Solicitors:
Norton Rose Fulbright (Plaintiff)
W Advisers Pty Ltd (Defendants)
File Number(s): 2022/157217
[2]
JUDGMENT
HER HONOUR: I gave judgment in this matter on 6 September 2023, dismissing the summons with costs: Halkett v APG & Co Pty Ltd [2023] NSWSC 1058. The defendants now seek a special costs order based on an offer of compromise or, alternatively, a later Calderbank offer. It is only necessary to consider the former.
The defendants relied on two affidavits by their solicitor, Mark Wilson. The plaintiff did not adduce any evidence on this application.
[3]
Facts
The plaintiff, Peter Halkett, was the chief executive officer and executive chairman of APG & Co Pty Ltd. He held 5% of the defendants' shares and units under the terms of an Equityholders Agreement.
APG operated 200 retail stores across Australia, selling fashion under brands including Sportscraft, Saba and Jag. In March 2020, APG's stores were closed following lockdowns imposed by the Commonwealth, State and Territory governments in response to the COVID-19 pandemic. On 2 June 2020, Mr Halkett gave written notice of his resignation, to take effect in 12 months' time. On his resignation, the defendants were entitled to buy back Mr Halkett's securities for "Fair Market Value" as calculated in accordance with a formula in the Equityholders Agreement.
On 6 June 2020, Mr Halkett circulated a presentation entitled "Proposed Exit Arrangements", setting out the basis on which he proposed that Fair Market Value should be calculated to take account of the impact of COVID-19 on the defendants' business. As I read it, Mr Halkett proposed that Earnings Before Interest and Tax (EBIT) should be "normalised" to assume a "run rate ex-covid-19 impact", that is, to calculate Fair Market Value on the basis that the COVID-19 pandemic had not occurred.
This led to a dispute. The defendants consulted their solicitor, Mr Wilson, who proceeded to communicate with Mr Halkett regarding the valuation of his equity and other matters concerning his employment and exit arrangements. On 20 April 2021, Mr Wilson received an email from a solicitor retained by Mr Halkett, requesting that all correspondence regarding the valuation of Mr Halkett's equity be directed to his office. Following this, Mr Wilson communicated with the plaintiff's solicitor and provided, in response to requests, a large volume of financial information including audited financial statements as well as the underlying financial data in the form of spreadsheets, to allow the plaintiff to assess the defendants' valuation of his equity.
On 2 June 2021, Mr Halkett's resignation took effect. On 5 November 2021, APG's auditors advised that their audit of the 2021 financial year was substantially complete. This enabled the calculation of Fair Market Value to be completed. On 11 November 2021, the defendants issued a buyback notice to Mr Halkett, proposing to acquire his securities for $1,395,299.44.
From 12 November 2021 until 16 December 2021, the parties, through their solicitors, engaged in discussions regarding the valuation of the plaintiff's equity, the calculation in the buyback notice and the Fair Market Value formula in the Equityholders Agreement. Mr Halkett's solicitor was now Norton Rose Fulbright. Mr Wilson sent Norton Rose a large volume of financial information, including bank statements, financial statements and spreadsheets. Mr Wilson offered to re-send any material that had previously been provided prior to the issue of the buyback notice. The parties were also then assisted by accounting experts, Greg Meredith of KPMG and Andrew Ross of KordaMentha, both of whom later gave evidence in these proceedings.
On 16 December 2021, a Settlement Deed was executed, permitting the buyback to proceed for $1,395,299.44 but entitling the plaintiff to seek judicial determination as to whether this figure was correct. Recital I of the deed observed:
The Parties enter this Deed to seek to resolve all disputes between them other than the sole issue as to whether the Sale Price represents the full amount of Fair Market Value of the Halkett Equity as at 11 November 2021 (the FMV Dispute), and to agree a process in relation to resolving the FMV Dispute.
