Hakea Holdings Pty Ltd v McGrath

Background 7 This proceeding was commenced in the Supreme Court of New South Wales (the Supreme Court) on 24 April 2017 by the filing of a Commercial List Statement. Hakea subsequently joined Neon to the proceeding and, on 29 January 2019, the proceeding was transferred to this Court by order of the Supreme Court. By then, Hakea had filed an Amended Commercial List Statement which pleaded its claim against Neon. 8 On 10 September 2019, Neon filed its defence. It denied any liability to Hakea, including on the ground that the first exclusion applied. 9 On 3 June 2020, I made an order that the proceeding be listed for hearing for five days commencing on 19 April 2021. 10 On 22 December 2020, I made an order permitting Neon to file, on certain conditions, an expert's report limited to the issues raised in para 65(b)(i) of the amended defence it wished to file. Paragraph 65(b)(i) of the proposed amended defence was in these terms: 65. In answer to paragraph 65, the Second Respondent: … (b) Says that if (which is not admitted) the First Respondent is liable to the Applicant as alleged in the List Statement, then: (i) that liability is Loss in connection with a Claim based upon, consequent upon, by reason of, arising out of, arising from, directly or indirectly resulting from, attributable to, in any way involving or in connection with the First Respondent gaining a personal profit or advantage, and by virtue of the term pleaded at paragraph 58(c)(i) above (clause 5(a)(ii)) the Second Respondent is not liable to indemnify the First Respondent in respect of that Loss; Particulars The conduct of the first respondent pleaded in paragraphs A5, A6, A10, A11 and C17-C52 of the List Statement constituted or involved the first respondent gaining a personal profit or advantage. The claim made by the applicant against the first respondent is a claim based upon, consequent upon, by reason of, arising out of, arising from, directly or indirectly resulting from, attributable to, involving or in connection with that conduct. Further, the first respondent used moneys wholly or partly obtained from the applicant (by the first respondent's conduct pleaded in the List Statement) to make the payments set out in the Schedule, each of which discharged a personal liability of the first respondent. 11 On 11 March 2021, I made an order granting leave to Neon to file and serve the amended defence and the expert's report. 12 The hearing for final relief commenced on 19 April 2021. It was adjourned part-heard on 22 April 2021. The hearing finally concluded on 29 September 2021 (after leave to re-open had been granted to Hakea). 13 Following the dismissal of the proceeding against Neon, Hakea filed a notice of appeal dated 19 September 2022. The appeal is listed for hearing on 9 February 2023.

The application for indemnity costs 14 On 18 April 2021, at 1.43 pm, Neon's solicitors sent, by email, a letter to Hakea's solicitors containing an offer to resolve the proceeding. The letter identified a number of grounds on which Neon contended that Hakea's claim against it would not succeed, including the following: 2. It remains Neon Underwriting's position that your client's claim will not succeed for the following reasons: … (b) McGrath is not entitled to indemnity under the Policy in respect of the alleged liability because: … (ii) Indemnity is excluded by clause 5(a)(ii) of the Policy. Amongst other things, that clause excludes liability where the claim in any way involves the Director gaining any personal profit or advantage. 15 The letter continued: 3. Notwithstanding Neon Underwriting's position that it is likely to successfully defend your client's claim, we have been instructed to make an offer to resolve the proceedings on the following terms: (a) Neon Underwriting will make payment of $200,000 within 30 days of the acceptance by your client of this offer; (b) each party bear their own costs in the proceeding. 4. The offer is inclusive of interest and, in full and final satisfaction of your client's claim against our client insofar as they relate to the proceeding. 5. The offer is open for acceptance until 5.00PM on Monday, 19 April 2021. 6. The offer may be accepted upon written confirmation of acceptance of the offer from your firms on behalf of your clients. For the reasons outlined above we consider that our client's offer is a generous one, and your clients acting reasonably ought to accept it. If there is any aspect of this letter or the offer that you do not understand, please contact us forthwith. 7. If your clients do not accept the offer and your clients do not obtain a more favourable result at verdict of the Proceedings, our client will produce this letter in support of an application that your clients pay our client's costs from the date of this letter on an enhanced basis other than the ordinary applicable basis in accordance with the principles enunciated in Calderbank v Calderbank [1975] 3 ALL ER 333 and Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No. 2) (2005) 13 VR 435. 16 Of particular importance for present purposes is the fact that the offer was communicated on the afternoon of the day before the commencement of the hearing, which was a Sunday, and remained open for acceptance only until 5.00 pm the following day, the first day of the hearing. The offer was also inclusive of interest, with each party to bear its own costs of the proceeding. 