Elanor Funds Management Ltd v Alceon Group Pty Ltd

MCELWAINE J: 1 I dismissed the applicant's proceeding on 30 October 2023: Elanor Funds Management Ltd v Alceon Group Pty Ltd [2023] FCA 1291 (primary reasons/J). I made consequential orders for the determination of any costs applications on the papers. The parties have filed uncontroversial affidavits and controversial supporting submissions. The parties agree that costs follow the event and any order for costs should be made on a lump sum basis as provided for at r 40.02(b) of the Federal Court Rules 2011 (Cth) (Rules). They are divided on whether the respondents should receive their costs wholly or partially on an indemnity basis pursuant to r 40.02(a) of the Rules. 2 These reasons assume familiarity with my primary reasons. It should be recalled that the applicant's claim failed in several respects. First, aspects of the contravening conduct pleaded against the respondents were not made out: J [182]. Second, the remaining contravening conduct was not objectively misleading or deceptive in all of the circumstances: J [183]-[245]. Third, in any event, the applicant failed to establish reliance: J [247]-[272]. And fourth, the applicant failed to prove that it suffered damage, being the difference between the price paid to purchase the Centre and its fair market value at the time, even if there were arrears, defaults or undisclosed incentives in favour of a number of the Food Court Tenants: J [273]-[358]. 3 The respondents' submissions in support of each application for indemnity costs are very similar, and for that reason it is not necessary to separately address each, save that there are differences in the factual bases. The applications are put in various alternative ways. In summary: (1) On 23 June 2021, prior to commencement of the proceeding, the first respondents' solicitor sent without prejudice correspondence to the applicant's solicitor, which correspondence was adopted by the second respondent's solicitor on 24 June 2021. The respondents submit that the applicant by that time had the benefit of preliminary discovery orders and a detailed explanation by the respondents as to why it could not be contended that the applicant had been misled in relation to the rental arrears position, extended commencement dates or incentive payments in respect of nine of the Food Court Tenants. It ought to have been reasonably apparent to the applicant that commencement of its foreshadowed proceeding was futile, and the contentions made by it were bound to fail at trial. Indeed, the correspondence of 23 June 2021 expressly made these points; (2) On 31 May 2023, the parties attended a mediation. The respondents put a joint offer, to be funded by the second respondent's insurer, to pay $2.5 million inclusive of costs and interest in full and final settlement, conditioned upon the execution of mutual releases. That offer 'remained on the table' until 1 June 2023, when it was withdrawn in consequence of the termination of the mediation. It is only the second respondent that relies upon this offer; (3) On 3 June 2023, the first respondent's solicitors sent Calderbank correspondence to the applicant's solicitors making a "walk away" offer, on the basis that the applicant and the first respondent would pay their own costs if the proceeding were dismissed. That offer was open for acceptance until 5 pm on 9 June 2023; (4) On 23 June 2023, the second respondent's solicitors, acting on behalf of each respondent, sent Calderbank correspondence to the applicant's solicitor offering to pay $2.4 million inclusive of costs and interest in full and final settlement of all claims, subject to execution of a deed of release; (5) The trial of the proceeding occurred between 10 and 21 July and 2 and 3 August 2023. On 16 October 2023, the solicitors to the second respondent sent a further Calderbank proposal to the solicitors for the applicant and in it proposed that the applicant discontinue its claim against the second respondent, that each party would bear their own costs of the proceeding and that the offer, if accepted, be formalised in a deed of release. 4 The applicant does not dispute these facts, but objects to the admissibility of the offer put at mediation, by reference to the mediation agreement entered into by the parties which appointed Mr Anthony Lo Surdo SC as mediator. As is usual the agreement contains confidentiality and privilege clauses, including that the parties must not disclose or rely upon any settlement proposal. No submission was addressed to me as to the operation of the costs privilege exception for settlement communications at s 131(2)(h) of the Evidence Act 1995 (Cth). I need not express a view on that question because the parties attended mediation pursuant to an order that I made on 5 April 2023 and s 53B of the Federal Court of Australia Act 1976 (Cth) operates to prohibit receipt of evidence of that offer, even on the question of costs: Pinot Nominees Pty Ltd v Federal Commissioner of Taxation [2009] FCA 1508; 181 FCR 392 (Siopis J); Forsyth v Sinclair (No 2) [2010] VSCA 195. 