The plaintiff released the defendants from all Claims (clause 6.1), where Claim was defined in clause 1.1(2) as follows:
Claim means any present or future, actual or contingent, claim, cause of action, complaint, liability, demand, cost or expense that any person has or might have in relation to or arising in any way from:
…
(c) any matters referred to in this Deed including Halkett's rights or liabilities under the Equityholders Agreement … except for the right of Halkett to seek:
(i) further payments as described in clauses 5.4 or 5.6 of this Deed;
(ii) ancillary relief or orders relating to such payments,
whether or not the facts, matters or circumstances giving rise to that claim, cause of action, complaint, liability, demand, cost or expense are known to that person or to any other person at the date of this Deed, and whether brought in law or in equity or under statute.
In the event that the parties could not reach agreement as to whether $1,395,299.44 was the Fair Market Value of the plaintiff's securities by 7 February 2021, the parties agreed that the plaintiff could apply to the Court "seeking relief … as to the Fair Market Value of the Halkett Equity," the payment of any additional sums by the defendants and "declaratory relief or any ancillary relief or orders required so as to ensure that Halkett can receive the full Fair Market Value": clauses 5.2 and 5.3. If the Court determined that the plaintiff had been under-paid, then the defendants were obliged to pay the additional amount with interest: clauses 5.4 and 5.6. If the Court determined that the plaintiff had not been under-paid, then Mr Halkett was not obliged to refund any excess: clause 5.5.
Correspondence resumed between the parties' solicitors in January and February 2022. Five substantive pieces of correspondence were exchanged. The issues which were subsequently determined in my primary judgment were referred to in these (and earlier) substantive correspondence.
In March 2022, Mr Meredith completed his first report. In April 2022, the defendants' solicitors wrote at length setting out their position on Mr Meredith's opinions, including having regard to the views of Mr Ross. Again, the issues the subject of my primary judgment were canvassed. These proceedings were commenced on 31 May 2022. By Mr Wilson's count, some 26 communications had passed between the parties between when the buyback notice was issued in November 2021 and commencement of the proceedings.
[4]
The offer
On 11 July 2022, the defendants filed a Commercial List Response. On 14 July 2022, the defendants served an offer of compromise pursuant to rule 20.26 of the Civil Procedure Rules 2005 (NSW), offering to pay the plaintiff $150,000, with the proceedings to be dismissed with no order as to costs. There was no response.
Following the offer, in October 2022, Mr Ross completed an expert report. In November 2022, Andrew Martin affirmed an affidavit for the defendants, which was read at the final hearing. The matter was listed for hearing. Orders were made for the defendants to provide discovery. Mr Meredith provided a second report. In April 2023, Mr Martin affirmed a second affidavit. Mr Ross completed his second report. A joint expert report was prepared. The hearing, however, was vacated. The defendants accept that they should pay the costs occasioned by reason of the vacation.
In June 2023, Mr Meredith completed his third report. In July 2023, a second joint expert report was prepared. Mr Martin affirmed a third affidavit shortly before the hearing on 27 July 2023. In his third affidavit, Mr Martin said that he had prepared the Fair Market Value and set out how he had calculated an extraordinary item identified as "Jobkeeper contribution from Govt." The calculation was, in any event, obvious from the financial statements which formed the basis of the calculation.
[5]
Submissions
The plaintiff accepts he bears the burden of persuading the Court to make "orders otherwise" in respect of his failure to accept the offer of compromise. The plaintiff submitted that his rejection of the offer was reasonable where the full parameters of the dispute were then uncertain, the defendants' case changed after the offer and all relevant evidence had not been served: Fairall v Hobbs (No 2) [2017] NSWCA 133 at [14]-[15] (this passage is a summary of the applicant's submissions rather than the Court's summation of the relevant principles); Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [15]. At the time when the offer of compromise was served, the proceedings had only been on foot for six weeks, the defendants had yet to file the Amended Commercial List Response (albeit the amendments related to an issue which was not pursued at trial and, thus, this matter does not appear to be relevant) and no evidence had been served. Whilst the parties had exchanged pre-litigation correspondence, the defendants were under no obligation to frame their defence in the same manner as expressed in their letters, nor could the plaintiff know what evidence they would choose to adduce to support their defence. To penalise the plaintiff for not knowing this was said to impermissibly apply the benefit of hindsight, where the reasonableness of the refusal of an offer should be assessed by reference to circumstances as they were known at the time the offer was made: Fernandez v Perez (No 2) [2012] NSWSC 1602 at [20] (per Beech-Jones J).
