Cutting Edge Services Pty Ltd v Raymond & Therese Penfold; Raymond & Therese Penfold v The Hollard Insurance Company Pty Ltd

Solicitors: Baldock, Stacy and Niven (Plaintiff) Campbell Paton & Taylor (Defendants) McMahons Lawyers (Cross-Defendant) File Number(s): 2018/00033995 Publication restriction: Nil.

Judgment

1. By statement of claim filed on 1 February 2018 the plaintiff, Cutting Edge Services (Aust) Pty Ltd ("Cutting Edge"), sought damages from the defendants, Mr Penfold (the first defendant) and his wife Ruth Penfold (the second defendant (collectively "the Penfolds"), in the amount of $1,094,703.15 for the destruction of what it claimed were 32,865 wooden railway sleepers stored at "Maryvale", a property owned by the Penfolds, on 18 December 2016. On that day, Mr Penfold was welding on a silo on Maryvale. A spark from the welder started a grass fire which spread and destroyed a large number of timber railway sleepers then stored on the property. The sleepers were the property of Cutting Edge which conducted a business of retrieving and selling discarded railway sleepers. It was owned by Mr Penfold's sister Janine Brus and her husband Dean Brus. By arrangement between Cutting Edge and Mr Penfold, the sleepers had been taken to Maryvale in June 2015 for storage.
2. On 1 May 2018, the defendants filed a cross-claim against their insurer, the Hollard Insurance Company ("Hollard"), seeking an indemnity for the value of the destroyed sleepers under their farm insurance policy. Pursuant to an exclusion clause in the policy, the cross-defendant, Hollard, asserted that its liability was capped at $100,000 (minus an excess of $1,000).
3. On 15 October 2021, I delivered judgment in this matter: Cutting Edge Services Pty Ltd v Raymond & Therese Penfold; Raymond & Therese Penfold v The Hollard Insurance Company Pty Ltd [2021] NSWSC 1322 ("Cutting Edge"). The defendants were ordered to pay damages in the amount of $177,290 to the plaintiff. The cross-claim was dismissed, with counsel for the cross-defendant noting that Hollard would, as previously indicated, pay $99,000 to the defendants. On that date, the parties indicated that further written submissions were required on the questions of costs and interest. These reasons assume familiarity with that judgment.
4. On 5 November 2021, the plaintiff filed written submissions seeking that costs be paid on the ordinary basis notwithstanding r 42.34 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR").
5. On 5 November 2021, the cross-defendant filed written submissions and an affidavit of Bryan Francis McMahon affirmed on 5 November 2021 with annexures.
6. On 22 November 2021, the defendants filed written submissions, an affidavit of Raymond Mark Penfold sworn on 22 November 2021, an affidavit of Ruth Penfold sworn on 22 November 2021 and an affidavit of Mason Manwaring sworn on 22 November 2021.
7. On 6 December 2021, the plaintiff filed submissions in reply, objecting to the defendants' affidavits and seeking to cross-examine the defendants.
8. By email on 17 January 2022, the plaintiff sought leave to file an affidavit of Dean Brus sworn on 14 January 2022 and an affidavit of Janine Brus sworn on 14 January 2022. On that date, I informed the parties that I proposed to list the matter for hearing to determine the objections to evidence and issues raised in the written submissions.
9. On 11 February 2022, I heard the parties on the issues raised in recent correspondence. In particular, I heard submissions on the admissibility of the affidavits of Mr and Mrs Brus and Mr and Mrs Penfold referred to above. After considering the submissions of the parties made orally before me on this date, I ruled that those affidavits were inadmissible and that the dispute as to costs should be determined solely based on the written submissions and the affidavits of the solicitors annexing the relevant correspondence. My reasons for so finding are set out below in my consideration.
10. To summarise the positions of the parties, the plaintiff seeks that the defendants pay its costs on the ordinary basis, the cross-defendant seeks that the defendants pay its costs on an indemnity basis (given the rejection of reasonable offers of compromise) and the defendants seek the following orders: 1. That the plaintiff bears its own costs pursuant to r 42.34 of the UCPR; 2. That the plaintiff pays the defendants' costs on an indemnity basis for the entire proceedings or, in the alternative, from 3 July 2020; 3. That such costs order be set-off against the damages payable to the plaintiff; 4. That the plaintiff pays the cross-defendant's costs (instead of the defendants); 5. In the alternative to (5), that the plaintiff indemnify the defendants for any costs payable to the cross-defendant; 6. That the cross-defendant's application for indemnity costs be dismissed; 7. That any costs order in favour of the cross-defendant be limited to the costs of it defending the cross-claim; 8. That interest be payable on the $99,000 to be paid by the cross-defendant; 9. That the cross-defendant's application for set-off be refused; and 10. That the defendant is not liable to pay interest on the judgment sum from 17 August 2020, being the date that the proceedings were set down for hearing but were vacated due to the conduct of the plaintiff.
11. The material relevant to this costs dispute can be summarised as follows.

Offers of compromise before the commencement of proceedings

1. On 20 December 2016, two days after the fire, the Penfolds lodged an insurance claim in respect of the destroyed sleepers. Several offers were then made by the insurance company directly to Cutting Edge without any involvement from the Penfolds.
2. On 11 January 2017, Mr Andrew Bristow, from Hollard, emailed Mr Brus offering $288,750 (based on $8.75 per sleeper for 33,000 sleepers). It was noted that this was based on the costs incurred in obtaining the sleepers rather than their market value.
3. On 18 January 2017, Mr Brus' solicitor, John Carpenter, wrote to Mr Bristow stating that the offer of $288,750 had been rejected on the basis that it was "unacceptable" and that the value of the sleepers was around $792,000 (based on $24 per sleeper for 33,000 sleepers). Mr Carpenter stated that the plaintiff's estimated loss was $508,750 (the value of the sleepers less the recovery and stockpile costs and the costs of grading prior to sale).
4. On 23 January 2017, Mr Bristow responded to Mr Carpenter by email noting that the figures claimed for both value and cost were "largely undocumented" and included assumptions about matters such as grading, storage and transport, which had not yet taken place. Mr Bristow noted that it could be an onerous task for the plaintiff to provide more detailed documentation and offered $360,000 to finalise the claim.
5. An email of 31 January 2017 from Mr Bristow to Allstate Underwriting (the entity with which the Penfolds had taken out farm insurance) indicated that: "… Lawyers for Brus rejected an offer of $288,750 and sought a settlement of $508,750. I have responded with an increased offer of $360K but have had no further contact from the lawyers. I'll let you know what transpires."
6. On 6 February 2017, Mr Carpenter wrote to Mr Bristow stating that Mr Brus had recently graded 100 of the sleepers stored at Access Recycling. Based on Mr Brus' grading and price estimates, those sleepers had an average price of $30.56 (GST exclusive) per sleeper. Mr Carpenter noted that Mr Brus was willing to accept an average price of $4 less per sleeper because the quality of the sleepers at the "eastern end of the last pile" on Maryvale was "below average". (I note that in his cross-examination at the hearing, Mr Brus denied ever saying on the day of the fire that the sleepers at the western end were of a higher quality and stated that all the sleepers on Maryvale were "top quality" sleepers: Cutting Edge at [175], [351].) Mr Carpenter estimated, based on that average, that the value of 33,000 sleepers was $876,480, GST exclusive. He stated that the insurer's offer of $360,000 was "unacceptable" and proposed referral to a mediator to reach an agreement. Mr Bristow replied by email on the same day noting that the offer had been rejected and inquiring as to whether Cutting Edge proposed to make a counter-offer.
7. On 8 February 2016, Mr Carpenter wrote to Mr Bristow stating that Cutting Edge would accept $550,000 in full satisfaction of its claim based a total value of $876,480, less $283,250 in recovery, stockpile and grading costs, reduced by a further $43,230 in the interests of reaching a settlement.
8. On 8 February 2016, Mr Bristow wrote to Mr Carpenter as follows: "The Penfolds' policy contains a provision which limits indemnity in relation to liability for property in the custody and control of the Insured to $100,000. We note that the stockpile was located on the Penfolds' property and was effectively in their custody at the time of the incident. As such, Insurers' [sic] liability for any settlement could be limited to $100,000, with the balance to be recoverable from the Penfolds. The grading sample of 100 sleepers from a stockpile of 4,000 is not particularly representative. The average value figures appear to vary somewhat from those originally supplied by Mr Brus. The sample invoices supplied by Mr Brus appeared to include delivery costs, contrary to your assertion. Notwithstanding the above, and on a without prejudice basis, Insurers are prepared to offer an immediate settlement of $400,000 to resolve the matter without further delay. I look forward to your response once you have obtained your Clients' instructions in relation to the offer."
9. On 14 February 2017, Mr Carpenter wrote to Mr Bristow referring to a phone conversation earlier that day and requesting that Mr Bristow confirm whether the insurer's liability was limited to $100,000 and if so confirming whether the insurer had instructions from the Penfolds to make the offer in the amount of $400,000 contained in the email of 8 February 2017. Mr Bristow replied on that date stating that: "Insurers are keen to settle the matter and do not currently intend to rely on the provision referred to earlier. They are reserving their right to reconsider their position if the matter cannot be resolved. I look forward to hearing from you in relation to the offer."
10. On 15 February 2017, Mr Carpenter wrote to Mr Bristow rejecting the offer of $400,000 made on 8 February 2017 on the basis that it represented "approximately 67% of the value of the stockpile after deduction of recovery and stockpile costs". Mr Carpenter went on to state that: "Our client appreciates that some reduction to their provable loss is a commercial reality of the settlement process. With that in mind, we are instructed to indicate that they will accept $525,000.00 in full settlement of their legal claim and costs."
11. In a further letter of 15 February 2017, Mr Carpenter stated that the insurer's initial offer based on the costs incurred in retrieving the sleepers was "contrary to well-established Australian law" and was potentially misleading. The letter went on to allege that the offer of 8 February 2017 was also misleading, inconsistent with assurances given to the Penfolds and made without appropriate instructions from the Penfolds.
12. On 9 March 2017, Mr McMahon, solicitor for Hollard, wrote to the Penfolds setting out the background to the claim and expressing the view that the relevant exclusion clause limited Hollard's liability to $100,000 less an excess of $1,000. The insurer offered to pay the defendants $99,000 in full settlement of the insurance claim.

