(5) Where the proceedings terminate after interlocutory relief has been granted, the Court may take into account the fact that interlocutory relief has been granted …'
67 The same question was considered in Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; ex parte Lai Qin (1997) 186 CLR 622. McHugh J said at 624 -625:
'In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd [1971] QWN 13, the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent Council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans.' (Footnotes omitted)
68 The principles discussed in these cases apply where a court is asked to make an order under UCPR 42.19. This was recognised in Fordyce v Fordham , where McColl JA (Beazley and Santow JJA agreeing) said, after pointing out the default orders provided for under the rules governing discontinuance (see UCPR 42.19):
'84 [ UCPR 42.19 is] a relevant, but not determinative, consideration. Other relevant considerations were, as the primary judge concluded, usefully gathered in Lai Qin and Australian Security Commission v Aust-Home Investments Ltd & Ors (1993) 44 FCR 194, notwithstanding, as the discussion below reveals, that they were decided in a different statutory context.
…
87 Once it is recognised, however, that the costs discretion conferred by UCPR 42.19 … is unconfined, the matters referred to in the Lai Qin line of authority are plainly pertinent, although, again, not necessarily determinative.'"
60 The authorities suggest to me that the discretion conferred by r 42.19 will be enlivened where the plaintiff demonstrates some sound positive ground or good reason for departing from the ordinary course, and requires the court to make such order as it thinks just in the particular circumstances of the case.
61 The plaintiff submitted that the defendant should be ordered to pay its costs of the proceedings, including the costs of the interlocutory application, alternatively there should be no order as to costs. It submitted that it was entitled to a favourable costs order on grounds that the unreasonable conduct of the defendant precipitated the litigation and, in the circumstances, it had acted reasonably in commencing the proceedings.
62 It was put that the circumstances which necessitated the interlocutory application were evidenced by the correspondence between the parties, details of which are set out above. Emphasis was placed on the following.
63 In its letter of 23 March 2009 the plaintiff disputed the defendant's requirement to carry out the make good work in accordance with the Australis report, and the suggested liability to pay rent in an amount of over $200,000 as indicated in the report. It said it intended to carry out the work in accordance with the Altium report at a cost substantially less than that proposed by the defendant. In response, the defendant insisted that the work it proposed be carried out by 31 March 2009, the termination date, failing which it would call on the securities to reimburse it for loss and damage suffered.
64 On 26 March 2009 the defendant refused the plaintiff's request that it be given 14 days notice of any action to be taken in respect of the security. By letter of 22 April 2009 the plaintiff repeated its denial of liability for rent, asserted that the amount sought by the defendant was excessive, and that liability be limited to the reasonable costs of the make good work. Subsequently, it invited discussion as to the extent of work required. On 29 April 2009 the plaintiff asked for confirmation that it be given seven days notice of intention to draw on the bank guarantee, failing which an application for injunctive relief would be made. It sought agreement to a proposal that the bank guarantee be returned in exchange for one to cover the possible claim relating to Level 3 on the basis that the only outstanding work was for Level 3, and there had been no loss of rental income. The proposal was rejected.
65 Having been notified by HSBC that the draw down was by a cheque payable to Elderslie, on 27 May 2009 the plaintiff repeated its assertion to the defendant that the amount it claimed was excessive, and sought details of the basis upon which the amount of $480,000 was drawn down. It requested an undertaking that Elderslie would not deal with the proceeds or make any distribution to third parties, including creditors, pending resolution of the question as to any entitlement to draw down under the leases.
66 Without giving the undertaking, on 28 May 2009 the defendant's solicitors advised that they were instructed to hold the cheque and retain it in escrow, and that it was not intended to deposit it until it became necessary to meet the costs of make good work then in progress, and yet to be invoiced. On the same day they also advised that the bank guarantee was drawn to cover, inter alia, make good expenses estimated at $156,000, and compensation for loss of rent during the make good period. It advised that the defendant would draw on the proceeds of the cheque for the payment of make good costs, compensation for rent, and legal costs, and then return the balance of remaining funds to the plaintiff.
67 On 2 June 2009 the plaintiff repeated its assertions that the amounts claimed were excessive, and the rent claim was baseless. It disputed entitlement under the leases to draw down almost the whole of the amount guaranteed prior to sustaining actual loss. It sought an undertaking not to deposit the cheque, or deal with its proceeds, without giving five days notice, failing which urgent injunctive relief would be sought.
68 On 12 June 2009 the plaintiff was informed that the undertaking was declined. On 16 June 2009 it commenced these proceedings.
