County Securities Pty Limited v Challenger Group Holdings Pty Limited

Court of Appeal (NSW)|2008-10-27|Before: Spigelman CJ, Beazley JA, McColl JA, Coll JA

CITATION: County Securities Pty Limited v Challenger Group Holdings Pty Limited (No 2) [2008] NSWCA 273

JUDGMENT OF: Spigelman CJ at 1; Beazley JA at 2; McColl JA at 3

DECISION: Order Challenger and CHL to pay County's costs of the trial before Rolfe DCJ up to and including 8 February 2007 on the ordinary basis and from 9 February 2007 on the indemnity basis.

CATCHWORDS: PRACTICE AND PROCEDURE - Calderbank offer - whether indemnity costs of trial should be ordered.

Civil Procedure Act 2005 LEGISLATION CITED: Legal Profession Act 2004 Uniform Civil Procedure Rules 2005

Calderbank v Calderbank [1976] Fam 93 Commonwealth of Australia v Gretton [2008] NSWCA 117 County Securities Pty Limited v Challenger Group Holdings Limited [2008] NSWCA 193 County Securities Pty Limited v Challenger Group Holdings Pty Limited [2007] NSWDC 125 County Securities Pty Limited v Challenger Group Holdings Limited (District Court of New South Wales, 3 September 2007, unreported) CASES CITED: Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322 Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 Herning v GWS Machinery Pty Ltd (No. 2) [2005] NSWCA 375 Leichhardt Municipal Council v Green [2004] NSWCA 341 Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72

County Securities Pty Limited - Appellant PARTIES: Challenger Group Holdings Limited (formerly known as Challenger Financial Services Group Limited) - First Respondent Challenger Hedging Limited - Second Respondent

COUNSEL: J Gleeson SC with D Robertson - Appellant D F Jackson QC with K Morgan - Respondents

SOLICITORS: Thompson Eslick - Appellant Mallesons Stephen Jaques - Respondents

LOWER COURT JURISDICTION: District Court

LOWER COURT FILE NUMBER(S): DC 5289 of 2005

LOWER COURT MEDIUM NEUTRAL CITATION: [2007] NSWDC 125

13 - IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40418/07

Spigelman CJ Beazley JA McColl JA

County Securities Pty Limited v Challenger Group Holdings Pty Limited (No 2) Judgment 1 SPIGELMAN CJ: I agree with McColl JA 2 BEAZLEY JA: I agree with McColl JA. 3 McCOLL JA: The Court allowed the appeal in this matter and entered a verdict and judgment for County Securities Pty Limited ("County") in the amount of $338,639.84 plus interest pursuant to s 100 of the Civil Procedure Act 2005 from 26 June 2003 to 3 July 2007 of $124,535.96 and interest thereafter of $92.78 a day: County Securities Pty Limited v Challenger Group Holdings Ltd [2008] NSWCA 193 (the "principal judgment"). When judgment was handed down County's counsel sought, and was given, leave to make submissions about costs. 4 County seeks an order that Challenger Group Holdings Pty Limited ("Challenger") and Challenger Hedging Ltd ("CHL"), the respondents, pay its costs of the proceedings at first instance up to and including 8 February 2007 on the ordinary basis, and from 9 February 2007 on the indemnity basis. 5 The indemnity costs order is sought in relation to the trial before Rolfe DCJ which took place over the period 20 - 22 and 26 - 28 February 2007. In those proceedings County alleged that it had wrongly paid an amount of $338,639.84 by way of interest when it settled a transaction with Challenger and CHL in which it acquired CHL's Equity Swap Business. 6 It was common ground at trial that County had paid that amount and that it related to unpaid capitalised interest which had accrued on Challenger and CHL's accounts with external margin lenders. The critical issue was whether County was entitled to recover that sum from Challenger and CHL by way of damages for breach of contract, for breach of statutory provisions dealing with misleading and deceptive conduct or in unjust enrichment: see principal judgment (at [68]). 7 County was unsuccessful on all issues at trial: County Securities Pty Ltd v Challenger Group Holdings Pty Ltd [2007] NSWDC 125. Rolfe DCJ entered verdict and judgment for Challenger and CHL and ordered County to pay 80 per cent of Challenger and CHL's costs of the proceedings. 8 County founds it claim for indemnity costs of the trial on a letter its solicitors wrote to Challenger and CHL dated 9 February 2007, expressed to be "without prejudice save as to costs", in which it offered to accept the sum of $320,000.00 (inclusive of interest) plus costs up to the date of acceptance of the offer. The offer was sent at approximately 12.30pm on Friday 9 February 2007 and was expressed to be open until 4pm on Tuesday 13 February 2007. The offer was not accepted. 9 At the date the offer was sent, interest accrued on the principal sum of $338,639.84 from the date of payment was $110,925.42. Thus County's total claim as at 9 February 2007 was $449,565.26. The offer, accordingly, represented a discount of $129,565.26. 10 It is common ground that the offer was a Calderbank offer: see Calderbank v Calderbank [1976] Fam 93.