The plaintiff also submitted that he could not have foreseen that the Court would dismiss his claim on the basis that it did, where it was said that he was precluded from agitating the point on which it was said the case was decided against him. It was said that my primary judgment turned on Clause 2.2 of the Equityholders Agreement and the plaintiff's pleading: at [74]-[76]. The plaintiff submitted that Clause 2.2 was not raised by the defendants in their Commercial List Response nor their written submissions. Mr Halkett was precluded from alleging any breach of the Equityholders Agreement by the terms of the Settlement Deed, which released the defendants from all such claims and left open only the "dry" question of construction which he ultimately pursued: clauses 1.1(2)(c), 6, and Recital I. At the time the offers were made, and in light of the Settlement Deed, Mr Halkett could not have foreseen that his claims would be dismissed in the manner they were.
The defendants submitted that there was no basis to conclude that the full parameters of the dispute were unknown to the plaintiff at the time of the offers in the absence of any evidence in support of that contention, the lengthy history of the parties setting out their competing positions in writing and where the case simply turned on the proper legal construction of a contract. To the extent that the plaintiff's case failed because of the way it was framed, perhaps by reason of the Settlement Deed, the plaintiff was in a position to recognise this at the time he received the offer. The plaintiff had negotiated (and received) a considerable sum of money under the Settlement Deed to give up various rights. The Commercial List Response (served before the offer of compromise) and the Amended Commercial List Response (served before the offer expired) were inconsequential to that position.
[6]
Consideration
Whilst it is relevant to first consider whether the rejection of a Calderbank offer was unreasonable when deciding whether to make an order for indemnity costs, the same is not the case where an offer of compromise has been served in accordance with the rules: IFTC Broking Services Ltd v Commissioner of Taxation (2010) 268 ALR 1 at [12] (per Stone, Edmonds and Jagot JJ); [2010] FCAFC 31. In that event, an order for indemnity costs follows, unless the Court orders otherwise: New South Wales Insurance Ministerial Corp v Reeve (1993) 42 NSWLR 100 at 102 (per Gleeson CJ, Clarke and Cripps JJA agreeing); Morgan v Johnson (1998) 44 NSWLR 578 at 581-82 (per Mason P, Sheller and Powell JA agreeing).
There does not need to be "exceptional circumstances" before the Court will make orders otherwise. Nevertheless, "the prima facie position should only be departed from for proper reasons which, in general, only arise in an exceptional case": see Leach v The Nominal Defendant (QBE Insurance (Australia) Ltd) (No 2) [2014] NSWCA 391 at [47] (per McColl JA, Gleeson JA and Sackville AJA agreeing); Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) [2004] FCA 1437; (2004) 212 ALR 281 at [17] (per Hely J). A "tight leash" should be maintained on the circumstances in which the Court should "order otherwise" so as to promote certainty in the operation of the rules relating to offers of compromise, discourage offerees who seek to 'game the system' and to discourage satellite litigation with respect to costs: Walker v Harwood [2017] NSWCA 228 at [22] (per Basten JA).
The onus is on the offeree to demonstrate why the Court should depart from the consequence of its rejection of the offer: Leach at [45]. It is impossible to exhaustively state the circumstances in which the court's discretion to "order otherwise" might be exercised: Leach at [48]. The mere fact that it was reasonable for the offeree to take the view that they did in rejecting the offer is not enough to displace the rule, although this does not mean that reasonableness of the rejection is an irrelevant consideration: Leach at [48].
Here, the plaintiff does not suggest that the offer of compromise did not involve the required element of compromise. What is suggested, however, is that the offer was served at an early point in the proceedings such that the full parameters of the dispute were then uncertain. The offer was served six weeks after the commencement of the proceedings, shortly after the pleadings had closed. But this was done where the parties had been engaged in lengthy and detailed communications, assisted by able lawyers and accounting experts, for a significant period of time. Mr Wilson had been communicating with the plaintiff via a solicitor for some 15 months, including communicating with Norton Rose for eight months.
