Freemantle's Pastoral Pty Ltd v Hyett [1999] VSC 188

5. The first issue is that the sum recovered by the plaintiff is less than half the relevant jurisdictional limit of the County Court. The plaintiff concedes that, as a result, any costs it recovers can be awarded on no more than the top scale, scale D of the County Court.

8. The other issue that has arisen concerns the consequence of the failure of the plaintiff to recover an amount greater than an offer of compromise made by the defendants on 22 August 1995. That offer of compromise was to pay the plaintiff $128,000. The offer was open for acceptance for 14 days. This offer of compromise was made a few days after the issue of the writ and shortly prior to the delivery of the defendants' defence. Accompanying the offer of compromise was a letter which identified the reasoning behind the offer. That was, in essence, that in assessing the loss on 1 June 1992, there being no valuation as of that date, the best indication of value was the sale of the land and chattels to Graeme Freemantle for $180,000. The defendants also said that they apportioned half of those proceeds to the chattels. They did not allow for the costs of realising the security. They also allowed, however, $37,002.80 interest for loss of use of the money from 1 June 1992 to the date of the offer. The letter also indicated that if the offer was not accepted, solicitor and client costs would be sought at any hearing.

11. The defendants have applied for an order that the plaintiff pay to them the cost of them defending the proceedings on and after 23 August 1995 and that such costs be taxed on a solicitor and client basis. The defendants rely upon rule 26.08 (3) which provides:

"(3) where an offer of compromise is made by a defendant and not accepted by the plaintiff, and the plaintiff obtains a judgment on the claim to which the offer relates not more favourable to him than the term of the offer, then, unless the court otherwise orders, the plaintiff shall be entitled to an order against the defendant for his costs in respect of the claim up to and including the day the offer was served tax on a party and party basis and the defendant shall be entitled to an order against the plaintiff for his costs in respect of the claim thereafter taxed on a party and party basis."

Counsel for the defendants referred me to a discussion of the policies behind the offer of compromise rule articulated by the Court of Appeal of New South Wales in Maitland Hospital v Fisher (No.2) (1992) 27 N.S.W.L.R. 721 at 724 (cited, with approval, by Hayne, J.A. in his dissenting judgment Grbavac v Hart [1997] 1V.R. 154 at 164). They were said to be -

"(1) To encourage the saving of private costs and the avoidance of the inherent risks delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff's real claim which can be placed before its opponent without risk that its `bottom line' will be revealed to the court; (2) To save the public costs which are unnecessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable offer of compromise made by a plaintiff to a defendant;) and (3) to indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection the compromised offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant who has rejected the compromise. In such circumstances that party should ordinarily bear the costs of litigation."

In Maitland's case the court went on to say (at 725 - 726):

"litigation is inescapably chancy. The purpose of the rule is to put a premium on realistic assessment of cases. It is not to demand perfect foresight which is denied even to the judges. That is why a discretion is retained, under the rule, for the Court to order otherwise than the rule provides. But the ordinary provision is expected to apply in the ordinary case. It has added a new duty to functions of legal practitioners advising litigants. It is a duty which is both protective of the interests of litigants and of the public interest and the prompt and economical disposition of litigation. It is the duty of courts, allowing for exceptions in particular cases, to give effect to the purpose of the rule."

19. Relying on the discretion reserved in the rule, the defendants have submitted that there should be a departure from the prima facie entitlement to party party costs and that costs should be awarded in the defendants' favour on a solicitor and own client basis. The plaintiff has disputed that proposition. It has also submitted that the discretion should be used to order that the defendants should not recover all of their costs of the defence of the matter after the date of the offer and that it should receive a portion of its costs after that date. The plaintiff relies upon rule 63.04 which permits the Court to make an order for costs in relation to a particular question in a particular part of the proceeding. Under that rule, the Court making an order is required to fix the proportion of the total costs of the proceeding which is attributable to the particular question or the particular part of the proceeding. It is put that reference may be made to that rule pursuant to the discretion retained in rule 26.08(3). I did not understand counsel for the defendants to submit that the plaintiff could not seek to invoke rule 63.04. Rather his argument was that the plaintiffs argument to support apportioning could not be made out.