County's submissions 11 County submits that its offer was a genuine offer of compromise representing a significant, 30 per cent, discount to the amount of its claim at the date of the letter. It concedes the period for which the offer was open was short, but contends Challenger and CHL should have been in a position to consider the substance of the case and determine their response in the available time. County submits this is an available inference because the offer was made when the trial was imminent, discovery had been completed and affidavits disclosing the substance of its case had been filed and served. It also points to the fact that a mediation was conducted shortly before the offer was made, although it concedes that no evidence may be tendered of anything said or done at the mediation: s 30(4), Civil Procedure Act. 12 County submits Challenger and CHL acted unreasonably in declining its Calderbank offer. It points to the following matters in support of that contention. 13 On 9 February 2007, Challenger and CHL forwarded a Calderbank offer to County's solicitors of $50,000.00 inclusive of costs, expressed to be open until 8am on 19 February 2007. It is not clear from the papers whether that letter responded to County's offer. After their trial success, they sought indemnity costs in reliance on that offer. The primary judge rejected that claim, holding it was not unreasonable for County to have rejected it. He also awarded Challenger and CHL only 80 per cent of their costs of trial because he concluded they fought a claim for access to documents unnecessarily, were delinquent in preparing their lists of documents and also made a tardy concession about the amount of capitalised interest County paid to or on the respondents' account on settlement of the Transfer Agreement: County Securities Pty Limited v Challenger Group Holdings Limited (District Court of New South Wales, 3 September 2007, unreported) (at [24]). County submits this was indicative of the primary judge's attitude towards Challenger and CHL's conduct of the proceedings and can be taken into consideration as demonstrating unreasonable conduct on their part also manifested in their rejection of County's offer. 14 County also points to its willingness to compromise the proceedings, demonstrated by its consistent communication of the basis of its claim to the respondents, communications it contends received short shrift. 15 On 6 June 2005 County's solicitors wrote a detailed letter to the General Counsel of CHL setting out the factual basis of its claim. It is unnecessary to reproduce that letter. It is a sufficient description to say that it recounted the history of the transaction, including the conversations which led to County acquiring the Equity Swap Business. It referred to conversations between County's principal, Mr Slater, and CHL's representatives, Mr Ireland and Mr Gilsenan, in which it was alleged the former would take over the business "with no risk" to either Mr Slater or County. In summary it recounted County's claim in a manner County persisted with until final success in this Court. On 29 July 2005 the General Counsel responded reiterating that CHL did not accept it was indebted to County in law or in equity. 16 On 17 July 2006 County served an Offer of Compromise in the amount of $438,000. At the date that Offer was served the claim was $431,909.60 inclusive of interest. County does not rely on that Offer to found a claim for indemnity costs, but relies, on the covering letter which accompanied it and set out the basis of the claim. The letter from County's solicitors pointed out that affidavits in the proceedings had been filed and discovered documents reviewed by both parties. It asserted: "It would seem apparent that it was never intended by either your clients or our client, that our client was to assume your clients' liability for accrued and unpaid interest on the various margin loans your clients had put in place in relation to the equity swap business, which was transferred to our client on 23 June 2003. It is equally apparent that our client did assume, on the transfer of the business, the liability for that accrued and unpaid interest. As a consequence therefore our client suffered loss, and your clients (or companies associated with them) profited at the expense of our client. It seems to us therefore that the matter needs to be resolved with your clients accepting what has occurred and agreeing to reimburse our client for its loss." 17 On 9 August 2006 Challenger and CHL solicitors responded, setting out detailed calculations and asserting that as the Offer did not contain any "real element of compromise" their clients were not at risk of adverse costs consequences if they did not accept it. 18 County submits that the scope of the issues at trial did not prejudice Challenger and CHL's ability to give informed consideration to the offer. It points out that at trial, they did not dispute the quantum of the capitalised interest which County was seeking to recover. It submits that the issues at trial related only to whether there was a contractual or other basis upon which County could recover that amount, and that there was no substantial factual controversy in the proceedings: see principal judgment (at [172]). 19 County contends that Challenger and CHL's stance in maintaining their resistance to any restitution or repayment to it, was contrary to business common sense, as found by the Court: see principal judgment (at [38]) per Spigelman CJ; (at [204]) per McColl JA.