5 I do not consider that this is a case which attracts the exercise of my discretion to make an indemnity costs order from 23 June 2021, or even from the date of commencement of the proceeding. The respondents emphasise that the applicant obtained preliminary discovery on issues relevant to the contemplated proceeding, which application was supported by a draft statement of claim broadly similar to the version ultimately relied upon, pursuant to orders made by Greenwood J on 11 May 2021. The then prospective respondents produced the documents on 15 June 2021. The correspondence dated 23 June 2021 from Arnold Bloch Leibler on behalf of the first respondent to Holding Redlich for the applicant, begins with stating their clients understanding that the applicant was "considering commencing proceedings" against the first and second respondents alleging that it was misled in relation to the rental return that it could expect to receive from the Food Court Tenants. That allegation was denied. Several documents were attached on a without prejudice basis to explain the denial. The documents comprised a works schedule for the casual dining precinct upgrade, a reconciliation of rental charges, a reconciliation of bank statement cash payments and receipts for each tenant and a reconciliation of cash receipts journals and the first respondent's bank statements to the incentive deeds. As contended by the author, each of those documents explained, in considerable detail, the unforeseen delay in completion of the casual dining precinct upgrade, the deferred commencement dates for various tenancies and the effect of the reconciliations was that the rental charged to each Food Court Tenant reconciled with the dates of commencement of each tenancy and the payments made by each tenant, that each tenant had "paid precisely the amounts owed under" the respective leases and that each Food Court Tenant was paid each amount owed pursuant to each incentive deed, with the exception of one tenancy. 6 The correspondence continued: It should be apparent to you that each of the nine Food Outlet tenants paid the full amount charged to them by Alceon in accordance with the lease terms and incentive deeds. To the extent any of the tenants may have given your client the impression that this was not the case, they have provided demonstrably false accounts. We also note that each lease and the incentive deeds were disclosed to Elanor in the data room during the due diligence process. Elanor has not been misled in any way, including as to the amounts charged and received by Alceon. Alceon has taken the unusual step of explaining these matters to you now so that your client can carefully consider whether it wishes to commence distracting and expensive legal proceedings. Alceon has not engaged in any misleading conduct. If your client nevertheless chooses to commence legal proceedings, Alceon will defend those proceedings and will not entertain any attempt on the part of your client to reach a 'commercial' resolution. This letter is sent in accordance with the principles set out in Calderbank v Calderbank… (Footnote omitted.) 7 As I have noted, the following day, the second respondent's solicitors also corresponded with Holding Redlich and adopted the Arnold Bloch Leibler letter. A response to the 23 June 2021 letter was sent by Holding Redlich to the respondents' solicitors on 12 August 2021 which relevantly stated that Elanor believed, on the basis of documents and information in its possession, there to be a proper basis to commence proceedings against the respondents and that it proposed to do so. None of the parties sought to draw my attention to this correspondence in their submissions, and I do not consider that it assists my determination of the costs applications. 8 The respondents submit that I should conclude, not with the benefit of hindsight informed by my primary reasons, that the applicant knew or ought to have reasonably understood that its claim was bound to fail, had no chance of success and or was futile. Conclusions of that type should not be drawn lightly. Justice Wigney in Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd (No 5) [2021] FCA 246 summarised the relevant principles, albeit in the context of an indemnity costs application made against a regulator, which his Honour ultimately refused. I adopt his Honour's summary as lucid and comprehensive at [6]-[12]. Two paragraphs bear repeating for the purposes of this case at [11]-[12]: Two things should perhaps be noted about these descriptions of the types of cases in which an indemnity costs order may be warranted. First, they use expressions which suggest a high degree of certainty concerning the deficiencies in the losing party's case. It would appear not