69 In short, the plaintiff submitted that in circumstances where, from the outset, there was a clear dispute as to the reasonableness of the extent and costs of the make good work, and as to the claim for consequential loss of rent, and as to any entitlement under the leases to draw upon the bank guarantee where no actual loss or expense had been incurred, it would have been reasonable for the defendant to provide the undertakings requested (for example in the letter of 27 May 2009) and thereby avoid commencement of proceedings. In particular, it was put that it was unreasonable and provocative to have drawn down the amount of $480,000, rather than an amount equivalent to a reasonable amount for expenses incurred for make good work.
70 Further, it was submitted that the defendant's failure to undertake not to deal with the cheque pending resolution of the disputed issues supported the plaintiff's fear that there was a real risk that Elderslie would be permitted to deal with the cheque with third parties, including creditors, and thereby put the proceeds beyond recovery under any subsequent claim by the plaintiff for damages. It submitted that, taken overall, the plaintiff's conduct in commencing the proceedings and in maintaining them, to the extent they were maintained was reasonable.
71 Accordingly, the plaintiff submitted that it had established the basis for the exercise of discretion under r 42.19 which warranted the making of a favourable costs order.
72 In opposing the plaintiff's costs claims, the defendant sought an order that the plaintiff pay its costs of the proceedings, including the cross-claim on an indemnity basis, alternatively on the ordinary basis.
73 The claim for indemnity costs was based on cl 9.2 and cl 11.3 of the Level 3 lease, and cl 12.4 and cl 13.4 of the Level 2 lease which, in effect, obliged the plaintiff to pay the defendant's costs and expenses for which the defendant became liable as a consequence of the plaintiff's default or breach under the leases, for example, costs and expenses incurred in rectifying breaches. Relevantly, it was claimed that the legal costs of these proceedings were costs incurred by reason of the plaintiff's default under the leases, thus entitling the defendant to indemnification for such costs.
74 The defendant submitted that the plaintiff was in breach of its obligation to make good prior to the termination date, the consequence of which was that the defendant drew down under the bank guarantee. As these proceedings concern the defendant's entitlement to do so, it was put that these proceedings arose as a consequence of, or in connection with, the plaintiff's breach, hence rendering the plaintiff liable under the relevant provisions of the leases to indemnify the defendant for its legal costs incurred in these proceedings. The claim was said to be in accordance with claims 4 and 5 under the cross-claim for orders for costs on an indemnity basis, alternatively on the ordinary basis, based upon the pleaded breaches of the plaintiff's make good obligations under the leases.
75 It was argued that these claims under the cross-claim had not been resolved by the settlement which resulted from the acceptance by the plaintiff on 9 October 2009 of the defendant's offer, which had been confirmed by the defendant on 13 October 2009. It was put that, as a matter of construction, the settlement agreement left open the claim for indemnity for legal costs of these proceedings as pleaded in the cross-claim. (The relevant allegations and particulars in support as pleaded in the cross-claim are referred to in pars 43, 44, 45 above.)
76 Alternatively, and in reply to the plaintiff's claim, the defendant submitted that in the circumstances, the commencement and continuation of the proceedings by the plaintiff was unreasonable. Reliance was placed on the correspondence as evidence of this conduct. The defendant's submissions are summarised as follows.
77 It was put that although warned by the defendant on 4 March 2009 to make good by the termination date, the plaintiff, in breach of the leases, did not do so. (Reference was also made to the email of 12 February 2009 by which the defendant's agent advised the plaintiff that all make good requirements should be completed by the termination date, to which no response was made.) It was pointed out that the letter of the defendant's solicitors of 28 May 2009 informed the plaintiff of the defendant's intention not to deposit the cheque until it became necessary to pay for make good works then in progress in about four to six weeks time. It was put that, acting reasonably, the plaintiff would have accepted that there was no threat to deal with the cheque within that period, and the cheque would be secure without the undertaking sought. It was argued that the defendant had acted hastily, and unreasonably, in approaching the court on 16 June 2009, having regard to the matters canvassed in the preceding correspondence including the plaintiff's threats on 25 March 2009 and 29 April 2009 to apply for injunctive relief which were not acted upon.
