Carter v Mehmet

Background to the proceedings

1. The proceedings concerned a contract for the sale of land. The respondents, who were purchasers and a guarantor under the contract for the sale of land (the fifth respondent guaranteed the purchase obligations of the first to fourth respondents), sued for return of the $300,000 deposit they paid and damages for breach of contract. Substantial damages representing the respondents' alleged expectation loss under the contract were claimed but that claim was abandoned before the trial.
2. The appellants, the vendors, cross-claimed for damages for the loss of the sale (the property was resold well before the trial, and the amount obtained was $475,000 less than the contract price agreed with the respondents).
3. As a result of the principal decision of this Court, the claim failed and the cross-claim succeeded. The following orders were made: "(1) Appeal allowed. (2) Set aside the orders of Ward CJ in Eq made on 17 April 2020 and in lieu thereof order: (a) Judgment for the appellants against the respondents in the sum of $480,832.20 [1] plus interest thereon from 29 November 2015 pursuant to s 100 of the Civil Procedure Act 2005 (NSW). (b) Respondents pay the appellants' costs of the proceeding below, including (as per the orders of the Court of Appeal made on 13 December 2018) the costs of the separate determination the subject of the proceeding before Darke J in 2017. (3) Respondents pay the appellants' costs of the appeal."
4. Prior to resolution of the substantive proceedings, a number of separate questions relating to the contract for sale of land and the rights of the parties thereunder were addressed. On 16 August 2017, Darke J answered those questions favourably to the appellants: Mehmet v Carter [2017] NSWSC 1067. The respondents successfully appealed against his Honour's answers to those separate questions: Mehmet v Carter [2018] NSWCA 305 (the first Court of Appeal). As to costs of the separate questions, the first Court of Appeal made no order as to the costs of the appeal but ordered that the costs of the hearing of the separate questions before Darke J were to be costs in the cause.
5. To summarise, pending resolution of this UCPR r 36.16 application, the respondents have been ordered to pay, on the ordinary basis, the appellants' costs of the appeal in 2021, the costs of the proceeding before the trial judge and the costs of the hearing of the separate questions before Darke J, but not the costs of the first Court of Appeal hearing.

The appellants' evidence

1. In support of their application for the indemnity costs orders, the appellants relied on an affidavit of Mr Brad Heydon sworn 9 December 2021. On 21 March 2016, Mr Heydon sent an offer of compromise on behalf of the appellants to the respondents' solicitor. The respondents did not reply to that offer, the terms of which provided: "To the cross-defendants: The cross-claimants offer to compromise the cross-defendants' cross claim on the following terms: 1. A Declaration that the deposit of $300,000 paid by the cross-defendants pursuant to the Contact of sale the subject of these proceedings to the stakeholder named in the contract, Unique Estates Australia Pty Ltd and the income thereon ought to be paid as follows: (a) $290,000 to the cross-claimants; (b) $10,000 plus any income thereon to the cross-defendants. 2. An Order that the cross-claimants and cross-defendants do forthwith direct the said stakeholder to pay the deposit as set out in paragraph 1. 3. The balance of the proceedings on the cross-defendants' claim is to be abandoned. 4. This offer is made pursuant to Pt. 20 Div. 4 of the Uniform Civil Procedure Rules. 5. This offer is open for 28 days after the date on which this offer is made. 6. This offer concerning the cross-defendants' cross claim is separate from the below offer concerning the plaintiffs' claim and may be accepted whether or not the below offer concerning the plaintiffs' claim is also accepted. To the plaintiffs: The cross-claimants/defendants offer to compromise the plaintiffs' claim on the following terms: 1. An Order that the plaintiffs' claim be dismissed with no order as to costs. 2. This offer is made pursuant to Pt. 20 Div. 4 of the Uniform Civil Procedure Rules. 3. This offer is open for 28 days after the date on which this offer is made. 4. This offer concerning the cross claim is separate from the above offer concerning the plaintiffs' claim and may be accepted whether or not the above offer concerning the plaintiffs' claim is also accepted."
2. In a subsequent affidavit sworn 1 March 2022, Mr Heydon gave evidence about the legal costs incurred by the appellants, the payment of which constituted an exception to a freezing order made in relation to the proceeds of the sale of the land. He said that the majority of the legal costs incurred by the appellants related to answering the respondents' claim (later abandoned) for expectation loss, including the retention of three experts and evidence from further witnesses. By the commencement of the hearing before Ward CJ in Eq, the funds the subject of the freezing order were exhausted by payment of the appellants' legal costs.

The respondents' evidence

1. The respondents relied on an affidavit of Mr Timothy James Lynch sworn 15 February 2022. In that affidavit, Mr Lynch gave evidence as to the state of proceedings at the time of the appellants' offer of compromise on 21 March 2016. As at that date the fifth respondent, Mr Matthew Cheers, was not a party to the proceedings. Mr Cheers was joined on 4 September 2017 by the filing of the Amended Cross‑Claim. The parties had not yet served evidence in chief, and the appellants' defence to the Amended Statement of Claim had not yet been filed.
2. In the earlier stages of the proceedings (including at the time of the appellants' offer of compromise), the respondents intended to claim expectation damages for loss of the benefit of the contract of sale. That claim was abandoned in late 2019 because Mr Lynch believed that a judgment for such damages would be "worthless" in circumstances where the funds the subject of the freezing order had been effectively exhausted by payment of the appellants' legal expenses.
3. Mr Lynch swore a further affidavit on 28 March 2022 in which he gave evidence that the appellants had opposed the respondents' suggestion to defer determination of quantum of damages and did not serve on the respondents any expert evidence directed to quantum. The expert reports which were served dealt with the issue of the use that could be made of the subject land, and there was no evidence to suggest that the appellants had incurred costs in relation to those reports before the date of the offer of compromise.

The appellants' submissions

1. The appellants rely on UCPR rr 42.14 and 42.15 which provide that: 42.14 Where offer not accepted and judgment no less favourable to plaintiff (1) This rule applies if the offer is made by the plaintiff, but not accepted by the defendant, and the plaintiff obtains an order or judgment on the claim no less favourable to the plaintiff than the terms of the offer. (2) Unless the court orders otherwise, the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim - (a) assessed on the ordinary basis up to the time from which those costs are to be assessed on an indemnity basis under paragraph (b), and (b) 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. 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.
2. The appellants acknowledge that the fifth respondent was not yet a party to proceedings at the time the offer of compromise was served but submit this is no impediment to the making of the costs order sought against the remaining respondents.
3. In relation to the cross-claim, the appellants submit that the Court of Appeal's award of $475,000 in loss of bargain damages (including the $300,000 deposit) and $5,832.20 for conveyancing costs is "plainly no less favourable" than the appellants' offer to compromise the cross-claim for effectively $290,000 on the basis that the respondents retain $10,000 plus income on the deposit sum, with the balance of $290,000 to be released to the appellants. Accordingly, pursuant to UCPR r 42.14 the appellants are entitled to their costs assessed on an indemnity basis from the day following the day on which their offer was made. The appellants submit that there is no discretionary reason to order costs otherwise than as provided by the default rule.
4. In relation to the claim, the appellants say that the Court's rejection of that claim and its order that the respondents pay the appellants' costs of the proceedings below are no less favourable than the terms of the appellants' offer which was, in substance, that the respondents' claim be dismissed with no order as to costs. The appellants point in particular to the costs they incurred in relation to the respondents' substantive claim for expectation loss (still pressed at the time of the offer) which, as a substantial part of the appellants' costs of the proceedings, demonstrate that the offer represented a significant compromise. Pursuant to UCPR r 42.15, the appellants submit they are entitled to their costs assessed on an indemnity basis from the day following the day on which their offer was made.
5. As for the costs of the appeal, the appellants acknowledge that they did not make any express offer with respect to the appeal. They also acknowledge that "the usual position is that the appeal costs should primarily be determined by the issues in and the outcome of the appeal proceedings themselves": Bathurst Regional Council as Trustee for the Bathurst City Council Crown Reserves Reserve Trusts v Thompson (No 2) [2012] NSWCA 420 at [16].
6. However, the appellants submit that in accordance with UCPR r 51.49, the Court should have regard to its offer of 21 March 2021 and order the respondents to pay their costs of the appeal on an indemnity basis. This case is outside the "usual position" referred to in Bathurst as all the issues that founded liability against the appellants in the court below were necessarily "in play" in the appeal, and were ultimately resolved in the appellants' favour.