The disputed affidavit evidence

1. As stated above, I excluded the affidavits of Mr and Mrs Brus and Mr and Mrs Penfold on the costs argument. It is necessary to briefly summarise them to then explain further below why I excluded them.
2. Mr Penfold deposed that on 22 December 2016, four days after the fire in which the sleepers were destroyed, he attended Maryvale and met Dean Brus. They had a conversation to the following effect: "[Dean Brus]: Listen, Ray, I have a chance of making a big claim against the insurance company. We are not looking to you, but only the insurance company. If there is any increase in your premiums, I will help you out. But as we are not looking to you and if I can make a big claim on your insurance company, it will not cost you anything. [Ray Penfold]: Dean, leave us out of this. I do not want anything to do with your claim."
3. Mr Penfold deposed that he then left Maryvale. He stated that the topic was discussed again in December 2016 or January 2017.
4. The defendants relied on the evidence to establish that the plaintiffs brought proceedings against the defendants as a means to get an inflated insurance payout.
5. Mr Brus denied the above conversation and deposed that on 19 December 2016, the day after the fire, he and Mrs Brus had a conversation with Mr and Mrs Penfold. He recalled that his wife, Janine Brus, was extremely upset and one of the Penfolds said words to the effect of: "It will be alright Janine. We've got insurance. We are not certain but think it will cover us for the sleepers. We will find out and put a claim in."
6. Mrs Brus recalled a conversation on 19 December in which one of the Penfolds said they had "public liability insurance" and would make a claim. She could not recall the rest of the conversation as she was very upset at the time.
7. Mr Brus said that in late December 2016 or early January 2017 he was contacted by an assessor from the insurance company to arrange meetings at Maryvale and Access Recycling. He did not recall being informed that the Penfolds had lodged a claim. Mr Brus said that he then engaged in negotiations with Mr Andrew Bristow of Cunningham Lindsey in relation to the plaintiff's loss.
8. Mrs Brus recalled telephoning Mrs Penfold on 12 February 2017 and saying words to the effect of: "Our solicitor has received an email from your insurer making an offer to pay us $400,000 for the sleepers, but it looks like you will have to pay $300,00 of that. I'll read it out to you."
9. Mrs Brus then read the letter of 8 February 2017. She recalled that Mrs Penfold said: "I can't believe that would be right. We haven't been contacted by anyone about it. I will have to get in contact with [our broker]."
10. Mrs Brus then forwarded the above offer of 8 February 2017 to the Penfolds. Mrs Brus said, "[w]e don't like his grubby tactics but thought it best you know."

Offers of compromise after the commencement of proceedings

1. As set out above, Cutting Edge filed a statement of claim on 1 February 2018 seeking damages in the amount of $1,094,733.15, particularised as $872,894.40 in respect of the value of the destroyed sleepers and $221,838.75 for "recovery and stockpile costs thrown away". Cutting Edge claimed that 32,865 sleepers had been destroyed in the fire.
2. On 11 October 2019, the matter was set down for a five-day hearing commencing on 17 August 2020. The defendants understood at that time that the plaintiff had filed and served all its evidence on liability and damages.
3. On 14 October 2019, Mr McMahon, solicitor for Hollard, wrote to Mr Manwaring, solicitor for the Penfolds, in the following terms: "1. Hollard will pay either to your client or directly to the plaintiff an amount of $200,000. 2. In addition, Hollard will pay the plaintiff's reasonable costs to date of the proceedings to be agreed or assessed… 3. The offer of $200,000 is to be conveyed by the defendants to the plaintiff by way of Offer of Compromise [in accordance with Pt 20 of the UCPR and must remain open for at least 28 days]. 4. If the offer of compromise is accepted… Hollard will indemnify the defendants in respect of any [costs order made against the defendants]. 5. The defendants to bear their own costs of the Cross-claim. 6. Judgment for Hollard on the Cross-Claim with no order as to costs. For the avoidance of doubt, the intention of Hollard's offer is to facilitate the making [of] an Offer of Compromise by [the defendants] to the Plaintiff. This offer is made in accordance with the principles applied in Calderbank v Calderbank… It shall remain open until 29 November 2019."
4. Mr Manwaring deposed that on 12 November 2019 he received a draft letter from Mr Drummond, addressed to the solicitor for Hollard, rejecting the offer and indicating that an appropriate offer would be in the vicinity of $350,000 to $370,000. Mr Manwaring failed however to forward that letter to Mr McMahon. That oversight was brought to Mr Manwaring's attention by email of 25 February 2020. On 9 March 2020, Mr Manwaring on behalf of the defendants wrote to Mr McMahon stating that: 1. The Penfolds considered that the sum of $200,000 was inadequate considering the amount claimed by the plaintiff; 2. An effective offer of compromise would need to be in the order of $350,000 to $370,000 plus the plaintiff's costs and 85% of the defendants' costs; 3. The defendants would not consent to judgment for Hollard on the cross-claim if the statement of claim were to proceed.
5. On 16 June 2020, the solicitor for Hollard wrote to the defendants' solicitor noting that the offer was made in accordance with Pt 20 of the UCPR or as a "Calderbank" offer and that the insurer would settle the cross-claim on the following basis: 1. Judgment for the Penfolds on the cross-claim in the amount of $357,000; 2. Hollard to pay the Penfolds' costs of the cross-claim on an indemnity basis; 3. Hollard to pay the Penfolds' costs on the statement of claim on an indemnity basis and any costs the Penfolds were ordered to pay to Cutting Edge on the statement of claim.
6. That offer remained open until 15 July 2020.
7. On 19 June 2020, the defendants' solicitor served on Cutting Edge a Calderbank letter offering: 1. Judgment for the plaintiff against the defendants in the amount of $357,000; 2. Defendants to pay the plaintiff's costs on the ordinary basis.
8. The time for acceptance of that offer was extended, upon the plaintiff's request, to 2 July 2020.
9. On 1 July 2020, Cutting Edge served without leave a further affidavit of Adam Perry sworn on 26 June 2020.
10. On 2 July 2020, Cutting Edge served without leave a report of Furzer Crestani, forensic accountants, and an affidavit of Dean Brus sworn on 1 July 2020. Prior to that date, Cutting Edge had not served any forensic accounting evidence in support of its claim for loss of profits. The Furzer Crestani report estimated a loss of profits of between $912,965 and $933,506 for approximately 32,000 sleepers. Mr Manwaring deposed that because of this new material, the Penfolds did not accept Hollard's offer of 16 June 2020 as they needed to investigate and obtain evidence in response to Cutting Edge's material. He further deposed that this evidence, for the first time, indicated that Cutting Edge claimed there was no alternative source of second-hand sleepers for purchase of replacement sleepers and that Cutting Edge now relied on this evidence in support of its claim for loss of profits.
11. On 2 July 2020, Cutting Edge wrote to the defendants rejecting the offer of $357,000 plus costs on the ordinary basis and making a counter-offer in the amount of $550,000 with the defendants to pay the plaintiff's costs on the ordinary basis. That counter-offer was subsequently amended to provide that Cutting Edge would accept $100,000 for its costs.
12. On 24 July 2020, Cutting Edge filed a notice of motion seeking leave to rely on the additional affidavit evidence of Mr Perry and Mr Brus. That notice of motion was heard by me on 30 July and 3 August 2020. I delivered judgment on 6 August 2020 granting leave to rely on the additional evidence, vacating the five-day hearing listed to commence on 17 August 2020, ordering that Cutting Edge pay the defendants' and cross-defendant's costs of the motion and the costs thrown away by vacation of the hearing date and setting the matter down for hearing on 2 August 2021: Cutting Edge Services Pty Ltd v Raymond & Therese Penfold [2020] NSWSC 1012. A significant factor in granting the adjournment was the plaintiff's position that the supplementary statement of Mr Perry was "vital" to the assessment of damages (see at [36]) leading me to find (at [45]) that "it would be very difficult, if not impossible, for any assessment of damages to be made either way" without it.
13. Mr Manwaring deposed that the defendants' costs of the motion and the costs thrown away by vacation of the hearing date were in the order of $104,713 and that these costs had not been paid by Cutting Edge. The cross-defendant's estimate of the costs of the motion and those thrown away was $68,914.45.

