Cahill v Kenna

The bases the claim for indemnity costs

1. LMW relies on one of three offers to settle made by it during 2013. It contends that each of the offers was a Calderbank offer (Calderbank v Calderbank [1975] 3 All ER 333]). The plaintiffs accept that each of the first two offers was in form at least a Calderbank offer.
2. The first offer was made by letter dated 3 January 2013. LMW offered to pay the plaintiffs $25,000.00 in full settlement of the proceedings, on the basis that each party should pay its own costs. The letter noted that LMW's costs to that point exceeded $53,000.00. There has been no suggestion that this was incorrect.
3. The letter set out in some detail, by reference to the issues raised by LMW in its Commercial List Response, why (in LMW's view) the claims against LMW were doomed to fail.
4. The offer was open for acceptance until 25 January 2013. The plaintiffs have not suggested that, either having regard to the time of year when the offer was made or for other reasons, this did not allow sufficient time for consideration of the offer.
5. The second offer was made by letter dated 20 October 2014. That letter was written some two weeks before the scheduled start of the hearing.
6. The settlement proposed was a "walk away": that the proceedings should be dismissed with no order as to costs. The letter did not state what was the amount of costs incurred to that date by LMW, although the earlier letter had said that LMW expected that its costs overall would be of the order of $250,000.00.
7. As the earlier letter had done, the letter of 20 October 2014 set out, by reference to the pleaded issues, the reasons why (in LMW's view) the plaintiffs would fail.
8. The offer was said to be open until the close of business on 30 October 2014. There was no response. Again, the plaintiffs have not suggested that the second offer did not allow sufficient time for consideration.
9. On 7 November 2014, Senior Counsel for the plaintiffs invited Senior Counsel for LMW to resubmit the 20 October offer, but on the basis that there should be a deed of release and notice of discontinuance rather than dismissal of the proceedings. That, or more accurately, the correspondence passing between LMW's solicitors and the plaintiffs' solicitors, is said to constitute the third offer. That correspondence includes: 1. an email from the former to that latter referring to the discussions, stating the expectation (but not the concluded agreement) that the proceedings would be resolved in the manner discussed between Senior Counsel, and offering to provide the relevant documents; 2. an email later the same day attaching the draft documents, inviting comments and noting that they were subject to the liquidator's approval (which, I add, given that the litigation was being conducted by LMW's insurers, can only have been a matter of formality); and 3. a letter sent by email later on the same day referring to the earlier events, referring to "your telephone call at 5:20pm to suggest that there was no settlement on the terms agreed", reiterating that the plaintiffs' case against LMW is hopeless, and noting that LMW would claim indemnity costs.

The relevant principles

1. The parties are in substance agreed that it is for LMW to show that the plaintiffs' non-acceptance of one or other of the offers relied upon (to the extent that they are properly characterised as Calderbank offers) was unreasonable. They agree, further, that to give rise to indemnity costs consequences, an offer which is rejected or (as in this case) not accepted must be capable of being characterised as "genuine": that is to say, as an offer which was a genuine attempt to negotiate a settlement.
2. In forming those judgments, the Court must have regard to the terms of the offer, all relevant surrounding circumstances, and the public interest in the reasonable conduct of litigation. The reasonable conduct of litigation extends to seeking, in appropriate case, to resolve it by compromise. As to the last point, see Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (No 2) [2009] NSWCA 12 at [18].
3. An offer to forgo costs incurred is capable of amounting to a compromise, as appears from Baulderstone Hornibrook at [19]. However, in the ordinary case at least, it would be unusual to regard rejection of a "walk away" offer as unreasonable unless the claim or defence in respect of which the offer was made was close to frivolous or vexatious: see Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [31].
4. Regency Media was a case involving an offer of compromise under the Rules. However, in Leach v Nominal Defendant [2014] NSWCA 39, McColl JA (with whom Gleeson JA and Sackville AJA agreed) considered that if an offer of compromise (if ineffective under the Rules) should have been regarded in the alternative as a Calderbank offer, similar considerations would apply (see at [57]).
5. The parties referred to many other decided cases. I hope that I am not being discourteous either to the careful submissions of Counsel or to the Courts whose decisions were cited if I say that, in my view, fact-specific applications a general principles are of at best limited utility in considering the exercise, in different fact situations, of the discretion to award indemnity costs. Ultimately, in each case the discretionary exercise must turn on the specific circumstances of that case.