17 As events transpired, Hakea did not respond to the offer, which expired by effluxion of time. 18 Neon relies on the principles discussed in Calderbank v Calderbank [1975] 3 All ER 333 (Calderbank) and Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; 13 VR 435 (Hazeldene's) to displace the rule that costs are ordinarily awarded on a party and party basis. 19 In Hazeldene's, the Court of Appeal discussed, with specific reference to Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724, the policy rationale underlying the availability of special orders for costs where offers of compromise are rejected. Their Honours also noted the competing consideration, referred to in Oversea-Chinese Banking Corporation Ltd v Richfield Investments Pty Ltd [2004] VSC 351 at [60], that special orders for costs should only be made in special circumstances lest potential litigants be discouraged from bringing their disputes to the courts. The Court of Appeal observed: 23 In our view, these competing considerations can be sufficiently accommodated by applying a test of (un)reasonableness. The critical question is whether the rejection of the offer was unreasonable in the circumstances. We see no justification for a more stringent test such as "manifestly" or "plainly" unreasonable. (Footnote omitted.) 20 At [25], the Court of Appeal discussed the factors relevant to assessing reasonableness in this context: 25 The discretion with respect to costs must, like every other discretion, be exercised taking into account all relevant considerations and ignoring all irrelevant considerations. It is neither possible nor desirable to give an exhaustive list of relevant circumstances. At the same time, a court considering a submission that the rejection of a Calderbank offer was unreasonable should ordinarily have regard at least to the following matters: (a) the stage of the proceeding at which the offer was received; (b) the time allowed to the offeree to consider the offer; (c) the extent of the compromise offered; (d) the offeree's prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; (f) whether the offer foreshadowed an application for an indemnity costs in the event of the offeree's rejecting it. (Footnote omitted.) 21 This passage was endorsed by the Full Court in Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [7] (Anchorage). In that case, the Full Court noted (at [6]) that a well-established circumstance justifying award of indemnity costs is an imprudent refusal of an offer to compromise, where a key question is whether the offeree's refusal of the offer was "unreasonable" when viewed in light of the circumstances existing at the time the offer was rejected: see also Black v Lipovac [1998] FCA 699; 217 ALR 386 at [217] - [218]. 22 The Full Court also noted (at [8]) that an unsuccessful party is not liable to pay indemnity costs merely because it received, and rejected, an offer to settle on terms more favourable than it achieved at trial. The Full Court said that the assessment of the "unreasonableness" of an offeree's refusal of a settlement offer is a broad-ranging inquiry that is not restricted to consideration of the extent or quantum of the compromise offered. 23 Neon submits, with reference to the factors identified by the Court of Appeal in Hazeldene's, that its offer was made at a time when the parties were well-placed to assess the strengths and weaknesses of their respective cases. It submits that the period for acceptance of the offer provided Hakea with "ample time to consider the merits of the offer and assess its position". It submits that the offer represented a "compelling compromise" made at a time when the parties were about to embark on a costly trial. It notes that the offer was neither a "walk away" offer nor a call for complete capitulation by Hakea. It also notes that the first exclusion provided a complete defence to Hakea's claim against it. 24 With reference to the fact that the offer was made on the basis that each party bear its own costs, Neon says that, at the time it made the offer, it did not know the quantum of Hakea's costs. It contends, however, that Hakea's solicitors did not make contact to discuss any aspect of the offer, including the term that the parties' bear their own costs. 25 Neon submits that Hakea's prospects of success, in so far as the first exclusion was concerned, were poor and that Hakea must have been well aware of the difficulties it faced given that Neon's case, in this regard, was premised on Hakea's own pleading of its case against Mr McGrath. 26 Neon submits that the terms of the offer were clear and unambiguous and made explicit reference to the operation of the first exclusion. The offer put Hakea on notice that, if it was not accepted, and Hakea did not obtain a more favourable result against Neon in the proceeding, Neon would rely on the offer to seek costs from the date of the letter on an "enhanced" basis. Neon submits that, instead of accepting the offer, Hakea "embarked on what was ultimately found to be an entirely futile exercise, spanning eight hearing days, of attempting to establish any liability against Neon". Neon submits that, in all of the circumstances, Hakea's conduct in not accepting the offer was unreasonable. 