Arrangement between the defendants and cross-defendant

1. On 7 August 2020, Mr McMahon contacted Mr Manwaring about a proposed arrangement between the insurer and the Penfolds in relation to the conduct of the defence in relation to damages. That email stated that: "Our client considers that the costs [expended] by it to date on the damages case are excessive having regard to the fact that we are the cross defendant. We are instructed not to involve our counsel further in that part of the case. … we propose the following arrangement. … : (1) That Michael Kennedy be retained jointly as the timber expert to respond to the evidence of Mr. Perry. (2) That Fiona Bateman be retained jointly as the forensic accounting expert to respond to the evidence of Furzer Crestani. (3) That the fees rendered by Mr. Kennedy and Ms. Bateman in respect of work performed from now on be shared on a 50/50 basis by the defendants/cross- defendant… (4) That any letters of instruction to the experts be initially prepared by this firm at the cross-defendant's cost and settled by Mr Drummond at the defendant's cost. (5) Any conferences with expert witnesses to be held jointly; with the parties to bear their own costs in respect of their attendances. (6) That the list of questions for experts be initially prepared by this firm at the cross-defendant's cost and settled by Mr Drummond at the defendant's cost."
2. On 3 September 2020, Mr Manwaring replied by email indicating that the defendants agreed broadly with the proposed arrangement. Mr Manwaring sent another email of 21 September 2020 indicating that the defendants agreed to the arrangement in relation to damages. Mr Manwaring also forwarded an advice from Mr Drummond of counsel in relation to damages which proposed not to undertake a defence in relation to the claim for loss of profits but rather to proceed to establish, based on expert evidence, the replacement cost of the sleepers.
3. Annexed to Mr Manwaring's affidavit were several emails and letters of instruction sent between the defendants and cross-defendant on the issue of damages. The Penfolds and Hollard jointly instructed Mr Kennedy, obtaining three expert reports, and the defendants obtained the affidavits of Leonie Emmott, Mark Antunac and Bruce Bennie. The defendants also drafted and served the relevant subpoenas and notices to produce from September 2020. Mr Manwaring stated that, to his knowledge, Hollard ceased to retain counsel from approximately September 2020 and then retained new senior counsel in July 2021.
4. Mr Manwaring deposed that, despite the agreement as to damages, senior counsel for the cross-defendant at the hearing in August 2021 prepared detailed opening submissions on damages, cross-examined Mr and Mrs Brus, including on the question of damages, cross-examined both the defendants, albeit on the limited issue of their insurance policy and prepared detailed final submissions on issues relevant to both the summons and the cross-claim.

Plaintiff's submissions

1. The plaintiff submitted that costs should follow the event and interest should be payable under s 100 of the Civil Procedure Act 2005 (NSW). As to whether r 42.34 of the UCPR would militate against an order for costs, it was submitted that the plaintiff's case involved "significant factual complexity" which warranted commencing and continuing proceedings in the Supreme Court: Benson v Rational Entertainment Enterprises Ltd (No 2) [2018] NSWCA 148 ("Benson") at [18]. It was further submitted that the cross-claim raised issues of policy construction which warranted the attention of a "superior commercial court".
2. The plaintiff submitted that the issues involved were complex and it was an "arguable prospect" that damages could have exceeded $500,000. The plaintiff relied upon the decision of State of New South Wales v Quirk [2012] NSWCA 216 ("Quirk") at [171].
3. In more detailed submissions in reply the plaintiff rejected the submission that the claim was "knowingly exaggerated" and "false". It was submitted that there were a number of difficult elements in the plaintiff's claim and the difficulty of the process was demonstrated by the extensive judgment on the issue as well as the advices annexed to Mr Manwaring's affidavit. It was submitted that Mr Brus maintained that his "mental notes" and estimates were correct despite the contemporaneous documentation indicating the contrary. The plaintiff submitted that it had a reasonable basis for asserting that its loss exceeded the pre-litigation offers made by Hollard.
4. In relation to set-off, it was submitted that the defendant had not established any of the discretionary factors necessary to warrant set-off of the judgment debt. It was submitted that there was no question that the plaintiff had the capacity to satisfy any judgment as to costs. It was noted that the defendants considered making an application for security for costs but decided not to do so.
5. In relation to the cross-defendant's costs the plaintiff submitted that there was no nexus between the plaintiff's claim and the cross-claim. It was submitted that the proper construction of the defendants' insurance policy was completely unrelated to the proceedings brought by the plaintiff and that the costs incurred in prosecuting and defending the cross-claim should not be visited upon the plaintiff.
6. Finally, the plaintiff noted that the Court entered judgment for the plaintiff in the sum of $177,290 plus interest. Applying s 100 of the Civil Procedure Act to the sum from the date of judgment would yield $43,133.44 in interest, making a total judgment debt of $220,423.44.

Defendants' submissions

1. The defendant sought ten variations to the usual order that costs follow the event, as summarised above at [10]. The defendants' submissions on each issue were as follows.

