecting them. Indeed, it goes further and says that ANS was better off accepting any of them rather than commencing, or pursuing the claim in the way that ANS did. It says that, properly advised, ANS should have known that it had no real prospect of obtaining a better outcome for judgment than it did and that, by its withstanding a net claim of nearly $550,000 (plus interest) for all but $50,000 or so, DC was the true victor in the proceeding.
2. ANS says that DC failed on every factual and legal issue it agitated in its opposition to its claim, save for one "narrow" point of construction, relating to cl 4.5 of the Contractor Agreement, which significantly depleted the quantum. It says that its conduct in rejecting the offers of settlement was not so plainly unreasonable as to justify a partial order that it pay indemnity costs. It takes issue with DC's contention that, given that the offers were inclusive of costs, it could be said that ANS would have been better off accepting the offers. It also says that the point upon which DC succeeded was not clearly put to ANS. It says that since the Calderbank offers of December 2018 and February 2019 foreshadowed entry into a Deed of Settlement, there were 'unspecified issues', beyond the ambit of the issues in the proceeding that remained to be negotiated. Finally, it contests DC's contentions that its defence of the cl 4.5 point had no prospects of success and that DC was the true victor.

The 28 July 2017 offer of settlement

1. I do not consider that rejection of the offer of settlement in the shorter letter of 28 July 2017, prior to the commencement of the proceeding, was unreasonable. It was not expressed to be a Calderbank letter, even though Calderbank offers are capable of being made prior to the commencement of a proceeding (Ofria v Cameron (No.2) [2008] NSWCA 242 at [27])). Indeed, no indication was given that it would be relied upon, at all, should a proceeding, ensue on any costs application. Further, the offer had to be read in conjunction with Tress Cox' longer letter of the same date, which muted that it might bring a substantial claim of its own (later, its cross-claim), at least in excess of $138,000. The offer of settlement made was expressed only to deal with ANS' claim. The 28 July 2017 offer of settlement provides no basis for qualifying the general rule nor sustains DC's application for indemnity costs.

