Dyluc Pty Limited v Mally Group Pty Limited & Ors

The First and Second Defendants' Application for a Special Order as to Costs 10The first and second defendants' application is based on a letter forwarded to the plaintiff's solicitors dated 24 July 2012 (DPN-1). The letter was marked "without prejudice save as to costs". It contained the following offer: "My clients, the first & second defendants, offer to settle this litigation on the following terms: 1. The parties to enter into a Deed within 14 days of acceptance of this offer that records this settlement. 2. Within 7 days of execution of the Deed, Consent Orders will be filed by the parties as follows: 2.1 By consent, the Court orders that: 2.1.1 The proceedings, including any or all cross-claims, be dismissed. 2.1.2 The first & second defendants discontinue their Notice of Motion filed 27 June 2012. 2.1.3 The third defendant discontinues its Notice of Motion filed 17 July 2012. 2.1.4 There be no order as to costs. 3. The Court notes that the terms of the settlement will remain confidential as between the parties. This offer is open for acceptance until 9.30am on 27 July 2012, and thereafter lapses. Should your client continue the litigation and is unsuccessful, then I will call upon you to produce this letter in support of my clients' application that your client be ordered to pay my clients' costs on an indemnity or solicitor/client basis." 11The matter had been listed for hearing of an application for security for costs on 27 July 2012. The letter was sent to the plaintiff's solicitors at 3.54pm on 24 July 2012, and therefore provided less than three days for the plaintiff to consider the offer contained therein. 12The first and second defendants characterise their offer as a "Calderbank-style letter". They submit that at the time the offer was made the proceedings had been on foot for two years (a Statement of Claim being filed on 25 July 2010, the cross-claims on 2 December 2010 and 22 July 2011) and significant costs had accrued, so notwithstanding that the offer was for dismissal of the proceedings, including the cross-claims, the offer represented a significant compromise. 13Further, the first and second defendants submit that the plaintiff had served a substantive expert's report, and had sworn her affidavit, which comprised her evidence in chief for the hearing on 26 July 2012, whilst the offer was open. The first and second defendants submit that if further time was required to consider the offer, it could have been sought. 14The plaintiff has submitted that on its terms the offer proposed a resolution of the proceedings amongst all parties, including the third defendant, and as such it was not an unequivocal or unambiguous offer capable of resolving the proceedings if immediately accepted by the plaintiff. No assurance had been given that the third defendant was prepared to enter into the terms of settlement. It was therefore a conditional offer. 15The plaintiff further submits that following the letter, amended defences were received, affidavit evidence and other documentary evidence was exchanged between the parties, and therefore the plaintiff was not in a position at the time it received the letter to know the whole of the material facts and circumstances of the case so as to properly consider the content of the letter. Also relevant was that, contained in the affidavit material, were documents that had been materially altered by the second defendant, and those alterations were left unexplained until her crossexamination at trial. 16In the circumstances the plaintiff submits that the Court should not invoke "the Calderbank discretion to award the first and second defendants indemnity costs". 17The letter dated 24 July 2012 from the solicitor for the first and second defendants contains an offer to resolve the litigation by way of all parties agreeing to enter into a Deed, and that the parties consent to the proceedings, including any or all cross-claims being dismissed, that the defendants, including the third defendant, discontinue their Notices of Motion and that there be no order as to costs. 18There is no indication that the solicitor for the first and second defendants had authority to make that offer on behalf of the third defendant. To that extent, it was a conditional offer that never became unconditional. 