Cutting Edge's costs

1. The defendants submitted that the plaintiff's original claim for $1,194,733 in loss of profits was premised on "a number of falsehoods each of which were known [to the plaintiff] prior to the commencement of the proceedings". It was submitted that the plaintiff's claim was based on both erroneous facts and an erroneous application of legal principle.
2. First, it was submitted that the plaintiff knew, or should have known, based on its own documents, that only 18,157 sleepers had been recovered and stored at Maryvale. The defendants noted that none of the invoices recording the number of sleepers were put into evidence by the plaintiff. Secondly, the defendants submitted that the plaintiff knew based on its own documents that around 47% of the sleepers it had recovered were "redundant", meaning C grade of firewood. Thirdly, it was submitted that the plaintiff knew that the sleepers stored at Access Recycling had been "cherry picked" and were not a representative sample of the sleepers stored at Maryvale. It was thus submitted that Cutting Edge knew its claim as to the grades of the sleepers at Maryvale, based on the grading of sleepers at Access Recycling, was not representative of the quality. Fourthly, it was submitted that the plaintiff's claim as initially pleaded and maintained until the hearing in August 2021, was based on loss of profits. The defendants submitted that this approach was "fundamentally flawed and contrary to principle", and that the plaintiff knew or should have known this. The plaintiff belatedly conceded this at the hearing in August 2021: Cutting Edge at [356].
3. The defendants submitted that the above factors were relevant to the reasonableness of the plaintiff refusing the pre-litigation offers made by the cross-defendant Hollard and commencing and continuing proceedings in the Supreme Court.
4. In relation to the pre litigation offers made by the insurer in January and February 2017 (in the amounts of $288,000, $360,000 and $400,000 respectively), it was submitted that it was "manifestly unreasonable" for the plaintiff to refuse the offers and that the plaintiff "falsely, belligerently and unreasonably proceeded to commence and continue these proceedings upon a knowingly exaggerated false and untenable claim."
5. The defendants submitted that the plaintiff was aware from the email of 12 February 2017 that if they declined the offer of $400,000 the insurer would contest liability in excess of $100,000 under the farm insurance policy. It was submitted that the plaintiff knew that the defendants would need to bring a cross-claim. The defendants relied in this respect, at least in part, upon affidavit evidence I have excluded.
6. In relation to the plaintiff's refusal on 2 July 2020 of the defendants' offer of $375,000 plus costs, the defendants submitted that the plaintiff was well aware of the factual issues in relation to damages. It was noted that Mr Penfold's affidavit of 14 June 2019 squarely raised the issue of the number of sleepers present on Maryvale at the time of the fire, whether better quality sleepers were "cherry picked" and whether the sleepers at Access Recycling were of higher average quality. The issue of contributory negligence had also been raised in the defendants' pleadings and evidence. It was thus submitted that the plaintiff was aware by 19 June 2020, when the offer was made, of all the issues in its case in relation to damages. It was submitted that even if the plaintiff maintained its case for loss of profits, that claim was no greater than $120,398 based on the available evidence. It was thus submitted that the plaintiff knew, when it declined that offer, that its claim for loss of profits was "excessive, exaggerated and untenable".
7. On the basis of the above factors, it was submitted that the plaintiff could not show, as required by r 42.34, that it was reasonable to commence and continue proceedings in the Supreme Court.
8. The defendants referred to G E Dal Pont's Law of Costs (5th ed, LexisNexis Butterworths, 2021) at [12.15] and submitted that the Court would take the following factors into account when assessing the reasonableness of commencing proceedings in this Court: the amount claimed; the amount actually recovered; the difficulty or otherwise of assessing the likely damages; the complexity (factually and/or legally) of the case; the nature of the proceedings; the conduct and attitude of the parties; and the importance of the legal principle involved.
9. The defendants submitted that the original claim of more than $1,000,000 was based on factual errors and misguided legal principle, as well as knowingly false or exaggerated claims by the plaintiff. It was submitted that the reason the amount recovered was less than 20% of the amount claimed was that the Court rejected the plaintiff's "false" evidence as to the number of sleepers and their grades, as well as the plaintiff's eventual concession that the appropriate measure of damages was replacement costs rather than loss of profits.
10. In relation to complexity, it was submitted that the issues in relation to liability and damages did not raise complex factual or legal issues and each of the issues could have been determined by the District Court. As to the plaintiff's suggestion that the construction of the cross-claim was so complex as to warrant the attention of a superior commercial court, the defendants submitted that Cutting Edge did not initiate the cross-claim and any issues raised therein were irrelevant to the reasonableness of Cutting Edge commencing and continuing proceedings against the defendants in the Supreme Court.
11. In relation to the two cases relied upon by the plaintiff, it was submitted that Benson was more complex in that the respondents had no physical presence in Australia and initiating processes in the District Court cannot be served outside of Australia (at [18]). It was submitted that Quirk involved significantly more complex factual issues, as demonstrated by the fact that it involved a 14-day hearing in the Supreme Court and could, if successful, have involved damages of over $500,000.
12. The defendants submitted that the Court could not be satisfied that it was reasonable to commence and/or continue proceedings in the Supreme Court and there should be no order as to the plaintiff's costs.

Defendants' costs

1. The defendants submitted that the plaintiff should pay their costs on an indemnity basis. It was submitted that s 98 of the Civil Procedure Act confers a wide discretion and an order for indemnity costs may be made where proceedings are brought "in wilful disregard of known facts or clearly established law": Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; [1993] FCA 801 at 233. The defendants further submitted that the Court would have regard to the plaintiff's conduct prior to the commencement of proceedings as conduct "connected with or leading up to the litigation": Northern Territory v Sangare (2019) 265 CLR 164; [2019] HCA 25 at [24]. The defendants submitted that the plaintiff's pre-litigation conduct in refusing three offers made by Hollard should be considered in relation to costs.
2. It was further submitted that pursuant to s 56(5) of the Civil Procedure Act, the Court could consider any failure on the part of the plaintiff to assist in the just, quick and cheap resolution of the issues in the proceeding: s 56(3). The defendants submitted that if the plaintiff and their legal representatives had undertaken a proper assessment of the claim based on the available facts and documentation prior to rejecting Hollard's offers, it would have been clear that the actual number of sleepers was much lower and their quality far inferior to that asserted by the plaintiff.
3. The defendants submitted that the Court would find based on the above factors that the plaintiff acted unreasonably in refusing Hollard's pre-litigation offers and commencing proceedings seeking damages of over $1,000,000. It was submitted that the Court would exercise its discretion to order that the plaintiff pay the defendants' costs on an indemnity basis for the whole of the proceedings.
4. In the alternative it was submitted that the plaintiff should be ordered to pay the defendants' costs on an indemnity basis from 3 July 2020, the day after the plaintiff refused the defendants' Calderbank offer of $357,000 plus costs on the ordinary basis. The defendants submitted that the offer was a genuine compromise in circumstances where the number of sleepers and their quality was significantly lower than that claimed by Cutting Edge and the plaintiff was found to be contributorily negligent. Considering that the offer included costs on the ordinary basis (which Cutting Edge subsequently indicated was in the vicinity of $100,000 at that time), the defendants submitted that the Calderbank offer of 19 June 2020 was significantly better than the judgment obtained by Cutting Edge and the offer represented a real compromise.
5. As for the timing of the offer, the defendants noted that it was made approximately two months prior to the original hearing date, in circumstances where Cutting Edge had put on its evidence on damages (save for the late evidence which was not ultimately relied upon). It was submitted that Cutting Edge had a reasonable time to consider the offer (two weeks) and the offer was extended at the plaintiff's request. The plaintiff then sought advice and responded with a counter-offer. The defendants submitted that the plaintiff's prospects of obtaining judgment approaching the amount offered, based on the evidence, were very low. The defendants submitted that it was manifestly unreasonable for the plaintiff to reject the offer of 19 June 2020, such as to justify an order for costs on an indemnity basis.
6. The defendants submitted that they should be entitled to set off any costs order made in their favour against the judgment debt on the basis that the amount of an indemnity costs order from 3 July 2020, plus the costs thrown away by vacation of the original trial would be greater than the judgment debt. It was further submitted that there was a real question about the capacity of Cutting Edge to satisfy a substantial adverse costs order.

