Calderbank v Calderbank

Judgment 1The Plaintiff, Gestion Pty Ltd ("Gestion"), sought declaratory relief seeking to establish that the Defendants, Kit Digital Australia Pty (in liq) ("Kit") and its liquidators, held an amount of $181,445 on trust for it and an order that the Defendants pay that amount to it. I held, in my judgment delivered on 6 November 2014 ([2014] NSWSC 1547), that the relevant trust was not established and that the proceedings must be dismissed, and that Gestion should pay the Defendants' costs of the proceedings, as agreed or as assessed. When I delivered judgment, the Defendants indicated that they sought a special order as to costs and I directed that the parties submit their respective submissions and evidence in respect of that application, including indicating whether an oral hearing was required. Each party lodged written submissions and neither required an oral hearing The applicable principles 2The Defendants sought an order that Gestion pay their costs of the proceedings on the ordinary basis until 23 July 2014 and on an indemnity basis from 24 July 2014. They submitted that they ought to be entitled to costs on an indemnity basis from that date in accordance with the principles in Calderbank v Calderbank [1975] 3 All ER 333 or alternatively for other reasons outlined in their submissions. 3There was little dispute between the parties as to the applicable principles which are well-established. Gestion refers to the formulation of the relevant test by the Court of Appeal in Jones v Bradley (No 2) [2003] NSWCA 258 at [8], where the Court recognised that the recipient of a Calderbank offer can reasonably fail to accept an offer without suffering in costs and that: "In the end the question is whether the offeree's failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs, and that the offeree ends up worse off than if the offer had been accepted does not of itself warrant departure." 4The Defendants in turn referred to the summary of the relevant principles by Ward J (as her Honour then was) in NuLine Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 816 at [9] - [14], which I gratefully adopt. Her Honour observed that: "The rationale for the principles applied in relation to Calderbank offers was outlined in Commonwealth v Gretton [2008] NSWCA 117 by Beazley JA, her Honour noting (at [41]) that the public policy considerations underpinning the making of favourable costs orders where a Calderbank offer has been made (and not accepted) are the encouragement of settlement of disputes as soon as possible and the discouragement of wasteful and unreasonable behaviour by litigants. The Court of Appeal in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 recently reiterated the public policy objectives of special costs orders in the context of offers of compromise. Basten JA (with whom McColl and Campbell JJA agreed) referred at [6] to the objects underlying the formal offer of compromise procedures under the then court rules that were identified in Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 as including: 1. To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff's real claim which can be placed before its opponent without risk that its "bottom line" will be revealed to the court; 2. To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and 3. To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation. The onus is on the party seeking to rely on a Calderbank offer (in this case, the defendants) to satisfy the court that it should exercise the costs discretion in its favour (Evans Shire Council v Richardson (No 2) [2006] NSWCA 61). An indemnity costs order will not automatically follow from the fact that a genuine offer of compromise more favourable than the final judgment was made nor is there any presumption to that effect (Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWCA 790; Rolls Royce Industrial Power (Pacific) Ltd v James Hardie & Co Pty Ltd [2001] NSWCA 461). What must be considered is the reasonableness of the offeree's rejection or non-acceptance of the offer, having regard to the relevant circumstances at the time that the offer fell to be considered (ie, here, as at September 2006) (citing MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd [1996] 70 FCR 236 per Lindgren J). The question is whether, in all the circumstances, the failure to accept the offer "warrants departure from the ordinary rule as to costs" (SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 per Giles JA at [37]). Counsel for the defendants (Mr Stitt) submits that, insofar as the Court is to have regard to the particular circumstances of the case, this includes the evidence advanced, the conduct of the parties and the ultimate result (referring to Knight v Clifton [1971] Ch 700; Hally v Dennis (1955) 95 CLR 661 at 664) and that relevant conduct of the parties to be taken into account may include not only conduct in the course of the proceedings (Beoco Ltd v Alfa Laval Co Ltd [1995] QB 137) but also conduct leading up to commencement of the proceedings (Peters v Peters (1907) 7 SR (NSW) 398 at 399). Save where there is a special costs order by reference to the procedure provided for under the Rules or in accordance with the principles in Calderbank v Calderbank [above], it has been said that a court should depart from the general rule (and award indemnity costs only where the conduct of the party against whom the order is sought is "plainly unreasonable" (Sydney City Council v Geftlick [2006] NSWCA 280; Dunstan v Rickwood (No 2) [2007] NSWCA 266). In Leichhardt Municipal Council v Green [2004] NSWCA 341, Santow JA (at [57]) said that indemnity costs orders should be reserved for the most unreasonable actions by unsuccessful plaintiffs. In that regard, it remains to be seen whether the exhortation in the above cases as to the category of case in which conduct by an unsuccessful plaintiff would warrant an indemnity costs order is to be reconsidered having regard to the regime now in place in relation to the conduct of litigation in this court and, in particular, the recognition in s 56(5) of the Civil Procedure Act that non-compliance with the statutory objectives provided for in that legislation may be taken into account in the exercise