Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan

Supreme Court of NSW|2023-08-03|Before: Robb J

JUDGMENT

These reasons deal with the final substantive orders and orders for costs that should be made in these proceedings. The latter requires the Court to decide the effect of a number of offers of compromise made by Mr Vaughan during the course of the proceedings.
This is the fourth judgment that the Court has delivered in these proceedings. The previous judgments are Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan [2018] NSWSC 1455 (J1) delivered on 27 September 2018, Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 2) [2019] NSWSC 509 (J2) delivered on 7 May 2019, and Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 3) [2023] NSWSC 679 (J3) delivered on 22 June 2023.
The history of these proceedings is now so extended and convoluted that it will be necessary for the purposes of these reasons to assume that the reader is familiar with the content of the three previous judgments.

Short minutes of order proposed by the parties

Mr Dlakic proposes that the Court make final orders in the terms of the following draft short minutes of order: THE COURT NOTES THAT: 1. The plaintiff elects to affirm the buyback agreement which entitles him to compensation calculated in accordance with the First Scenario (as defined in Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 3) [2023] NSWSC 679). THE COURT ORDERS THAT: 2. Judgment be entered for the plaintiff against the defendant in the sum of $521,621.11 plus pre-judgment interest in the sum of $240,160.46 calculated in accordance with the attached schedule. 3. The defendant is to pay: a. The plaintiff's costs incurred since 14 May 2019 as agreed or assessed including: i. his costs of the reference; ii. his costs of 8 August 2019; iii. his costs of 9 July 2021. b. The plaintiff's costs of the Notice of Motion filed 10 March 2021 as agreed or assessed. c. The plaintiff's costs of and incidental to the appearances on: i. 25 March 2021; ii. 3 May 2021; d. Interest on the plaintiff's costs.

Determination of the interest payable on the compensation

The parties disagree as to the proper basis for the calculation of pre-judgment interest.
The first issue that arises in relation to the calculation of the amount of interest that Mr Vaughan should be ordered to pay to Mr Dlakic is whether Mr Dlakic was correct to calculate that interest on the basis that the whole of the amount of $521,621.11 ought to have been paid to him on the date of the buyback agreement. The quantification of the Unbilled WIP component of the First Scenario compensation was considered at J3 [202]-[218]. As explained at J3 [204], Mr Dlakic was entitled to be paid all of the legal fees received by Mr Vaughan after the date of the buyback agreement on 25 November 2014 for work done for clients before that date, whenever the clients were sent a tax invoice for the legal work done. It follows that Mr Vaughan will have received the amounts paid by clients for work done before 25 November 2014 at different times after that date. Mr Vaughan was only required to remit those amounts to Mr Dlakic after they were received. It therefore follows that Mr Dlakic is not entitled to interest calculated on the whole amount from 25 November 2014.
The other component of the First Scenario compensation is the Post-Buyback Expenses of $199,683 that were considered in J3 [194]-[198]. As noted at J3 [194], this amount was determined by Ms Exner at R2 [2.8]. The components of this amount of compensation represent amounts paid by Mr Dlakic after the date of the buyback agreement for the expenses of Johnston Vaughan, on the assumption that Mr Dlakic affirms the buyback agreement. They were in effect amounts had and received by Mr Vaughan. Mr Dlakic became entitled to repayment of the amounts at the times they were paid after the date of the buyback agreement. Consequently, interest should be calculated on each amount from the time that it was paid.
In relation to the calculation of interest on the Unbilled WIP payments, Mr Vaughan's written submissions correctly doubt that the interest should be calculated from 25 November 2014, but they do not offer any assistance as to how the correct calculation should be carried out. I infer that is because the Court has made no findings concerning the times when the individual payments of fees were received by Mr Vaughan. That was because, as will be explained below in some detail, Mr Vaughan did not comply with the notice to produce that was served on him by Mr Dlakic before the commencement of the first hearing in these proceedings to produce to the Court all of the financial records of the practice of Johnston Vaughan that would ordinarily be taken for granted would be maintained by a functioning solicitor's practice.
It will be necessary in the circumstances for the Court to make a practical determination of a fair adjustment to the calculation of interest made by Mr Dlakic to allow for the fact that, on average, the Unbilled WIP payments will have been received at different times after 25 November 2014. I will return to this issue after I have considered the equivalent problem that applies to the Post-Buyback Expenses.
The Court has also not made any findings concerning when the individual components of the Post-Buyback Expenses were paid by Mr Dlakic. In principle, as these payments were made by Mr Dlakic, the times when they were paid should appear from the records of Mr Dlakic that were used to prove the making of the payments. Ms Exner, at R2 [2.8], referred to R2 [3.40]-[3.44] for her explanation as to how she calculated the amount of $199,683. Ms Exner in those paragraphs referred back to R1 [2.23]-[2.28]. It appears that Ms Exner determined the amount of the Post-Buyback Expenses on a basis that did not lead her to stipulate when each amount was paid.
The result is that there has been no finding as to when each amount that comprises the Unbilled WIP was received by Mr Vaughan or when each amount of the Post-Buyback Expenses was paid by Mr Dlakic, and it is no longer feasible to make findings on those matters.
In the circumstances, I propose to exercise my discretion as to the award of interest under s 100 of the Civil Procedure Act 2005 (NSW), by allowing for the spread of the payments received or made by assuming that they all occurred four months after the 25 November 2014 buyback agreement, being 25 March 2015. Using the schedule for the calculation of interest provided with Mr Dlakic's submissions, the amount of interest of $240,160.46 will be reduced by $11,239.86 (being 37 days in 2014 and 84 days in 2015 at 6.5% per annum). Judgment will therefore be given in favour of Mr Dlakic for $228,920.60.
Subject to making an equivalent adjustment to the calculation of the interest payable by Mr Vaughan to Mr Dlakic up to the dates that each of the offers of compromise was served, the observations made on behalf of Mr Vaughan in pars 5 and 6 of his proposed short minutes of order are correct insofar as they say that, for the purpose of determining the effectiveness of an offer of compromise, Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.16 requires that interest on the amount of the primary judgment only be calculated up to the date on which the offer was made. Whatever approach is adopted to the calculation of interest on this basis, the total amount of the judgment calculated solely on the basis of the compensation Mr Dlakic may have received was at the date of each offer of compromise less than the amount offered by Mr Vaughan.
However, pars 5 and 6 of Mr Vaughan's proposed short minutes of order are incorrect if they were intended to suggest that the interest that should be included in the judgment of the Court made now should be limited to the interest that would have been included in a judgment made on the dates of the offers of compromise. Whatever the effect on Mr Dlakic's entitlement to be paid his costs, the judgment that is now made in his favour must include the full amount of interest up to the present date. As stated, that will be $228,920.60.