Challenger and CHL's submissions 20 Challenger and CHL submit that they did not act unreasonably in rejecting the Calderbank offer. 21 First, they argued that their prospects of successfully defending all three causes of action relied on by County justified their non-acceptance of the offer. They rely on three observations: first, that County lost at trial on each of the causes of action it pleaded; secondly, that the appeal involved an evaluative judgment by the Court in respect of which minds might reasonably differ, as evidenced by the Court's difference of opinion in relation to the identification of express and implied terms; and thirdly, that at the time the offer was not accepted, no witnesses' evidence had been tested in cross-examination. 22 Secondly, they submitted that County's offer was not "a reasoned suggestion of capitulation which alerted them to what County saw as deficiencies in the respondents' case": see Leichhardt Municipal Council v Green [2004] NSWCA 341 (at [30]). They argued the offer did not contain any description of County's belief that it would succeed at trial, the alleged deficiencies in their case, or any elucidation of the basis upon which it was suggested that they should, in effect, abandon their defence.

23 Thirdly, they argued that the offer was merely a demand to capitulate, and not a genuine offer of compromise, pointing to the difference between what they described as the amount of the offer, $320,000.00 plus costs, and the amount of the judgment entered by the Court in the appellant's favour, $338,639.84 plus interest and costs. They characterised the offer as a strategy to persuade the Court to exercise its discretion to award indemnity costs, rather than a genuine attempt at compromise. 24 Fourthly, they contended it had not been suggested or established that their case could not be reasonably argued, and that it succeeded at first instance. They draw attention to Spigelman CJ's observation that Mr Slater failed to undertake elementary inquiries to protect the appellant's interest at the time of settlement of the Transfer Agreement (principal judgment at [60]). 25 They also argued that at the time of the offer, there was a reasonable basis for their argument that, in the event County was successful, interest should not run from the date of the payment which County sought to recover due to its two year "delay" in identifying overpayment and its failure to conduct due diligence. 26 Fifthly, they contended they were not given a sufficient opportunity to consider and deal with the offer. They draw attention to the fact they were given less than 2½ business days to consider it, at a time when they and their advisers were devoting their energies to preparation for the trial. They also submit that, contrary to County's submissions, it was not appropriate for the Court to draw an inference from the circumstances of the mediation that the respondents were in a position to properly consider the offer despite the period for which it was open. 27 Finally, Challenger and CHL contend that the County's case changed significantly between the date of the offer and the appeal. They note that County had pleaded at first instance that the Transfer Request was one of four documents which comprised the written part of the transfer agreement. They contended that on appeal County instead submitted that the Transfer Request was not a contractual document. Challenger and CHL submitted that this change in County's case could not have been reasonably foreseen by them at the time of the offer, and was significant to the appellant's ultimate success on appeal.

Consideration 28 Section 98(1) of the Civil Procedure Act relevantly provides that "[s]ubject to rules of court and to this or any other Act…(a) costs are in the discretion of the court, and … (c) the court may order that costs be awarded on the ordinary basis or an indemnity basis". The "ordinary basis" is set out in s 364 of the Legal Profession Act 2004: s 3, Civil Procedure Act. 29 Subject to Part 42 of the Uniform Civil Procedure Rules 2005, if the court makes any order as to costs, it is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs: UCPR 42.1. 30 The discretion conferred by s 98 is unconfined, however it is appropriate that courts develop principles to guide the exercise of the s 98(1) discretion: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 (at [22], [35]) per Gaudron and Gummow JJ. Such principles have been developed to assist in determining the effect to be given to Calderbank letters: see Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322 (at [96]). 31 The party making the Calderbank offer bears the onus of satisfying the court that it should exercise the costs discretion in its favour: Evans Shire Council v Richardson (No 2) [2006] NSWCA 61; Commonwealth of Australia v Gretton [2008] NSWCA 117 (at [46]). 32 An offer with no real element of compromise in it, which is designed merely to trigger the costs sanctions, will not be treated as a genuine offer of compromise. Whether or not an offer is a genuine offer of compromise or merely a demand to capitulate depends upon an assessment of all the circumstances of the case at the time: Leichhardt Municipal Council v Green (at [21], [27]) per Santow JA (with whom Stein JA agreed); see also Herning v GWS Machinery Pty Ltd (No. 2) [2005] NSWCA 375 (at [4]); Gretton (at [44]) per Beazley JA (Mason P agreeing); cf Hodgson JA (Mason P also agreeing) (at [115]). 33 Other principles concerning Calderbank offers were set out in Elite as follows: "98 The general principles concerning Calderbank offers were set out in Jones v Bradley (No 2) where the Court approved Giles JA's statement in SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 (at [37]) that: 'The making of an offer of compromise in the form of a Calderbank letter … where the offeree does not accept the offer but ends up worse off than if the offer had been accepted, is a matter to which the Court may have regard when deciding whether to otherwise order, but it does not automatically bring a different order as to costs. All the circumstances must be considered, and while the policy informing the regard had to a Calderbank letter is promotion of settlement of disputes an offeree can reasonably fail to accept an offer without suffering in costs. 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 …'