The first offer

1. It is not necessary to set out the parties' submissions.
2. The starting point in my view is that, when the first offer was made, no party had served its evidence (in these or the related proceedings). The "pleadings" were closed. There had been some interlocutory skirmishes. An order had been made for LMW to give limited disclosure of documents. Presumably, that order had been obeyed.
3. However, whilst each party was able to appreciate, from the pleadings, what were the issues, no party was in a position to assess the strength or weakness of its case on those issues by reference to the evidence that it proposed to lead, and the evidence proposed to be led against it.
4. If it be assumed that the costs incurred by the plaintiffs would not have been less than the costs incurred to that point by LMW (and for reasons that will become apparent I think it likely that the plaintiffs' costs by then were substantially higher), acceptance of the offer would have done no more than allow the plaintiffs to recoup somewhat less than half their costs.
5. Although the parties had not served evidence, it is clear, as I said in my earlier reasons, that the plaintiffs had had the benefit of advice from a valuer, Mr Davis, since at least 2010. It is apparent that Mr Davis had been heavily involved before the commencement of proceedings.
6. I dealt with the valuation evidence in my earlier reasons from [61] to [158]. Mr Davis valued the site at $20 million exclusive of GST. Mr Panopoulos, the expert valuer retained for LMW, valued it at $12,150,000.00 including GST. In short, my conclusion was that the site did not have anything like the value attributed to it by Mr Davis (see at [157]) and that there was no basis in the evidence for valuing the site any higher than $14,500,000.00, the value which in effect Messrs Cahill and Bega attributed to it in their deed of restatement (see at [158]).
7. For present purposes, I am prepared to assume that the plaintiffs had been advised, by Mr Davis, that the LMW valuation was grossly under the proper market value. The difference between the LMW figure and Mr Davis' figure was $8 million, leaving aside GST. (I am not now sure, and do not propose to return to the papers to find out, if LMW had valued the site on a basis that included or excluded GST.) In any event, returning to the agreed value that Messrs Cahill and Bega attributed to the site, the difference between that figure and Mr Davis' figure was $5.5 million. As the formula for calculation of the "Swing Payment" worked (I referred to this at [7] of my earlier reasons, set out above), the difference of $5.5 million between those two figures was worth $2.75 million to the plaintiffs. Of course, if the true measure of damages were to be assessed by reference to the difference between the LMW valuation and Mr Davis' valuation, the relevant figure is $4 million.
8. The plaintiffs have not put on any evidence in relation to the application for indemnity costs. Thus, I do not know whether figures of the kind I have been discussing were in fact known to or considered by the plaintiffs when (to the extent that they did) they thought about the offer of 3 January 2013. Nonetheless, even if figures in that degree of detail were not available to the plaintiffs, it must be the case, taking into account the early and seemingly extensive involvement of Mr Davis and the evidence that he gave of it, that the plaintiffs would have appreciated that the offer made was minuscule compared to what they regarded as the likely amount of their claim; and that is so whether the offer is regarded as one worth $25,000.00 or one worth $88,000.00.
9. In short, in my view, the inclusion of the sum of $25,000.00 in the offer of 3 January 2013 does not make it anything in substance more than an offer that each party should walk away and bear its or his own costs. Thus, the real question is whether, at the time that offer was made, the plaintiffs on reflection should have appreciated that their case was very likely to fail.
10. I see no reason why it can be said that the plaintiffs should then have so regarded their claim. As I have said several times, they then had the benefit of advice from an independent valuer. I can safely infer that the valuer's advice, even if it did not have the specificity of the figures that I have set out above, was that the figure assigned to the site by LMW was unreasonably and negligently low.
11. Of course, that advice of itself was not all that the plaintiffs needed to succeed. They needed to overcome the very real hurdles that had been raised by LMW's pleading: including as to the terms of the retainer, and the existence of a duty of care. But it is one thing to say that a party's case faces very real hurdles. It is quite another to say that, in substance, it is hopeless.
12. I do not think that LMW has shown that it was relevantly unreasonable for the plaintiffs to reject the offer of 3 January 2013.