Appropriate costs orders leaving aside the offers of compromise

I will now turn to a consideration of the costs orders that should be made on the assumption that the offers of compromise served by Mr Vaughan were not effective to cause the Court to make different costs orders than it would usually make in the ordinary course.
The costs orders sought by Mr Dlakic are set out in order 3 of his proposed short minutes of order. This issue must be considered in the light of the costs orders made on 14 May 2019 to give partial effect to J1 and J2, which were as follows: 17 Orders the Defendant to pay the Plaintiff's costs of these proceedings, other than the claims made by the Plaintiff for damages for professional negligence in respect of the loans made by Mr Fetin and Dr Vince pleaded in pars 34-45 and 46-53 respectively of the amended statement of claim (the professional negligence claims). 18 Orders the Plaintiff to pay the Defendant's costs of the professional negligence claims.
As I understand it, Mr Vaughan accepts that these orders will stand insofar as they deal with costs of the proceedings up to 18 December 2018. I also understand that Mr Vaughan has included order 8A of his proposed short minutes of order only to make it clear that Mr Dlakic is only required to pay the costs the subject of order 18 made on 14 May 2019 on the ordinary basis.
I found at J3 [231] that, subject to the effect of any offers of compromise served by Mr Vaughan, Mr Dlakic is entitled to an order that Mr Vaughan pay all of his costs incurred after 14 May 2019 on the ordinary basis. At J3 [232], I found that these costs should include the costs of the reference that Mr Vaughan was ordered to pay in the first instance by order 13 made on 14 May 2019. At J3 [234]-[242], I dealt with Mr Dlakic's application for orders that Mr Vaughan be ordered to pay his costs of specific aspects of these proceedings in any event, even if a general costs order was not made in favour of Mr Dlakic for the proceedings after 14 May 2019.
As I am satisfied that an order should be made, subject to the effect of the offers of compromise served by Mr Vaughan, that Mr Vaughan pay Mr Dlakic's costs of the proceedings after 14 May 2019, including his costs of the reference, on the ordinary basis, I am not sure why Mr Dlakic has sought in his proposed order 3 separate costs orders for individual parts of these proceedings. I am also not sure whether the separate costs orders will equate to a general order that Mr Vaughan pay Mr Dlakic's costs after 14 May 2019 on the ordinary basis. I would prefer to make the general costs order.
Order 3(d) proposed by Mr Dlakic would require Mr Vaughan to pay interest on the costs payable to Mr Dlakic. Mr Vaughan's proposed short minutes of order do not include an equivalent order. Subject to the effect of the offers of compromise served by Mr Vaughan, an order should be included requiring Mr Vaughan to pay Mr Dlakic interest on his costs from the dates those costs were paid by Mr Dlakic: see s 100(4) and (5) of the Civil Procedure Act and Lahoud v Lahoud [2006] NSWSC 126 at [83] per Campbell J (as his Honour then was).

Offers of compromise served by Mr Vaughan

Mr Vaughan served his first offer of compromise pursuant to UCPR r 20.26 on 18 December 2018. The covering letter stated that Mr Vaughan also relied upon the offer of compromise under the principles in Calderbank v Calderbank [1975] 3 WLR 586. The operative part of the offer of compromise provided: 1. In the matter (2016/00368205) judgment for the defendant in the claims relating to loan agreements with Dr and Ms Vince and Mr Aysan Fetin; 2. In the matter (2016/00368205) judgment for the plaintiff in the remaining claims in the total sum of $650,000; 3. In the matter (2016/0032 1090) judgment for the cross-defendant and dismissal of the cross claim. 4. This offer is open for acceptance for a period of 28 days; 5. This offer is made in accordance with Rule 20.26 of the Uniform Civil Procedure Rule 2005.
Mr Vaughan's second offer of compromise was served on 20 February 2019, and was made on the same basis as the first offer. It was in the same terms as the first offer except that the amount stipulated in par 2 was increased to $750,000.
Mr Dlakic did not accept the first offer of compromise in the time allowed and his solicitor rejected the second offer by letter dated 22 February 2019.

Compliance of offers with formal requirements

Mr Dlakic made the following submissions as to why the offers of compromise did not comply with the requirements of UCPR r 20.26: 16. First, the Court should find that neither of the offers were valid as they did not identify the proposed orders for disposal of the claim or part of the claim (UCPR r 20.26(2)(a)(ii)). Both offers referred to multiple judgments for different parties (i.e. the plaintiff and the defendant) in the same proceedings (2016/368205) in respect of different "claims". What order would the Court enter in those circumstances in respect of the proceedings? 17. Second, as a result of those multiple judgments, the offers were not capable of acceptance. By way of example in relation to the First Offer, it was not open to the plaintiffs to accept an offer of a "judgment for the defendant in the claims relating to loan agreements with Dr and Ms Vince and Mr Ayan Fetin" in proceedings 2016/368205 and "judgment for the plaintiff in the remaining claims in the total sum of $650,000". The Second Offer suffers from the same vice.
I will deal with Mr Dlakic's third submission below, which is based upon the inadequate response made by Mr Vaughan to a notice to produce the financial records of Johnston Vaughan to the Court before the commencement of the first hearing.
Both offers of compromise were made by Mr Vaughan after J1 was delivered on 27 September 2018. Paragraph 1 reflected a finding in J1 that Mr Dlakic had failed in his claims for compensation from Mr Vaughan for professional negligence in relation to the loans made to Mr Dlakic by the persons referred to in par 1. Paragraph 3 reflected the fact that Mr Vaughan had advised the Court during the hearing that he withdrew his cross claim against Mr Dlakic. Paragraphs 1 and 3 therefore were consistent with the findings that the Court had already made in J1.
The only paragraphs in each of the offers of compromise that have any significance to the determination of the costs orders that should be made in these proceedings are pars 2 in each of the offers. In essence, Mr Vaughan offered to compromise all outstanding claims as at the time of the publication of J1 by paying to Mr Dlakic first $650,000, and then $750,000.
Uniform Civil Procedure Rules r 20.26 relevantly provides: 20.26 Making of offer (1) In any proceedings, any party may, by notice in writing, make an offer to any other party to compromise any claim in the proceedings, either in whole or in part, on specified terms. (2) An offer under this rule - (a) must identify - (i) the claim or part of the claim to which it relates, and (ii) the proposed orders for disposal of the claim or part of the claim, including, if a monetary judgment is proposed, the amount of that monetary judgment, and (b) if the offer relates only to part of a claim in the proceedings, must include a statement - (i) in the case of an offer by the plaintiff, as to whether the balance of the proceedings is to be abandoned or pursued, or (ii) in the case of an offer by a defendant, as to whether the balance of the proceedings will be defended or conceded, and …
I do not accept that the offers of compromise are technically deficient for the reasons submitted by Mr Dlakic. As explained, the offers were made after the publication of J1, which had already decided that Mr Dlakic's professional negligence claims against Mr Vaughan had failed, and recorded that the cross claim by Mr Vaughan had been withdrawn. Paragraph 2 of each of the offers was clearly intended to dispose of the whole of the balance of the proceedings. In making the offers, Mr Vaughan was not making separate offers to compromise different parts of the proceedings. He was suggesting orders to deal with aspects of the proceedings that had already been determined or recorded by J1, and then making a separate global offer to compromise the whole of the proceedings that remain to be decided. As will be seen below, there are nonetheless difficulties with the terms of the offers of compromise, but they are not difficulties that involve technical non-compliance with UCPR r 20.26.