to be enough that the losing party's case was simply weak or tenuous. Second, and relatedly, the deficiencies must be sufficiently manifest and clear such that it can be inferred that the losing party would or should have appreciated them when the action was commenced or continued, at least if they had given proper consideration to, or been properly advised about, the merits of their case. In assessing whether a case can be said to "have no chance of success", or to be "hopeless" or "foredoomed to fail", and that the losing party should have known that to be the case, it is also necessary to be wary of reasoning with the benefit of hindsight. As Goldberg J said in Re Kingsheath Club of the Clubs Ltd (in liq) [2003] FCA 1589 at [5], it is "easy with hindsight to make an observation that an action has no chance of success, after the matter has been fully argued and has enjoyed considered attention of experienced solicitors and senior and junior counsel". 9 Whilst the applicant failed on most of the claims of misconduct it relied on, save for oral representations made by Mr Shah to Mr Hamilton (J [146]-[151]), failed on establishing that the conduct was objectively misleading or deceptive or likely to mislead or deceive and, even though it was not necessary to proceed and make further findings, failed on the questions of reliance and damage, I am unable to conclude with the requisite high degree of certainty that the case from the outset was so weak that the applicant knew that was so, or ought reasonably to have known it, despite the information that it obtained in consequence of the preliminary discovery orders, and the additional information provided in the correspondence of 23 June 2021. 10 What must not be overlooked in this matter is that the proceeding concerned a large commercial transaction, a very considerable amount of documentation, detailed lay evidence and complex accounting and valuation evidence. Until the point of the joint expert conferences, there were material differences between the accounting and valuation experts. Some of those differences resolved in consequence of the joint expert reports, but others remained. The trial proceeded over two weeks, involving a detailed forensic examination of the facts. It is insufficient in this proceeding in my view to conclude from the fact that the applicant was put on notice of various deficiencies in its contemplated proceeding, or that the case was weak or suffered from various other deficiencies, that an indemnity costs order is warranted because the applicant, properly advised, ought to have understood that it had no chance of success, that its case was doomed to fail or was otherwise hopeless - to adopt some of the adjectival descriptions that have been employed in other cases. It is also of relevance that the applicant at all times has had the benefit of competent solicitors, an experienced and well regarded senior and junior counsel and I am prepared to infer that the applicant has acted in accordance with the advice received. 11 I deal next with the offers of 3 and 23 June 2023. At this stage of the proceeding, the parties had largely filed and served their lay and expert evidence. The framing of the respective cases was clear. The documents intended to be relied on were settled. Arnold Bloch Leibler sent detailed correspondence, without prejudice save as to costs, to Holding Redlich on 3 June 2023. It addressed the principal misleading conduct claim, causation and loss. In part, it was said of Elanor's case that: Liability Eleanor's core allegation is that Alceon did not disclose the true arrears positions of certain tenants in the food court and so Elanor was misled. This allegation will not succeed. The relevant leases need to be read with the disclosure statements and the incentive deeds. The commercial context for these documents was Alceon's refurbishment of the Shopping Centre (Project Works). By the commencement of the leases, the Project Works were due to be completed to a stage whereby the tenants could commence the fit out and/or start trading. However, the Project Works were delayed, and Alceon could not deliver shops which could be used for trading and/or fitted out. The legal consequence of the delayed Project Works was that Alceon was not entitled, as a matter of construction of the leases, to charge each tenant their rent or any outgoings contribution… The rent commencement date for each affected tenant was therefore delayed to account for the completion of the Project Works. Alceon's expert forensic accounting evidence demonstrates that, once the deferred date for rental commencement is taken into account, there were no meaningful arrears. Alceon did not failed to disclose anything to Elanor. We also note that Elanor currently has no credible, admissible evidence of any of the alleged misleading conduct. Causation Even if Elanor was misled because the relevant food court tenants were