Hollard's costs

1. The defendants accepted that the starting point was that costs should follow the event in relation to the cross-claim but submitted that the interests of justice required that the plaintiff pay the cross-defendant's costs or be required to indemnify the defendants in respect of the cross-defendant's costs. The defendants referred to the observations of Ball J in DIF III - Global Co-Investment Fund LP v Babcock & Brown International Pty Limited (No 2) [2019] NSWSC 1578 at [10] where his Honour held that: "The question whether a plaintiff will be ordered to pay the defendant's costs of an unsuccessful cross-claim, and to indemnify the defendant against costs it is ordered to pay the successful cross-defendant, turns ultimately on whether those costs ought fairly to be borne by the plaintiff. That, in turn, depends on a number of factors including whether the proceedings were the catalyst for the cross-claim, whether it was reasonable for the defendants to have joined the cross-defendants, and whether the cross-claim raised issues private to the parties to it…"
2. The defendants submitted that the Court would take into account whether it was reasonable or appropriate for the defendants to bring the cross-claim; whether the plaintiff's claim was the catalyst for the cross-claim; the nexus between the plaintiff's claim and the cross-claim; and the purpose of the third party claim procedure. It was further submitted that the Court would consider the plaintiff's pre-litigation conduct, including its refusal of offers made by the cross-defendant, in circumstances where the plaintiff was on notice that the cross-defendant intended to deny liability in excess of $100,000 if the offers were refused. The defendants relied on the observations of Einstein J in Furber v. Stacey & Anor. [2005] NSWCA 242 at [115]:
3. The defendants submitted that the plaintiff always intended for the cross-claim to be brought and it was effectively brought for the benefit of the plaintiff. It was submitted that it was reasonable to bring the cross-claim in circumstances where the defendants' construction of the policy was reasonably open. The defendants submitted that the plaintiff's claim was the catalyst for the cross-claim and that the plaintiff's unreasonable conduct in refusing both the pre-litigation offers and the Calderbank offer of 19 June 2020 caused the defendants to bring and maintain the cross-claim.
4. As to the basis on which the cross-defendant's costs should be paid, the defendants submitted that the cross-defendant should be "estopped by its pre-litigation conduct from relying on offers of compromise made to the [defendants] which exceed $100,000". The defendants relied on the case of Hansen v Marco Engineering (Aust) Pty Ltd [1948] VLR 198 in which an insurer settled a claim on behalf of the insured on the understanding that the applicable policy was a comprehensive insurance policy with no limit of indemnity. After settling the claim for £3,705, the insurer discovered that the comprehensive insurance policy contained an exclusion in respect of injury to passengers and the applicable third-party insurance policy limited the insurer's liability to £2,000. Fullagar J held that the insurer was estopped from relying on the limit of indemnity, having purported to settle the claim on behalf of the insured based on the comprehensive policy. I pause to note that it was not explained how that case was applicable on the present facts. The correspondence on behalf of the cross-defendant on 8 and 14 February 2017 made clear that while the cross-defendant was of the view that its liability may be limited to $100,000, it was prepared to settle the claim for $400,000, while reserving its right to rely on the relevant exclusion clause in future proceedings.
5. The defendants submitted in the alternative that "the Court should not permit Hollard to rely on the offers of compromise exceeding $100,000 as it had elected, by its conduct, to accept that the claim could have been resolved for an amount exceeding $100,000". The defendants submitted that Hollard was required to elect at the outset whether to deny liability in excess of $100,000 or attempt to settle the claim for a greater amount. It was submitted that the insurer elected to take the latter course and "[could] not now be permitted to rely on either of the offers of compromise served in the course of the proceedings".
6. The defendants submitted that the following circumstances were relevant to the reasonableness of refusing Hollard's Calderbank offer of 14 October 2019: 1. Although Hollard had pleaded in its defence to the cross-claim that the sleepers were in the physical and legal control of the defendants, Hollard had not filed any submissions indicating why this was so; 2. Hollard had not filed any evidence on the question of physical and legal control; 3. Hollard had not articulated the legal argument upon which it ultimately succeeded, that being that it was necessary to read the exception in cl 2 harmoniously with the provision of item 4 of the policy; 4. Hollard had not expressly articulated that it intended to rely on the 2015 PDS rather than the 2012 PDS which was annexed to the affidavit of Mrs Penfold. It was also submitted that it was relevant that the offer did not provide for the payment of the defendants' costs; 5. The offer expressly stated that it was intended to facilitate the making of an offer of compromise to the plaintiff. It was submitted that such an offer would have had no realistic prospects of being accepted by Cutting Edge and would not have provided an appropriate basis upon which the defendants could claim indemnity costs from Cutting Edge. On this basis, it was submitted that the defendants did not act unreasonably in refusing Hollard's offer of 14 October 2019. The defendants submitted that Hollard eventually accepted the force of what was said in their refusal letter of 9 March 2020 when it made its offer of 16 June 2020.
7. The defendants accepted that Hollard's offer of 16 June 2020 was made in accordance with r 20.26 of the UCPR such that r 42.15A(1) was applicable but submitted that the Court would exercise its discretion not to make an order in accordance with r 42.15A(2). The defendants relied on the arguments summarised above in relation to their non-acceptance of the offer of 14 October 2020. In addition, the defendants relied on Cutting Edge's refusal of their Calderbank offer of 19 June 2020 and the additional evidence filed on 1 and 2 July 2020. It was submitted that the evidentiary landscape changed such that it was not unreasonable for the defendants to refuse Hollard's offer in the absence of any agreement with Cutting Edge. These factors were said to be sufficiently exceptional that the Court would decline to make an order under r 42.15A(2).
8. In relation to the quantum of Hollard's costs that should be allowed, the defendants submitted that the nature of the agreement between the Penfolds and Hollard was such that the Penfolds "would assume carriage of the defence of the claim… on the issue of damages". The defendants submitted that despite this agreement, senior counsel for Hollard made opening and closing, as well as written submissions on damages and cross-examined Mr and Mrs Brus on issues relevant to damages. The defendants submitted that it was unnecessary for counsel for Hollard to address any of the issues on liability, contributory negligence or damages at the hearing (as in the defendants' submission, Hollard did). The defendants submitted that any costs order in favour of Hollard should only extend to the costs incurred in the defence of the cross-claim on the limited issue of the construction of the relevant exclusion clause.
9. The defendants submitted that Hollard should not be entitled to set-off in respect of any costs order in its favour. It was submitted that no issue as to the defendants' solvency arose and Hollard had at all times been prepared to pay the defendants $99,000 under the policy. The defendants also sought interest on that sum pursuant to s 57 of the Insurance Contracts Act 1984 (Cth) on the basis that Hollard had never disputed liability up to that amount.

Interest on the judgment sum

1. The defendants submitted that no order in relation to interest should be made from 17 August 2020, that being the original hearing date which was vacated due to the plaintiff's late filing of evidence upon which it did not ultimately rely. It was submitted that the plaintiff's conduct in seeking to vacate the original hearing date was unreasonable and inconsistent with the principles in ss 56-58 of the Civil Procedure Act. The defendants submitted that the Court would take into account the unreasonable delay caused by the plaintiff and exercise its discretion not to award interest from 17 August 2020.
2. Hence, the defendant submitted that any award of interest on the judgment sum should be limited to the period of 18 December 2016 to 17 August 2020.