19Neither party in their submissions referred to a letter served by the solicitors for the third defendant at the same time, in similar but not identical terms, referred to below. Neither letter referred to the other letter. Further, the letter does not seek to invoke the principle in Calderbank v Calderbank [1975] 3 All ER 333. In its context, the offer was made less than three days before applications were to be heard for security for costs and the plaintiff had less than two days to consider it. It is also clear that the nature of the defendants' case evolved significantly after the offer had closed. In those circumstances I would not exercise my discretion to make a special order for costs on the basis of that letter and I decline to do so. 20The first and second defendants also seek an order that the plaintiff pay their costs of the cross-claims between themselves and the third defendant, up to and including 27 July 2012 on an ordinary basis, and from 28 July 2012 onwards on an indemnity basis. The first and second defendants have submitted that where the nature of the plaintiff's claim or the allegations in support of it make it reasonable for a defendant to bring in a cross-defendant and the cross-claim is unsuccessful solely by reason of the failure of the plaintiff to sustain its claim or the relevant allegations, the defendants should ordinarily recover from the plaintiff the costs of the cross-claim, relying on Furber v Stacey [2005] NSWCA 242 at [31] per Hodgson JA; Einstein JA agreeing, and Kalls Enterprises Pty Limited (In liq) v Baloglow [2006] NSWSC 1021 at [10], per Hamilton J. 21The cross-claims commenced by the first and second defendants was limited to seeking indemnity or contribution from the third defendant. The first and second defendants submit that it was reasonable for them to make a cross-claim against the third defendant, and further, that it was reasonable for them to defend the cross-claim brought against them by the third defendant. In those circumstances, they submit that the plaintiff should pay their costs relating to the two cross-claims. 22The judgment of Hodgson JA in Furber v Stacey relied on by the plaintiff was concerned with the application of the then District Court Rules Pt 39A r 9 and Pt 21 r 8. At [32] His Honour stated that the guiding principle in respect of the third party procedure rules contained therein was subject to the ability of the Court to make such orders as the justice of the case may require. Hodgson JA referred to the useful discussion on the question of liability of a plaintiff for a cross-defendant's costs by King CJ in Lombard Insurance Co (Australia) Limited v Pastro (1994) 175 LSJS 448, as qualified by the judgment of Finn J in GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited [2003] FCS 688, 201 ALR 55 - see paragraphs [31] and [32]. Hodgson JA went on to exercise his discretion to order the unsuccessful plaintiff to pay part only of the costs of the crossclaims in that case which had been dismissed by consent. 23In this case, the cross-claims between the various defendants sought contribution or indemnity for any liability that may arise to the plaintiff. Other than the filing of the cross-claims themselves, it has not been submitted that any evidence discreet to the cross-claims was relied on by any defendant, nor was any time taken at trial in respect of the crossclaims. Whilst they were no doubt brought for more abundant caution to protect each defendant's position, having regard to the principles outlined in the authorities referred to above, there is no basis for exercising my discretion to make a special costs order in respect of the cross-claims. I therefore dismiss the first and second defendants' Notice of Motion with costs.

The Third Defendant's Application For a Special Order as to Costs 24The third defendant's application is supported by an affidavit of Jacqueline Catherine Norton sworn on 14 May 2013. That affidavit annexes a number of documents relevant to the Court's discretion as to costs. In the principal judgment, it was held that the third defendant had prepared the Vendor's Statement competently and in accordance with the relevant taxation and financial statements of the first defendant. 25By letter dated 13 October 2010 the plaintiff's solicitors had requested such documents from the third defendant's solicitors and had stated: "If the documents show that the Vendor's Statement merely reflects the tax and financial statements of the First Defendant then we have little action against your client and will need to amend the Statement of Claim accordingly." 26By letter dated 19 October 2010 solicitors for the third defendant noted that the documents requested had been provided and provided numerous explanations for minor discreptancies within the Vendor's Statement which were found to be de minimis. Further, the solicitors referred to the disclaimer in the Vendor's Statement which was referred to in the principal judgment. 27By letter dated 26 November 2010 solicitors for the third defendant made the following without prejudice offer: "Our client agrees to the following to resolve the proceedings against him: 1. The plaintiff discontinue the proceedings as against our client and provide a release with respect to the subject matter of the proceedings; (sic) 2. Our client will attend Court to give evidence for your client (unless he has a reasonable excuse as defined in the Evidence Act), if a Subpoena to Attend and Give Evidence is served on him. We have instructions to accept service on his behalf in this regard; 3. Our client agrees to discuss his version of events with you, either at an arranged meeting in Melbourne or by telephone or video link. However, he is not in a position to sign any documents (as these could be obtained under discovery by the Co-Defendant). Please confirm that your client agrees to settlement on the above basis. This offer remains open for a period of 28 days from the date of this letter." 