First Plaintiff/First Defendant by Counterclaim v Second Plaintiff/Second Defendant by Counterclaim

2 I asked the parties to consider the form of order and costs. The parties have not been able to agree on either the form of order or costs. As a result, I listed the proceeding for mention today. These reasons deal with the issue of costs.

3 For the reasons that follow, I have concluded that the plaintiffs are entitled to their costs of the proceeding from the first and second defendants on a standard basis.

4 I set out the background to the issues which arose in the trial of this proceeding in the Reasons. In summary, Sean and Pat are brothers. In 1988, together with their brother, Joseph, they established the Delplant group. Since 2007, when Joseph sold his interest in the Delplant group, Sean and Pat have owned the Delplant group in equal shares. Over time there had been a breakdown in the relationship between Sean and Pat. By the HoA dated 27 May 2020, Sean agreed to buy Pat's interests in the Delplant group for $10 million. In this proceeding, Sean sought to enforce that HoA.

5 The proceeding was commenced on 6 July 2020. The defendants filed a defence and counterclaim on 28 July 2020 and an amended defence and counterclaim on 31 July 2020. The plaintiffs filed a reply and defence to counterclaim on 6 August 2020. Witness outlines were filed in July and August 2020 and lists of documents to be relied upon at trial were filed on 12 August 2020. The trial in the proceeding commenced on 26 October 2020. Evidence was heard over a period of seven days.

6 In the defence and counterclaim, Pat disputed that the HoA was intended to be legally binding or was enforceable. Further, Pat alleged that prior to entering into the HoA, the plaintiffs misrepresented the financial position of the Delplant group in contravention of s 18 of the ACL. Further, Pat alleged that it would be unconscionable to enforce the HoA. Further, on 25 May 2020, Sean in his position as Managing Director of Delplant made Pat's position as Operations Manager redundant. This issue was addressed in the HoA pursuant to which Pat agreed to resign from the Delplant group. Pat alleged at trial that, if the HoA was not enforceable, he was entitled to proper redundancy payments.

7 In the Reasons, I concluded that the HoA was intended to be legally binding and is enforceable. As a result, specific performance of the HoA ought to be ordered.

8 However, cl 5 of the HoA provided that it was proposed that accounting and taxation implications 'would be settled by Mr Maric and Mr Lidonnici in a mutually beneficial taxation outcome for both parties'. At the hearing of the trial, I was not satisfied that the accountants had been provided with an opportunity to reach a mutually beneficial outcome for the resolution of taxation and accounting consequences. As a result, as part of ordering specific performance, I considered that the accountants ought to be given such an opportunity. I noted that I would hear from the parties as to the time within which this should take place and that, in my preliminary view, a period of 28 days would be appropriate.

9 I wish to note at this stage that the meaning and categorisation of cl 5 was a significant issue at trial. I found the construction of cl 5 a difficult issue. I concluded that cl 5 required the accountants to meet in a good faith attempt to reach a mutually beneficial outcome on taxation and accounting issues relating to the sale of Pat's interests in the Delplant group to Sean's interests. However, I concluded that it was not an essential term of the HoA which would indicate the HoA was not intended to be legally binding or was not enforceable.

10 As to the claims for damages for breach of s 18 of the ACL in the counterclaim (the 'misleading conduct claim'), I concluded that the defendants had not established on the evidence that all of the representations alleged were made or established. In any event, I concluded that the representations in fact made were not false or misleading at the time each of them was made. I note that, as the Reasons made plain, the way in which the misleading conduct claim was both pleaded and conducted was far from clear. In particular, it was alleged that the representations relating to financial projections were current representations and not representations as to future matters. Further, the case pursued by the defendants failed to address that, just because a projection as to turnover or profit at a future time was not achieved, does not mean the projection was false at the time it was made. In addition, the misleading conduct claim relied upon many representations which were later updated and thus superseded.

11 I also concluded that the defendants had not established that it would be unconscionable to enforce the HoA. Given I concluded the HoA was enforceable, it was not necessary for me to determine the redundancy claim.

12 As a result, the plaintiffs succeeded not only on their claim but also in their defence to the counterclaim.

13 The plaintiffs submitted that, as they succeeded both on their claim and on their defence of the defendants' counterclaim, they were entitled to their costs. The plaintiffs submitted that the Court should exercise its discretion to order that those costs be paid on a standard basis up to 29 September 2020 and thereafter on an indemnity basis based upon the defendants' rejection of a Calderbank offer made to them on that date (the '29 September offer').

14 A copy of that offer was exhibited to the affidavit of Mr Bannister, solicitor for the plaintiffs, sworn on 30 June 2021. The 29 September offer was expressed to be without prejudice save as to costs. It was dated approximately one month before the trial date. It referred to the fact that the plaintiffs had reviewed the defendants' defence in light of the evidence intended to be led. It then summarised the plaintiffs' view on the prospects of success in the proceeding in light of that evidence.

