D & D Ventures Pty Ltd (In Liquidation) v Evans & Anor

REASONS FOR DECISION Introduction 1 In this matter, the Applicant Lessee's claim against the Respondent Lessors was based on alleged defects in premises ('the premises') which were the subject of a lease between them ('the Lease'). The damages claimed came to approximately $150,000. The Lease was governed by the Retail Leases Act 1994 ('the RL Act'). The Lessee carried on a restaurant business at the premises, which were situated at 1-7 Napier Street, North Sydney. 2 A further complaint by the Lessee, that the Lessors had failed to repair the restaurant's hot water system, was abandoned at the hearing. 3 At the commencement of the Lease, the Lessee procured a bank guarantee ('the guarantee') from Westpac in favour of the Lessors, securing performance of the Lessee's obligations under the Lease. The Lessee paid $101,000 into a term deposit with Westpac in order to finance the guarantee. On 10 April and 1 May 2003, the Lessors drew on the guarantee for sums totalling $68,682.15. This left a balance of $27,490.71 available under the guarantee. 4 On the ground that the Lessor refused to take steps to repair the alleged defects, the Lessee vacated the premises early in April 2003 and purported to terminate the Lease while it still had some fourteen months to run. The Lessors regained possession. They neither relet nor sold the premises. 5 In a cross claim, the Lessors claimed damages of about $400,000 from the Lessee for unpaid rent and outgoings, the cost of repairs, replacement and restoration of the premises, rent during the unexpired portion of the Lease and costs associated with attempting to relet the premises. To the extent that their claim exceeded $300,000 (the upper limit of the Tribunal's jurisdiction in retail leases cases), they abandoned the excess. 6 The case was heard before the present Panel of Tribunal Members on 17, 18 and 19 December 2003. 7 The Panel's decision (D & D Ventures Pty Ltd v Evans [2004] NSWADT 130) was delivered on 6 July 2004. As is the case with the present decision, it was determined and written by the Deputy President after consideration of advice tendered by the two Non Judicial Members. 8 In its decision of 6 July 2004, the Tribunal dismissed the application by the Lessee and allowed in part the cross claim by the Lessors. It ordered that the Lessee pay to the Lessors the sum of $158,379.61, chiefly on account of unpaid rent. This comprised a principal sum of $152,731.86 and $5,647.75 as interest. In calculating this sum, the Tribunal took account of the drawings amounting to $68,682.15 that the Lessors had already made on the Guarantee. It rejected the Lessors' claim in so far as it was based on damage to the premises that was not admitted by the Lessee. The Tribunal also stipulated that each party had 28 days from the date of the decision to file a written submission seeking an order for costs. 9 On 26 July 2004, the Lessors filed and served a submission seeking an order for costs, on the grounds set out below. In this submission, Mr Reuben, counsel for the Lessors, also sought (a) a declaration that they were entitled to have recourse to the balance of $27,490.71 remaining subject to the guarantee and (b) an order that the Lessee 'do all acts and things necessary to release such sum' to the Lessors. In his submissions at the principal hearing, he had sought orders to this effect. 10 On 9 September 2004, the creditors of the Lessee resolved that it should be wound up under s 439C(c) of the Corporations Act 2001 (Cth). Antony de Vries and Riad Tayeh, of de Vries Tayeh, were appointed Joint and Several Liquidators. On 12 September 2004, a copy of the Lessors' submission on costs was served on de Vries Tayeh. 11 In a letter dated 22 October 2004 to the Registry, Riad Tayeh stated as follows: I advise that I neither consent nor object to any costs orders made against the Company. If the application for costs is successful, the claim would rank as an unsecured creditor and the claimant would be required to lodge a Proof of Debt with the Liquidators. 12 In a letter dated 25 October 2004 to the Registry, the solicitor for the Lessors requested the Tribunal to vacate an interim order that it had made on 22 May 2003 prohibiting the Lessors from making any further drawings on the guarantee. A copy of this letter was sent to the Liquidators. 13 In their submission on costs, the Lessors argued that the requirement of 'special circumstances' set out in s 88(1) of the Administrative Decisions Tribunal Act 1997 ('the ADT Act') was satisfied in this case. Section 77A of the RL Act makes this provision applicable in retail tenancy proceedings conducted in the Tribunal. Section 88(1) of the ADT Act states as follows:- 88 Costs (1) Subject to the rules of the Tribunal and any other Act or law, the Tribunal may award costs in relation to proceedings before it, but only if it is satisfied that there are special circumstances warranting an award of costs. 