Specifically, the plaintiff proffered Mr Meredith's views as the correct way to calculate Fair Market Value under the Equityholders Agreement. The defendants had obtained advice from KordaMentha on 30 April 2021; excerpts from this advice were provided to Norton Rose on 6 December 2021, attached to a 12-page letter setting out the defendants' position at length.
By the time the offer was made, themes of this correspondence, and Mr Meredith's opinions and Mr Ross' disagreement, were now articulated in pleadings. I accept that the defendants may well have supplemented their reasons as to why Mr Meredith's views were wrong as the case unfolded. But the fundamental propositions advanced by the parties were then articulated and had been canvassed at length in the pre-litigation period. There is no affidavit from Mr Halkett or his solicitor stating that they did not understand the issues, nor does the correspondence at the time suggest that they were not aware of the case being brought and the defence raised. This submission is not accepted.
The Court may 'order otherwise' if the offeror's case changed substantially after the offer was rejected: G E Dal Pont, Law of Costs (LexisNexis Butterworths, 5th ed, 2021) at [13.22] citing Rolls Royce Industrial Power (Pacific) Ltd v James Hardie & Co Pty Ltd [2001] NSWCA 461; (2001) 53 NSWLR 626 at 642 (per Stein JA). The change in the plaintiff's case must, however, be substantial, as explained by Perry J in Shaw v Jarldorn [1999] SASC 529; (1999) 76 SASR 28 at [36], [38]: (emphasis added)
… The circumstances which … might justify relieving a defendant from the obligation to pay solicitor and client costs, will be those where there is such a significant change in the manner in which the plaintiff's case is presented at the trial, or the manner in which the evidence emerges at the trial, that it might fairly be said that the full dimensions of the plaintiff's entitlement could not possibly have been foreseen before the hearing commenced.
…
But the fact that the defendant is caught by surprise by some development at the trial, standing alone, would not ordinarily be sufficient, as it is symptomatic of litigation that the course taken by a trial will often be unpredictable. It will only be in an extreme case that such considerations would avail a defendant. It is not necessary or appropriate, in the context of argument as to the application of the rule, for the Court to embark on a nice comparison between the material discovered before trial, and the evidence as it emerged at the hearing. In considering their response to an offer, defendants must allow for the fact that the course of evidence may turn significantly and unexpectedly against them at the trial. That is an ordinary hazard of litigation which no properly advised defendant should fail to allow for.
See likewise Doyle CJ at [8].
It is not entirely clear how it is said that the defendants changed their case after the offer. If this was a reference to amendments to the defendants' pleading, those amendments were directed to whether the Equityholders Agreement had been varied, and whether the agreement applied as varied. This was not pressed. It may be a reference to the further evidence of Mr Martin and Mr Ross - concerning the pre-COVID-19 decision to close the Myer concession stores - that led to the vacation of the trial. In either case, I do not consider that any change in the defendants' case after the offer was substantial, nor one which warrants the Court to "order otherwise."
It is, of course, correct that no evidence had been served at the time that the offer was made. But this is of lesser moment than might otherwise be the case for, essentially, two reasons. First, the case concerned the proper construction of the Equityholders Agreement and did not turn on lay or expert evidence per se. Second, to the extent that the views of accounting experts or the contents of accounting records came into play, these views and documents appear to have been exchanged and canvassed at length by the time the offer was served. This submission is also not accepted.
As to the plaintiff's submission, in essence, that I decided the case on a basis that was not pleaded or argued, I will leave that matter to be determined elsewhere. Assuming that the Settlement Deed restricted the plaintiff so that he could only plead the case which he did, the plaintiff was presumably conscious of these limitations when pleading his case. One might think this would have made the defendants' offer all the more attractive. It does not appear to me to be a basis on which the Court should, however, 'order otherwise' if an offer of compromise to resolve the case that was brought was not accepted.
[7]
Orders
For these reasons, I make the following orders:
1. Vary Order 1 made on 6 September 2023 by adding:
"as follows:
(a) defendants to pay the plaintiff's costs occasioned by reason of the vacation of the 13 April 2023 trial date;
(b) plaintiff to otherwise pay the defendants' costs of the proceedings on the ordinary basis until 13 July 2022 and on any indemnity basis thereafter."
[8]
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Decision last updated: 13 October 2023