15 As to the HoA, the 29 September offer set out the reasons why the plaintiffs considered the Court would conclude that the HoA was binding and enforceable, including by reference to cl 4(a) and cl 6. It referred to authorities, including some which I referred to in my Reasons. It expressed the view that in this case 'the inescapable conclusion' is that the parties intended to be bound by the HoA. However, it did not address cl 5.

16 As to the misleading conduct claim, it noted the four key allegations of falsity in [25] of the counterclaim. It noted the fact that the relevant representations said to be false in that paragraph were superseded by subsequent representations. Further, it disputed any reliance on those superseded representations.

17 The letter noted that the plaintiffs had incurred approximately $200,000 in legal fees in relation to the proceeding. In these circumstances, the plaintiffs proposed the parties settle on the following terms:

(a) Our clients [the plaintiffs] will discontinue the Proceeding with no order as to costs.

(b) Your clients [the defendants] agree to settle on the sale of the Delplant business (in accordance with the terms of the Heads of Agreement) on 30 October 2020 (or at a different time as agreed between the parties in writing), save that our client is willing to pay the sum of $10,500,000 for your client's interests in the Delplant Group (as opposed to the $10,000,000 provided for in the Heads of Agreement) on the following dates:

(i) $8,000,000.00 on 16 November 2020; and

(ii) $2,500,000.00 on 15 July 2021.

18 The offer was open for acceptance until 5pm on 14 October 2020.

19 The defendants responded by letter dated 14 October 2020 (the '14 October letter'). The defendants' response noted that the plaintiffs had submitted an earlier offer dated 28 July 2020. The 14 October letter rejected the 29 September offer. It referred to the defendants' defence and counterclaim and noted that the defendants' position in response to the matters raised in the 29 September offer remained unchanged. It also referred to the defendants' assessment of the 'enterprise value' of the Delplant group based upon the offer of $10.5 million in the 29 September offer. The defendants appear to have been seeking to revalue the Delplant group's business rather than addressing the merits of the proceeding.

20 The plaintiffs submitted that the defendants' rejection of the 29 September offer was unreasonable. This was because:

(1) by the date of that offer, the pleadings were closed, outlines of evidence had been filed and the documents to be relied upon at trial were confirmed;

(2) the defendants were provided with adequate time to consider the offer;

(3) the offer was a substantial compromise given the settlement sum under the HoA, the legal costs that would be likely to be incurred and the ongoing risks to the business;

(4) the defendants' prospects of succeeding in its defence and counterclaim were 'patently weak'; and

(5) the offer was clear in its terms and foreshadowed an application for indemnity costs in the event it was rejected.

21 The defendants submitted that they were not unreasonable in rejecting the 29 September offer. They disputed that their prospects were weak. Indeed, they submitted that, contrary to the terms of the 29 September offer, it was not an inescapable conclusion that the HoA was enforceable. Rather, they submitted that, consistent with the Reasons, the issues at trial in relation to the binding nature and the enforceability of the HoA were by no means clear and were of some complexity. They referred in particular to the concerns regarding cl 5, the identity of purchaser and the restraint of trade clause in the Reasons.

22 Further, the defendants submitted that the standard costs of the proceeding should be ordered but that those costs should be offset, on an interest adjustment basis, against the corresponding commercial advantage obtained by Sean during the last 12 months as a result of the plaintiffs not paying the settlement sum under the HoA (the 'commercial advantage adjustment'). They submitted that the commercial advantage adjustment was necessary to equalise the positions of the respective parties. They also submitted that the costs of Pat's long service leave entitlements should be similarly offset against any award of costs.

23 Costs are generally in the discretion of the Court, but that discretion must be exercised judicially. Section 24(1) of the Supreme Court Act 1986 (Vic) provides:

Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.

24 In the ordinary case, costs follow the event and the successful party in litigation is entitled to an award of costs in its favour.

25 As to the basis on which costs may be calculated in circumstances where a Calderbank offer has been rejected, the Court of Appeal in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) ('Hazeldene's Chicken Farm') stated that the rejection of a Calderbank offer is a matter to which the court should have regard when considering whether to order indemnity costs.[2] There is no presumption that the party which made the offer is to be entitled to indemnity costs if the offeree receives a less favourable result at trial. The question is whether the rejection of the offer was unreasonable in the circumstances. What is unreasonable will involve matters of judgment and impression taking into account all relevant considerations.[3]

26 While there is no exhaustive list of factors to be taken into account in determining whether the rejection of an offer is unreasonable, the Court of Appeal in Hazeldene's Chicken Farm noted that a court should ordinarily have regard to at least the following matters:[4]

(1) the stage of the proceeding at which the offer was received;

(2) the time allowed to the offeree to consider the offer;

(3) the extent of the compromise offered;

(4) the offeree's prospects of success, assessed as at the date of the offer;

(5) the clarity with which the terms of the offer were expressed; and

(6) whether the offer foreshadowed an application for indemnity costs if the offeree rejects the offer.