14 The Lessors put forward three grounds for claiming that this requirement of 'special circumstances' was satisfied. These were (a) that the Lessee's case lacked merit and should not have been brought; (b) that the Lessee had unreasonably rejected an offer of compromise which was more advantageous to it than the orders made by the Tribunal in disposing of the proceedings; and (c) that since the Lessee had made an unconscionable conduct claim, the Lessors could have applied for the proceedings to be transferred to the Supreme Court under s 76A of the RL Act, in which event they would have had the benefit of the principle that in Supreme Court proceedings, costs generally 'follow the event'. 15 This judgment now deals with each of these three grounds in turn. The merits of the Lessee's case 16 In Gizah Pty Ltd v AXA Trustees Ltd (No 2) [2001] NSWADT 164 at [29] (a case decided in the Retail Leases Division), the Tribunal defined 'special circumstances' as 'circumstances that are out of the ordinary, but without having to be extraordinary or exceptional'. This observation, which expressly took account of the 'commerciality' of the Division, was quoted with approval by an Appeal Panel of the Tribunal in Randi Wiks Pty Ltd v Pokana Pty Ltd [2003] NSWADTAP 27 at [12] and [28] (also a retail leases case). 17 It has been held in retail leases cases that 'special circumstances' may exist where a claim 'lacked any conceivable merit in fact or in law', or was 'without real merit in the sense referred to in cases dealing with vexatious actions' (see Alessa Pty Ltd v Total & Universal Pty Ltd [2001] NSWADT 150 at [5] and [19]) or where an appeal was dismissed 'as disclosing no sufficiently arguable questions of law' (Citadin Pty Ltd (No 2) v Eddie Azzi Australia Pty Ltd & General Pants Co Pty Ltd [2001] NSWADTAP 31). 18 On the other hand, the requirement of 'special circumstances' is not made out merely by showing that a party has failed in advocating one or more aspects of his or her case. This is to be distinguished from the situation where 'an argument is so totally without merit that it is in reality unarguable' (Barsoum v Glebe Administration Board (No 2) [2002] NSWADT 174 at [47]). 19 In the present case, the Lessee's principal claim against the Lessors was for an award of damages. It alleged that there were five grounds of recovery: (a) breach of the Lessors' covenants set out in three sub-clauses of the Lease; (b) misrepresentation under s 10 of the RL Act; (c) unconscionable conduct under s 62B of the RL Act; (d) misleading or deceptive conduct under s 42 of the Fair Trading Act 1987; and (e) a false and misleading representation concerning the nature of an interest in land under s 45 of the Fair Trading Act. 20 In addition, the Lessee claimed (i) that by virtue of damage to the premises, its liability to pay rent and outgoings had been reduced pursuant to a sub-clause in the Lease and (ii) that since the Lessors had failed to repair the damage within a reasonable time after being notified of it, the Lessee had become entitled under a further sub-clause to terminate the Lease on not less than seven days' notice. 21 In relation to the last two of the five grounds on which damages were claimed, the Tribunal held (D & D Ventures Pty Ltd v Evans [2004] NSWADT 130 at [64 - 65]) that these must fail because it was well established that the Tribunal, in exercising its functions under the RL Act, does not have jurisdiction to make award of damages under s 42 or s 45 of the Fair Trading Act. Mr Reuben accordingly succeeds in his argument that, in so far as the Lessee relied on these two grounds, its case lacked merit in law. 22 On the other hand, while the Tribunal rejected almost totally the other three grounds on which the Lessee claimed damages (see [67 - 87], [93 - 95]) and also rejected its claims for non-monetary relief (see [88 - 92]), it did not treat these aspects of the Lessee's case as 'unarguable'. Its conclusions on these matters were reached only after careful consideration of conflicting testimony and of difficult questions raised in determining whether terms used in the Lease were applicable to the facts found. Contrary to an assertion by Mr Reuben in the Lessors' submission that the Lessee had 'agitated a patently flawed interpretation' of two sub-clauses of the Lease, the decision stated, at [74], that the issue of interpretation posed was not an easy one. 23 Furthermore, the Tribunal held, at [80], that the Lessee had succeeded in establishing one of its allegations of a breach of the Lease by the Lessors. Its case in this regard only failed because, as was said at [95], it could not prove that it had suffered damage as a result of this breach. 24 For these reasons, the Lessors have not established that the Lessee's case as a whole 'lacked any conceivable merit in fact or in law'. Instead, it fell within the category of a case that was unmeritorious with respect to some of the grounds advanced, but arguable on the remaining grounds. It failed at trial, as many arguable cases do. As was made clear in Barsoum v Glebe Administration Board (No 2) [2002] NSWADT 174 at [46 - 47], this is insufficient to satisfy the requirement of 'special circumstances'. 25 The Tribunal accordingly rejects the first ground put forward by the Lessors in their submission on costs. The Lessee's rejection of offers of compromise 26 In putting forward this second ground, the Lessors annexed to their written submission copies of 'without prejudice' letters between the parties' solicitors making or referring to offers of compromise. 