99 In Leichhardt Municipal Council v Green [2004] NSWCA 341 (at [46]) Santow JA (with whom Stein JA agreed) reviewed the authorities concerning Calderbank letters. His review demonstrated that such a letter would only justify an order for costs on an indemnity basis, rather than the ordinary basis, if it constituted a genuine offer of compromise, which it was unreasonable for the appellant not to accept: Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375 (at [4]) per Handley, Beazley and Basten JJA. Among the issues germane to the question of the reasonableness of the offeree's conduct will be whether the offeree had an 'appropriate opportunity … to consider and deal with the offer': Donnelly v Edelsten (1994) 49 FCR 384 (at 396) (Full Court of the Federal Court, Neaves, Ryan and Lee JJ)." 34 The first point to consider is whether the offer was a genuine offer of compromise. In my view it was. County had on at least two previous occasions dating back to 2005 clearly identified the basis of its case claiming the principal sum of $338,693.94 plus interest. The case detailed in the correspondence to which I have referred was factually that presented at trial. The offer was a discount of $129,565.26 on the principal amount and interest claimed at the date of the offer. Challenger and CHL's submissions do not address the point that the offer was inclusive of interest, comparing only the amount of $320,000 in the offer with the principal of $338,693.94 plus interest County recovered. In my view, County's offer represented a genuine inducement for Challenger and CHL to compromise against the risks which are inherent in any litigation: see Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 (at 725) per the Court (Kirby P, Mahoney JA and Samuels AJA). 35 The next question is whether Challenger and CHL had an appropriate opportunity to consider and deal with the offer. In my opinion they did. It smacks of naivety to contend that Challenger and CHL were so busy devoting their time to preparation for trial that they could not consider the offer. The period leading up to the trial is precisely when parties are often in the best position to consider an offer. While compromise should be considered from when a party's claim is foreshadowed, clearly the further the process of preparation for trial has advanced, the better will the recipient of an offer be able to assess its prospects of success. Experienced practitioners know that decisions as to whether offers should be accepted are often made in a matter of hours, not days. Further, County had, in my view, clearly explained the basis of its claims on the two earlier occasions to which I have referred. By 9 February 2007 Challenger and CHL had County's affidavit evidence and must have been in a position to evaluate it in light of its own case, an issue to which I will return when considering the reasonableness of the rejection of the offer. In any event, had Challenger and CHL needed more time to consider the offer, they could have asked for it: Elite (at [149]) per Basten JA. Instead they either responded with what could only be described as a disdainful offer of $50,000 inclusive of costs or, if their letter preceded County's, chose to sit on their offer. It can be inferred that they had evaluated what they regarded as County's prospects of success - wrongly as the judgment in this Court makes clear - at the time they sent their 9 February offer. 36 I turn then to the question whether it was unreasonable for Challenger and CHL not to accept County's offer. 37 County's case at trial was based primarily on conversations between Mr Slater, on its behalf, and Challenger and CHL's representatives, Mr Ireland and Mr Gilsenan. The documents entered into to effect that transaction were said, essentially by their silence, to reflect the conversations. County contended that Mr Gilsenan and Mr Ireland offered, and County accepted the offer, to "hand over the Equity Swap Business" to Mr Slater, or to an entity he might nominate for no profit to either CHL or the Challenger Group: principal judgment (at [90]). As the principal judgment records: "94 Challenger did not call Mr Ireland, and did not dispute he had told Mr Slater that Challenger would transfer the business to County at no profit to it…. 95 The primary judge referred to there being some difference between the version of the conversation between Mr Slater and Mr Gilsenan upon which County relied. The primary judge recorded (at [67]) that Mr Gilsenan said he had not used the words 'at no cost to Challenger' as Mr Slater had said, but had said there would be 'no hit' for Challenger. The primary judge concluded that this meant the same thing. It should be noted that Mr Slater's evidence was that Mr Gilsenan had told him the transfer would be 'at no cost to County'. Mr Gilsenan's affidavit responded that he did not believe he said 'at no cost' to Mr Slater or his company (save as to the legal costs which Challenger was to pick up), but said the transfer could go ahead 'as long as there was no 'hit' for Challenger i.e. no economic exposure, liability or market risk for Challenger'. It is apparent, therefore that his Honour's reference (at [67]) to 