In this matter I handed down my reasons for judgment on 14 December 2016: [2016] NSWSC 1798.
The defendants were wholly successful in those proceedings. They now submit I should make orders that the costs of the first defendant of the proceedings be paid on an ordinary basis up to and including 21 June 2016 and thereafter on an indemnity basis. Further the defendants seek the costs of the third to fifteenth defendants of the proceedings be paid on an ordinary basis up to and including 27 September 2016 and thereafter on an indemnity basis. There are additional orders sought which have not been the subject of any debate before me.
[2]
Background Facts
The defendants contend the plaintiff waged a press campaign in or about May 2016 where the plaintiff was content to make statements, or have statements made on his behalf, to the press which were disparaging of the first defendant and which the plaintiff accepted lacked any reasonable basis. I dealt with this in my judgment at [133]-[134]. It was further submitted that scandalous allegations were persisted during the trial (Defendants' written submissions [17]).
On 16 May 2016 Harris Freidman (solicitors for first and third to fifteenth defendants (active defendants)) wrote to Shine Lawyers (solicitors for plaintiff) and, amongst other things, stated it was factually incorrect to contend the plaintiff was part of any syndicate in relation to the purchase of the successful ticket, although the plaintiff had been part of separate syndicates including a syndicate which had been unsuccessful in the relevant draw.
On 17 May 2016 Shine Lawyers wrote to Harris Freidman. They asserted they believed the plaintiff was part of the winning syndicate and that somehow he had been wrongly excluded from his share of the winnings. It was observed the respective sides had versions of events which differed significantly. However, before commencing proceedings a number of questions were posed (nine in number) which sought to illicit further factual information about the circumstances in which the winning ticket was purchased and other related matters. The letter went on to indicate that unless a satisfactory response was received by 5pm that afternoon proceedings would be commenced the following day.
On 17 May 2016 Shine Lawyers also wrote to Ms Tucker, General Counsel for the New South Wales Lotteries Corporation, regarding the possible distribution of winnings and alerting her to the possibility of litigation.
Later on 17 May 2016 Harris Freidman responded to Shine Lawyers' letter from earlier that day. Harris Freidman asserted the plaintiff's understanding of the factual matters involved a misconception and that he had not been wrongly excluded. However, rather than provide any of the particulars requested in relation to the nine questions, Harris Freidman simply responded that if the plaintiff himself did not know the answer to those questions he was not in a position to give proper instructions to commence proceedings.
On 18 May 2016 the matter came before myself as Duty Judge. Amongst other things, senior counsel for the defendants stated in open court:
We do not believe there is a serious question to be tried in relation to this case simply for this reason. My friend has talked about a syndicate that has been in place for a long period of time. That syndicate ended in January. An additional syndicate of which the plaintiff was a party bought an unsuccessful ticket in this very draw. He was provided with a copy of the unsuccessful ticket…(T3/5-10).
On 8 June 2016 Mr Whiffen, on behalf of the plaintiff, stated in a call with Mr Freidman that the plaintiff would accept $2.5 million inclusive of costs in full and final satisfaction of his claim in the proceedings.
On 15 June 2016 the defence was filed together with 15 affidavits including an extensive affidavit from the first defendant setting out the detail of his purchase of tickets and attaching various allegedly contemporaneous and other records kept by him pertaining to the organisation of syndicates.
On 21 June 2016 Harris Freidman, on behalf of the first defendant, made an offer of compromise to settle the proceedings by the payment of the sum of $50,000 inclusive to the plaintiff. The letter further set out in considerable detail various difficulties the defendants perceived with the plaintiff's case by reference to authority. That offer was said to be open for 14 days, that is until 5 July 2016. At the date of that offer, but unbeknown to the defendants, the plaintiff had already incurred a little over $165,000 in legal fees.
On 5 July 2016 Shine Lawyers responded by rejecting the offer of $50,000 and putting in lieu an offer of $1.6 million inclusive. The letter contained a number of consequential terms which are of no current relevance.