Matters relevant to the effectiveness of the offers of compromise

A number of matters are relevant to the effectiveness of the offers of compromise served by Mr Vaughan, and in particular whether the Court should 'order otherwise' under UCPR r 42.15(2). That rule provides: 42.15 Where offer not accepted and judgment no more favourable to plaintiff (1) This rule applies if the offer is made by the defendant, but not accepted by the plaintiff, and the plaintiff obtains an order or judgment on the claim no more favourable to the plaintiff than the terms of the offer. (2) Unless the court orders otherwise - (a) the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and (b) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, assessed on an indemnity basis - (i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and (ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made.

Need for second hearing and J2 in any event

First, as noted at J1 [481], those reasons necessarily left unresolved many 'loose ends' that required consideration by the parties for the purpose of the submission of draft short minutes of order to give effect to the reasons. They included the consequences of the inadequacy of the response of Mr Vaughan to the notice to produce served by Mr Dlakic that I will consider in more detail below. They also included the consequences of Mr Dlakic's entitlement that was decided in principle in J1 to be registered as the holder of one of the two shares in Davlite Pty Ltd (Davlite), which was the company that owned the property from which the practice of Johnston Vaughan was conducted.
It was necessary for the Court to conduct the hearings on 28 March and 4 April 2019 that led to the publication of J2 on 7 May 2019, in order to determine the orders that should be made by the Court to give effect to the reasons in J1 that dealt with subjects other than the amount of compensation payable by Mr Vaughan to Mr Dlakic. Those orders were made on 14 May 2019. Some of the orders are set out in J3 [46]. Both of Mr Vaughan's offers of compromise were made between the publication of J1 and the hearing that began on 28 March 2019. The point of these observations is that, even if the offers of compromise were otherwise effective, in my view they would not have the effect of justifying an order that Mr Dlakic pay Mr Vaughan's costs of the hearing on 28 March and 4 April 2019 or the preparation for that hearing. That forensic effort was needed in any case to enable the Court to make orders to give effect to the reasons in J1, which in practical terms was incomplete, and dealt with subjects other than the amount of the compensation payable by Mr Vaughan to Mr Dlakic.

Significance of Mr Dlakic's right to elect between remedies

Secondly, it must be remembered that in J1 the Court found that Mr Dlakic had a right of election to affirm or rescind the buyback agreement. The reasons in J1 did not contain sufficient findings to enable Mr Dlakic to know which election would be most favourable to him. That was because of the inadequacy of Mr Vaughan' response to the notice to produce that I will consider below. Relevantly for present purposes, Mr Dlakic retained the right to elect to rescind the buyback agreement. That election would have raised issues concerning the restoration of the status quo that were considered at J2 [15]-[18]. Mr Dlakic would not have been able to resume the conduct of the practice of Johnston Vaughan himself because his practising certificate had been suspended and the deterioration in his mental faculties left no real possibility that he would regain the right to practice.
However, as discussed at J2 [42]-[49], Mr Dlakic had entered into a conditional agreement for the sale of the practice of Johnston Vaughan. The point of these observations is that the right of election that Mr Dlakic retained meant that his remedy may not have been limited to the payment of compensation by Mr Vaughan. There may have been an element of compensation together with the transfer of the practice of Johnston Vaughan by the direction of Mr Dlakic to his purchaser.
As recorded at J3 [8], during the hearing that led to the publication of those reasons, the Court was told that Johnston Vaughan had ceased to operate on 30 June 2019. As I then noted, the consequence was that, for all purposes, any consideration of Mr Dlakic being able to conduct the practice of Johnston Vaughan or to sell it became academic. Mr Vaughan apparently unilaterally decided to cease the conduct of the practice of Johnston Vaughan. As recorded elsewhere, Mr Vaughan continued to practice as a solicitor under his own name. The relevance of this for present purposes is that Mr Dlakic's right of election to rescind the buyback agreement and to recover the benefit of the practice of Johnston Vaughan that was alive when each of the offers of compromise was served was terminated by the unilateral conduct of Mr Vaughan. The legitimacy of that conduct was not an issue that had been raised in the proceedings. However, it remains relevant to the determination of the effectiveness of the offers of compromise that par 2 of each offer required Mr Dlakic to accept a lump sum compensation. Neither offer dealt with the possibility that Mr Dlakic may have elected to rescind the buyback agreement. Mr Vaughan's unilateral termination of the practice of Johnston Vaughan has had the retrospective effect of obscuring the need to consider the potential value to Mr Dlakic of recovering the practice of Johnston Vaughan in assessing whether the final outcome of these proceedings was no more favourable to Mr Dlakic than the terms of the offers for the purposes of UCPR r 42.15.

Significance of Mr Dlakic's equitable entitlement to a share in Davlite

Thirdly, it is necessary to address the significance of the fact that at the original hearing Mr Dlakic claimed a declaration that the transfer of one of the shares in Davlite from Mr Dlakic to Mr Vaughan as a result of Mr Vaughan having represented to ASIC on 27 August 2012, without Mr Dlakic's consent, that Mr Dlakic had transferred that share to Mr Vaughan was void, or alternatively an order setting the transfer aside: see J1 [6]. The Court dealt with that claim at J1 [326]-[465], and concluded in the last-mentioned paragraph that Mr Dlakic remained in equity the owner of the share.
On 14 May 2019, as part of the orders that gave effect to the reasons in J1 and J2, the Court made the following orders: 14. Directs the Australian Securities and Investments Commission to correct the register of members of Davlite Pty Ltd to show the Plaintiff as the holder of one (1) of the two (2) issued shares in that company. 15. Orders the Defendant to make all reasonable attempts to produce to the Court the register of members of Davlite Pty Ltd within 10 days of the publication of this judgment. 16. Grants liberty to the Plaintiff to apply to have his name recorded in the register of members of Davlite Pty Ltd if such register is produced by the Defendant.
The significance of these orders may have been forgotten by the parties, as they were some of the relatively few orders that the Court was able to make that actually resolved one of the issues at the hearing. I am not aware of the Court being told anything about the performance of these orders, and I assume that, whatever was necessary to be done to make Mr Dlakic the holder of one of the two shares in Davlite, was done.
As I have explained above, par 2 of each of the offers of compromise served by Mr Vaughan dealt with all remaining issues in the proceedings after the publication of J1, other than Mr Dlakic's professional negligence claims against Mr Vaughan (which were to be dismissed) and Mr Vaughan's cross claim against Mr Dlakic (which had been withdrawn). Paragraph 2 of the offers of compromise required that Mr Dlakic accept $650,000, or $750,000, as a compromise of all of his remaining claims. I have already explained above how that compromise would have terminated the extant right of Mr Dlakic to elect to rescind the buyback agreement and regain the benefit of ownership of the practice of Johnston Vaughan. But it would also have had the effect of extinguishing Mr Dlakic's right to be reinstated as a holder of one of the issued shares in Davlite. Consequently, the determination of whether the orders made by the Court in favour of Mr Dlakic will be no more favourable to Mr Dlakic than the terms of either offer of compromise would require the Court to be able to assess and add the value of Mr Dlakic's holding of one of the shares in Davlite to the amount of the compensation that Mr Vaughan will be ordered to pay to Mr Dlakic, together with interest calculated up to the date each of the offers was made. Davlite owned the property in the commercial part of Kogarah that it leased to the person who conducted the practice of Johnston Vaughan. The Court has not been given any evidence of the value of the property. Nor has the Court been given evidence of the value of one of the two shares in Davlite.