27 It appeared from this correspondence that in letters dated 17 October 2003 and 21 November 2003, the Lessors offered through their solicitors to settle the proceedings on payment by the Lessee of the balance of the guarantee ($27,490.71), with the parties paying their own costs. The letters described each of the offers as a 'Calderbank' offer and indicated that, if successful at the hearing, the Lessors would rely on them in applying for costs. In the earlier letter, the offer was stated to be open until 23 October 2003. 28 In a second letter bearing the date 21 November 2003, the Lessors' solicitors referred to an offer made by them during a 'without prejudice meeting' that 'the matter could be resolved by [the Lessee's] retaining the balance of the bank guarantee'. It referred also to the subsequent rejection of this offer by the Lessee. 29 The Lessee did not accept any of these offers. The correspondence refers to various counter-offers that it made to the Lessors, which were also rejected. 30 In their submission on costs, the Lessors relied on this correspondence to support a claim against the Lessee for the costs of the proceedings from their commencement, to be paid as from 23 October 2003 (the date of expiry of the first offer) on 'an indemnity solicitor/client' basis. 31 In Irresistible Frocks Salon Pty Ltd v Sparbac Pty Ltd and Roche Group Pty Ltd (No 2) [2004] NSWADT 72 at [16 - 19, 26], the Tribunal outlined in the following terms the circumstances in which rejection of an offer of compromise may provide grounds for an award of costs under s 88 of the ADT Act:- 16. A number of recent cases provide authority for the proposition that 'special circumstances' under s 88 of the ADT Act may arise when (a) a party in a case under the RL Act has previously made an offer to the other party to settle the dispute on a less advantageous basis than the offering party ultimately obtains from the Tribunal's decision and (b) this offer has been rejected. The analogy is drawn with the judicial treatment of rejected offers of compromise that have been made under rules of court or, more appositely, by means of a Calderbank letter (the reference is to Calderbank v Calderbank [1975] 3 All ER 333). In both these situations, the rejection of the offer provides possible grounds for departure from the normal rule that costs follow the event (when the offering party is the loser in the case) or that costs are paid only on a party-party basis, not on an indemnity basis (when the offering party is the winner). 17. The Tribunal decisions under the RL Act transpose, in effect, the principles applied by courts when offers in Calderbank letters are rejected by an offeree who subsequently fares less well in the court's decision, to the different, though analogous, context of determining whether there are 'special circumstances' within s 88. These decisions include Gizah Pty Ltd v AXA Trustees Ltd (No 2) [2001] NSWADT 164 and Barsoum v Glebe Administration Board (No 2) [2002] NSWADT 174. 18. While relying on these decisions, in which 'special circumstances' were found through this reasoning and awards of costs were made, Mr Titterton [counsel for the successful lessee] accepted the proposition that 'the existence of an offer of compromise' is, as his written submission expressed it, 'but one factor which the Tribunal should take into account in its determination'. 19. This accords broadly with a statement in [the] written submission [of Mr Angyal, counsel for the unsuccessful lessor] that 'bettering an offer contained in a Calderbank letter creates no entitlement to a special costs order, unless the party who did not accept the offer acted in a plainly unreasonable manner'. Mr Angyal cited Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No 2) [1999] NSWCA 133 at [21]. This approach, rejecting the notion of any prima facie entitlement to a special costs order, was recently reaffirmed by the Court of Appeal in Jones v Bradley (No 2) [2003] NSWCA 258 at [6 - 9]…. 26. In these circumstances, we must consider whether, in all the circumstances, [the unsuccessful lessor's] rejection of this offer was 'unreasonable'. If it was 'unreasonable', there would be a basis for a finding of 'special circumstances' and for the exercise of our discretion under s 88 of the ADT Act to award costs. 32 In the present case, the offers of compromise rejected by the Lessee were manifestly more favourable to it than the orders that we made in the proceedings. The offer made on 17 October 2003 and on 21 November 2003 was that it should surrender to the Lessors the sum of $27,490.71, being the balance remaining under the guarantee, and should pay its own costs. The offer referred to in the second letter of 21 November 2003 was even more advantageous to it. The Tribunal's order at the conclusion of the hearing was that it was liable to pay to the Lessors the sum of $158,379.61. 33 This gives rise to the question whether the Lessee's rejection of any one or more of these offers was unreasonable. Mr Reuben argued that the offer set out in the two letters was 'more than reasonable', since the Lessors were in effect giving up their claim for unpaid rent subject only to payment of the balance remaining under the guarantee. In rejecting this offer, the Lessee, he claimed, was simply attempting 'to get damages and relief from the payment of rent notwithstanding the lack of merit' in its claim. He pointed out that when this offer was repeated on 21 November 2003, it was after the Lessee had had the opportunity to review the written evidence that had been filed in the Tribunal. 