The Calderbank offers

1. That leaves for consideration the Calderbank offers of December 2018 and February 2019, respectively. Similar considerations apply to both.
2. I accept that the plaintiff received a judgment sum much less than the principal sum which it claimed for. I also accept that the amount offered respectively (in each Calderbank offer) was a genuine figure offered to compromise the claim.
3. Further, there is no reason to consider that ANS did not have sufficient time or information, at its disposal, in order to meaningfully consider the offers. ANS never made any complaint to such effect. DC had also served all the affidavit evidence it was proposing to rely upon, to enable ANS to evaluate the defence (such evaluation would have been further facilitated by the mediation which, by then, had occurred).
4. Further still, the terms of each were, subject to two qualifications, clear: ANS was to receive no further allowance beyond the settlement sum(s) offered (in each case), in terms of its costs and interest. The first qualification is that the terms of the Calderbank offers did not expressly deal with the matter of DC's cross-claim that was then on foot. I deal with the second qualification at paragraph 49 below.
5. Plainly, also, the judgment sum (for principal and interest) is much less than the settlement sum which it had been offered (in December 2018 and February 2019).
6. On balance, I am inclined to regard the settlement sums offered in each of the Calderbank offers as being reasonable.
7. But there are two further questions: 1. was the defendant's conduct in rejecting the offers unreasonable; and 2. (even if the answer to (a) is in the affirmative) whether the entirety of circumstances warrant departure from the general rule.
8. The starting point is that a fair reading of my reasons indicates that DC's success in reducing the quantum of the unpaid invoices turned upon my agreement with its contentions that (a) it was entitled to terminate the contractor agreement for ANS' breach of cl 4.5; and (b) on its proper construction, cl 4.5 meant that DC had no on-going obligation to meet ANS' invoices that were rendered on the basis of the use of sub-contracted labour.
9. From at least August 2018, if not much earlier (ie when it filed its Defence in September 2017) DC had put ANS on notice of the above contentions, upon which it ultimately succeeded.
10. But I reject, as too simplistic, the notion that simply because the judgment sum is for just under $50,000 (not inclusive of costs), the defendant should be regarded as the true 'victor' , or that it could be said that ANS had no real prospect of obtaining any better outcome, then that which was offered in each Calderbank offer.
11. As to the first of DC's contentions in this regard, firstly, it does not take into account the operation of the usual rule: that costs follow "the event". Ordinarily, the fact that the plaintiff obtained a monetary verdict would mean that it was entitled to its costs. The 'event', for the purposes of rules on costs, is not whether ANS bettered the settlement sum offered to it, which it rejected: DC had not openly and unconditionally acknowledged ANS' entitlement to a sum equal or greater to that which it obtained in the judgment (Gretton per Hodgson JA at [112]). Secondly, by 13 December 2018, ANS would have incurred substantial expense on account of its own legal costs incurred prior to the trial. This included the costs of its pleadings; the cost of preparing 10 affidavits and attending an unsuccessful mediation. To all intents and purposes, the case was ready to run to trial. If the ordinary rule of costs applied, ANS and its legal advisers would conceivably have doubted whether, once its pre-trial costs had been estimated, to that point, that amount, when added to the sum it eventually recovered on judgment, would or would not exceed the settlement sum offered pursuant to this Calderbank offer. ANS' debt claim was in the order of $370,000 (not including interest). Acceptance of the December 2018 Calderbank offer would have involved a discounting by ANS of what it perceived as its full value by approximately $150,000.
12. There was no evidence before me as to what ANS' estimated pre-trial costs were as at December 2018 or February 2019 (or DC's position for that matter), but by then, ANS had essentially completed its affidavit evidence and, subject to the intense phase of preparatory work usually performed just before the commencement of trial, it would have, by then, incurred a very large sum of legal expenditure, which, if the ordinary rule of costs applied, it could largely expect to recoup, by agreement or by assessment.
13. As to the second of DC's contentions, this is not a case where there was no real prospect that ANS could counter the points upon which DC succeeded in limiting its exposure on the debt claim: the application and effect of cl 4.5 of the Contractor Agreement. Although, in retrospect, the arguments (and evidence) that ANS marshalled were in my view rather weak, they were not hopeless; and they did raise some contestable factual lines of inquiry.
14. Further, another matter relevant to the reasonableness of ANS' rejection of the offers of compromise concerns the basis that DC used for calculating the settlement sums in the December 2018 and February 2019 settlement offers. This was not the same basis which led to the quantification of the judgment sum at trial. Had ANS put forward its calculations (which ultimately DC accepted) as to how the quantum could be calculated for the claim on the footing that cl 4.5 applied, then its case for arguing in favour of an indemnity costs would have been much more powerful. It did not do so.
15. Indeed, in this regard, there was some ambiguity in DC's approach to calculating its settlement sums in both Calderbank offers. In the Calderbank offer of 13 December 2018, the explanatory part of it emphasised that ANS could not succeed in recovering unpaid invoices because it breached the contractor agreement by using sub-contracted labour. But DC's calculations of the settlement sum in that Calderbank offer (which were thereafter adopted in the 3 February 2019 Calderbank offer) were approached on the footing that ANS should recover the difference between what DC had paid ANS and the aggregate amount of what ANS had paid all its workers' expenses, whether they were sourced from the labour of its own workforce, or otherwise. In short, DC's settlement sum calculations were based on a premise contrary (to some extent) to the multiple ways DC put its case at trial.