Significance of Mr Vaughan's failure to comply with the notice to produce

Fourthly, it is necessary for the Court to consider the consequences of the conduct to the proceedings of the failure by Mr Vaughan to properly respond to the notice to produce the financial records of Johnston Vaughan that was served on him by Mr Dlakic before the commencement of the original hearing. For that purpose, it will be appropriate to set out as background relevant parts of my earlier judgments in the context of the chronology of the determination of these proceedings.
The conclusion that I reached in J1 concerning the issue that is now relevant was as follows: [471] The position that has been reached is that Mr Dlakic has succeeded in his claims that in principle he is entitled to an order setting aside the buyback agreement and that he is entitled to be reinstated as the holder of one of the two shares in Davlite. He has failed in his two negligence actions against Mr Vaughan, so that in due course orders will be made dismissing those aspects of his claim. [472] It will be necessary for the parties and the Court to address the issue of the orders that are appropriate to be made in respect of those claims for which Mr Dlakic has been successful. [473] In relation to the setting aside of the buyback agreement, the Court should not simply make an order to that effect and ignore the consequences. The parties will be given an opportunity to confer about the matter, and in the absence of agreement, to make further submissions to the Court as to the orders that are appropriate. [474] I have discussed on a number of occasions the apparent significance of the inadequate response by Mr Vaughan to the notice to produce that was served upon him by Mr Dlakic. I have taken the view that the absence of adequate documentation concerning the affairs of Johnston Vaughan has had serious consequences to the conduct of these proceedings. Primarily, it has impaired Mr Dlakic's ability to make considered choices about the relief that he should pursue. It has also impaired the capacity of the Court to make case management orders for the just, quick and cheap completion of these proceedings. As to this last matter, the Court would hesitate simply to make an order that an accounting take place, without the Court having an adequate understanding of the practical consequences and being able to facilitate an appropriate and cost-effective determination of the remaining issues. [475] I should make it clear that I do not contemplate that the parties will be permitted to lead further evidence where that evidence could have and should have been led at the hearing, to enable them to remedy any deficiencies in the cases that they have presented. On the other hand, I am satisfied that it will not be appropriate for the Court simply to make case management orders and then leave the parties to pursue the attempt on Mr Dlakic's part, that has failed thus far, to gather the documents that ought to exist concerning the financial affairs of Johnston Vaughan at relevant times. That is an exercise that should take place first, and should be facilitated by the full force of the Court to ensure that all available documents are produced in a timely and complete fashion. Only then will the Court and the parties have some chance to determine how these proceedings should be brought to a proper conclusion. [476] Mr Dlakic made an application for the Court to make an order at this stage of the proceedings that Mr Vaughan pay the costs of the accounting that will be necessary, on the basis that it was his failure to comply with the notice to produce that has prevented the accounting effectively being undertaken during the hearing that has now been completed. It is premature for the Court to consider the issue of costs. Mr Vaughan is clearly at risk of an adverse costs order on this issue, but the evidence does not yet establish positively the extent to which Mr Vaughan's response to the notice to produce was inadequate, or what the consequences have been. It is also likely that a separate accounting exercise would have been necessary in any event. … [480] The issue of the cost of the proceedings [raises] complex questions, and a decision will be necessary as to whether those questions should be addressed now or at the conclusion of the proceedings. [481] When I deliver these reasons for judgment, I will discuss with the parties the appropriate short-term orders that should be made to enable the parties to consider these reasons, to confer, and to determine what orders should be made now for the future conduct of the proceedings. [482] It will be necessary for the parties to arrange with my associate an appropriate time for the making of the necessary orders.
The observations that I made at [474]-[475] are important to the resolution of the costs dispute between the parties.
I dealt with the cause of the difficulty at greater length earlier in the judgment, as follows: [98] It will be convenient to end this consideration of the background facts by dealing with the absence of detailed evidence of the work done by Johnston Vaughan for clients, the amounts of fees billed, and the amounts of fees paid by clients at relevant times. Evidence of those matters may have been significant or helpful in relation to many issues in these proceedings, as it would have assisted the Court to have an objectively based understanding of the real nature of the firm's practice. That evidence would have been necessary to enable the Court to determine whether, and if so to what extent, Mr Vaughan did not pay Mr Dlakic fees received by Johnston Vaughan in respect of work done for clients before the date of the buyback agreement. It would have been material to an assessment of whether the consideration of $1.00 payable under the buyback agreement was inadequate. It would have been material to an understanding of the likely outcome of an accounting that will be necessary if the Court makes an order setting aside buyback agreement. [99] It would also have been material for the Court to have evidence of the expenses of Johnston Vaughan at relevant times, and the extent to which those expenses were either paid by Mr Dlakic or were met from fees received by the firm to which Mr Dlakic was entitled under the buyback agreement. [100] The Court has not had the benefit of any of this evidence, and has not had comprehensive evidence covering these material financial issues. [101] On 7 August 2017, Mr Dlakic served a notice to produce on Mr Vaughan, which relevantly sought production of the following categories of documents: 4. A copy of the MYOB data files for the legal practice known as "Johnston Vaughan" and/or "Johnston Vaughan Solicitors" for the period September 2000 to date, including but not limited to the payroll, general ledger and profit and loss; 5. A copy of the timesheets, work in progress billed or unbilled, ledgers, taxation invoices, bills of costs and software files known as "Timeslips" for the legal practice known as "Johnston Vaughan" and/or "Johnston Vaughan Solicitors" for the period September 2000 to date. 6. In respect of all legal practice trust accounts operated by the law practice known as Johnston Vaughan and/or "Johnston Vaughan Solicitors", a copy of: a. Withdrawal authorities; b. Withdrawal receipts; c. Withdrawal ledgers, d. Trust account folders - being lever arch folders for clients alphabetically listed A - Z; e. Kalamazoo trust account records - which were located in the office of Johnston Vaughan Solicitors occupied by Stephen D'Apice (this includes all records of trust account transactions for closed trust account client files), and f. Audit reports - including reports by external examiners; for the period from September 2000 to date. [102] Mr Dlakic took the view that Mr Vaughan's response to the notice to produce was tardy and inadequate. Mr Dlakic raised the issue with the Court at a pre-trial conference held on 20 February 2018. At that time the Court was informed by counsel for Mr Dlakic that the parties were conferring about the issue and that it was hoped that full production could be made before the commencement of the hearing. [103] On the first day of the hearing, the Court was informed that shortly before the hearing Mr Vaughan had served on Mr Dlakic some 2,200 further documents that were copies of tax invoices, but all dated on the date of printout, and many documents were not complete in relation to the information that should have been included in the original documents when forwarded to clients. [104] The first morning of the hearing was devoted to dealing with the consequences of Mr Vaughan's response to the notice to produce. An affidavit by Mr Vaughan sworn on 8 March 2018 and an affidavit of Mr Dlakic's solicitor, Mr Hugo Nicholas Antony Paul sworn 12 March 2018, were read in respect of the issue. I permitted counsel for Mr Dlakic to cross-examine Mr Vaughan on the adequacy of his response to the notice to produce. [105] I do not propose in these reasons for judgment to deal with this issue in any comprehensive way. The reason is that the result of the exercise was inconclusive. The available evidence does not permit the Court reliably to form a judgment about the extent to which documents falling within the categories sought in the notice to produce exist, what has been produced, or the comprehensiveness of what has been produced. All that the Court knows is that, as a matter of fact, the legal representatives for Mr Dlakic have sought to be in a position where they could tender on his behalf reasonably comprehensive business records of relevant transactions, but they have not been able to do so. [106] The subject matter of Mr Vaughan's 8 March 2018 affidavit was his attempt to obtain from the Law Society a list of clients prepared by Mr Dlakic in about November 2014 and handed by him to the manager appointed by