Cross-defendant's submissions

1. The cross-defendant cited the principal judgment at [490]-[491] for the starting position under r 42.1 of the UCPR that costs follow the event, unless it appears to the Court that some other order should be made. The cross-defendant then relied on two offers (and to a lesser extent, a third) it made to the defendants (and rejected) which it was submitted would justify the Court awarding costs against the defendants on an indemnity basis from the relevant dates.
2. The first offer was made in a letter dated 9 March 2017 sent by the cross-defendant's lawyers to the defendants. After explaining the effect of the insurance policy, the cross-defendant offered to pay the defendants the sum on $99,000 upon receipt of a release, to be utilised by the defendants to satisfy any liability to the plaintiff as they saw fit. The offer was made well before the plaintiff commenced proceedings on 1 February 2018. The cross-defendant submitted that if the defendants accepted this offer the cross-claim would have been avoided, and that the cross-defendant was reasonably attempting to avoid further participation in the claim and being joined to any litigation.
3. The second offer was made in a letter dated 14 October 2019 sent by the cross-defendant's lawyers to the defendants' lawyers. It was made in accordance with the principles applied in Calderbank v Calderbank (1975) 3 All ER 333. The cross-defendant offered: 1. To pay either to the defendants or the plaintiff the sum of $200,000; 2. To pay the plaintiff's reasonable costs of the proceedings to be agreed or assessed; 3. To indemnify the defendants for any order for costs against them upon acceptance by the plaintiff of an Offer of Compromise; and 4. That the defendants bear their own costs of the cross-claim.
4. The offer remained open until 29 November 2019 and was rejected by the defendants.
5. The cross-defendant submitted that the Court has power to make an order for indemnity costs, relying on recent statements of the law made by Henry J in Kanjian Holdings No 1 Pty Ltd v Kanjian; Kanjian v Kanjian (No 4) [2021] NSWSC 1390 ("Kanjian v Kanjian") at [57]-[58] and by Ward CJ in Eq (as her Honour then was) in In the matters of Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in liq) (No 2) [2021] NSWSC 1161 at [93]-[99].
6. Relying on these principles, the cross-defendant submitted that the defendants should have known they had no chance of success against the cross-defendant. Further, the offer was a genuine offer of compromise and it was unreasonable for the defendants to reject it for the following reasons: 1. The offer was made at a time when the defendants were legally represented and knew the evidence and positions of the plaintiffs and the cross-defendant; 2. The offer was open for 46 days, being "more than reasonable"; 3. The compromise was generous (especially considering the Court's ultimate judgment); 4. The defendants' prospect of success at the date of the offer vis-à-vis the cross-defendant were, at best, fair; 5. The offer was expressed clearly; 6. The offer foreshadowed the application for indemnity costs if the defendants rejected the offer.
7. Accordingly, the cross-defendant submitted that the defendants should pay the cross-defendant's costs from the date the proceedings commenced until 29 November 2019 (ie the latest date for acceptance of the offer) on an ordinary basis, and thereafter on an indemnity basis.
8. The third offer was made in a letter dated 16 June 2020 sent by the cross-defendant's lawyers to the defendants' lawyers and was an offer of compromise under r 20.26 of the UCPR. Submissions as to this offer were made "should the Court not be minded to award the cross-defendant indemnity costs based on the October 2019 offer".
9. The cross-defendant offered to settle the cross-claim on the following basis: 1. Judgment for the insured on the cross-claim in the amount of $357,000; 2. The insurer to the pay the insured's costs on the cross-claim on an indemnity basis (as agreed or assessed); 3. In respect of the plaintiff's claim, the insurer will pay the insured's costs on an indemnity basis (as agreed or assessed) as well as any costs the insured is ordered to pay to the plaintiff.
10. The cross-defendant submitted that there was complete compliance with the requirements in UCPR r 20.26 and that the defendants' non-acceptance of the offer triggered UCPR r 42.15A. The force of this rule in the current context would be that the cross-defendant is entitled to an order against the defendants for its costs in respect of the cross-claim assessed on an indemnity basis from 17 June 2020, and on an ordinary basis up until this time. The cross-defendant submitted that there was no reason why the Court would "otherwise order", this being the caveat on the normal operation of r 42.15A.
11. In the alternative, the cross-defendant relied on the third offer as a Calderbank offer, should the Court not accept the submissions with respect to UCPR r 20.26.

Set-off and interest

1. The cross-defendant sought that the $99,000 to be paid to the defendants on the cross-claim be set-off against any costs payable by the defendants to the cross-defendant. The cross-defendant cited Tanilba Beach Pty Ltd v JR & JB Pty Ltd [2018] NSWSC 288 at [29] (and the cases there cited) as authority for the proposition that the Court has power to order such a set-off.
2. The cross-defendant estimated its costs and disbursements to be approximately $487,000, being well above the $99,000 payable under the policy regardless of the question as to payment on an ordinary or indemnity basis.
3. The cross-defendant submitted that the Court should order the set-off because: 1. The full financial position between the parties will only be resolved when all legal costs have been agreed or assessed and paid; 2. If in the meantime the cross-defendant pays $99,000 to the defendants they may not pass it onto the plaintiff until legal costs are resolved, and the plaintiff, as a company, may not be able to pay costs if ordered to do so; 3. The amount of $99,000, if paid early, would only have to be repaid later in the form of costs.
4. The cross-defendant also submitted that, pending set-off, it was also not appropriate for any interest, post-judgment or otherwise, to accrue on the cross-defendant's obligation to pay the $99,000 under the policy to the defendants.

Submissions in reply

1. The cross-defendant also made submissions in reply to the defendants' submissions on costs filed on 22 November 2021.
2. The cross-defendant made some general submissions as follows: 1. Under the policy, the cross-defendant's obligation to indemnify the defendants up to the $100,000 cap does not arise until the defendants have a liability to the plaintiff. Such liability needed to be determined by the Court, because the defendants denied that Mr Penfold was negligent. 2. Interest under s 57 of the Insurance Contracts Act has not started running. This is because the defendants are not yet "out of pocket" to the plaintiff, nor has the cross-defendant refused to provide the capped indemnity (and nor will it). 3. It is inconsistent for the defendants to seek a set-off of its liability to the plaintiff against costs but resist an equivalent order as between the defendants and cross-defendant. There should be a reconciliation of all amounts payable by all parties at one time. 4. Any (unproven) risk that the plaintiff cannot pay costs ordered against it ought to be borne by the defendants. The defendants chose to cross-claim against the cross-defendant and were not forced to by the plaintiff. It was the defendants' choice to dispute the construction of the policy, and not to seek security for costs from the plaintiff. 5. The preconditions for a "Sanderson type" order that the cross-defendant's costs be payable by the plaintiff (as opposed to the unsuccessful defendants) have not been satisfied. 6. Finally, there has been no election, waiver or estoppel based on the pre-litigation attempts by the cross-defendant to settle the claim by the defendants directly with the plaintiff, including by making offers in excess of a policy entitlement. Further, there was no reliance by the defendants on such offers to give rise to an estoppel.

Consideration

1. The question of which party should pay costs, to whom, and on what basis is one within the discretion of the court: s 98(1)(a) of the Civil Procedure Act. This discretion is subject to the qualification that it "must be exercised judicially in accordance with established principle and factors directly connected with the litigation": Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [65], per McHugh J.
2. Among the fetters on the discretion to award costs are the rules of the court contained in Pt 42 of the UCPR. The usual rule is that costs follow the event, unless it appears to the court that some other order should be made: UCPR r 42.1. Had there been no application to depart from the usual rule in this case, I would have ordered that the defendants pay the costs of both the plaintiff and the cross-defendant on the ordinary basis as the unsuccessful party in both claims. All three parties contend that I should depart from such orders.
3. The plaintiff contends that its costs should be paid by the defendants on the ordinary basis, despite the fact that it was awarded less than $500,000. The cross-defendant contends that the defendants/cross-claimants should pay its costs on an indemnity basis given their rejection of multiple settlement offers. The defendants seek multiple costs orders/findings as set out above at [10].
4. I propose to briefly set out the relevant principles derived from the authorities and then address each argument separately.