'at no cost to Challenger' should be read as 'at no cost to County'. … 97 County submitted that Mr Gilsenan's recollection of saying Challenger would not take a 'hit' was consistent with an agreement that the transaction was to be done 'at book', thus involving no profit for Challenger nor any loss for it. In this context the primary judge recorded a submission by County that Challenger would be making a profit if it received on settlement any amount which included capitalised interest because Challenger would be recouping an interest expense it had incurred and recorded in its books and would therefore receive an amount greater than the book value of the assets and liabilities transferred to County: primary judgment at [67]. Without, it appears, determining whether or not to accept County's submissions as to the circumstances in which Challenger would be making a profit, the primary judge held that assuming the words at 'no cost to County' and 'no profit to Challenger' were used, there was no evidence before the Court as to what profit Challenger made on the Equity Swap Transactions: primary judgment at [78]." 38 County also relied on evidence that Mr Basten, an employee of Challenger and CHL was instructed by Mr Gilsenan that the transfer should be at no profit to Challenger and that, in performance of that instruction, after the transaction was settled, he credited back to County interest which Challenger had accrued between 1 - 26 June 2003 on its Margin Loan Account: principal judgment (at [84]). 39 One of the significant features of the case was that "the Equity Swap Business operated on a comparatively low profit margin of about $70,000 per annum [and] [t]he effect of County paying the capitalised interest on the CHL margin loan account was that it paid away approximately five years' profits": principal judgment (at [169]). That fact was influential in Spigelman CJ's conclusion that the transaction did not involve County bearing the burden of capitalised interest because to do so would not be consistent with a commonsense business approach to the nature of the transaction: principal judgment (at [38] - [40]); see also [169], [204] per McColl JA. 40 It is also significant that Challenger and CHL did not challenge the conversations between Mr Slater and Messrs Ireland and Gilsenan and the primary judge concluded they meant "the same thing": principal judgment (at [95], [175]). 41 Next, the conduct of Mr Basten in re-crediting County's account with the June 2003 interest was held to be "a matter of fact relevant to objective intention" (principal judgment (at [45]) per Spigelman CJ) and an admission that the transfer was to take place on the terms for which County contended: principal judgment (at [201] - [202]) per McColl JA. 42 I accept that County put its case on number of bases at trial and, on appeal, only succeeded on its contract case. The views of this Court also differed as to the basis on which it should succeed. Spigelman CJ (Beazley JA agreeing) held that the terms for which County contended were implied, whereas my view was that they were express terms of the transaction. The Court did not consider the other bases on which County advanced its case. However County's case was always primarily advanced as one in contract. 43 Further, in my view County did not alter its case on appeal as Challenger and CHL contend. County's case at trial was that the agreement between it, Challenger and CHL for the sale of the Equity Swap Business (the "Transfer Agreement") was constituted in writing, in conversations and by conduct: principal judgment (at [89]). That was the case it advanced on appeal. 44 In my view Challenger and CHL had been on notice from as early as June 2005 of the precise basis on which County put its case. That position was reinforced in July 2006 after affidavits were filed and discovery inspected when County's solicitors wrote and made plain County's contention that it was apparent from these materials that it was never intended that County was to assume liability for accrued and unpaid interest on the margin loans. This was what both Mr Ireland and Mr Gilsenan effectively said in their "no hit/no profit" conversations. The re-crediting of the June 2003 interest was clear evidence that County was not intended to bear the capitalised interest. Nothing which emerged in the parties' cross-examination altered that position. It was known to Challenger and CHL, or should have been known, at the time the offer was made. 45 When one takes into account the significant element of compromise in the February 2007 offer against the objective facts in Challenger and CHL's knowledge at that time supporting the proposition that County was not to bear the burden of capitalised interest, it is apparent, in my view, that their conduct in not accepting the offer was unreasonable.

Orders 46 Accordingly I would order Challenger and CHL to pay County's costs of the trial before Rolfe DCJ up to and including 8 February 2007 on the ordinary basis and from 9 February 2007 on the indemnity basis. **********

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Judgment (22 paragraphs)

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