34 In considering this issue, the Tribunal is at a disadvantage in not having received an opposing submission from the Lessee. Making due allowance for this, it must however be concluded that the Lessors have succeeded in showing that the Lessee's rejection of its offer of 17 October 2003 was unreasonable. It was known by that time that the hearing was expected to last for three days and for that reason alone would be very costly for both parties. The Lessors were, as Mr Reuben argued, offering to give up a substantial proportion of their claim for unpaid rent (not to mention also their claim for damage allegedly done to the premises) in order to avoid an expensive trial. The Lessee was in a position to appreciate the very substantial risks that it ran by choosing to go ahead with the litigation. 35 It is not appropriate, however, to award all the costs claimed by the Lessors. The award should be limited to the period after 23 October 2003, the date on which the first offer of compromise expired. There is no basis for awarding costs incurred before that date. Furthermore, an award of party-party costs only is warranted. Nowhere in the correspondence put before the Tribunal did the solicitors for the Lessor indicate that indemnity costs or solicitor-client costs would be claimed. The possibility of having the case transferred to the Supreme Court 36 This third ground advanced by the Lessors may be disposed of fairly briefly. In Randi Wiks Pty Ltd v Pokana Pty Ltd [2003] NSWADTAP 27 at [42 - 44], an Appeal Panel rejected an argument by a successful lessee in a retail leases case that it should have its costs because it would have most probably have obtained an order for costs against the lessor if it had sued in the Supreme Court. The Panel stated at [44] that 'if s 88 [of the ADT Act] were to be consistently interpreted so as to produce costs outcomes comparable to those in the Supreme Court, the phrase "special circumstances" would be deprived of all meaning'. 37 That case did not include an unconscionable conduct claim and therefore did not fall within the terms of s 76A of the RL Act. Subsection (2) of this section provides as follows:- (2) The Tribunal must transfer the proceedings if the Tribunal is satisfied that: (a) the nature of the claim is such that it may be more effectively and appropriately dealt with by the Supreme Court, and (b) the interests of justice do not require the matter to be continued to be dealt with by the Tribunal. 38 The considerations outlined in Randi Wiks are nonetheless applicable to the present case. If the fact that an unconscionable conduct claim is potentially open to transfer under s 76A to the Supreme Court, with its different costs rules, were treated as sufficient without more to constitute 'special circumstances', the impact of this phrase in s 88 of the ADT Act would be totally blunted in any proceedings which included such a claim. 39 The third ground put forward by the Lessors is accordingly rejected. The bank guarantee 40 As indicated above at [9] and [12], the Lessors in these costs proceedings made two separate applications relating to the balance of the funds available under the guarantee. In their submission on costs, they applied for (a) a declaration that they were entitled to have recourse to this balance, amounting to $27,490.71, and (b) an order that the Lessee 'do all acts and things necessary to release such sum' to the Lessors. In a subsequent letter to the Registry, they applied for an order vacating an interim order that the Tribunal had made on 22 May 2003, prohibiting the Lessors from making any further drawings on the guarantee. 41 The Tribunal's conclusion is that the latter application should be granted. The evident purpose of this interim order was to secure the Lessee's position in the event that the Tribunal made an award in its favour. The Lessee was, however, unsuccessful. There is accordingly no basis for further prohibiting the exercise of such rights, if any, as the Lessors may have to the balance remaining in the guarantee. 42 For procedural reasons, however, the former application should not be granted. Issue has not been properly joined on this matter between the Lessors and the Liquidators of the Lessee. The Liquidators' letter to the Registry referred to at [11] above does not touch on this matter. The orders sought by the Lessors would most likely have significant implications for other creditors proving in the liquidation. It may well be also that Westpac, which provided the guarantee, would wish to be heard on the matter. 43 The appropriate course for the Tribunal is to make no order on the former application. This leaves it open to the Lessors to pursue this particular matter further. Orders made in this case 44 The Lessee is to pay the Lessors' costs of these proceedings (including the costs of the present application) on a party-party basis, as agreed or assessed, as from 23 October 2003. 45 The interim order made by the Tribunal on 22 May 2003, prohibiting the Lessors from making any further drawings on the bank guarantee given by the Lessee, is vacated.

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