of a discretion as to costs. ..." The first offer 5The Defendants refer to a letter sent by their solicitors to Gestion's solicitors on 24 April 2013 identifying suggested deficiencies in Gestion's claim (Cruickshank 20.11.14 Ex CJC 1 pp 1 - 15), and contending that the evidence failed to establish any relationship of principal or agent or any intention by Kit to establish a trust on behalf of Gestion. That letter identified many of the matters which ultimately led to the failure of Gestion's claim. That letter expressed the view that the evidence led by Gestion established a subcontractor relationship between Kit and Gestion and did not establish a trust. That letter also referred to Mr Conomos' first affidavit and contended that Gestion's belief that a "principal and agent" relationship existed, or any characterisation of the arrangement as having that character by Ms Angela Potter after her engagement by Kit ceased, did not establish a relationship of principal and agent. That letter also pointed to a possible inconsistency between the suggested agency arrangement and the panel arrangements by which Kit provided services to Telstra Corporation Ltd, and also referred to the fact that Mr Conomos had subsequently sought, but not received, confirmation of the suggested arrangement from Kit, in correspondence with Ms Dixon, which I also reviewed in my principal judgment. The letter also expressed the view that the evidence fell short of any intention to create a trust, where Kit did not operate a separate account to hold funds received from Telstra and those funds had been mixed with other funds received from other debtors of Kit, and also referred to a draft agreement between Gestion and Kit, which provided for a subcontractor arrangement, to which I also referred in my principal judgment. Many of these arguments were ultimately accepted in my principal judgment. However, it does not follow that it was unreasonable for Gestion, without the benefit of hindsight, not to recognise the ultimate outcome of the proceedings at that point. 6The Defendants rely on an offer they made to settle the proceedings by a payment of $10,000 made by their solicitors' letter dated 23 July 2013 (Cruickshank 20.11.14 Ex CJC1 pp 16 - 18) ("first offer"). They contend that it was unreasonable for Gestion not to accept the first offer, where it was made more than three months after the date on which Gestion filed its Originating Process and served Mr Conomos' affidavit in support of that application. Kit contended that Gestion's case depended primarily on Mr Conomos' evidence and his recollection of key conversations with Ms Potter, a consultant to Kit to whom I referred in my judgment, and that Mr Conomos was well placed to know the strength or weakness of that case. The Defendants acknowledged that the amount of the first offer was not a substantial sum, but submit that it still represented a compromise, referring to Prosperity Advisers Pty Ltd v Secure Enterprises Pty Ltd [2012] NSWCA 192 at [110] where an offer of that amount was held to be sufficient to support a claim for indemnity costs, albeit in the context of a case that was found to be weak with a real prospect of recovering less than that amount. The Defendants submit that the first offer involved a genuine compromise, to the extent that the liquidators would have abandoned their claim for legal costs in reviewing Kit's Originating Process and supporting evidence and assessing the application, although there is no evidence as to the extent of those costs that would allow the significance of any such concession to be assessed. 7Gestion responds that the first offer was made 14 months prior to the hearing of the proceedings, at a time that Ms Potter had not yet indicated that she would give evidence in support of the Defendants' position in the proceedings. Ms Potter's evidence in that regard was ultimately of some significance, so far as Ms Potter contested significant aspects of Mr Conomos' account of relevant conversations in her affidavit dated 7 May 2014 (filed many months after the first offer) and I ultimately preferred her evidence in that regard to that of Mr Conomos. 8Gestion submits that the first 2013 offer was not a genuine attempt to reach a settlement, but was only made to trigger potential cost sanctions, and refers to Leichardt Municipal Council v Green [2004] NSWCA 341 at [39], where Santow JA (with whom Bryson and Stein JJA agreed) observed that: "Accepting that such an offer as was made is capable of being a genuine offer of compromise, the next step is to consider whether the particular offer in the circumstances represented a genuine attempt to reach a negotiated settlement, rather than merely to trigger any costs sanctions." Gestion also submits that the first offer, in an amount of $10,000, was not a genuine offer of compromise, so far as its claim, if it succeeded, would recover an amount in excess of $180,000, and that offer was made prior to the Defendants' evidence being served. It seems to me important, in this context, that there was no real dispute as to the amount that Gestion would be entitled to recover, if a trust was established, and the only real questions were whether an agency relationship existed and whether, if such a relationship existed, a trust also existed. 9It does not seem to me that the Defendants' first offer supports a claim for indemnity costs. First, it does not seem to me that, at a time when only Mr Conomos' evidence had been filed, Gestion acted unreasonably in rejecting an offer which, on one view, did not give any real weight to the possibility that that evidence might be accepted. Second, the fact that Gestion could reasonably assess its prospects of success as greater than were reflected in the amount of that offer is demonstrated, inter alia, by the fact that the Defendants' subsequently made a more meaningful offer which implied that they assessed Gestion's prospects of success at a significantly greater value. 