the Law Society, certain aspects of the firm's billing and record keeping practices, and an explanation of the three tranches of production of documents in response to the notice to produce, together with additional documents produced in March 2018. As I understand it, on 6 March 2018, with the assistance of a law student who Mr Vaughan claims to be more computer literate than himself, Mr Vaughan produced from the firm's server a series of WIP reports as at 17 July 2010, then every six months and finally the date of the buyback agreement, 25 November 2014. Mr Vaughan also gave evidence that on 6 and 7 March 2018, with the assistance of the student and his secretary, he conducted a search on the firm's server for documents containing the word "tax invoice". The search revealed 2163 documents which all appeared to be tax invoices. Mr Vaughan said that he was not aware that these invoices were stored in the particular archive folder. The documents were provided to Mr Dlakic's solicitor in electronic form on 8 March 2018. [107] In his affidavit in response, Mr Paul explained that the invoices that had been produced could not be copies of genuine original invoices, as they were missing essential information and, for example, recorded payments being made both before and after the date of the invoice (par 5). Mr Paul expressed the opinion (par 7) that there had been little meaningful compliance with the notice to produce. Mr Paul's office has assembled the documents produced into 21 lever arch folders. Then, in pars 10 to 24 of his affidavit, Mr Paul expressed opinions as to difficulties and inadequacies with the production that had occurred. [108] At the end of her cross-examination of Mr Vaughan, Mr Dlakic's counsel put it to Mr Vaughan that he had not taken compliance with the notice to produce seriously, he had deliberately withheld documents until February, and that he knew that there were further documents that he was refusing to produce in answer to the notice to produce. Mr Vaughan denied each of these suggestions. [109] However, in the cross-examination Mr Vaughan accepted that the initial tranches of production of documents were inadequate because he had not caused the firm's server to be searched properly. [110] The ultimate result has been that the evidence that Mr Dlakic has been able to tender has in many cases not been the best evidence that ought to have been available, if the records of Johnston Vaughan had been properly kept in a conventional way at all relevant times, and if a proper response had been made to the notice to produce. The Court is at a loss to know whether in fact there are more documents that ought to have been produced but have not been produced. The Court does not know whether more complete and accurate versions of the documents that have been produced can still be produced. [111] The Court has no choice but to determine the issues that are before it on the basis of the evidence that has been tendered, but it should do that having regard to the appearance that Mr Dlakic's case has been impaired by the failure of Mr Vaughan to comply with the notice to produce in a complete and timely way. As it is clear that there has not been production of all of the documents that would have been prepared and retained in the ordinary course by a well-run firm of solicitors, the Court should be solicitous to an appropriate extent when considering the fact that in some respects Mr Dlakic has not been able to tender the best evidence that should have been available. [112] The deficiency in production will also have the effect that some issues that may otherwise have been capable of being determined finally on the evidence at the hearing will now need to be dealt with as part of an accounting process, if Mr Dlakic succeeds in one or other of his claims arising out of the buyback agreement.
The issue that the Court raised in J1 [105] concerning the indeterminate result of the Court's inquiry into why the production of the business records of Johnston Vaughan was so fundamentally incomplete and haphazard has not satisfactorily been resolved during the course of the balance of the proceedings. Mr Vaughan has neither explained nor cured his delinquent response to the notice to produce.
It is necessary to say a little more about the observations in J1 [106]-[107] insofar as they throw relevant light on the matter now under consideration. At the time Johnston Vaughan was an operating law practice under the control of Mr Vaughan. It must have prepared and retained financial records in order to enable it to operate. It was not that Mr Vaughan could not produce the documents the subject of the notice to produce because of evidence that the documents had been destroyed or were unavailable. At the last minute, Mr Vaughan produced substantial quantities of documents that had the deficiencies described by Mr Paul, who was a witness called for Mr Dlakic. In extraordinary circumstances, Mr Vaughan simply did not do what was necessary to produce the documents required by the notice to produce in a form that was meaningful and useful to Mr Dlakic, his legal representatives, and the Court.
However, considerable light was cast on the issue in the course of the hearing concerning the Court's adoption of the expert reports of Ms Exner that took place on 20-22 March 2023, and led to the publication of J3 on 22 June 2023. As I explained at J3 [157]-[165], Mr Vaughan sought to rely upon two new affidavits that contained considerable detail concerning the financial affairs of Johnston Vaughan for the relevant period that appeared to be based on business records that prima facie ought to have been produced by Mr Vaughan in response to the notice to produce that was served upon him by Mr Dlakic before the original hearing. I held that in the circumstances Mr Vaughan should not be permitted to rely upon the two affidavits for the purpose of the determination of the compensation that was payable to Mr Dlakic. However, at J3 [165], I made a limited qualification to that ruling to the effect that, where Mr Dlakic sought to prove matters that were not dealt with in Ms Exner's reports, the consequence may be that fairness would require the Court to permit Mr Vaughan to rely upon responsive evidence in his affidavits.
In a number of paragraphs in J3, I was required to deal with parts of Mr Vaughan's new affidavits in which he made assertions of fact that appeared to be based upon detailed financial records that he had available to him when he made his affidavits which had previously not been produced to the Court: see J3 [175], [181], [195], [196], [209]. I expressed the following conclusions on this issue: [211] In his affidavit Mr Vaughan gives detailed explanations about each of the matters involving the clients listed in the schedule in [205] above. The explanations are supported by attached extracts from general ledgers, tax ledgers, tax invoices and cheque butts. Mr Vaughan purports to have a detailed recollection of what happened in each of the matters. I will not set out the evidence in detail, but it is a fair description that it seeks to give chapter and verse responses to Mr Dlakic's claim. [212] The fact that Mr Vaughan is now able to give this evidence, whatever the truth of it may be, given that he did not respond to the evidence tendered by Mr Dlakic at the original hearing, and that he did not produce to the Court any of the documents upon which he now seeks to rely, is extraordinary. It is at least possible that the course of the original hearing would have been completely different if Mr Vaughan had complied with his obligations as a party, let alone a solicitor of this Court, to make a proper response to his obligation to produce the books and records of Johnston Vaughan that were in his possession or control. [213] The conclusion cannot be avoided that Mr Vaughan, who should have known better, decided to flaunt his obligations and to not provide an evidentiary response to Mr Dlakic's claims. Mr Dlakic was clearly hamstrung in the presentation of his case because of the absence of the books and records that he struggled mightily but unsuccessfully to obtain. I have set out above at [34] the observations I made at J1 [475] to the effect that I made it clear that I did not contemplate that the parties will be permitted to lead further evidence where that evidence could have and should have been led at the hearing, to enable them to remedy any deficiencies in the cases that they have presented. Mr Vaughan's attempt to rely upon the new evidence on the issue of the WIP receipts is a flagrant violation of that ruling.
Thus, while the reasons for Mr Vaughan's inadequate response to Mr Dlakic's notice to produce at the original hearing could not at that time be determined, it seems clear from the terms of Mr Vaughan's new affidavits that - one way or another that was not explained to the Court - Mr Vaughan had gained possession of detailed financial records of Johnston Vaughan that enabled him to create detailed evidence in answer to Mr Dlakic's reliance upon the conclusions in Ms Exner's reports and his attempt to extrapolate from those conclusions to support the assessment of the compensation that he claimed. The only conclusion available on the probabilities is that much more comprehensive financial records of Johnston Vaughan were available to be produced at the original hearing, if Mr Vaughan had conscientiously responded to the notice to produce, and that Mr Vaughan has only gathered those financial records at times after the publication of J1 and J2 and the delivery by Ms Exner of her two reports, in circumstances where Mr Vaughan was disappointed by the contents of those findings and was determined to improve his position by making use in his new affidavits of financial records of Johnston Vaughan that were always available to him had he sought them with proper diligence.