in arrears and this was not disclosed (which is denied), the rent payable by the relevant food court tenants comprised only 13.9% of the total base rent of the Shopping Centre. The effect of the deferred rent commencement date was that only $28,761 or 0.7%, of the total base rent, was lost… Had Elanor known of the alleged arrears position, nothing would have changed. Elanor would have paid the same price for the property. There are also a multitude of other reasons Eleanor's case on causation will fail at trial. Loss Eleanor's loss is the difference between the price Elanor paid for the property and what the property was worth. Elanor will not be able to establish it has suffered any loss. Mr Kwan's valuation will not be accepted. Mr Kwan was asked to make a critical assumption that the food court tenants be treated as vacant in perpetuity. This [sic] contrary to common sense and will not be accepted. There are also real questions about Mr Kwan's independence and the circumstances in which Mr Kwan was instructed to prepare his report. By contrast, Alceon's property valuers are actually independent and have concluded that the value of the property at the time of sale was $58,700,000. This value exceeds the purchase price paid by Elanor… Offer Solely for the purpose of avoiding future costs, management time and the distraction of legal proceedings, Alceon offers to settle the Proceeding against it on the terms set out below (Offer): 1. The proceeding is dismissed against Alceon; 2. Elanor and Alceon bear their own costs of the Proceeding; 3. Neither Elanor nor Alceon will enforce or seek to recover any entitlement to costs or any costs orders previously made in the Proceeding or in any related proceedings (including Eleanor's preliminary discovery proceedings). This offer is open for acceptance until 5 pm on 9 June 2023. It is subject to Elanor, and Alceon, executing a mutually satisfactory deed containing mutual releases and other customary terms. (Original emphasis.) 12 The balance of the correspondence made several points. The offer was framed pursuant to the principles in Calderbank v Calderbank [1975] 3 All ER 333 (Calderbank). If not accepted, and the case of Elanor failed, the correspondence would be produced in support of an application for costs by Alceon on an indemnity basis. To the date of the letter, Alceon had incurred costs in excess of $500,000 in connection with the proceeding. 13 CPRAM was not an offeror to that proposal and did not make its own offer on similar terms at the time. Later, a joint offer was made by Clyde & Co acting for CPRAM to Holding Redlich dated 23 June 2023, expressly pursuant to the principles in Calderbank . The offer was: The respondents have considered their positions in the Proceeding and, particularly, the costs they will each incur up to and including the trial set down for hearing for 10 days from 10 July 2023 and make the following offer of settlement to your client: (a) The respondents offer to pay to your client the amount of $2.4 million inclusive of interest and costs in full and final settlement of your client's claims against each of them; (b) The respondents agreed to bear their own costs of the Proceeding; (c) Your client and each of the respondents will release each other from and in respect of any liability arising out of the proceeding and well executed deed of release giving effect to this term (Offer). 14 Over the two and a half pages that follow, the basis for the offer is explained. In part it was said: Your client's liability case turns on proving that the 9 Food Court Tenants were in substantial arrears consistently and this had an adverse effect on the market value of the Property at the time of acquisition. The respondents' expert accounting report shows that while the 9 Food Court Tenants did not pay rent on the first of the month, for most tenants the arrears were rarely more than 30 days. Your client seeks to rely at trial on affidavits of lay witnesses which, in the respondents' view, are inadmissible and objection to their evidence will be made at the commencement of the trial. Further your client has issued subpoenas to the Food Court Tenants, only one of whom has been served… On the lay and expert evidence, in the respondents' view, your client's case on liability will fail. Causation The respondents consider that to the extent your client can establish any misrepresentations, such misrepresentations did not materially affect your client's decision to acquire the property. That is, your client did not rely on any of the alleged misrepresentations. It is apparent that your client was highly motivated to purchase the property for many reasons, including its redevelopment potential and strategic importance… In this context, a Court is likely to find that the alleged undisclosed matters in respect of the Food Court Tenants was immaterial to the value of the Property and would not have affected your client's decision to purchase the property. … Your client has not produced any proper evidence of the value of the Property at the time of acquisition. The approach taken by Paul Kwan is deeply flawed and unlikely to be accepted by the Court. 15 The correspondence continued with an explanation as to why it was said that the expert opinion evidence of Mr Kwan would not be accepted. The respondents assumed that the assessed costs of Elanor to that time "are likely to be around $500,000". The offer was open for acceptance until 4 pm on 28 June 2023. 16 If there was any meaningful response by Elanor's solicitors to either of these offers, no party considers it relevant to the exercise of my cost discretion. 17 Alceon submits that it was unreasonable for Elanor not to accept either offer and CPRAM makes a similar submission in relation to the offer of 23 June 2023. The principles that inform the exercise of the costs discretion where reliance is placed on Calderbank correspondence, instead of a formal offer of compromise as provided at Pt 25 of the Rules, are well understood and were recently summarised by the Full Court in Wills v Chief Executive Officer of the Australian Skills Quality Authority (Costs) [2022] FCAFC 43 (Wills) at [20]-[23] (Logan, Griffiths and Perry JJ). It is only necessary to observe that there is no presumption that an indemnity costs order will be made if the result at trial is less favourable than the terms of a Calderbank offer. The question is whether, in the circumstances, the failure to accept by the offeree was unreasonable. This is a question of objective fact, by reference to what was known at the time the offer was either rejected or expired by effluxion of time. Matters that are usually considered include the timing of the offer, the evidence that had been adduced to the date of making of the offer, the time allowed for mature consideration and acceptance or rejection, the extent of the compromise offered, whether the terms of the offer were clear and capable of immediate acceptance and the prospects of success of the offeree. That list was identified by the Full Court in Wills at [23] by reference to the Full Court in Anchorage Capital Partners Pty Ltd v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [7] (Nicholas, Yates and Beach JJ). 18 The respondents emphasise that when each of these offers were made, Elanor was in a position to make "a fully informed assessment". Elanor had the benefit of the affidavit evidence of the respondents, including the expert opinion reports of the forensic accountant Mr Hellen and the valuation opinion of Mr Goran. I note that Elanor did not receive the expert report from its accountant, Mr Gwynne until 21 June 2023. However, as explained in my primary reasons at [189] he did not undertake his own forensic reconciliation; rather he reviewed Mr Hellen's analysis. On the evidence of Mr Hellen and Mr Goran, Elanor ought to have appreciated the significant difficulties that it faced in proving the falsity component of the misleading conduct claims and that it suffered damage, even if it succeeded on the misleading conduct and reliance issues. 19 The respondents also submit, in summary, that the misleading conduct claim failed for the reasons outlined in each offer (at J [239]-[246]), failed on causation as foreshadowed by the respondents (at J [247]-[272]) and as predicted by the respondents, the evidence of Mr Kwan was not accepted on the damage question (J [273]-[358]). The hearsay evidence proposed to be adduced by Elanor as to statements made by representatives of the Food Court Tenants about the rental arrears, commencement dates and incentives was ruled inadmissible during the trial. 20 Elanor in responding to each application accepts that a "walk away offer" is capable of amounting to a genuine offer of compromise but points out that no evidence has been adduced by Alceon as to the costs incurred by it to 3 June 2023. It is also submitted that it is insufficient to simply contend that the case of an opposing party "was weak or tenuous", that Alceon has not established "to a high degree of certainty" the deficiencies that it then identified and that one should not reason from the offer to the findings made in the primary reasons, as it amounts to impermissible hindsight. As to the offer of 23 June 2023, Elanor submits that the matters identified are insufficient to attract the indemnity costs discretion, in that an award of indemnity costs is exceptional, and the submissions made are drawn with the benefit of hindsight. 