28By letter dated 22 December 2010 solicitors for the plaintiff responded in the following terms: "In view of the fact that your client has been joined in proceedings, we see that there is not point discontinuing your client at this stage. (sic) We have received firm instructions to proceed." An Amended Statement of Claim was enclosed with the letter. 29By email dated 23 December 2010 the solicitor for the third defendant wrote to the plaintiff's solicitors: "Before you file the amended statement of claim, please reconsider whether our client should remain a party. In light of the information provided to you, it is evident that our client was not in error. Further, your client's claim against the first two defendants covers all allegations against our client. Therefore not continuing against our clients, should leave your client with the same prospects (as, if your client recovers against our client it should also succeed against either or both of the first two defendants), yet it will save your client costs and exposure to costs orders. (sic)" 30By letter dated 24 July 2012 solicitors for the third defendant made a further offer to resolve the litigation. The letter was served by email at 3.54pm on 24 July 2012, precisely the same time as the first and second defendants made their offer set out in paragraph 10 above (DPN-1). The offer was not in identical terms to DPN-1. The letter stated: "The third defendant offers to settle the above proceedings on the basis that they be dismissed, with each party bearing its own costs. This offer is open for acceptance until 9.30am, Friday 27 July 2012. It is anticipated that: 1. The parties will record this settlement in a mutually agreeable deed within 14 days of acceptance. 2. The parties will cause consent orders to be filed with the Court within 7 days of the execution of the Deed. These orders will be in the following form: 2.1. By consent, the Court orders that: 2.1.1. The proceedings, including any or all cross-claims be dismissed. 2.1.2. The first and second defendants discontinue their Notice of Motion filed 27 June 2012. 2.1.3. The third defendant discontinues its Notice of Motion filed 17 July 2012. 2.1.4. There be no order as to costs. 2.2. The Court notes that the terms of the settlement will remain confidential as between the parties. This matter is made pursuant to the principals enunciated in Calderbank v Calderbank [1975] 3 All ER 333. Our client will rely on a copy of this letter on the issue of costs. (sic)" 31By letter dated 27 February 2013 the solicitors for the third defendant made yet another offer. The letter stated: "1. We are instructed to invite your client to settle the proceedings on the following basis: 1.1. The proceedings against our client be dismissed; and 1.2. The parties to bear their own costs. 2. This offer is: 2.1. Made pursuant to the principles enunciated in Calderbank v Calderbank; 2.1. Open for acceptance for 28 days from the date of this offer; and 2.3. Conditional upon a settlement being reached with the first and second defendants in respect of their cross-claim against our clients." 32The letter went on to set out in some detail the strength of the third defendant's case and the third defendant's understanding of the computer software programs used in the conduct of the subject business. The letter further stated: "5. To the extent your client has observed any accounting errors and/or misrepresentations subsequent to the purchase of the Business (which are not admitted), Mr Holgye alleges that such errors and/or misrepresentations were due to: 5.1. Miss McNuff's failure to accurately prepare the MYOB files; 5.2. Your client's failure to undertake any or any reasonable due diligence in connection with the purchase of the Business. 6. In light of the above, we consider that our client's offer is reasonable. 7. We are of the view that your client has no reasonable basis for pressing its claim against our client. In light of what we say in this letter, our client has clearly been joined to these proceedings under a misapprehension. 8. In the event your client does not accept our client's offer and continues to press its claim against our client, we will rely on this letter on the topic of costs." 33Under cover of letter dated 14 March 2013, the solicitors for the third defendant served the expert report prepared by Mr Greg Meredith of Ferrier Hodgson dated 14 March 2013, whose evidence was accepted in the principal judgment. 34On Friday 15 March 2013 the third defendant served a notice of offer of compromise on the plaintiff's solicitors in the following terms: "The Third Defendant offers to compromise this action in whole on the following terms: 1. Verdict for the Third Defendant; and 2. The parties to bear their own costs. This offer shall remain to be accepted until 10am on 18 March 2013. This notice of offer of compromise is made in accordance with rule 20.26 of the Uniform Civil Procedure Rules 2005 (NSW)." 