78 The defendant submitted that, in truth, the dispute concerned the make good costs and not rent as shown, for example, in the letter to the plaintiff's solicitors of 20 April 2009 which referred only to make good costs. It put that the defendant had merely reserved its position on rent, and no issue as to rent arose until the cross-claim was filed. It was put that the defendant was entitled to call on the bank guarantee in the prevailing circumstances where, in effect, the plaintiff had admitted that work was required, and expenditure would be incurred. On the defendant's construction of the lease, it said that it was entitled to draw down for any amount of expense or loss it had incurred or might incur, particularly in circumstances where no offer of payment had been made by the plaintiff and the defendant was likely to be out of pocket.
79 Furthermore, given that the plaintiff had been advised on 7 May 2009 that the defendant was the manager of the trust, the plaintiff's fear that the cheque would be improperly dealt with was baseless.
80 The defendant further submitted that the outcome of the proceedings established that it had emerged as the victor. It was pointed out that the defendant's estimate on 9 April 2009 for make good costs was $170,655 against the plaintiff's estimate of $42,800. As the matter was ultimately settled to allow the sum of $169,836.71 to be released to the defendant to pay such costs, the overall success in the proceedings was with the defendant.
81 Accordingly, having regard to what was said to be the unreasonableness of the plaintiff in commencing and continuing the proceedings, and to their outcome, it was submitted that the exercise of discretion required that the plaintiff be ordered to pay the defendant's costs of the proceedings, including the costs of the cross-claim.
82 In reply to the claim for indemnity under the leases, the plaintiff submitted that this, as with all other claims under the leases, had been resolved upon acceptance of the principal offer. All that remained open for determination, at the court's discretion, was the question of costs of these proceedings.
83 It was put that had it been otherwise it may be expected that the parties would have expressly reserved for later determination the issues under the cross-claim which asserted a contractual right to indemnity, and the existence of any breach of the relevant provisions of the leases.
84 Alternatively, it was put that under the applicable provisions of the leases, the indemnity extended only to costs incurred in consequence of a breach, of which there was no evidence. Further, it was put that had there been a breach it had been embraced in the settlement, alternatively no breach had been established in evidence and, accordingly, the claim was without foundation.
Determination
85 I turn first to the defendant's claim for indemnity costs, the outcome of which turns on the proper construction of the settlement agreement.
86 The offer of 30 September 2009 was expressed to be a Calderbank offer, without prejudice save as to costs. Its terms are set out in par 48 above. The basis of the principal offer was specified, and the supporting invoices were provided. The costs offer was for the amount of $75,000, proposed without elaboration.
87 A Calderbank offer is a well understood means of making an offer of settlement. Had this offer not been accepted, and the case proceeded to trial with an outcome more favourable to the defendant than one resulting from acceptance of the offer, it would have afforded the defendant the basis for seeking a costs advantage. The relevant principles were referred to in Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 by Ipp JA (Mason P, McColl JA agreeing):
"7 … Calderbank offers do not give rise to a prima facie presumption in favour of indemnity costs if the offer is not bettered: Leichhardt Municipal Council v Green [2004] NSWCA 341. The matter remains one for the court's discretion ( Jones v Bradley (No 2) [2003] NSWCA 258), the exercise of which depends on all the circumstances of the case: SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 (at [37] per Giles JA). It is well established that a Calderbank offer will not justify an indemnity costs order unless its rejection was unreasonable : Jones v Bradley (No 2) ; SMEC Testing Services Pty Ltd v Campbelltown City Council ; Leichhardt Municipal Council v Green ; Brymount Pty Ltd v Cummins (No 2) [2005] NSWCA 69 (at [14] per Beazley JA); Russell v Edwards (No 2) [2006] NSWCA 52 (at [6] to [7])."
88 It is to be assumed that the defendant's solicitors, when making the offer, and the plaintiff's solicitors, when accepting the principal offer and rejecting the costs offer, acted with these principles in mind. The defendant's letter contained nothing to indicate that the costs offer was for a sum for indemnity costs of the proceedings under the relevant provisions of the leases as claimed in the cross-claim, or to indicate that the amount was other than for costs on the ordinary basis. With regard to the principles referred to, both parties may be taken to have intended that non-acceptance of either offer would not automatically lead to an indemnity costs order for the defendant. In other words there was nothing to indicate that the parties intended that the principles relevant to the costs consequences of non-acceptance of a Calderbank offer did not apply.
89 The offers were expressed in unambiguous terms to be in full settlement of the proceedings which, self evidently, included the issues under the cross-claim. Had it been intended to except from settlement the claim for indemnity costs raised in the cross-claim, in my opinion express provision for such exception was required. In my opinion a commonsense construction of the letters of offer and acceptance establish that the rejection of the costs offer left outstanding only the question of costs of the proceedings to be determined in the exercise of the court's discretion in the usual way. Acceptance of the principal offer put an end to all other claims in the proceedings.