Thereafter the plaintiff broadened his case by adding claims he ought to have been given an opportunity to join in the new syndicate and what has been called the "pooling case". These amendments were made effective from August 2016.
On 23 September 2016 the parties attempted unsuccessfully to mediate. By that date and again unbeknown it seems to the defendants, the plaintiff had incurred approximately $447,000 in legal fees.
On 27 September 2016 Harris Freidman made an offer of $300,000 in full settlement of the claim.
The plaintiff rejected the offer of $300,000 and on 10 October 2016 the plaintiff served an offer of compromise seeking judgment in his favour in the sum of $1 million.
No further offers or counter offers passed between the parties and the matter proceeded for hearing before me commencing on 18 October 2016.
[3]
Objections to evidence
Before dealing with the principal issue of costs, I will first address a preliminary issue of admissibility that arose in oral submissions in the costs hearing. The plaintiff objects to admitting the following material:
1. The second sentence of paragraph 2 of the affidavit of Fiona McLay (20 January 2017), recalling the conversation Mr Freidman believed he had with Mr Whiffen on 8 June 2016 where Mr Whiffen said the plaintiff would accept $2.5 million inclusive of costs;
2. The "without prejudice" letter from Shine Lawyers to Harris Freidman dated 5 July 2016 with a $1.6 million offer of compromise; and
3. The "without prejudice" letter from Shine Lawyers to Harris Freidman dated 10 October 2016 with a $1 million offer of compromise.
(the Material)
The Material all goes to the offers made by the plaintiff to the active defendants to settle the proceedings.
The plaintiff objects to admitting the Material on the grounds of privilege pursuant to section 131(1) of the Evidence Act 1995 (NSW) (Evidence Act). The defendants submit section 131(1) does not apply because the Material falls within section 131(2)(h) of the Evidence Act. Section 131(2)(h) provides section 131(1) does not apply where:
(h) the communication or document is relevant to determining liability for costs;…
The plaintiff submits section 131(2)(h) is not enlivened because the Material is not relevant to the question of costs, namely, whether offers made by the defendants involve a genuine compromise, and whether it was unreasonable for the plaintiff to reject them. In my view the defendants' approach is the correct one.
The plaintiff accepts offers made by the defendants would be relevant and admissible under section 131(2)(h), but claims any offers the plaintiff may or may not have put forward by way of settlement proposal fall outside of the section and therefore remain protected by section 131(1) privilege.
The defendants maintain evidence of offers made by the plaintiff is relevant to determining costs. The defendants claim the court has broad and unfettered discretion when it comes to costs (pursuant to section 98(1)(a) of the Civil Procedure Act 2005 (NSW)), and considerations of offers made by the plaintiff are relevant in exercising this wide discretion.
In my view, the Material is admissible under section 131(2)(h). The history of negotiations between the parties, including offers made by the plaintiff, puts in context the question of whether the plaintiff's rejection of the $50,000 offer and subsequent rejection of the $300,000 offer was reasonable.
Events occurring after the plaintiff's final rejection of the $300,000 offer, such as those communications referenced in the 10 October 2016 letter, may be of marginal relevance. However, such communications are still a helpful backdrop to understanding the nature of the settlement negotiations and reasonableness of the plaintiff's rejections.
On these grounds, I overrule the plaintiff's objection and admit the Material into evidence.
[4]
The Issues Arising on Costs
The parties agree the principal issues arising are first whether the defendants' offers involved a real and genuine offer of compromise and secondly whether or not it was unreasonable for the plaintiff to reject them.
The plaintiff submitted the factual matters which the court could legitimately have regard to were limited to the offers of 21 June and 27 September 2016. The defendants on the other hand relied on a much broader landscape. In my view the defendants' approach is the correct one.
[5]
Legal Principles
Costs usually follow the event and there is no doubt in this case, the plaintiff, as the unsuccessful party, could not resist an order that he pay the costs of the active defendants on an ordinary basis; See Uniform Civil Procedure Rules 2005 (NSW), rule 42.1; Latoudis v Casey (1990) 170 CLR 534 at 566-7.