16. At trial, it will be recalled, DC contended, based upon a construction of cl 4.5 of the agreement that I accepted, that it could only be liable for further payment for ANS' invoices in relation to ANS own workers; not subcontractors or other franchisees. That position was not clearly telegraphed in DC's Calderbank offers. Although the offers were both made, without prejudice and, avowedly for commercial purposes, it is arguable that a reasonable party in ANS' position might have been encouraged, by DC's expressed mode of calculation, to think that there was a real and substantial prospect that, should ANS reject each Calderbank offer, DC might approach questions of quantum at the trial consistently with its calculations expressed in the Calderbank offers; and not as it eventually did, at trial (although, at trial, DC relied upon several possible ways of calculating quantum).
17. In the circumstances, which I regard as finely balanced, I am not persuaded that DC's rejection of each Calderbank offer was so unreasonable as to justify an order for indemnity costs from the date the offers expired.
18. If I am wrong, however, that would not automatically lead to acceptance of DC's application for indemnity costs. As Hodgson JA (with whom Mason P and Beazley JA agreed, on this point) said in Gretton (at [120]-[122]), there are a range of costs outcomes that can follow from the situation where a successful plaintiff rejects a defendant's Calderbank offer and receives less, in the judgment sum than the settlement sum offered. There are several further additional considerations, and here they run both ways.
19. First, ANS was responsible for a large amount of costs by the way it ran its Defence to ANS' claim. It took issue with the plaintiff's mode of proving its claim; it invited the Court to look behind the invoices to determine whether work had been performed; it sought to justify termination of the contractor agreement on various other grounds other than the ground I regarded as being justified; and it brought a cross-claim. It failed on all of these issues. All of them involved a dense factual inquiry and certainly prolonged the litigation, in time and cost, beyond what its limited 'success' would have warranted.
20. Further, although ANS did not specifically seek an order for costs following on from the dismissal of DC's cross-claim, that claim was used by DC as a defence of set-off against ANS' principal claim. As will be apparent from my treatment of DC's cross-claim in the principal reasons (see, in particular [215]-[257]) the factual and evidentiary scope of that claim was a very substantial part of the overall proceeding. Moreover, by that cross-claim, DC raised additional separate or discrete issues, in comparison to DC's other defences to ANS' claim. For the purposes of this application, I propose to treat the costs relevant to the adjudication of DC's cross- claim as being subsumed within the dispute as to the costs of ANS' proceeding against DC.
21. Secondly, there were a range of potential outcomes as to how much ANS would recover for its unpaid invoices, all predicated upon the different ways that DC resisted the claim. DC's written submissions at trial set out a cascading series of issues addressed to each potential outcome. I note, by way of comparison, that the prospect that a plaintiff may achieve multiple different outcomes was a factor militating against the order for indemnity costs in Gretton.
22. Thirdly, DC could have, but did not, make a 'rules' offer; which confers a presumptive, or conditional entitlement to costs if the terms of the offer are no less favourable to the offeror than the terms of the judgment. No such presumption attends the costs consequences of serving Calderbank offers.
23. Fourthly, I agree with DC's submission that ANS did not seriously engage with DC for the compromise of the litigation. It appears to have been irrevocably committed to a view of clause 4.5 which I have found to be erroneous. It took the risky course that its view, in that respect, would not be upheld by the Court. Further, it took that view in spite of DC emphasising what I have ultimately found to be the correct position as to the application and construction of cl 4.5 in the Calderbank offer in December 2018. It may be true, as ANS says, that had the trial simply been reduced to argument as to the application and construction of cl 4.5 of the Contractor Agreement it would have been over in half a day, but, if that be so, then ANS must take a significant share of the responsibility for the case being so prolonged.
24. Fifthly, and related to the last point, I am also conscious that, in circumstances where as here, a defendant has made a prima facie reasonable and genuine offer of settlement (whatever its mode of calculation) there are good public policy reasons for the Court to exercise its discretion in a way that would acknowledge the expectation in the offeror that it benefit from making the offer of settlement if the result that its opponent receives is no more favourable than what was offered. As I have mentioned, this consideration may have lesser force in Calderbank offers, than in rules offers, but it remains a relevant consideration in DC's favour.
25. Sixthly, having regard to the last two points, it would be unfair to DC that there not be some qualification to the usual rule, such that DC is liable to paying all of ANS' costs; even after having served the Calderbank offers and even after it had flagged the point upon which it succeeded, at trial, in significantly limiting its liability to pay ANS' invoices. That would mean, in effect, that it would receive no benefit from serving a genuine and reasonable offer of settlement against its opponent who, I have found, was less than engaged in attempts to compromise the litigation.
26. I consider that in all of the circumstances, both parties are jointly responsible for the costs incurred at the trial. I determine that it is appropriate that a qualification to the costs ought to be made, but rather than costs being awarded on an indemnity basis, or alternatively, an order for one side on the ordinary basis, from the date that the December 2018 Calderbank offer expired, the parties should bear their own costs of the trial and the imminent preparation for it.
27. For these reasons, I make the following orders: 1 Judgment for the plaintiff for the sum of $47,660. 2 The defendant's cross-claim is dismissed. 3 The defendant is to pay the plaintiff's costs on the ordinary basis until 3 January 2019. 4 The parties are thereafter to bear their own costs of the proceeding.

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: 08 April 2019