21 In my view, this is an appropriate case for the making of indemnity costs orders. By no later than 3 June 2023, objectively and acting reasonably, Elanor ought to have assessed its case and been cognisant of the significant risks faced by it in this proceeding. It had the benefit of all the affidavit evidence to be relied upon by the respondents. Its misleading conduct case was largely documentary, that is based on an interpretation of common documents. To the extent that its misleading conduct case turned upon the terms of an oral discussion between Mr Shah and Mr Hamilton, the conduct pleaded was made out, but was not ultimately found by me to be misleading or deceptive having regard to all the relevant circumstances. Put simply, on that aspect of the claim, Elanor acting reasonably ought to have appreciated that an answer given to a question from Mr Hamilton to Mr Shah about the rental arrears of the tenants generally, was simply not material in the context of the extensive due diligence that Elanor had itself undertaken and had engaged Mr Hamilton to undertake on its behalf. That one or more of the Food Court Tenants may have been in rental arrears for relatively short periods of time, having regard to the recent commencement of those tenants in consequence of the renovation works, was simply not objectively misleading in the context of the purchase of a shopping centre with 49 tenants, including Woolworths as the major anchor tenant, for a price in excess of $50 million. It is also the case that as at the settlement date all arrears, save for one tenancy, had been brought up to date. I explained these matters in detail in my primary reasons at [183]-[219] (Elanor failed to prove falsity on the rental arrears question for all but one tenant) and [220]-[246] (the conduct was not misleading when considered in context). 22 On the causation question, Elanor was aware of the detailed inquiries undertaken by Mr McNaughton as to the potential redevelopment of the Centre. Despite that, Mr McNaughton did not mention these inquiries in his affidavit evidence. Elanor was aware that the respondents intended to place considerable reliance on these inquiries to answer the causation case. That point was pleaded by way of defence, and many of the third party subpoenas, of which Elanor was aware, and documents produced in answer, went to that question. I found for the respondents on this issue. 23 On whether Elanor suffered damage, what was clear from the outset of this proceeding is that Elanor knew that it was required to prove, in a no transaction case, that the price paid for the property was greater than its true value at the time of sale. To do this, it chose to engage Mr Kwan as its valuer. The letter of instruction to Mr Kwan of 12 December 2022, expressly acknowledged the difficulty that Elanor was placing him in by seeking to engage him as an independent expert witness, when he had previously provided several valuations of the property for Elanor and its mortgagee. Elanor was aware by June 2023 that the respondents intended to heavily criticise Mr Kwan's perceived lack of independence. Ultimately, I did not prefer the evidence of Mr Kwan where it conflicted with that of Mr Goran because, amongst other things, he was not truly independent: at J [300]-[306]. 24 The offer made by Alceon on 3 June 2023, was a genuine attempt at compromise, notwithstanding that it was a walk away offer. The extent of compromise is evidenced by the fact that Alceon was prepared to forego a costs claim. Although there is no direct evidence in support of the figure of $500,000, I am satisfied that Elanor's costs must have been in at least that amount by that stage of this complex commercial proceeding. The terms of the offer were clear and capable of immediate acceptance. A detailed explanation was provided as to why, in Alceon's assessment, Elanor's case at trial would fail. The arguments in support were very strong. There was sufficient time at that late stage of the proceeding for mature consideration of the offer. Elanor does not rely on any reasoned meaningful response. It was imprudent and unreasonable for Elanor not to have accepted the offer. Its failure to do so, caused Alceon to expend very considerable costs from then. 25 Turning next to the joint offer of 23 June 2023, the reasons in support of my conclusion that it was unreasonable for Elanor not to have accepted $2.4 million in full satisfaction of its claim, are far stronger. The sum offered was very significant, in the context of a claim for approximately $5 million. Elanor knew, or ought to have known, the very significant risks that it then faced on the questions of misleading conduct, causation and damage for the reasons that I have given. The offer was clear, capable of immediate acceptance and provided a reasonable time for consideration. The respondents were put to very significant expense in preparing for and conducting the trial from the date of the offer. These costs could have been avoided if Elanor had acted prudently and reasonably and had accepted the offer. This in my view is manifestly a case of the exercise of my discretion to award indemnity costs from 23 June 2023 in favour of CPRAM. 26 For these reasons, I order as follows:

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