Significance of the instructions given to Ms Exner as referee

It is now necessary to refer to aspects of J2, as that was the judgment in which the Court was required to confront the consequences of its finding in J1 that Mr Dlakic had established in principle the right to rescind the buyback agreement, but as a result of the inadequate production of the financial records of Johnston Vaughan by Mr Vaughan, Mr Dlakic had not been able to prove the amount of the compensation to which he would have been entitled according to whether he elected to affirm the buyback agreement or to rescind it, so that he did not have a sound basis for making the election.
I made the following observations on this issue in J2: [71] The next unfinished aspect of this matter is to deal with the orders necessary to implement the accounting that must be undertaken to determine the amount, if any, to which Mr Dlakic is entitled, as a result of the setting aside of the buyback agreement, in the context of the unusual agreement that the Court found in the principal judgment to have been made between Mr Dlakic and Mr Vaughan, to the effect that Mr Dlakic would continue to enjoy the profits of the practice, and be responsible for its debts, notwithstanding the buyback agreement. [72] Orders should be made now to enable the accounting to take place, notwithstanding that I have continued to reserve my decision as to whether an order setting aside the buyback agreement should be made by the Court until after the issue of whether the surrender of lease should also be set aside has been determined. The reason is that the Court did not have before it the evidence necessary for it to decide what amount Mr Dlakic is entitled to from the conduct of the practice of Johnston Vaughan after the date of the buyback agreement, and that amount will have to be determined anyway, even if the buyback agreement is not set aside, as that amount would form part of any equitable compensation to which Mr Dlakic would be entitled. [73] The parties are agreed that the accounting should be undertaken by way of a reference under Division 3 of Part 20 of the Uniform Civil Procedure Rules 2005 (NSW). [74] It will be appropriate for the Court to adapt the draft orders for reference submitted by Mr Dlakic. [75] The following brief reasons concern particular submissions made by the parties concerning the basis upon which the reference should be conducted. … [80] Apart from the allowance for Mr Vaughan referred to in the preceding paragraph, I am not willing to stipulate the matters that the referee should be required to take into account in determining the net profits of the practice. It is already apparent that the referee's task will be impeded by the lack of comprehensive and reliable financial records for the practice. The parties will have to make submissions to the referee as to the most cost efficient manner for the reference to be conducted in the first instance. Both the parties and the referee will be given liberty to apply to the Court for directions to resolve any difficulties.
The instructions that were given to Ms Exner as referee were consistent with order 3 made by the Court on 8 August 2019, and were in the following terms, as set out at J3 [55]: Pursuant to the orders of the court, you are required to undertake two tasks: 1. Task 1: The amount (if any) the defendant is liable to account to the plaintiff for the net income of Johnston Vaughan for the period from 24 November 2014 to the date of the report. This amount is to be a sum which fairly and equitably in all of the circumstances is the best estimate of the likely net profit of the business of Johnston Vaughan over the relevant period, taking into account the accounts rendered, income received, genuine expenses, including expenses which were paid by the Plaintiff, and making an allowance to the Defendant for his work in that business as is reasonably appropriate for a solicitor performing the function of the sole principal of the practice; and 2. Task 2: The fair market value of Johnston Vaughan as at both 25 November 2014 and 27 September 2018, as well as (separately) the quantum of all monies paid by the plaintiff to the expenses of Johnston Vaughan subsequent to 25 November 2014.
That part of the description of Task 1 which states: "This amount is to be a sum which fairly and equitably in all of the circumstances is the best estimate of the likely net profit of the business of Johnston Vaughan over the relevant period…" is of great significance to the determination of the issue before the Court. If Mr Vaughan had produced the financial records of Johnston Vaughan that should have been available, then Mr Dlakic may have been able to tender documentary evidence during the first hearing that may have enabled the Court to make all necessary findings of fact, and to enable Mr Dlakic to make a soundly based election between the alternative remedies that were available to him. Even if that were not practicable, the Court could have made orders for an accounting to take place, after the publication of J1, that would have enabled findings to be made on a strict accounting basis using the relevant business records. As it was, that was not possible, because the necessary evidence was not available. Consequently, Ms Exner, as an experienced forensic accountant, was appointed by the Court to determine issues such as the "likely" net profit of Johnston Vaughan on a "best estimate" basis, that was fair and equitable in the circumstances. That exercise was expected to be an approximation of the true circumstances that would require Ms Exner to use her professional judgment and to make appropriate extrapolations from what could objectively be proved.
The inadequate response by Mr Vaughan to the notice to produce put Mr Dlakic in the practical position where the necessary financial records of Johnston Vaughan were not available to enable the compensation to which he was entitled to be determined with reasonable documentary precision. As the Court is not entitled to guess or to make up amounts of compensation payable by one party to another without an adequate objective basis, the circumstances committed Mr Dlakic to do the best he could in the reference process. It will be clear from an examination of the discussion in J2 of Mr Dlakic's entitlement to the individual components of the First Scenario and the Second Scenario for the calculation of the compensation payable to Mr Dlakic, that the whole exercise, both at the reference and before the Court, was hamstrung by the absence of the necessary financial records.
The significance of these considerations is that, at the time Mr Dlakic received the offers of compromise served by Mr Vaughan, he did not have, in my opinion, any sound basis for assessing the prospects that he would ultimately receive, as a result of the reference and the adoption of the referee's reports by the Court, an amount of compensation that was above or below the amount that Mr Vaughan had offered to pay. This consideration is entirely separate from the circumstances that the offers of compromise required Mr Dlakic to abandon his right to elect to rescind the buyback agreement and to enforce the Court's finding in J1 that Mr Dlakic was entitled to the beneficial ownership of one of the shares in Davlite.