22. It is probably appropriate to take first the issue raised by the plaintiff.

25. The argument that was put was that a very substantial period in the hearing, approximately 80% of the 9 days of evidence, was taken up with evidence relating to what came to be known as the agency issue - that is whether Graeme Freemantle, in buying the land and chattels, was acting as the agent of the plaintiff. It was also put that some 50% of final submissions which occupied approximately two days was also taken up with that question. Reference was also made to the substantial body of documentation incorporated in the court book relating to that issue. Counsel for the plaintiff submitted that the issue was marginal at best and one on which the defendant failed and that in those circumstances the appropriate allowance would be that the plaintiff should be allowed to recover 80% of is costs on Scale D from 23 August 1995 and the defendants should recover 20% of their costs from that date on the Supreme Court Scale. It was said also that there are other issues such as mitigation and contributory negligence where the defendant had also failed. These involved evidence and argument, in particular, pursuing the issue of whether there was contributory negligence or a failure to mitigate loss in the failure to attempt to have the chattel mortgage registered.

28. The policies that lie behind the offer of compromise rule would require that a court exercising the discretion ensure that the party who made the offer does not recover costs shown to be unnecessarily incurred or abnormal (see Westtub v Idaps (1990) 94 A.L.R. 310, 319 and Page v I.N.D. [1981] VicRp 19; [1981] V.R. 170. The onus would be on the opposing party, the recipient of the offer, to demonstrate that there were items of costs that were unnecessarily incurred. These concepts appear to lie behind the submission put forward for the plaintiff.

31. As indicated, the plaintiff submitted that the agency issue dominated the proceedings. I accept this proposition and it was not seriously disputed. The percentages nominated by the plaintiff are, however, a little high. The plaintiff also submitted that it was a marginal issue. I do not think that this can be accepted. The case was opened by the plaintiff on the basis of a claim for in excess of $400,000. If the plaintiff had purchased the chattels through the agency of Graeme Freemantle, there was a real issue as to whether the loss ranged from zero to $60,000. This arose because the chattels and the land were purchased for $180,000 and a deduction had to be made for the value of the land to determine the loss in respect of the chattels. Alternatively, the plaintiff's claim was put on the non-agency basis. As the amount claimed exceeded $200,000.00, after deducting the cost of acquiring land, it will be seen that potentially much turned on the issue of agency. As the hearing evolved it probably made little difference. The defendants, however, were not to know that.

34. It was further put that even if the issue was a significant one and one to be pursued, an inordinate length of time and effort was put into its pursuit. The defendants responded by referring to the comment in my reason for judgment about understanding the suspicions of those acting for the defendants and how I had myself started from a position of some suspicion. I do not resile from those comments. It did seem to me, however, that the vigour and enthusiasm with which the defendants addressed the issue was extreme not only in its detail but also in the manner in which counsel conducted it so much so that I kept waiting for the grand conspiracy to be revealed. The conspiracy theory that was advanced, as I have indicated in my reasons, did not stand up to scrutiny. In my view there was a degree of over enthusiasm involved in the approach taken. It is not possible, however, to suggest that those acting for the defendants engaged in unnecessary questioning or production of evidence. While it is necessary to look back over what occurred one must guard against the inappropriate use of hindsight. It is also necessary to allow for the fact that the view of a case from the bench is very different from that at the bar table. It must also be borne in mind I think that it cannot be demonstrated by the plaintiff that there was anything inappropriate in the pre-trial work done on the issue.

37. As to the other issues that were lost, I am unable to accept the proposition that they should be looked at in the same way. Issues such as contributory negligence or mitigation of loss based upon a failure of the plaintiff to itself buy the chattels were lost by the defendants because of the success of the defendants in bringing the award of damages of the plaintiff down to the level of $65,000.