35For reasons which are unexplained in the affidavit of Ms Norton, a further offer of compromise was served by the third defendant on 18 March 2013 in identical terms, except that offer was noted to remain open to be accepted until 10am on 20 March 2013. 36Subject to the question of whether each of those offers were left open for a reasonable time in accordance with r 20.26 (7)(b), the offers comply with UCPR r 20.26. 37The plaintiff has made similar submissions in respect of the offers made by the third defendant by letter dated 24 July 2012 and 27 February 2013 to their submissions relating to the application made by the first and second defendants and dealt with above. The letter dated 24 July 2012 is characterised as being conditional for the same reasons outlined above, and the letter dated 27 February 2013 is similarly characterised on the basis that it is expressed as being conditional upon the third defendant obtaining a release from the cross-claim made by the first and second defendants against him. 38The plaintiff further submitted that after the offer contained in the letter dated 24 July 2012 pleadings were amended and further affidavit and documentary evidence was exchanged between the parties so that it could not be submitted the plaintiff was in a position to know the whole of the material facts and circumstances so as to properly consider the offers contained in the letters. 39Further, the plaintiff submits that at the time when the report of Mr Meredith was served on 1 March 2013, the third defendant admitted that it had made incomplete discovery and thereafter sought to discover further material, the process which continued after the sittings of the District Court commenced at Albury on 18 March 2013. 40In those circumstances the plaintiff submits that the Court should not invoke its discretion pursuant to the principle in Calderbank to award the third defendant indemnity costs. 41In respect of the two offers of compromise dated 16 March and 18 March 2013 respectively, the plaintiff submits that the time for acceptance of each offer was unreasonable. 42From an early stage of the proceedings, and at least following receipt of the letter dated 19 October 2010 from the third defendant's solicitors, the plaintiff was in a position to assess that the preparation of the Vendor's Statement by the third defendant reflected the taxation and financial statements of the first defendant. The plaintiff's solicitors acknowledged in their letter dated 13 October 2010 that if that was the case, the plaintiff would have "little action against" the third defendant. Had the third defendant provided timely discovery of documents and earlier service of his expert report by Mr Meredith, I would have had no hesitation in exercising my discretion to award indemnity costs against the plaintiff from an early stage of the proceedings. For example, the plaintiff's solicitor's letter dated 22 December 2010 advising "in view of the fact that your client has been joined in proceedings, we see that there is not point discontinuing your client at this stage (sic)" provides an inadequate reason for continuing proceedings which must have had little prospect of success on any objective assessment. 43However, in view of the further amendments to the pleadings and ongoing process of exchange of witness statements and documentary evidence, it may have been prudent for the plaintiff to continue its claim against the third defendant, until the evidence was complete. 44I would not exercise my discretion to make an order for indemnity costs on the basis of the third defendant's solicitor's letter dated 24 July 2012, for the same reasons that I have outlined above in respect of the first and second defendants' solicitor's letter of the same date. It was by no means clear that the offers contained in the letters were unconditional, and the offer was open for acceptance for a very short period of time, namely, less than three days. 45The third defendant's application is much stronger based on its letter to the plaintiff's solicitors dated 27 February 2013. At the time the letter was written, it must have been clear to the plaintiff and its legal advisers that the third defendant had prepared the Vendor's Statement on the basis of the taxation and financial documents of the first defendant and further that the third defendant relied on the disclaimer contained in the Vendor's Statement. That letter also outlined in detail the third defendant's understanding of the software programs utilised in the business. The only consideration in favour of the plaintiff in proceeding against the third defendant at the time it received that letter was the absence of any expert report served on behalf of the third defendant. 46That situation was altered with the service of Mr Meredith's report on 14 March 2013. Upon receipt of that report, it must have been abundantly clear to the plaintiff and its legal advisers that the plaintiff's case against the third defendant had little or no prospect of success. 