Relationship between amounts offered and the outcome of the proceedings

In the light of these considerations, the Court must now determine whether Mr Vaughan has satisfied the requirements of UCPR r 42.15.
I consider that Mr Vaughan has not done so, and in any event, if it were necessary to do so, I would make an order otherwise under r 42.15(2).
This case does not satisfy the requirement in r 42.15(1) that "the plaintiff obtains an order or judgment on the claim no more favourable to the plaintiff than the terms of the offer." As I have explained above, if Mr Dlakic had accepted either offer, he would have lost his right to assert beneficial ownership of one of the two shares in Davlite. As he did not accept the offers, he retains that right. That right is likely to have a considerable value. In any event, Mr Vaughan has not demonstrated that the amount of the compensation plus interest payable to Mr Dlakic calculated up to the date of each offer plus the value of Mr Dlakic's share in Davlite is less than the amount stipulated in par 2 of each offer.
It is arguable that the same requirement is unsatisfied because the acceptance by Mr Dlakic of either offer would have precluded his right to elect to rescind the buyback agreement and regain the practice of Johnston Vaughan, even if only for the purpose of on-selling it. The fact that the opportunity to regain the practice of Johnston Vaughan by electing to rescind the buyback agreement was lost for later practical reasons, because Mr Vaughan unilaterally terminated the practice, may cloud the issue of how r 42.15 should be applied. However, the evidence led by Mr Vaughan does not establish that, at the time each of his offers of compromise were made, the amounts offered in pars 2 of the offers were more than the amount of the compensation plus interest payable to those dates plus the value of the benefit to Mr Dlakic of rescinding the buyback agreement and regaining the benefit of the practice of Johnston Vaughan.