40. "The "ordinary provision" is intended to apply in the "ordinary case". I have considered whether there are other circumstances that take the case out of the ordinary. In the normal case where the rule applies the plaintiff may win on all issues other than damages and fail to establish sufficient damages. Alternatively, it may establish liability and the measure of damages for which it alleges but have those damages reduced by contributory negligence and thus fall below the offer of compromise. In such normal cases it will not be uncommon for the plaintiff to be able to demonstrate that most of the preparation and most of the hearing has been devoted to issues which it won. Thus to demonstrate that that occurred in this case does not take this case out of the ordinary.

43. It might, however, be said that at the time the offer was made it could not have been envisaged that so much time and cost would be occupied in dealing with the agency issue. That, however, is something that must occur on occasions where offers, as in this case, are made at a very early stage, and there is no evidence before me about the expectations of the plaintiff and its lawyers. I considered also the fact that the offer that was made in this case by the defendants proceeded on the basis that the agency of Graeme Freemantle was established and this carried with it the possible assumption that an offer would have to be higher if it was to be made on the non-agency basis. It might be said that it was not until much later that the potential similarity of the result of the two options started to emerge, and, in particular, a long time after the time had elapsed in which to accept the offer. It might be said that the plaintiff was right to reject the offer in view of the fact that it succeeded on the agency issue and that both parties at the time of the offer were assuming the non-agency approach would result in a higher figure. The fact is, however, that the offer was made in full settlement of the case whatever way the damages were calculated. The plaintiff could not assume that the defendants were in fact conceding that a higher amount of damages would be recoverable on the non-agency basis and certainly there was no concession to that effect. Thus the plaintiff took its chance in not accepting the offer.

46. None of these considerations it seems to me can be brought to bear on the question of the discretionary operation of the exception to the general rule. At the same time they are relevant to the claim by the defendants to have their costs taxed on a solicitor client basis.

49. I note that the plaintiffs sought to bring into consideration the issue of the costs of the third party proceedings and the impact of those proceedings on the main proceedings. I consider it appropriate to consider those questions in the context of the defendants' application that the plaintiff pay the costs of the third party proceedings.

52. In all the circumstances it seems to me that I should not accede to the plaintiff's application. The outcome for the plaintiff is in a sense, extremely harsh. It had suffered a significant loss as a result of the negligence of its solicitors. In reality the case was an assessment. The harsh result, however, flows from its decision not to accept what has been proved to be a well judged offer.

55. I turn then to the claim by the defendants that their costs since 22 August 1995 be taxed on a solicitor client or indemnity basis. Counsel for the defendants acknowledged that the relevant rule provided that, prima facie, costs should be taxed on a party party basis and it was necessary for his client to demonstrate special reasons for the solicitor and client costs. The submission in essence was that the refusal of the offer of compromise was imprudent and thus the case was one which warranted the court exercising the discretion to order costs be paid on the solicitor client or indemnity basis. Counsel referred to Colgate Palmolive v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 at 233 per Shepherd, J. and Multicon Engineering Pty Ltd v Federal Airforce Corporation (1996) 138 ALR 425 at 445, per Rolfe J. Counsel submitted that the offer was made at the outset of the proceedings. He submitted that it was about twice the amount recovered by the plaintiff in damages and that the plaintiff acted unreasonably in refusing it. He submitted that it would be supporting the policy objectives of the rules on offers of compromise to award costs on an indemnity basis in those circumstances to encourage parties to accept reasonable offers.

58. In considering this issue it is necessary to establish the circumstances existing at the time the offer was put to the plaintiff. At the time the offer was made, the plaintiff had issued proceedings. It was entitled to proceed on the basis that liability was not in reality going to be an issue. While the defendants did not admit liability until the start of the hearing, realistically it was not going to be an issue. Thus, any assessment of the offer would have properly proceeded on the basis that the case was an assessment. This would have been reinforced I suggest by the fact that an offer of compromise was made so early - before a defence was delivered in fact. The issue that, therefore, faced a reasonable litigant in the position of the plaintiff was whether, in a case that was an assessment, an offer made of $90,000 plus interest was one that should be accepted.