90 Accordingly, the defendant's claim for indemnity costs must be rejected.
91 I turn now to consideration of the costs order to be made under r 42.19. Essentially, the determination of the competing claims for costs requires, on the one hand, an assessment of the reasonableness of the defendant in refusing to give the undertakings sought by the plaintiff prior to the commencement of proceedings and, on the other, the reasonableness of the plaintiff in commencing them.
92 As the correspondence has been set out earlier, it is unnecessary to recite the details. It demonstrates that from 23 March 2009 until the interlocutory orders were made on 19 June 2009 there was a real dispute as to the extent and cost of the make good work, and as to the validity of the defendant's claim for rent, and as to the entitlement of the defendant to draw down under the bank guarantee for the amount of $480,000, or at all.
93 On 29 April 2009 the plaintiff, inter alia, sought agreement to a proposal that the bank guarantee be returned in exchange for one to cover the possible claim relating to Level 3 on the basis that the only outstanding work was for Level 3, and there had been no loss of rental income. The proposal was rejected.
94 On 25 May 2009 the defendant drew down under the bank guarantee having given no notice as to when, or for what amount it would do so, or of particulars in support of the amount drawn down. This action prompted the plaintiff's response on 27 May 2009 in which it repeated the matters of which it said there was a genuine dispute. The plaintiff sought an undertaking that there be no further dealing with the proceeds of the cheque pending resolution of the disputed question as to the legal basis upon which the bank guarantee was drawn down. The letter advised that if the undertaking was not provided by 4pm next day, application for interlocutory relief would be made.
95 The effect of subsequent letters from the defendant, including the letter of 12 June 2009, was to inform the plaintiff of the intention to apply $156,000 progressively towards items which included make good costs and compensation for rent, and to decline to provide the undertakings.
96 On 19 June 2009, when the matter was first before the court, the defendant provided an undertaking in terms substantially similar to those earlier sought, and consented to orders the effect of which was to preserve the proceeds of the cheque pending determination of the proceedings subject to the release of monies not exceeding $150,000 to meet make good costs.
97 In my assessment, the regime provided by these orders was tantamount to the arrangement proposed by the plaintiff in its letters of 22 April, 27 May, and 2 June 2009. The proposals had allowed for payment for make good work in the amount claimed by the defendant or, at least, to meet costs actually incurred. The draw down by Elderslie confronted the plaintiff with a fait accompli which put Elderslie in a position to use the proceeds of the cheque as it, or the liquidator, saw fit, including for the payment of disputed amounts of make good costs yet to be invoiced. I am satisfied that, in the circumstances, the proposals were reasonable.
98 It is difficult to see what, if any, inconvenience would have been suffered by the defendant had it accepted any of the proposals. I am satisfied that the defendant's conduct in rejecting them, coupled with an inflexible insistence that it was entitled to do what it did, was unreasonable in the circumstances, and precipitated the commencement of proceedings which could have been avoided by acceptance. Furthermore, in my opinion, reasonableness required the defendant to make some evaluation of the plaintiff's case as presented in the correspondence. Had it done so, it should have recognised that the plaintiff's claims were at least arguable, and, accordingly, there was a real likelihood that the plaintiff would be successful in obtaining an order to preserve the status quo which restrained Elderslie from dealing further with the proceeds of the cheque pending determination of the dispute. In my opinion its failure to recognise the plaintiff's likely prospects of success and to take appropriate steps to avoid the litigation is further indication of unreasonable conduct on its part. It was reasonable for the plaintiff to commence the proceedings in order to preserve the proceeds of the cheque pending determination of the dispute.
99 As for the defendant's submission that, ultimately, it was the victor, my opinion is that it must be rejected having regard to the undertakings and consent orders of 19 June 2009. As I have said, the arrangement so reached was to substantially the same effect as the plaintiff had earlier proposed.
100 Accordingly, the plaintiff has demonstrated good reason for departure from the ordinary course under r 42.19. I generally accept the plaintiff's submissions. The costs order should relate to the whole of the proceedings, including the interlocutory application and the cross claim. It would be artificial and unjust to treat them separately. The referral proceedings which were dismissed with costs on 17 September 2009 are not included.
101 In my opinion, the proper exercise of discretion requires an order that the defendant pay the plaintiff's costs of the proceedings.
Orders
102 It is ordered that: