Connelly (liquidator), in the matter of CIMC Rolling Stock Australia Pty Ltd (in liq) v One Rail Australia

Federal Court of Australia|2022-07-22|Before: Downes J

Pursuant to r 26.12(2)(c) of the Federal Court Rules 2011 (Cth), the cross-claimant is granted leave to file a notice of discontinuance of its cross-claim as against the second cross-defendant. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

DOWNES J: 1 This proceeding was commenced on 28 April 2021 and a notice of cross-claim was filed on 1 July 2021. 2 The second cross-defendant (Mr Zhan) filed a defence to the cross-claim on 1 December 2021. 3 By order dated 14 December 2021, discovery was ordered to be undertaken by 25 January 2022, an inspection of certain 'assets' which were the subject of the proceeding was scheduled for January 2022 and the order also contained a timetable for the filing and service of affidavit evidence, with the evidence of the cross-defendants (including Mr Zhan) not falling due until April 2022. 4 An offer of compromise was made on 11 January 2022 by Mr Zhan, expressed to be under the Federal Court Rules 2011 (Cth) and pursuant to the principles in Calderbank v Calderbank [1975] 3 All ER 333. 5 The offer was to the effect that the cross-claimant discontinue proceedings against Mr Zhan, each party bear their own costs, and the cross-claimant release and discharge Mr Zhan from any further claims in relation to the subject matter of the cross-claim. The offer noted that approximately $66,000.00 had already been incurred in legal fees by Mr Zhan, that the offer would be relied upon in support of an application for indemnity costs and that the offer was open for acceptance until 4.00 pm on Friday, 28 January 2022. 6 The matter was listed for trial to commence on 30 May 2022. 7 By notice of discontinuance filed on 27 May 2022, the plaintiffs discontinued the whole of the proceeding against the defendant/cross-claimant. 8 By notices of discontinuance filed on 25 May 2022, 27 May 2022 and 30 May 2022, the defendant/cross-claimant discontinued the cross-claim against the first, third and fourth cross-defendant. 9 Order were made, by consent, providing for the filing of affidavit material and submissions by Mr Zhan and the cross-claimant in relation to costs payable by the cross-claimant upon the discontinuance of the cross-claim against Mr Zhan. 10 By its written submissions, the cross-claimant seeks an order that leave be granted to it to file a notice of discontinuance of its cross-claim as against Mr Zhan with the cross-claimant paying Mr Zhan's costs as agreed or assessed. 11 Mr Zhan does not oppose an order that leave be granted to the cross-claimant to file a notice of discontinuance but he seeks an order that the cross-claimant pay his costs on a party and party basis until 11.00 am on 13 January 2022 and thereafter, on an indemnity basis. This is sought on the basis that the cross-claimant unreasonably refused the offer. 12 While the making of an offer to compromise proceedings is a commendable course of action and consistent with the overarching purpose in s 37M of the Federal Court of Australia Act 1976 (Cth), for the following reasons, no order will be made as to costs.

Application of rr 1.35 and 25.14(2) 13 It was accepted by counsel for Mr Zhan that r 25.14(2) of the Rules does not apply on its face as the proceeding will be discontinued, not dismissed. 14 However, counsel for Mr Zhan submitted that "it is open to the Court to use rule 1.35 [Federal Court Rules 2011 (Cth)] to apply rule 25.14(2) as applying to a discontinued proceeding." 15 Counsel for Mr Zhan submitted that the power of the Court to make such an order was supported by the decisions in Sydney Equine Coaches Pty Ltd v Gorst [2017] FCAFC 34, Reurich v Club Jervis Bay Ltd (No 2) [2018] FCA 1727, Ringshaug v Comcare (No 2) [2017] FCA 349 and Brooke & Mackenzie Pty Ltd v El-Gra Engineering Pty Ltd (2015) 116 IPR 521; [2015] FCA 1495. However, these decisions concern the use (or consideration of the use) of r 1.35 in order to prevent the operation of r 25.14 where it would otherwise apply, as opposed to the use of r 1.35 to order that r 25.14 applies in circumstances where it otherwise has no operation. 16 The use of r 1.35 in the manner proposed by counsel for Mr Zhan is inconsistent with the text of r 1.35, which contemplates the making of an order which is inconsistent with the Rules, and its "remedial" nature: see Sydney Equine Coaches [19]. Rule 1.35 is directed towards the making of orders that 'overrule' the Rules in order to prevent an unjust outcome resulting from their application. That is not this case. 17 Furthermore, given the conclusion reached below that the refusal of the offer was not unreasonable, there would be no utility in using r 1.35 to order that r 25.14(2) be applicable in this proceeding. 18 For these reasons, I decline to use r 1.35 to apply r 25.14(2) to this proceeding in the manner proposed by Mr Zhan.

Refusal of Calderbank offer 19 Counsel for Mr Zhan submitted in the alternative that the offer should be considered as a Calderbank offer. 20 The authorities diverge as to whether Calderbank principles are applicable where a proceeding is discontinued. Furthermore, in order for Calderbank principles to be enlivened, the offeror must show that the result to the offeree (in this case the cross-claimant) was less favourable than the offer made: Taleb v GM Holden Limited (2011) 94 IPR 459; [2011] FCAFC 168. This was not addressed in Mr Zhan's submissions and it is not clear that this has been established in circumstances where the offer included a release and discharge of all claims against Mr Zhan in respect of the subject matter of the cross-claim and no such release and discharge has been achieved by him. 21 However, assuming Calderbank principles are applicable to this case (which is not certain), the failure of the cross-claimant to accept the offer was not unreasonable for the following reasons. 22 In considering the reasonableness of a refusal of an offer to compromise, the Court may have regard to the following non-exhaustive list of relevant factors identified by the Full Court in Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 (Nicholas, Yates and Beach JJ) at [7]: (a) the stage of the proceeding at which the offer was received; (b) the time allowed to the offeree to consider the offer; (c) the extent of the compromise offered; (d) the offeree's prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; and (f) whether the offeror foreshadowed an application for an indemnity costs in the event of the offeree rejecting the offer. 23 In this case, the offer made by Mr Zhan was open for consideration for more than two weeks, was genuine, was expressed in clear terms, and foreshadowed an application for indemnity costs in the event of rejection. These factors all support a finding that refusal of the offer was unreasonable. 24 However, the following factors tell against such a finding: (1) the offer included a term that the cross-claimant agree to a release and discharge of Mr Zhan from any further claims in relation to the subject matter of the cross-claim. In considering the extent of the compromise sought from the cross-claimant, this would have been a significant concession; (2) the offer was made and had expired at a relatively early stage in the proceedings, being before discovery had been completed, all of the lay evidence prepared and exchanged, including that of Mr Zhan, and the expert evidence served. It was not unreasonable to fail to release Mr Zhan from any further claims without waiting for this discovery and exchange of evidence to occur; (3) the success of the claim, and the cross-claim, turned in part on an assessment of the credit of witnesses which would necessarily affect the ability of the cross-claimant to assess the prospects of success of the cross-claim. In determining this application for costs, Mr Zhan asks the Court to engage in a hypothetical trial to assess the strength of the cross-claim at the time of the offer. The conduct of a hypothetical trial where there has been no hearing on the merits is inappropriate and cautioned against by the authorities: see e.g. Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622, 624 (McHugh J). Further, despite Mr Zhan's submission that the weakness of the cross-claim was "manifest on the face of the record", the alleged lack of merit was not so manifest that Mr Zhan brought an application for summary judgment. 25 For these reasons, if the Calderbank principles do apply, they were nonetheless not satisfied. 26 The ordinary operation of r 26.12(7) has the result that the cross-claimant "is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued." There is therefore no need to make an order as to costs. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Downes.

Associate: Dated: 22 July 2022 SCHEDULE OF PARTIES QUD 134 of 2021 Cross-Defendants Second Cross-Defendant RUI ZHAN Third Cross-Defendant BRADLEY KYM USHER Fourth Cross-Defendant BARRY MIDGLEY

Court Rules 2011(Cth)

Federal Court Rules 2011(Cth)rr 1.35, 25.14, 26.12(7)

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