The respondents' submissions

1. The respondents' submissions against the indemnity costs order sought by the appellants have two parts. First, the respondents dispute that the default rules at UCPR rr 42.14 and 42.15 are engaged. Secondly, the respondents contend that, even if they are engaged, this case is one in which the Court should "otherwise order".
2. On the first point, the respondents rely on various reasons as to why the default rules are not engaged. The first of these is that as at the time of the offer of compromise on 21 March 2016, the fifth respondent was not a party to the proceedings. As the offer of compromise was not addressed to him, it could not engage the operation of UCPR rr 42.14 or 42.15 against him.
3. Next, the respondents say that the appellants' offer to compromise the respondents' claim was "a capitulation" and did not involve a genuine element of compromise. The respondents submit that such an element generally only exists where proceedings have advanced in a substantial way, such that the offeror is giving up something substantial by way of genuine compromise. However, as at 21 March 2016 the appellants had only filed the "earliest form" of their defence and cross-claim, which did not name the fifth respondent as a party. Further, the respondents challenge the appellants' assertion that they had incurred substantial costs in relation to the respondents' claim for expectation loss because the expert evidence on use of the land ultimately led by the appellants at trial went to the issue of defect in title, and not any distinct question of substantial damages. The reports were also served in mid-2019 and annexed letters of instruction from early-2019 - three years after the date of the offer of compromise.
4. As for the appellants' offer to compromise their cross-claim, the respondents dispute the appellants' contention that the judgment of the Court of Appeal was no less favourable than the terms of that offer. The respondents say that the difference in the form of relief was merely a reflection of the uncertainty as to who held the deposit.
5. Finally, the respondents submit that, because the offers to compromise the claim and cross-claim were expressed to be separate, it left open the possibility that one might be pursued while the other was compromised, giving rise to inconsistent relief. This meant, on the respondents' submission, that the offer did not in substance comply with UCPR r 20.26(2)(a)(iii) which requires an offer to identify the proposed orders for disposal of the claim or part of the claim. Further, the existence of the fund subject to the freezing order meant that acceptance of the cross-claim offer might have caused "difficulty and complication" in the pursuit of the appellants' as-yet-unabandoned claim for expectation loss.

Consideration

1. The costs of the appeal may be dealt with shortly. Whilst UCPR r 51.49 permits the Court to have regard to the appellants' offer of 21 March 2016 to compromise the proceedings below, UCPR rr 51.47 and 51.48 make clear that for the provisions of rr 42.14, 42.15 and 42.15A to apply there must be a compliant offer of compromise served in relation to the appeal: Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368. As the Court explained in Regency Media: "[37] The above conclusion would lead to the same result with respect to the application for indemnity costs of the appeal. However, even if we had been of a different opinion with respect to an order for indemnity costs at trial, we would reject the application that an order of that character should be made with respect to the proceedings in this Court. [38] No offer of compromise was made in this Court pursuant to rr 51.47 and 51.48 of the UCPR. We note that r 51.49 permits this Court to have regard to any offer of compromise made in the court below; however, that rule operates to inform the discretion which must be exercised pursuant to r 51.48, insofar as it picks up and applies in this Court Div 3 of Pt 42 of the UCPR. We do not understand the appellant to invoke r 51.48. [39] In view of the inapplicability of Div 8 of Pt 51, in the present proceedings the Court is concerned with the exercise of the general discretion to award costs pursuant to s 98 of the Civil Procedure Act 2005. A pre-trial offer is relevant in the exercise of that discretion. (See Grace v Thomas Street Café Pty Ltd (No 2) [2008] NSWCA 72 at [33].) The original offer has cost consequences, in the sense that it is a relevant consideration, but it is not an offer under the rule applicable in this Court. The proceedings in this Court are distinct proceedings. [40] One of the reasons underlying the practice of the Court referred to in Grace v Thomas Street Café is that on appeal, parties are in a different position from that which they were in prior to or at trial. Prior to trial, the facts are still to be determined. There may be questions as to the credibility of witnesses or as to the weight of evidence that are in issue. By the time of the appeal, facts have been found, credibility issues resolved and the weight of evidence determined. Although there may be a challenge to such findings, the parties are nonetheless in a different position from that prior to trial and should assess their cases accordingly, if they intend to seek indemnity costs based upon an offer of compromise. [41] Furthermore, the presumptive quality of the rule, leading to a situation in which the Court has to 'otherwise order', does not apply in a case in which no offer of compromise has been made in this Court. The original offer was not open to be accepted at any time after judgment below. [42] The respondent was successful at first instance. It was reasonable to support the reasoning of the trial judge. (See Takacs supra at [16].) The discretion to make special costs orders will not generally be exercised in favour of a successful party who has not invoked Div 8 of Pt 51. (Grace v Thomas Street Café supra at [33].) The public policy to encourage settlement is equally applicable in this Court. The fact that one party has won at first instance does not mean that efforts to compromise should cease. [43] Something special is required to vary the usual order as to costs in this Court. We can see no basis for making a special order for the costs of the appeal."
2. This well-established position was summarised by Bell P, Macfarlan and Leeming JJA in Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 3) [2021] NSWCA 160 as follows: "[10] It was not suggested that the Calderbank offers made in respect of the proceedings at first instance should affect the costs orders made in Valmont's favour in relation to the appeal. This approach accorded with the standard approach taken where no separate Calderbank offer is made in relation to appeal proceedings, that being that although the Court may have regard to the earlier offer made in the context of proceedings at first instance, the costs of the appeal are usually determined by reference to the issues in, and the outcome of, the appeal: see Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 at [70]-[79] (Perisher Blue); Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [37]-[41]; Bathurst Regional Council as Trustee for the Bathurst City Council Crown Reserves Reserve Trust v Thompson (No 2) [2012] NSWCA 420 at [16]; McKeith v Royal Bank of Scotland Group PLC; Royal Bank of Scotland Group PLC v James (No 2) [2016] NSWCA 260 at [31]-[36], [44]-[46]; Gray v Hobson (No 2) [2018] NSWCA 131 at [9]-[12]; and Squire v Squire (No 2) [2019] NSWCA 120 at [3] (Squire)."
3. No separate offer in relation to the appeal proceedings was ever made and, accordingly, proposed order 3 must be dismissed.
4. As to the costs of the trial, and the costs of the separate questions hearing, we do not accept the respondents' submission that, because the offers to compromise the claim and cross-claim were expressed to be separate, the offer did not in substance comply with UCPR r 20.26(2)(a)(iii) which requires an offer to identify the proposed orders for disposal of the claim or part of the claim. Each offer identified orders which could be made. We do, however, find that acceptance of the cross-claim offer might have caused "difficulty and complication" in the pursuit of the appellants' claim for expectation loss. We will return to address some of those difficulties shortly. The opening words of the cross‑claim offer expressly limited the offer "to compromise the [respondents'] cross claim" (see UCPR r 20.26(2)(a)) and cl 6 of the cross-claim offer expressly confirmed that it was separate from the offer on the respondents' claim. This had the rather difficult effect that the cross-claim offer left it open to the respondents to pursue their claim, whilst at the same time proposing a settlement of a cross-claim that was inconsistent with it.
5. It is highly relevant that at the time the offer was made the parties had served only very limited evidence in chief, and the appellants' defence to the Amended Statement of Claim had not yet been filed. The principal issue which was ultimately dispositive in this Court, the existence or otherwise of "Aboriginal objects" (as defined) on the land the subject of the sale, had not been explored in the evidence.
6. So far as the offer was addressed to the respondents' claim, it amounted to an offer to capitulate: Hutley v Cosco (No 2) [2021] NSWCA 335; Lewis Securities Ltd (in liq) v Carter (No 2) [2018] NSWCA 159; Bartlett v Australia & New Zealand Banking Group Ltd (No 2) (2016) 92 NSWLR 670; [2016] NSWCA 142. We are not satisfied that an award of indemnity costs is appropriate to the offer to settle the respondents' claim.
7. So far as the offer was addressed to the cross-claim, this is a case where the Court should not act in accordance with the default rule as to costs under UCPR r 42.14 to make the order sought in prayer 2 of the motion, but "otherwise order". In Mendonca v Tonna (No 3) [2020] NSWCA 332 this Court held: "[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]."
8. In this regard, the facts and circumstances relevant to the case are: 1. at the time the offer was made the parties had served only very limited evidence in chief, and the appellants' defence to the Amended Statement of Claim had not yet been filed. This was a case where "the nature of the dispute was uncertain at the time of the offer"; 2. the principal issue which was ultimately dispositive in this Court, the existence or otherwise of "Aboriginal objects" (as defined) on the land the subject of the sale, had not been explored in the evidence. Plainly, "all the relevant material had [not] been served before the offer was made"; 3. the fifth respondent was not a party to the proceedings or to the cross-claim offer; 4. whilst the offer formally complied with the UCPR, there was no doubt "difficulty and complication" in the simultaneous acceptance of the offer to compromise the cross‑claim whilst pursuing the claim.
9. The Court is satisfied that in the somewhat unusual circumstances of this case given the interplay between the relief sought on the claim and cross-claim, and given the early stage at which the offer was made, it was reasonable for the first to fourth respondents to not accept the cross-claim offer.
10. In these circumstances it is appropriate that the Court "otherwise order" and accordingly make no order for the payment of any part of the appellants' costs of the cross-claim on an indemnity basis.

Conclusion and orders

1. For the forgoing reasons the Court makes the following orders: 1. Dismiss paragraphs 2 and 3 of the notice of motion dated 9 December 2021; 2. No order as to costs of paragraphs 2 and 3 of the notice of motion.

Endnote

1. Being $475,000 plus conveyancing costs. 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: 21 April 2022