The court must have regard to all the relevant circumstances of the case in deciding whether to make an order for payment of costs on an indemnity basis. The making of an offer by a Calderbank letter and rejection of that offer, followed by a result no more favourable than the offer, is a relevant - albeit not determinative - consideration in the exercise of the court's discretion; Jones v Bradley (No 2) [2003] NSWCA 258 at [6]-[9]; Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 at [16], [17], [18], and [60].
Basten JA (McColl and Campbell JJA agreeing) relevantly said in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [14]-[15]:
The extent of the compromise offered will always be a relevant factor in determining the reasonableness of the offeree's rejection. In Robb Evans & Associates an offer in compliance with the UCPR, r 20.26, involved an effective amount (after deducting a sum as to which there was no dispute) of less than $2,000 to settle a claim in excess of $800,000. The court stated:
[20] If the offer were based on a legal assessment of the likelihood of success in an amount in excess of $800.000, the claim should have been struck out as frivolous and vexatious. It ultimately failed in this Court, but could not, on any view, be so categorized. It is implausible that the appellant so categorized it in quantifying his offer.
[21] If the appellant had carried out a commercial evaluation, rather than a pure legal assessment of the likelihood of success, he would undoubtedly have concluded that, even if ultimately successful, he would be unlikely to recover many thousands of dollars of costs incurred if the litigation proceeded. A commercially based offer would have taken that matter into account. This offer clearly did not.
….
[23] The amount offered, beyond that amount which was not in dispute, is properly characterised as trivial or contemptuous. It does not engage the costs consequences provided by r42.15.
A similar approach was applied in Regency Media, where an offer of $10,000 was made in response to a claim of approximately $600,000: at [16]. The court noted at [32]:
If a derisory offer, of the kind made in these proceedings, could result in an order for indemnity costs, then it is likely that many, perhaps most, contract interpretation disputes would result in an indemnity costs order, if the formality of an offer in accordance with the rules had been made at an early stage. If the appellant were to succeed in the present case, it is quite likely that such an offer would accompany most statements of claim as a matter of commercial practice. The purpose of the special order - to encourage settlement - would no longer be served. An order for indemnity costs could, in our opinion, become the normal order in many commercial disputes.
[6]
The Submissions of the Parties
The defendants advance numerous arguments as to why the orders sought for indemnity costs should be made.
First, the defendants submit the plaintiff's case was entirely unmeritorious, indeed hopeless, and the plaintiff and/or his lawyers should have realised this from the very start. According to the defendants, it was unreasonable for the plaintiff to have persisted against the information and explanation provided by the defendants from time to time both prior to, and after, the litigation was commenced. It follows that both offers according to the defendants were entirely reasonable at the time they were made and that it was unreasonable on the part of the plaintiff to have rejected either.
In addition, the defendants argue the course of conduct pursued by the plaintiff, or the plaintiff's lawyers on his behalf, was unreasonable in the sense that scandalous and/or baseless allegations were made, and continued to be made in order to pressure the defendants to agree to a favourable commercial outcome for the plaintiff.
As a consequence of an unrealistic appreciation of the merits of the case, the defendants argue the plaintiff persisted in making offers which were grossly disproportionate to the legal and factual reality and, ultimately, to the inevitable outcome.
A further argument developed in submissions, as best I understood it, was that the plaintiff had somehow acted unreasonably by incurring excessive legal costs thereby placing himself in a position where he was forced to reject what were otherwise reasonable offers in June and/or September 2016. This argument was partly sought to be advanced with the aid of an affidavit of Mr Freidman, solicitor (13 February 2017) in which Mr Freidman indicated that as at 27 September 2016 the costs and disbursements incurred by the active defendants (including GST) were $220,077.87. Further, Mr Freidman deposed to the fact that as at the date of his affidavit the total costs and disbursements incurred and paid by the active defendants were less than the costs and disbursements incurred by the plaintiff.