61. The plaintiff had a valuation from a professional valuer, Mr Roberts, of an amount of $463,200,00 in respect of the plant and equipment on the site. The defendants argued that there were problems with the valuation in that it was made in 1994 as at 1994. It would have been reasonable to assume, however, that the plant and equipment in 1992 was worth no less and probably more. It is true, however, that a reconciliation was apparently needed between the plant and equipment valued then and the plant and equipment on site at the critical time in 1992. An allowance also had to be made for the purchase of the land. The plaintiff had a valuation of a Mr McLoughlin in July 1992 who valued the land on a forced sale basis at $120,000 and on a current market value basis of $200,000. Notwithstanding some uncertainty, it was reasonable for the plaintiff to assume that if it succeeded on the agency issue, it was likely to recover an amount significantly in excess of that which had been offered. It in fact succeeded on that issue. As noted above, the offer also would have reinforced that view because it carried with it a suggestion that the defendants thought that the result of the agency approach was likely to be a lesser amount of damages than that available on the other approach.

64. In light of the above it is not open to find on the evidence before me that the rejection of the offer was unreasonable or imprudent in the circumstances known to the plaintiff at the time. A reasonable person, in the position of the plaintiff in the circumstances at the time the offer was made, was entitled to consider that it was not being offered enough in a case that was in reality an assessment. I am not persuaded, therefore, that there should be any departure from the prima facie operation of the rule which is that the defendants' costs should be taxed on a party party basis.

67. The remaining matter to resolve is the defendants' application that the plaintiff pay the costs that the defendants were ordered to pay the third party on discontinuing the third party proceedings. It appears that I attempted to address this issue in error in the concluding paragraphs of the reasons for judgment. I say in error because it has been pointed out that notwithstanding that a brief submission was made by counsel for the defendants and a submission was made by counsel for the plaintiff, counsel for the defendants had in fact reserved his position on the issue wishing to make submissions in more detail depending upon the outcome of the proceedings. The plaintiff ultimately did not oppose the revisiting of the issue.

70. The defendants submitted that for such costs to be recoverable from the plaintiff the defendant must have acted reasonably in joining the third party and there must be some aspect of the plaintiff's conduct which warranted the costs of the third party being visited upon the plaintiff. Counsel submitted that such an order can be made even though judgment is given for the third party and, for example, in the event of discontinuance by the defendant of the third party proceedings - as here. Reference was made to Bourke v Gillett [1996] VicRp 11; [1996] 1 V.R. 196 at 200 and Devon Downs Administrators Pty Ltd v Theoderopolis (unreported, 7 April 1992 per Kaye, J.). The defendants submitted that it is appropriate to make such an order where the conduct of the plaintiff made it virtually inevitable that the third party would be joined.

73. Counsel for the defendants relied on the fact that for some three years up to and including the hearing of the case and in the course of the opening of the case, the plaintiff maintained that the damages recoverable were in excess of $400,000. They argued that the position of the defendants in their defence was that the chattels were worth no more than $90,000.

76. The defendants submitted that had the plaintiff alleged from the outset that the claim was for $65,000 there would have been no point in issuing the third party notice. They submitted that because the claim was in excess of $400,000 that it was necessary for the defendant to protect itself by making its claim against Monte Paschi for contribution. Counsel said that if the plaintiff at any point had said that the value of the chattels was less than $180,000 there would have been no issue. He said that if an amount of $400,000 had been established, the complex arithmetic that would have flowed would have resulted in a contribution of some $50,000 from Monte Paschi. Put to counsel that there would still have been an argument if the claim had been of the order of $250,000 he said that the issue then became a marginal one and that it was only if the claim was in excess of $220,000 that there was point in pursuing Monte Paschi.

79. The defendants acknowledged that a few days before the trial commenced the plaintiff conceded that the sale by Monte Paschi was at a gross under value. I note also that while the plaintiff did not ever formerly admit that it had consented to the sale it admitted on the first day of the trial that it had not objected to the sale.