When plaintiff is awarded less than $500,000: UCPR r 42.34

1. The plaintiff sought damages in the amount of $1,094,733.15 and was awarded an amount of $177,290 (plus interest). Accordingly, UCPR r 42.34 is applicable. It is in these terms: (1) This rule applies if: (a) In proceedings in the Supreme Court, other than defamation proceedings, a plaintiff has obtained a judgment against the defendant or, if more than one defendant, against all the defendants, in an amount of less than $500,000, and (b) The plaintiff would, apart from this rule, be entitled to an order for costs against the defendant or defendants. (2) An order for costs may be made, but would not ordinarily be made.
2. In Quirk Tobias AJA, with whom Beazley JA and Hoeben JA agreed held the following at [171]: "True it is that the present case did not involve any complex legal issues and that the monetary amount to which the respondent would have been entitled had he succeeded on all his claims may not have exceeded the amount of $500,000. … Importantly, the facts were complex involving as they did two separate incidents involving not insignificant conflicts of evidence. … Although it is true that the case could have been litigated in the District Court, in my view the factual issues were sufficiently complex as to warrant the proceedings being commenced and continued in the Supreme Court. It therefore follows that in my view rule 42.34 has no application to the present case."
3. The question involves an assessment of the complexity of the case. As the Court (Beazley P, Leeming JA and Emmett AJA) observed in Benson v Rational Entertainment Enterprises Ltd (No 2) [2018] NSWCA 148 at [18]. "Minds may differ as to what is 'particularly complex', and further a cause of action may be straightforward whilst having factual complexity. Mr Benson's proceedings were neither legally nor factually straightforward. They involved, in part, the construction of the 'USA Settlement Deed', made in the United States and governed by United States law, but having the form of an order certified by a United States federal judge. The unjust enrichment claim was novel. And the amount at stake was US$285,00 plus interest, which is not insubstantial."
4. I have considered the defendant's submissions to the effect that the plaintiff's claim was "knowingly exaggerated" and "false" and based on "factual errors and misguided legal principle". It is to be accepted that I made adverse credit findings in relation to Mr and Mrs Brus in these proceedings. Despite this, I made no findings that they lied in their evidence: it was more a case of "wishful thinking". Mr and Mrs Brus were adamant in their evidence that their estimates and mental notes were correct despite the contemporaneous documentation to the contrary. Their evidence was given in a way suggesting that they did not accept the documentation - but it was their documentation.
5. I have also considered the competing arguments as to whether these proceedings were particularly complex. The Cutting Edge judgment (albeit including the cross-claim) runs to 494 paragraphs. Almost every factual and legal issue was put in dispute by the defendants. This inevitably resulted in the case being a factually complex one. Although the defendants were entitled to put everything in issue, in doing so they made the proceedings considerably more complex than they could have been. Relevantly, the defendants cannot now contend that the proceedings were not factually complex. It is to be accepted that most of the legal (rather than factual) complexity arose in the cross-claim but I am satisfied that overall the proceedings brought by the plaintiff were sufficiently complex such that I would not decline to make a costs order by reason of UCPR r 42.34.

Indemnity costs

1. There were two bases upon which it was contended that indemnity costs ought to be awarded: the rejection of reasonable settlement offers and the plaintiff's conduct of an unreasonable case.
2. As the chronology set out above established, there were numerous settlement offers made in this matter which, regrettably, were not accepted. Indemnity costs are sought by both the defendant and cross-defendant on that basis.
3. It is well established that an order for indemnity costs is not made to punish an unsuccessful party for persisting with a case that fails. Rather, such an order is made to compensate a successful party for costs when an offer of compromise is unreasonably rejected.
4. Offers of compromise are provided for in UCPR r 20.26. The consequences of such an offer not being accepted and where the judgment is "no less favourable" are set out in UCPR r 42.15A as follows: 42.15A Where offer not accepted and judgment no less favourable to defendant (1) This rule applies if the offer is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim no less favourable to the defendant than the terms of the offer. (2) Unless the court orders otherwise - (a) the defendant is entitled to an order against the plaintiff for the defendant'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.
5. Thus, "unless the court orders otherwise," the rejection of a Calderbank offer by the plaintiff where the judgment obtained is ultimately less favourable than the terms of the offer entitles a defendant to be awarded costs on an indemnity basis. But the rejection of such an offer does not inevitably lead to that result: Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 3) [2021] NSWCA 160 ("Valmont") at [23] per Bell P (as his Honour then was), Macfarlan and Leeming JJA agreeing. As the Court of Appeal observed in Valmont at [25], the following factors will be relevant to the determination of whether the refusal to accept a Calderbank offer was unreasonable: "(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 offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it."
6. In Kanjian v Kanjian, Henry J noted at [57]-[58] that there is no "fixed rule" as to when an order for indemnity costs is warranted, but (citations omitted): "Indemnity costs should only be ordered where the party's conduct is 'plainly unreasonable', such as where there is some 'relevant delinquency' on their part … The circumstances that might give rise to an indemnity costs order include the following: where a party, properly advised, should have known they had no chance of success; where unfounded allegations of fraud or improper conduct are made, such as where they have been made knowing them to be false; the undue prolongation of proceedings by groundless contentions; where there is particular evidence of misconduct that causes loss of time to the court or other parties; the commencement of proceedings for some ulterior motive; and the unreasonable rejection of an offer of compromise …" (Emphasis added.)
7. In In the matters of Earth Civil Australia Pty Ltd, RCG CBD Pty Ltd, Bluemine Pty Ltd, Diamondwish Pty Ltd and Rackforce Pty Ltd (all in liq) (No 2) [2021] NSWSC 1161, Ward CJ in Eq (as her Honour then was) observed at [93]-[99] (citations omitted): "The principles in relation to special costs orders are well-known … Relevantly, while the rejection or non-acceptance of a Calderbank offer (in circumstances where it later transpires that the final result in the proceeding is less favourable to the offeree) enlivens the discretion to award indemnity costs, it does not create a prima facie right to such an order … Where the offer is a Calderbank offer, the onus to demonstrate that it was unreasonable to reject it is on the party seeking to rely on the making of the offer … In order to warrant the making of a special costs order, the offer must constitute a genuine offer of compromise that was unreasonably rejected … … The factors relevant to take into consideration when considering whether the rejection or non-acceptance of the offer was unreasonable (as summarised in Favotto at [20]-[30]) include: (i) the stage of the proceeding at which the offer was received; (ii) the time allowed to the offeree to consider the offer; (iii) the extent of the compromise offered; (iv) the offeree's prospects of success assessed as at the date of the offer; (v) the clarity with which the terms of the offer were expressed; and (vi) whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it … Where a Calderbank offer is unreasonably rejected, and the offeror succeeds in litigation, costs may be made on an indemnity basis at least from the date of the offer or thereabouts. Whether such an order will be made will be determined in the exercise of the Court's discretion …"
8. Applying these principles to the material before me, I turn first to consider whether it was reasonable of the plaintiff to reject the defendants' offer to the plaintiff on 19 June 2020 to pay $357,000 and costs on the ordinary basis. I am satisfied that was a reasonable offer and should have been accepted. The offer was made prior to the 2020 hearing date and provided the plaintiff a reasonable time to consider it. Although it was much less than what was sought it was also nearly double what was ultimately ordered. Given the state of the documentation in the plaintiff's possession there was always going to be difficulty reconciling the plaintiff's oral assertions with the contradictory documentation. The offer was clear, and it foreshadowed an application for indemnity costs in the event of the offeree's rejection.
9. Similarly, I am satisfied that both the offer from the cross-defendant to the defendants on 14 October 2019 ($200,000 plus costs) and on 16 June 2020 ($357,000 plus costs on an indemnity basis) were reasonable offers and should have been accepted. In fact, in relation to the second offer it was in the amount that the defendants put forward (as sufficient) to settle the matter. The offers were both made prior to the 2020 hearing date and provided a reasonable time to consider it. Although the offers were much less than what was sought, it was also nearly double what was ultimately ordered. All the arguments relied upon by the defendant in the cross-claim were unsuccessful for the reasons I have set out in that judgment.
10. I reject the defendants' contention that the cross-defendant should be "estopped by its pre-litigation conduct from relying on offers of compromise made to the [defendants] which exceed $100,000". As the conduct of the litigation and costs incurred illustrates, the insurer made a commercial decision to offer more than what it contended it was liable to avoid the cost of litigation. That does not preclude them seeking indemnity costs now that the defendants have lost. As the letter dated 14 February 2017 extracted above at [20] makes clear, the insurer expressly reserved its right to rely on the cap.
11. The offer was clear, and it foreshadowed an application for indemnity costs in the event of the offeree's rejection.
12. The defendants also assert that it was unreasonable for the plaintiffs to bring these proceedings and that is a further basis upon which the plaintiffs should pay the defendants costs on an indemnity basis. It is well accepted that indemnity costs can be awarded when litigation has been conducted unreasonably or in bad faith. In Fountain Selected Meat (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401; [1988] FCA 364, Woodward J explained that where an action is commenced or continued in circumstances where "the applicant, properly advised, should have known that he had no chance of success" then: "…the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law".
13. Similarly, in Hamod v State of New South Wales (2002) 188 ALR 659; [2002] FCA 424 at [20] it was held that indemnity costs can be ordered when the court takes the view that it was unreasonable for a party to have subjected the other party to the expenditure.
14. I am not satisfied that the plaintiff's conduct in bringing these proceedings was so unreasonable that it should pay the defendants' costs on an indemnity basis. The plaintiff won and the defendants lost. The difficulty with the plaintiff's case was not one of liability; in fact, in opening submissions the defendants conceded that they were negligent but backtracked on that when pressed at the commencement of the hearing. The commencement of proceedings for negligence was not unreasonable but establishing the extent of the damage had its difficulties.
15. Given that I do not accept this submission by the defendant, the indemnity costs payable by the plaintiff to the defendants are confined to being from the rejection of the 19 June 2020 offer discussed above.