The plaintiff on the other hand submits that neither offer was reasonable, and indeed both were, in the circumstances, objectively derisory. It was submitted they were a minute fraction of the amount claimed and were entirely unrealistic commercial assessments of the potential liability on the part of the defendants.
The plaintiff submits, for example, that the $50,000 offer at the time it was made in June would have in effect invited capitulation on the part of the plaintiff. The offer would not and could not encourage settlement. In relation to the $300,000 offer made in September, the plaintiff does not suggest $300,000 is a nominal amount per se. However, again, at the time the offer was made the reality was that the plaintiff had incurred significant legal costs in excess of that amount and, according to the plaintiff, the defendants should have been cognisant of that fact. The plaintiff submits that again, the amount offered was not a genuine encouragement to resolve the claim in the circumstances.
In determining the reasonableness of the plaintiff's conduct in rejecting the offers, it is submitted by the plaintiff it was not unreasonable to believe he could win the litigation. Alternatively, as I understand the argument, there was a good deal of factual uncertainty as to who was to, or more to the point, who should be, regarded as a member of the winning syndicate. In addition, the first defendant (as trustee) would bear an onus to affirmatively persuade the court that none of the monies used for the purchase of the winning syndicate were derived from the plaintiff. The plaintiff submits the documentary evidence was not clear cut, and the result could have gone either way. Further, the affidavits filed by the defendants exposed numerous questions and/or inconsistencies between their respective accounts and that of the first defendant as to when he received certain monies and from which monies he purchased the winning ticket.
The plaintiff therefore submits the defendants paid insufficient regard to their potential downside and themselves remained unrealistically resolute in their view that the plaintiff's case could not succeed and should merely capitulate.
[7]
Consideration
The plaintiff and many, if not all, of the defendants have been workmates for many years. On the uncontroverted evidence the plaintiff had regularly participated in syndicates organised by the first defendant. It is plain each of the persons relevantly concerned trusted the first defendant to organise the various syndicates. The particular win here was not only extraordinary and life changing but obviously totally unexpected. On the other hand, the plaintiff, when the situation was explained to him, reacted not only in disbelief but in distrust. He could neither believe nor accept that he was not, or indeed, should not have been a member of the winning syndicate. I am satisfied he persuaded himself that morally at least he should have been one of the winners.
What had been harmonious and a relatively cordial workplace became a most strained atmosphere. The plaintiff had a grievance he was determined to pursue.
The plaintiff was, however, confronted with many factual and legal difficulties which were not easy to resolve. He was never going to be able to make more than a limited contribution to the factual resolution. His story was necessarily confined. He could speak of his conversations with the first defendant, his participation in syndicates and in the particular syndicate at the centre of the litigation. Beyond that, however, it would be necessary for his lawyers to analyse in a precise fashion what the first defendant and others did in order fully to investigate whether or not he had any effective remedy. These were not sophisticated business people dealing with each other with, for example, multiple iterations of a draft agreement or impeccable contemporaneous records. The first defendant was the repository of the principal records such as they were. As the organiser, if anyone was going to have documents which may well determine the case, he was the person. However his documents were necessarily incomplete. Some were contemporaneous, importantly some were not. Some existed, some had been discarded.
An important issue which occupied much time at the trial was how much money the first defendant had or could have had at the time he purchased the winning ticket. There were alleged inconsistencies between several of the defendants and their employment records which it was said cast some doubt over the first defendant's evidence as to how much money he had at the relevant time. These matters are set out in much greater detail in the judgment and I do not propose to rehearse any of the arguments again.
When a party gives consideration to making an offer of settlement there are no rules as to what factors should or should not be taken into account. It is a matter entirely for that party and his or her lawyers. A firm view of the facts and the law is essential, but commercial reality should remain at the forefront. Further, it is not generally a prudent course for a party or his or her lawyer to take a view he or she has a case that cannot be lost. That, of course, goes for either a plaintiff or a defendant. It is notorious that the vagaries and uncertainties of litigation cannot be underestimated. Judges will often see things very differently from one or other or both of the parties. Intermediate and other appellate courts will frequently have different views again. Even where an award of indemnity costs is made there will generally be a proportion of non-recoverable costs. In other words, the successful party will never be fully compensated for the actual costs expended. This is all the more so if the award is on an ordinary basis.