82. The defendants in pleading contributory negligence, alleged that Monte Paschi sold the chattels at a gross undervalue and that the plaintiff was contributorily negligent in not objecting to or restraining the sale by Monte Paschi. Counsel for the plaintiff emphasised the reality that the fact of consent or acquiescence in the sale by Monte Paschi was going to arise inevitably either because the plaintiff would be shown to have purchased the plant and equipment or shown to have known and consented to or acquiesced in the sale to Graeme Freemantle. The precise legal ramifications of defence of consent of acquiescence have not been fully explored to my satisfaction but plainly there are and were debatable issues involved.

85. In the end it seemed to me that the argument for the defendants came down to the following propositions.

1. That it was reasonable and necessary for them to issue the third party proceedings in view of the fact that the plaintiff's claim was for an amount in excess of $400,000 notwithstanding the defences arising from the consent to the sale. . 2. That when it became clear at the time the plaintiff closed its case that the amount claimed was no more than $250,000, they discontinued the third party proceedings. 3. Thus the conduct of the plaintiff was responsible for the commencement of the third party proceedings and their termination.

89. It seems to me the argument is somewhat disingenuous. A defendant should be expected to assess the situation for itself. It cannot simply proceed by relying on an uncritical acceptance of the plaintiff's case as pleaded and expect to be reimbursed for its costs of third party proceedings that it issues.

92. A reasonable assessment of the matter at the time of the issuing of a third party notice would have revealed that it was likely the plaintiff's claim would in the end be less than $250,000. On about 12 October 1994, well before the third party proceedings were commenced, the defendants received a copy of the valuation of Mr Roberts from the plaintiff. They were familiar with the Freemantles' affairs and much of the relevant history of the matter. A reading of Mr Robert's valuation would have made it clear that his valuation assumed that the plant and equipment would remain on the land and be used on the land. They would or should have known that anyone wishing to acquire the chattels to use on the land would have had to buy the land and that the land had substantial value. Accepting counsel's proposition that if the claim was less than $250,000 it was not worthwhile pursing the claim against Monte Paschi, the issuing of the third party notice would or should have seemed questionable for that reason alone assuming a proper assessment had been made of the third party proceedings.

95. There were other issues of which the defendants were or should have been aware which added to the questionability of the proceeding. They were alive to the agency issue - that being pleaded by them in the defence filed shortly after the offer of compromise. The defendants' case was that the plaintiff purchased the goods from Monte Paschi at what amounted to a gross undervalue. The issue of consent or acquiescence in any third party proceedings should therefore have been obvious. What ever be the precise legal analysis of the consequences of the consent or acquiescence, any assessment of the prospects of success of third party proceedings would have had to consider the practical reality that it would not be easy to persuade a court to require Monte Paschi to compensate the defendants on the basis that the plaintiff, which had purchased the goods at a gross undervalue or consented or acquiesced in their sale at such value, had a cause of action against Monte Paschi for compensation for selling either to it or to Graeme Freemantle at a gross undervalue. In addition, there was the pleaded defence of contributory negligence based on the consent or acquiescence in the sale, an issue also available to Monte Paschi.

98. It is reasonable to conclude that the defendants decided to embark upon an imaginative and very debatable third party proceeding. One can understand a third party deciding to issue third party proceedings in those circumstances but the need to issue did not flow inevitably from the issuing of the writ against the defendants. Rather it was done because the defendants saw it as being in their interests to do so. In such circumstances, however, the plaintiff should not be required to pay the cost of the proceedings when they are discontinued. The defendants made a choice to issue third party proceedings and took the risks inherent with that and should have to bear the cost of the result.

101. At the same time, the plaintiff should not recover its costs associated with the third party proceeding because, while it could argue that those costs could not have been foreseen at the time of the offer of compromise and, therefore, were out of the ordinary, it cannot escape the fact that the amount claimed by it was a factor in the issuing of the third party proceedings.

104. I will invite submission as to the terms of the orders to be made to give effect to this ruling on costs.