47The offer of compromise dated 15 March 2013 was a valid offer made under the UCPR - see Whitney v Dream Developments Pty Limited [2013] NSWCA 188. The only question to be determined is whether it was open for acceptance for a reasonable period pursuant to r 20.26(7)(b). 48In the circumstances of this case, at a time when the trial was imminent, the time during which the offer was open was barely reasonable. The third defendant has relied on the judgment of Gzell J in Leda v Weerden (No. 3) [2006] NSWSC 220. At [10] and [11] His Honour said: "10. In my view, the parties will be in the best position to assess an offer when it is made shortly before the commencement of the trial. By that stage, preparation for the trial will be well in hand and the legal advisers will, therefore, be armed with sufficient information to make a reasoned judgment of the offer. 11. It was said that the plaintiff was in the throes of significant preparation for trial and was not in a position to give consideration to the offer. The whole point about offers of this nature is to encourage the proper compromise of litigation in the private interests of litigants and in the public interest in the prompt and economic disposal of litigation. Recent reference to these matters was made by Hunt AJA in South Eastern Sydney Area Health Service & Anor v King [2006] NSWCA 2 at [83]." 49By the time the plaintiff received the offer of compromise made in identical terms on 18 March 2013, she and her legal advisers were in a position to properly assess the offer. That offer remained open for acceptance until 20 March 2013, which extended the period during which what was in fact the same offer was open for acceptance over a total period of five days. 50Having regard to the history of the litigation, the role of the third defendant in preparing the Vendor's Statement and the state of the evidence at that time, in my view, the notice of offer of compromise dated 18 March 2013 was open for acceptance for a reasonable period of time and the plaintiff's refusal to accept the offer gives rise to an entitlement pursuant to r 42.15A(2)(b)(i) to an order for indemnity costs from 16 March 2013. 51I therefore vary the Orders made in the principal judgment to provide that the plaintiff pay the costs of the third defendant on an ordinary basis up to 18 March 2013 and thereafter that the plaintiff pay the costs of the third defendant on an indemnity basis from 19 March 2013.

Costs Thrown Away on 17 May 2013 52The defendants' applications for costs were listed for hearing before me in Sydney on 17 May 2013. Arrangements were made for the solicitors for the first and second defendants, who are based in Albury, to file their Notices of Motion electronically and the matters were to be listed before the Judicial Registrar on that day and referred to me for hearing. That administrative process involved email communication between my Associate and the solicitors for all parties, including the plaintiff's solicitors on 8 May and 13 May 2013. A further email was sent to all solicitors including the plaintiff's solicitors on 14 May 2013. Other email communications took place between the solicitors for all parties up to and including 14 May 2013. 53When the matter was called for hearing, counsel appearing for the plaintiff, who was not the counsel at trial, advised the Court that the plaintiff had received late notice of the application, that he had been briefed late and was not in a position to assist the Court. It was for that reason that I made Order No. 5 set out in paragraph 9 above. 54The plaintiff's solicitor has provided an explanation as to why he was unaware of the applications, as he was absent from his office from 11am on Tuesday 14 May 2013. That explanation does not explain why he was not aware of the emails forwarded to his office on 8 May and 13 May 2013. The Notices of Motion, however, were served by email on him after he left his office on 14 May 2013 and he was unaware of them until his return on the evening of 16 May 2013. I accept his explanation that at that time he was unaware of the direction made for service of material for the hearing on 17 May 2013 and that counsel who appeared at the hearing was, at that time, unavailable. 55In those circumstances, I accept the explanation of the plaintiff's solicitor and make no further order. Order 4 made by me on 17 May 2013 that the plaintiff pay the defendants' costs thrown away on that day will however stand.

Orders 56I make the following orders: (1)Order (2) made by me on 1 May 2013 is vacated. (2)I order the Plaintiff to pay the costs of the first and second defendants on an ordinary basis. (3)I order the Plaintiff to pay the costs of the third defendant on an ordinary basis up until 18 March 2013, and thereafter to pay the costs of the third defendant on an indemnity basis from 19 March 2013. (4)I order that the first and second defendants pay the plaintiff's costs of the Notice of Motion filed 15 May 2013. (5)I order the plaintiff to pay the costs of the third defendant's Notice of Motion dated 14 May 2013 on an ordinary basis. 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: 17 July 2013