Determination whether to apply UCPR r 42.15

I will now consider the alternative issue of whether, even if r 42.15(1) is technically satisfied, the Court should order otherwise so that r 42.15(2) will not take effect.
In Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268, Gleeson JA and Tobias AJA said: [32] One further matter should be mentioned at this point. There is a conflict in decisions in this court to the approach to be taken when exercising the discretion to make an "otherwise" order under Div 3 of Pt 42 UCPR. In outline the differing approaches are whether it is necessary to show "exceptional circumstances" for making an "otherwise" order, or whether the discretion is to be exercised having regard to all the circumstances of the case. [33] The former approach finds support in Porter-Coote v DHSH (Aust) Travel Pty Ltd [2009] NSWSC 1094 at [5] (Gzell J), specifically dealing with r 42.13A. Gzell J applied by analogy, the approach to an "order otherwise" under r 42.14 in Macquarie Radio Network Pty Ltd v Arthur Dent (No 2) [2007] NSWCA 339, where Beazley JA (as her Honour then was) at [15] held that the court would only deviate from the general rule provided for in r 42.14 and make a different order if the court found exceptional circumstances for doing so. See also South Eastern Sydney Area Health Service Ltd v King [2006] NSWCA 2 at [83] (Hunt AJA; Mason P and McColl JA agreeing). [34] The latter approach is reflected in Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 (Regency Media) at [15], where this court (Spigelman CJ, Beazley and McColl JJA), said in relation to rr 42.14, 42.15 and 42.15A, each of which was expressed to be "unless the court orders otherwise" (emphasis added): The relevant provisions of these rules do not specify that exceptional circumstances or the avoidance of substantial injustice must be established before the court will make a different order to the prima facie order for which the rules provide and, in our opinion, the rule should not be so construed. Rather, the discretion is one that has to be exercised having regard to all the circumstances of the case. [35] In Barakat v Bazdarova [2012] NSWCA 140 at [42]-[50], Tobias AJA (Bathurst CJ and Whealy JA agreeing) reviewed the authorities in the context of an "order otherwise" for the purposes of r 42.14(2), but found it unnecessary to determine which line of authority to follow. McColl JA referred to the conflict in decisions in this court in Commissioner of Taxation v Moodie [2014] NSWCA 59 ; 308 ALR 571 McColl JA at [64]. In Jojeni Investments Pty Ltd v Mosman Municipal Council (No 2) [2015] NSWCA 208 at [18], the issue was noted but did not need to be resolved. [36] It may be observed that, in practice, the difference in view may be more a matter of semantics, particularly if the reference to "exceptional circumstances" is understood as explaining the operation of the relevant rule rather than impermissibly attempting to place a fetter on the exercise of the court's discretion: see the observations of McColl JA (Gleeson JA and Sackville AJA agreeing) in Leach v Nominal Defendant (QBE Insurance (Australia) Ltd) (No 2) at [46]-[47], where reference is made to the view of Hely J in relation to the like power to "order otherwise" in O 23, r 11(4) of the Federal Court Rules 1979 (Cth) (as then in force). [37] Hely J considered that the use of language such as "compelling and exceptional circumstances" with respect to the discretion to make an "otherwise" order, merely "convey[s] that the prima facie position should only be departed from for proper reasons which, in general, only arise in an exceptional case": Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) [2004] FCA 1437; 212 ALR 281 at [17]. [38] As will appear below, it is unnecessary here to determine which line of authority to follow here.
Hallen J has helpfully reviewed the authorities on the application of Div 3, Part 42 of the UCPR, including when it is appropriate for the Court to "otherwise order" in Ballam v Ferro (No 2) [2022] NSWSC 1358, as follows: [100] Recently, in D Capital 2 Pty Ltd v Western (No 2) [2022] NSWSC 1283 at [127] , Meek J referred to what I had written in Meres v Meres (No 2) [2017] NSWSC 523. In that case, I explained the two-stage process for determining the effect of what is said to be an Offer of Compromise at [43]-[44]: "From the authorities, it appears the question for determination regarding the effect of what is said to be an Offer of Compromise involves a two-stage process. The first stage is to enquire whether the offer made is an Offer of Compromise at all, within the meaning of the UCPR. This will depend, in part, on whether it satisfies the formal requirements laid down by UCPR rule 20.26. It also depends, in part, on whether the offer made is one that can truly be called a compromise: If the Court concludes that the offer which is made is an Offer of Compromise within the meaning of the Rules, and that the offer made is one that can truly be called a compromise, then UCPR r 42.15A(2) operates to establish a "default" position, relevantly that, if the defendant obtains a judgment no less favourable than that which the defendant had offered to accept, then indemnity costs would follow. It is then that the second stage of the process arises, in that the Court can "otherwise order". The Court will "otherwise order" if it is persuaded that is appropriate, in the interests of justice, that the "default" position ought not to apply: Manly Council v Bryne (No 2) [2004] NSWCA 227, per Campbell JA, at [10]; Evans v Braddock (No 2) [2015] NSWSC 518, at [52]." [101] In Croghan v Blacktown City Council (2019) 100 NSWLR 757; [2019] NSWCA 248 the approach to be adopted by the Court was set out as follows at [11] and [13] (Meagher, McCallum JJA and Simpson AJA): "It is convenient to start with the statement of those principles by Mason P in Morgan v Johnson (1998) 44 NSWLR 578 at 581-582 : (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 [ (1992) 27 NSWLR 721] (at 725-726); Hillier [ (1995) 36 NSWLR 414 ] (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 [ (1993) 42 NSWLR 100 ] (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 chancy': 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). … (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 [(Court of Appeal, 15 June 1995, unreported)]. … In Fairall v Hobbs (No 2) [2017] NSWCA 133, where it was accepted that the presumption in r 42.15 might be displaced 'by demonstrating that rejection of the offer was reasonable', the court described the matters relevant to such an assessment as including: [15]… where the full parameters of the dispute are still uncertain at the time of the offer: Equity 8 Pty Ltd v Shaw Stockbroking Ltd [2007] NSWSC 503 at [42]; or where the offeror's case changes after the offer: South Eastern Sydney Area Health Service v R [2006] NSWCA 2 at [85]; or where all relevant evidence has not been served before the offer: Vale v Eggins (No.2) [2007] NSWCA 12 at [22] . [102] The judgment in Croghan v Blacktown City Council was referred to in Mendonca v Tonna (No 3) [2020] NSWCA 332, in which the Court of Appeal (Bell P, Meagher and Payne JJA), wrote, at [24]: "As this Court said in Croghan v Blacktown City Council (2019) 100 NSWLR 757; [2019] NSWCA 248 at [12]-[14], a significant (but not necessarily determinative) factor that may justify the Court ordering 'otherwise' is where the rejection of the offer was reasonable. Whether that is so depends on the facts and circumstances specific to the case, including whether the nature of the dispute was uncertain at the time of the offer; whether the offeror's case changed after the offer was made; or whether all the relevant material had been served before the offer was made. Furthermore, an offer made pursuant to the UCPR will generally not attract indemnity costs where no significant compromise is made by the offeror: Mega-Top Cargo Pty Ltd v Moneytech Services Pty Ltd [2016] NSWCA 3 at [5]." … [104] The recent judgment of Payne JA in YWCA Australia v Chief Commissioner of State Revenue (No 2) [2021] NSWSC 102 demonstrates that there remains a difference in the authorities as to whether exceptional circumstances are required for the Court to "otherwise order"… … [106] Perhaps, a useful summary of what the Court ought to do in determining whether to "otherwise order" was provided by Kunc J in Bates v Cooke (No 2) (which was cited, with approval, by White J in AB v Curry (No 2) [2015] NSWSC 1209 at [4], and by the Supreme Court of Victoria in Briggs v Mantz (No 2) [2014] VSC 487 at [33]-[35] (McMillan J), and Smith v Whittaker [2016] VSC 287 at [36] (Derham AsJ)). Kunc J wrote at [33]: Taking into account the language of r 42.15A, a party seeking to persuade the Court to order otherwise must identify some feature or features of one or more of the proceedings, the claim, the offer (including, for example, when it was made) and the order or judgment obtained by the successful party which provide a rational basis for the Court to displace what the rule specifies is the costs order to which 'the defendant is entitled'. [107] (An appeal from the substantive judgment of Kunc J was dismissed in Bates v Cooke (2015) 14 ASTLR 221; [2015] NSWCA 278 . Nothing was written by the Court of Appeal about the costs judgment.)
It is not necessary in this case for the Court to attempt to synthesise all of these observations on the Court's approach to whether to order otherwise under UCPR r 42.15, although I will say that I consider the concise explanation given by Kunc J to be particularly helpful. I am satisfied that, whatever complexion should be given to the proper approach to the application of the rule, this is a clear case in which the Court should order otherwise within the meaning of the rule.
Paragraph 2 of each of the offers of compromise required Mr Dlakic to accept a lump sum in compromise of all of his remaining claims for compensation, as well as the recovery of the practice of Johnston Vaughan by means of the recission of the buyback agreement, and also his claim to be the beneficial holder of one of the two shares in Davlite. They were bare offers and did not provide any explanation as to why Mr Vaughan had a reasonable expectation of achieving a result in the defence of Mr Dlakic's claims that was more advantageous to Mr Vaughan than the lump sums that were offered. More importantly, Mr Vaughan remained in default in respect of his response to the notice to produce the financial records of Johnston Vaughan that was served on him before the initial hearing. The consequence was that Mr Dlakic remained in a state of evidentiary deprivation concerning the making of a rational assessment of what the likely outcome of his proceedings would be. Mr Vaughan only sought to introduce evidence of the financial records of Johnston Vaughan during the reference and at the hearing for the adoption of the referee's reports, and he did so in a piecemeal way that led to the rejection of the evidence. The consequence was, in my opinion, that it was not reasonable for Mr Dlakic to be required to respond to an offer of compromise under UCPR r 20.26, until after the issue by Ms Exner of her second report. Prior to that time, Mr Dlakic's remedial fate was largely 'up in the air', and dependent upon the exercise of evaluative judgments by Ms Exner on the basis of insufficient financial information. Mr Dlakic could not reasonably have been expected to respond to an offer of compromise until after he had been given the opportunity to consider the likely consequences of Ms Exner's two referee's reports.
As a separate matter, even if the currency of Mr Dlakic's entitlement to elect to rescind the buyback agreement and his right to the beneficial ownership of one of the two shares in Davlite does not have the effect that Mr Vaughan has failed to satisfy UCPR r 42.15(1), I consider that it would be entirely unjust, in all of the circumstances, for the Court to reverse the costs obligations between the parties as from the dates of the offers of compromise, and to impose the burden of indemnity costs upon Mr Dlakic, given that he would have had to abandon his right of election to rescind the buyback agreement and his entitlement to the beneficial ownership of one of the two shares in Davlite, if he had accepted either of the offers of compromise.

Conclusion

In the circumstances, given the costs orders that have already been made by the Court, the proper costs order is that Mr Vaughan be ordered to pay all of Mr Dlakic's costs of the proceedings since 14 May 2019, including his costs of the reference, on the ordinary basis.
It should now be possible for the parties to agree final short minutes of order to give effect to these reasons, so that these proceedings are brought to a belated end. Mr Dlakic should take the lead in preparing the short minutes of order and ensure that they are provided to my Associate in the near future.

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: 03 August 2023

Federal Court Rules 1979(Cth)

(2019) 100 NSWLR 757

At a glance

Court

Decision date

Before

Source

Judgment (16 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (34)