Special costs orders sought by the defendants against the plaintiff

1. The defendant sought that the plaintiff bear its own costs pursuant to r 42.34 of the UCPR and pay the cross-defendant's costs or indemnify the defendants for any costs payable to the cross-defendant on the basis that the defendants were somehow forced by the plaintiffs to bring the cross-claim against the insurer. I have considered the defendants' submissions (summarised above [75]-[77]) and I am not persuaded that the authorities relied upon are applicable on the facts in this matter.
2. At the hearing on 11 February 2022, the order sought in this respect was said to be akin to a "Sanderson" order (Sanderson v Blyth Theatre Co [1903] 2 KB 533; Coombes v Roads and Traffic Authority (No 2) [2007] NSWCA 70). But such an order is made when an unsuccessful defendant is ordered to pay the costs of the successful defendant direct to that defendant (distinguishable from a "Bullock" order where the plaintiff recovers from the unsuccessful defendant the costs of the successful defendant which he has been ordered to pay: Bullock v London General Omnibus Company [1907] 1 KB 264). Neither situation arose here.
3. I am not satisfied that the nexus between the plaintiff's claim and the cross-claim relied upon by the defendants has been established. There is no requisite link between the plaintiff's successful claim in tort against the defendants and the defendants' unsuccessful claim in contract against the cross-defendant.
4. The defendants contend that the nexus arises from the fact that when the plaintiff rejected the pre-litigation offers of compromise from Hollard that necessitated the defendants bringing the claim against Hollard. I am not persuaded that that is the case. Although it is accepted that the Penfolds and the Bruses are family and both no doubt wanted the insurer to pay, it was always a matter for the defendants as to whether there were more than fair chances of succeeding. Just because the plaintiff did not accept an offer does not mean that the defendants were forced into bringing the cross-claim against Hollard.
5. In any event, even if I were satisfied that the plaintiffs should have accepted the pre-litigation offers from the insurer, the plaintiff and the insurer have never been directly joined by any contractual relationship or legal proceedings. Although the insurer represented the defendants' interests prior to proceedings being commenced, its position was that it was only required to pay $99,000 under the insurance contract. Once the defendants commenced proceedings against the insurer seeking more than that amount, there was no longer any basis for the insurer to deal directly with the plaintiff.
6. I am not satisfied that the offers to the plaintiff before the proceedings commenced bear on the questions I am required to determine. It is for that reason that I excluded the affidavits summarised above at [25]-[32]. The affidavits were not relevant. Even if they were relevant, all deponents were required for cross-examination and I would have excluded the affidavits under s 135 of the Evidence Act 1995 (NSW) on the basis that their probative value is substantially outweighed by the danger that the evidence might cause or result in an undue waste of time given the issues for determination. It is understandable that the defendants feel aggrieved that the plaintiffs did not accept the pre-litigation offer of $400,000; a significant amount of costs would have been avoided had they done so. But, for the reasons stated, the sufficient nexus has not been established.

Agreement between the defendants and the cross-defendant

1. Finally, the defendants contend that any cost order against them in favour of the cross-defendant be limited to the costs of the cross-claim as per the arrangement that the defendants alone would conduct the case defending the plaintiff's case on damages. It was contended that senior counsel for the cross-defendant failed to observe this agreement by making opening and closing submissions and cross-examining the Bruses and the Penfolds.
2. I have considered these submissions as well as the limited role that the cross-defendant took at the hearing. I am not satisfied that senior counsel for the cross-defendant took any significant role in the case insofar as damages were concerned. In any event, it was not suggested on behalf of the defendants that any submissions or cross-examination on behalf of the insurer was repetitive of anything put by the defendants. It would be impractical to suggest that, in the context of the arrangement made, senior counsel was precluded from putting matters which had not been put, or not clearly put, by the defendants to the detriment of her client.
3. For these reasons, I do not propose to limit the costs order payable by the defendants to the cross-defendant in the manner contended for by the defendants.

Set off

1. The defendants seek that the costs payable to them by the plaintiff be set off against the award of damages but contend that the cross-defendant's costs ought not be set off as against the $99,000 payable by it to the defendants. The plaintiff argues that no basis for set-off was established and that the cross-defendant sought set off against the defendants.
2. As Ward J (as her Honour then was) observed in Lahoud v Lahoud [2010] NSWSC 1297 at [79], one situation which might arise in which an order for set off of costs might be made is when a party pleads a prior order of costs obtained by it against the other party as a defence to a judgment debt. In that factual context her Honour went on (at [80]) to list that matters such as the public interest, the efficient administration of justice and the conduct of the parties are relevant. An important consideration is the insolvency of one of the parties as is the prospect of delay between obtaining the costs order and having the costs assessed. Her Honour concluded: "Logically, there seems no reason why a court would not also take into account in the exercise of this discretion the overall disputes between the parties (and the fairness of a set-off operating at a time that interest on other costs orders between the parties was still running, at least if it was not made clear at that time as to how the set-off was to apply to those interest orders)."
3. Having considered the submissions in this matter, I am not satisfied that a case has been made for setting off any of the costs orders in this matter. None of the costs have been assessed at this stage and the true position of each of the parties is not known. There is no suggestion of any incapacity to pay and I did not make any order that the cross-defendant pay $99,000 to the defendants in any event.

The payment of interest

1. Section 100 of the Civil Procedure Act provides for the circumstances in which the Court can order that interest be payable on a judgment.
2. The defendants contended that I would not order interest on the plaintiff's judgment after 17 August 2020, and I would order interest on the amount of $99,000 payable by the cross-defendant.
3. When I vacated the 2020 hearing date, it was on the basis that the plaintiff contended that it needed the additional evidence in order to run its damages case (see above at [44]). At the final hearing the following day, that damages case was not pressed by the plaintiff. I have already made costs orders in relation to that adjournment. The question remains as to whether the defendants should have to pay interest on the amount payable to the plaintiff as from the day of that adjournment.
4. Accepting that my discretionary power in this regard is broad, I am satisfied that the defendants have established that they should not be required to pay interest on the damages payable from 17 August 2020, being the date that the proceedings were set down for hearing but were vacated due to the conduct of the plaintiff. The adjournment was granted on a basis that was not ultimately pressed. It would not be in the interests of justice for the defendants to have to pay interest from that date.
5. I do not propose to accede to the defendants' claim that I order, pursuant to s 57 of the Insurance Contracts Act, that interest is payable on the $99,000 to be paid by the cross-defendant. Section 57(1) provides that: Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section.
6. Under the terms of the contract between the cross-defendant and the defendants, interest is not payable until the insurer is liable to pay an amount under the contract. Although the insurer made offers to pay amounts in excess of $99,000 in order to settle the matter, there is some force to the argument that it did not become legally liable to pay that amount until there was a finding that the defendants were negligent, which was 15 October 2021. The fact remains that the insurer was always willing to pay that amount and, on that basis, I have not made any order for it to do so. For these reasons, I do not propose to order that the interest is payable on that amount.

ORDERS

1. Accordingly, I make the following orders: 1. The defendants are to pay the plaintiff's costs on the ordinary basis from 1 February 2018 until 2 July 2020. 2. The plaintiff is to pay the defendants' costs from 3 July 2020 on an indemnity basis. 3. The defendants are to pay the cross-defendant's costs on the ordinary basis from 1 May 2018 until 29 November 2019 and on an indemnity basis thereafter. 4. Interest is payable on the damages claim from 18 December 2016 until 17 August 2020 but not thereafter.

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: 02 May 2022