The offer of 20 October 2014

1. Again, it is not necessary to set out the parties' submissions.
2. Quite different considerations apply to this offer. True it is that it was, in form as well as substance, an offer that each party should walk away and bear its own costs. The only element of compromise offered was that LMW would bear its own costs. However, as the authorities show, even an offer to settle on that basis may, depending upon the particular facts of the case, be seen to involve a genuine element of compromise.
3. The evidence was complete (with, perhaps, minor and irrelevant exceptions) by 20 October 2014. To the extent thought necessary, the parties had had the benefit of disclosure. The plaintiffs were aware of the detail of the evidence that they had marshalled in support of their case, and of the detail of the evidence that LMW had marshalled against them. In particular, they were aware that: 1. there was evidence which, if accepted, would be likely to lead to the conclusion that LMW had performed the terms of Mr Ferrier's retainer of it; and 2. there was a very sharp division of opinion between the valuers, which was unlikely to be resolved on the basis that the Court would find some middle ground between them; in other words, it was likely that, on the valuation issues, success or failure would depend on acceptance of one valuer or the other.
4. There is a further matter that needs to be introduced at this point. As I recorded at [238] of my earlier reasons, the plaintiffs did not plead or particularise the material facts relied upon to support the allegation that the defendants owed them a duty of care. The significance of this has to be assessed against the plaintiffs' acceptance at all material times that the duty of care alleged by them was a duty of care to avoid pure economic loss. Indeed, it appears from what was said during opening that the plaintiffs had not really turned their minds to the question of establishing the existence of such a duty of care, let alone its terms or scope.
5. It has not been suggested that the plaintiffs had insufficient time to consider the offer of 20 October 2014. Nor would I accept such a submission, if made, in circumstances where the plaintiffs must have been engaged in preparing their case for hearing, and in a position to assess, even "on the run" to some extent, the substantive merits of the points that LMW made in its letter.
6. Indeed, to the extent that inferences are available from the events of 7 November 2014, it would appear that the plaintiffs did assess the offer; not only did they assess it, but they determined that, at least in principle, that their dispute with LMW should be resolved accordingly. In this context, I do not think the differing mechanisms (dismissal on the one hand, discontinuance plus deed of release on the other) are of any significance.
7. In short, I infer from the events of 7 November 2014 that the plaintiffs had come to the conclusion that their case was likely to fail, and thus that it was advantageous to settle on the substance on the terms offered; but for unexplained reasons, had changed their corporate and individual minds.
8. Objectively, in my view, the offer did involve a genuine element of compromise. It is apparent, simply from the detail and range of the evidence on which LMW relied at the hearing, that it must have incurred substantial costs to that point. I note that back on 3 January 2013, an estimate of $250,000.00 had been given to take the matter through to a hearing. It is I think reasonable to assume that a substantial proportion of those costs had been incurred by 30 October 2014, when the offer would lapse if not accepted.
9. Objectively, the plaintiffs' case against LMW was very weak; conversely, LMW's prospects of successfully defending that case were very strong.
10. I accept that the Court must evaluate the question at the time the offer was made, and not with the benefit of hindsight. However, approaching the question on that basis, the following points are obvious (and must have been obvious at the time): 1. it was likely, unless the Court entirely rejected the evidence of the relevant witnesses Mr Ferrier, Mr Fatouros and Mr Kenna - the last two being former employees of LMW - that the Court would decide the "retainer" issues in favour of LMW; 2. it was unlikely that the Court would reject the evidence of those witnesses, in circumstances where there was nothing of substance opposed to it and where there was some support for it in the contemporaneous documents; 3. as I have noted, the plaintiffs seem not to have turned their minds to the question of how or by means of what evidence they would prove the existence of the duty of care that they allege; and 4. a decision in the plaintiffs' favour on the valuation issues would depend essentially on the Court's preferring Mr Davis to Mr Panopoulos; and even if the Court were to do that, the plaintiffs would not succeed unless the other issues (including, of prime importance, the duty of care issues) were resolved in their favour.
11. Those matters, considered objectively, should have made it clear to the plaintiffs that their case against LMW was very weak, and likely to fail.
12. In substance, the plaintiffs appear initially to have come to that view. It would appear, from the events of 7 November 2014, that they decided, first, in principle to settle with LMW, and then not to do so, but to fight on. Perhaps the plaintiffs thought that they had invested a very substantial amount of money in the proceedings to date, and that their incremental costs of running to a conclusion would not be significant by comparison. I do not know. But if that were the plaintiffs' reasoning, it would in my view involve a failure to grapple with the real question presented for their consideration by the offer. And in circumstances where all we know is that the plaintiffs at one stage were minded in principle to settle on the basis offered, but then decided not to, I do not think that the Court should draw inferences in their favour as to why they decided to fight on.
13. Thus, I conclude, LMW has discharged the obligation of showing that it was relevantly unreasonable for the plaintiffs to reject the offer of 20 October 2014.
14. The plaintiffs took a subsidiary point, that if the Court should come to this conclusion, indemnity costs should run from the expiry of the offer. I agree with that submission.
15. I acknowledge that with offers of compromise under the Rules, rejection or non-acceptance of which may engender a liability for indemnity costs from the date the offer was served. But I am not dealing with the statutory mechanism and its prescribed statutory consequences.
16. The question is whether it was unreasonable for the plaintiffs not to accept the offer. To my mind, that question should be decided at the time when the offer can be seen not to have been accepted. By necessary implication, it seems to me, if it were reasonable for the plaintiffs to consider the offer over the period given for its consideration (and this must be so), it cannot become unreasonable retrospectively not to accept it unless it can be shown that the decision not to accept it was made at some earlier time than the time limited by the offer. And there is no such evidence in this case.

The offer of 7 November

1. It is unnecessary to consider this offer; in particular, whether it is capable of being regarded as a Calderbank offer, or indeed any offer at all, as opposed to a series of negotiations.

Conclusion and orders

1. LMW has made good its case for indemnity costs, but on the basis that those costs be payable only from the expiry (without acceptance) of its second offer.
2. Accordingly, I order that the costs order made on 10 December 2014 in proceedings 2012/198505 be varied by ordering that the plaintiffs pay the costs of the defendants: 1. on the ordinary basis up until 30 October 2014; and 2. thereafter (apart from the costs of this application) on the indemnity basis.
3. In light of the defendants' limited success on the application for indemnity costs, I think the appropriate order as to the notice of motion filed on 23 December 2014 is that the plaintiffs should pay one-half the defendants' costs of that notice of motion, assessed on the ordinary basis.

Amendments 17 March 2015 - 44. Date change DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 March 2015