10There was also a further difficulty with the first offer. The Defendants submitted, incorrectly, that this offer was open for acceptance for a reasonable period of 14 days. As Gestion points out, in fact, the first offer was open for acceptance from 23 July 2013 until 4pm on 30 July 2013, for a period of only seven days. It does not seem to me that that offer allowed a reasonable time for Gestion to consider the position, particularly where the offer was made at a very early stage in the proceedings, long before the parties could have anticipated the allocation of a hearing date, and there was no need for the Defendants to specify such a short time for acceptance of the offer. For completeness, I should note that a possible further difficulty with the first offer is that it required the execution of a settlement deed, and a draft of that deed had not been provided to Gestion for review, which would have necessarily made it difficult for Gestion to assess that offer. However, I do not take account of that matter in reaching the result noted above where it was not addressed in the parties' submissions. The second offer 11By letter dated 19 August 2013, Gestion made a without prejudice, except as to costs, offer to the Defendants. It is not necessary to say any further as to the terms of that offer. 12The Defendants also made a second, and substantially more generous, offer to settle the proceedings by a payment of $90,722.50 made on 10 October 2013 (Cruikshank 20.11.14 Ex CJC 1 pp 21 - 23) (""second offer"), although the orders for indemnity costs which they sought were directed to the date of the first rather than the second offer. The Defendants submit that it was unreasonable for Gestion to reject the second offer where the offer of that amount was a significant concession on the part of the liquidator. Gestion responds that the second offer was made 11 months prior to the hearing of the proceedings, also at a time that Ms Potter had not yet indicated that she would give evidence in support of the Defendants' position in the proceedings. As I noted above, that evidence was ultimately of some significance, so far as Ms Potter contested significant aspects of Mr Conomos' account of relevant conversations in her affidavit dated 7 May 2014 (also filed several months after the second offer) and I ultimately accepted Ms Potter's evidence in that regard. 13Gestion also points out that, in October 2013, it was still working with Ms Potter to prepare her affidavit to be filed in its case (rather than the Defendants' case), and expected that she would give evidence in Gestion's case, together with other Kit employees who gave evidence in support of its claim. That, as Gestion points out, also seems to provide some support for Gestion's decision not to accept the second offer, although it should also be recognised that there was always a substantial likelihood that evidence of staff members as to their understanding of the relevant arrangements would not ultimately prevail over the objective evidence as to the manner in which the parties dealt with each other. 14In any event, there was a further difficulty with the second offer. The Defendants submitted, incorrectly, that this offer was open for acceptance for a reasonable period of 14 days. As Gestion points out, this offer was in fact sent at 4:52pm on 10 October 2013, and was expressed to be open for acceptance until 4pm on 16 October 2013, a period of less than seven days. Again, this does not seem to me to have been a reasonable time for acceptance of the offer, in circumstances where there was no particular reason for urgency, where the Defendants' evidence had not then been filed and, indeed, important parts of that evidence including Ms Potter's affidavit would not be filed until May 2014. In those circumstances, it was not unreasonable for Gestion not to accept it within the very short time it had been permitted to make a decision. Other matters on which Kit relies 15The Defendants also submits that there are also other reasons to make an order for indemnity costs, namely that the relief sought by Gestion would have preferred it over other unsecured creditors of Kit, which was insolvent, and that, had Gestion succeeded, other unsecured creditors or the liquidator would have suffered a corresponding disadvantage. It does not seem to me that that proposition supports an order for indemnity costs, where there would have been nothing unreasonable about that result had Gestion's claim succeeded and it established the trust for which it contended. 16The Defendants also submit that, where the liquidators have had to fund the defence of the proceedings from the limited assets of an insolvent company, it is only fair that Gestion make that company whole to the extent that it is incurred such expenses in defending the proceedings. There is some force in this submission, so far as creditors or the liquidator of Kit will be disadvantaged, to the extent that costs have been incurred on a solicitor and own client basis which are not recoverable in a costs assessment in an ordinary basis. However, that proposition would have the consequence that, in effect, any plaintiff that brought proceedings against a company in liquidation and did not succeed would be subject to an order for indemnity costs, since the disadvantage to which the Defendants refers would equally exist in any other proceedings brought to establish a proprietary right against a company in liquidation. The Defendants have not drawn my attention to any authority for so wide a proposition, and I am not satisfied that the matters to which they refer otherwise take the matter out of the usual course of a claim against a company in liquidation. Conclusion 17I am not satisfied, in the circumstances, that the first or second offers made by the Defendants allowed a reasonable time for acceptance, and I am also not satisfied that it was unreasonable for Gestion to reject those offers in the relevant circumstances. I am also not satisfied that the other matters on which the Defendants relied on supported an order for indemnity costs for the reasons noted above. Accordingly, the Defendants' claim for an order for indemnity costs is not established. 18I therefore order that the Plaintiff pay the Defendants' costs of the proceedings (excluding the costs of this application) on an ordinary basis, as agreed or as assessed. The Defendants should pay the costs of this application for indemnity costs on an ordinary basis, as agreed or as assessed.