27 Hakea submits that an award of indemnity costs is not appropriate. It submits that the time allowed for an acceptance of the offer was "manifestly inadequate" to allow it to properly consider and deal with it. As explained in an affidavit made by Ms Golovanoff (Hakea's solicitor with responsibility for the carriage of the proceeding), at the time that the offer was received all of Hakea's legal resources were directed to the preparation of the trial that was to commence the next day. It was not feasible for Hakea to give serious consideration to, let alone allow Hakea's legal advisers to provide detailed advice on, the offer. 28 Hakea points to the fact that no explanation has been given by Neon as to why, if it was a genuine compromise, the offer was not made much earlier and why Hakea was only provided with a "very short window" in which to accept it. In this connection, Hakea also points to the fact that the parties were in court all day on 19 April 2021, and that the period for acceptance lapsed shortly after the conclusion of the hearing on that day. 29 Hakea also submits that the quantum of the offer does not represent a genuine compromise. If accepted, the offered sum of $200,000 was to be paid on the basis that each party bear its own costs. Hakea submits that, given the loss it claimed (which it says was in excess of $3 million), Neon's offer was "basically akin to a walk-away" and that its "real purpose" was not to attempt to compromise the proceeding, but to generate "costs protection".

Conclusion 30 I am not persuaded that an order for indemnity costs should be made. Hakea did not act unreasonably in not accepting the offer and allowing it to lapse. Hakea was not given a reasonable opportunity to consider its position, having regard to the time at which the offer was made, and the period allowed for its acceptance. 31 I also take into account the fact that Hakea's case with respect to the first exclusion was not unarguable, even though it was hardly assisted by its own pleading of the case against Mr McGrath. In this regard, however, Neon's own case on the application of the first exclusion was not without its difficulties. 32 To explain, Neon initially advanced a case that was somewhat at odds with its reliance on the first exclusion. As I pointed out at [124] - [134] of the primary reasons, when opening their respective cases on the first day of the hearing, Hakea and Neon refined their positions by departing significantly from their respective pleadings concerning Mr McGrath's alleged breaches. As I noted at [134] of the primary reasons, in oral opening submissions Hakea's case had moved from one of conscious and deliberate wrongdoing on the part of Mr McGrath to one of negligence. On the other hand, Neon's case moved from one that denied or put in issue the fact that Mr McGrath owed any fiduciary duties or breached any statutory duties as a director of Hakea, to one that not only embraced the fact that Mr McGrath had breached his duties, but also relied on the fact that, in doing so, Mr McGrath acted deliberately to prefer his personal interests and to obtain an improper advantage for himself and for Denham Constructions Pty Ltd (Denham). 33 In its written opening submissions, which were served on 15 April 2021, and which remained unqualified at the time the offer was made, Neon argued that Hakea had acceded to, and consented to, Mr McGrath's conflict between his duties to Hakea and his duties to Denham, and had thereby relieved Mr McGrath of his fiduciary duties to it (Hakea). Although, in its written opening submissions, Neon relied on the first exclusion, its contention that Mr McGrath was relieved of his fiduciary duties to Hakea struck at the foundation of Hakea's pleading that Mr McGrath had preferred his and Denham's interests over Hakea's interests. This sat awkwardly with Neon's reliance on the first exclusion. 34 Therefore, at the time the offer was made, the application of the first exclusion was not as straightforward as Neon's present submissions suggest. Neon's position was only clarified on the first day of the hearing by its departure, in the course of its oral opening, from its pleaded case and, in this respect, its written outline of opening submissions. By that time, the period for accepting the offer was rapidly coming to an end. As I have said, Hakea was not given a reasonable opportunity to consider its position in light of the offer. This was particularly so given Neon's change in position, discussed above.

Lump sum costs and quantum 35 The most efficient course to adopt in determining whether a lump sum costs order should be made and, if so, the quantum of those costs, is to refer those questions to a Registrar of the Court for inquiry and report as a referee under s 54A of the Federal Court of Australia Act 1976 (Cth) and in accordance with the Federal Court Rules 2011 (Cth). However, given the impending appeal from the primary judgment, it would not be an efficient use of the Court's resources to have that inquiry proceed until after judgment is given in the appeal. Orders will be made accordingly. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Yates.