In this case, it seems to me the initial offer of $50,000 should properly be characterised as derisory. It is tantamount to requiring the plaintiff to capitulate and simply walk away. The plaintiff's lawyers did not communicate to the defendants that by 21 June approximately $165,000 had been incurred on behalf of the plaintiff. However, it would not have been unreasonable at the time to proceed upon the basis that the $50,000 would have barely covered his costs at that point. I accept so far as the factual exercise was concerned the defendants were in a superior position to anticipate precisely how the case may unfold. They were always going to provide the bulk of any factual material to be put before the court and were necessarily in control of it. The plaintiff not only had thoroughly to investigate that material but make an informed assessment of the likely outcome of testing that evidence.
By 27 September when the offer of $300,000 inclusive of costs was made, the defendants themselves had incurred costs of $220,077.87. By this stage the plaintiff had filed an amended statement of claim with enlarged allegations. There had been an unsuccessful mediation, and the matter was due to be heard in October.
Again, I do not consider the offer of $300,000 on 27 September in all the circumstances was anything more than requiring the plaintiff to capitulate. I do not consider the offer took into account the significant factual and legal uncertainties confronting both parties, but especially the defendants. That is not to say the defendants were not correct, as I have found, to feel confident about the ultimate outcome. But they invited - indeed needed - a number of favourable factual findings to achieve that outcome. When a party calls as many witnesses as the defendants intended to call, it would be remarkable if, after cross examination, there were not multiple inconsistencies and/or some flaws exposed. Cases have an unnerving capacity not to run smoothly. A finding of a mixture of funds (about which there was a dispute) could have easily enlivened the pooling case and potentially led to an award of damages for the plaintiff, albeit smaller than the primary amount claimed.
In my view, therefore, based on all of the circumstances of the case, an order of indemnity costs should not be made by reason of the plaintiff's rejection of the $300,000 offer. It was not unreasonable on the part of the plaintiff to reject that offer.
The course of conduct relied upon by the defendants is not a matter which should count against the plaintiff. It is true the plaintiff made the relevant concessions in cross examination. He was a man embittered by his experience with his workmates. Whilst some of the disparaging remarks could be placed directly at his feet, some clearly could not. I am satisfied his lawyers had a hand in drafting many of the words used as did a number of journalists. He might have been responsible for parts of press releases or articles, but not for others. Whilst I do not excuse for a moment any attempt on his part to use the press to cause the defendants to reach a settlement, I do not consider those matters to be appropriate in the exercise of my discretion on costs. One or more of the defendants may potentially have actions in libel open to them. That would be a matter for them. Of course an attempt to place pressure upon a party or a witness in any case could, in theory amount to a contempt of court. Running cases in the press can be a perilous exercise. Regrettably it has become somewhat common place. That said, in this case I am of the view that none of the matters referred to by the defendants in this regard should properly be taken into account in the exercise of my discretion in relation to an award of indemnity costs.
Further, I do not consider the conduct of this trial is a relevant factor in determining the appropriateness of indemnity costs. A robust cross examination cannot, of itself, on any view found an award of indemnity costs. In any case, I do not consider counsel transgressed permissible boundaries.
As far as the plaintiff incurring excessive costs is concerned, I consider that cannot be put at the feet of the plaintiff. No doubt he accepted in good faith the charges he incurred. There is simply no suggestion he has had any part in the computation of those charges. I consider it unreasonable to suggest he has failed properly to keep them in check, which is implicit in this submission. Again I do not consider this factor should be taken into account on the question of indemnity costs.
In all the circumstances in my view any order for indemnity costs is inappropriate. The plaintiff should however be ordered to pay the costs on an ordinary basis.
I invite the parties to approach my associate with short minutes of order to reflect my reasons.
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Decision last updated: 24 February 2017