27 I accept that the 29 September offer was clear in its terms, allowed sufficient time for the offeree to consider the offer and foreshadowed an application for indemnity costs if the offer was rejected. I also accept that the 29 September offer offered a higher 'price' for the sale of Pat's interests in the Delplant group than the settlement sum in the HoA. No doubt that was to reflect, in part, the costs incurred by the defendants in relation to the proceeding.

28 However, I am not satisfied that the prospects of success of the defendants, as assessed at the date of the offer, was such that their failure to accept the offer was unreasonable with the result that indemnity costs should be ordered for the entire proceeding from the time it was rejected. This is notwithstanding that the plaintiffs were ultimately successful both in their claim and their defence to the counterclaim and that, by the 29 September offer, the plaintiffs offered to pay the sum of $10.5 million to complete the sale of Pat's interests under the HoA at that time.

29 This is for a number of reasons. First, I consider that the issues relating to whether the HoA was legally binding and enforceable were far from clear. I am conscious that many of the points raised by the defendants in this regard, in the defence and at trial, had little merit. This is evident from the Reasons. Relevantly, central to the determination of both whether the HoA was binding and its enforceability was cl 5 of the HoA. As is evident from the Reasons, there were real issues about the meaning and effect of cl 5 in its context and, in particular, the true construction of that clause.

30 For completeness, I do not consider that any concerns raised in the Reasons about the enforceability of the restraint of trade in cl 2 relates directly to the specific performance of the HoA actually sought by the plaintiffs in this proceeding, namely the obligation on the defendants to sell Pat's interests in the Delplant group.

31 Second, the relief that I have ordered in this case is not a simple order for specific performance which would result in the payment of the purchase price. Rather, it includes a condition that the accountants for the parties undertake the task entrusted to them by cl 5 of the HoA. The possibility of such a conferral was not referred to in the 29 September offer. I am conscious that such a condition was not sought by the defendants but imposed by the Court. However, I consider it is a relevant factor to take into account in determining whether the rejection of the 29 September offer was unreasonable and whether, in all the circumstances, I ought to order indemnity costs. This is in circumstances where the result of the conferral process in cl 5 might result in the nomination of a different purchaser of Pat's interests in the Delplant group other than Sean and/or Skildale.

32 Further, I am conscious that, as submitted by counsel for the plaintiffs, the misleading conduct claim and the unconscionability claim were entirely unsuccessful and that the misleading conduct claim took up a substantial proportion of the trial. Indeed, counsel for the plaintiffs submitted that the claim was weak with the result that the rejection of the offer was unreasonable. I acknowledge that the misleading and deceptive conduct claim took up a substantial proportion of the trial. I also acknowledge that the prospects of success of the defendants on the misleading conduct claim and the unconscionability claim were not strong assessed at the date of the 29 September offer. I refer to my comments in [10] above.

33 However, in my view, it is significant in assessing the reasonableness of the rejection of the 29 September offer that it only contained one offer relating to both the HoA issues and other issues including the misleading conduct claim. I am unable to accept the submission of the plaintiffs that, in these circumstances, the rejection of the 29 September offer entitles the plaintiffs to their costs of the entire proceeding on an indemnity basis from the time of the 29 September offer.

34 As a result, in the circumstances of this case, I decline to order that the defendants pay the plaintiffs' costs on an indemnity basis based upon the defendants' rejection of the 29 September offer. I will order that the first and second defendants pay the plaintiffs' costs of the proceeding on a standard basis.

35 Further, I reject the submission of the defendants that the commercial advantage adjustment should be offset against this costs order. Any alleged benefit to Sean in retaining the settlement sum under the HoA until now has arisen by reason of the defendants having purported to terminate the HoA in June 2020, which resulted in the need for the plaintiffs to issue this proceeding.

36 Further, I reject the submission of the defendants that any costs in favour of the plaintiffs should be offset against the costs of Pat's long service leave entitlements. No separate claim for Pat's long service leave entitlements was made in this proceeding. Rather, Pat made a claim for redundancy entitlements, which included long service leave but only in the event that the HoA was not legally binding or was unenforceable. As noted above, I concluded that the HoA was both legally binding and enforceable. In these circumstances, I decline to make such an order.

[1] [2021] VSC 365 (the 'Reasons'). For convenience, I will use the terms defined in the Reasons.

[2] (2005) 13 VR 435, 441 [20] ('Hazeldene's Chicken Farm').

[3] Hazeldene's Chicken Farm (n 2) 441 [23]-[24].

[4] Hazeldene's Chicken Farm (n 2) 442 [25].