Interim Finance Pty Ltd v Bright Beginnings Learning Centre Glendenning Pty Ltd

Supreme Court of NSW|2018-02-16|Before: Ward CJ, Darke J, Black J

Judgment

HER HONOUR: On 2 February 2018, I published my reasons in a dispute between parties to a loan agreement involving a claim by the plaintiff (Interim Finance Pty Ltd) for fees in the sum of $8,100 (plus expenses) consequent upon the loan transaction not having proceeded (Interim Finance Pty Ltd v Bright Beginnings Learning Centre Glendenning Pty Ltd [2018] NSWSC 36). Interim Finance had lodged a caveat over property owned jointly by the second and third defendants to secure the claimed debt. Following the issue of a lapsing notice in respect of the caveat, Interim Finance commenced proceedings in this Court seeking an extension of the operation of the caveat. An interim extension of the caveat was ordered by Darke J, on the plaintiff's usual undertaking as to damages. The matter then came before me for hearing on 29 September 2017, on which occasion the defendants were represented by Senior Counsel. On 2 February 2018, I dismissed Interim Finance's summons and made consequential declarations and orders (in effect for the removal of the caveat), reserving the question of costs and directing that brief written submissions on costs be filed with a view to determining that issue on the papers.
The parties have now filed, and I have had an opportunity to consider, submissions as to costs. These are my reasons for the costs order that I will now make. I do not propose to repeat the background to the dispute which is set out in my earlier reasons. In the reasons that follow, I use the abbreviations adopted in those earlier reasons.

The opposing contentions

Interim Finance contends that the appropriate order for costs is that (as foreshadowed in my earlier reasons at [116]) each party pay its own costs of the proceedings.
The defendants contend that Interim Finance should be ordered to pay their costs on the indemnity basis, relying on a Calderbank offer (see Calderbank v Calderbank [1975] 3 All ER 333; 3 WLR 586) made by letter dated 9 October 2016, sent within 10 days of the interim orders having been made and within two weeks of the filing of Interim Finance's summons (and before the filing of their cross-claim). The defendants' solicitors in that letter, having set out their clients' position as to why no financial obligation had arisen under the loan agreement and having pointed to "costs considerations", conveyed the defendants' offer to settle Interim Finance's claim on a "full and final" basis. The letter, which was headed "Without Prejudice Save as to Costs", stated that the offer was open for acceptance by Interim Finance for a period of 28 days and asked that, to avoid the parties incurring further costs, Interim Finance refrain from preparing any further evidence in the Supreme Court proceedings until it had considered the offer.

Principles

The applicable principles on the exercise of the discretion in relation to costs are well-known and I do not propose here to restate them (see, for example, the recent judgment of Black J in Saba v Plumb [2017] NSWSC 955 at [4]-[6]). As to the position where a Calderbank offer has been made by one party and not accepted by the other, and assuming the offer contains a real and genuine element of compromise, the question is whether the party seeking to rely upon the offer (who bears the onus in this regard - see Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 at [26]) has established that it was unreasonable for the other party to reject, or not to accept, the offer. It does not automatically follow that simply because the offer was more favourable than the judgment then an indemnity costs order will be made.
In Commonwealth of Australia v Gretton [2008] NSWCA 117, Beazley JA, as her Honour then was, noted the public policy considerations that underpin the making of favourable costs orders where a Calderbank offer has been made (see at [41]), those being the encouragement of settlement of disputes as soon as possible and the discouragement of wasteful and unreasonable behaviour by litigants. The question is whether in all the circumstances the failure to accept the offer "warrants departure from the ordinary rule as to costs" (see SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 per Giles JA at [37]).

Submissions

The defendants maintain that the prima facie position, or general rule, that costs follow the event (r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW)) should here be applied. Insofar as I drew attention (at [116] of my reasons) to the disproportionality between the amount in dispute and the likely cost of the proceedings, the defendants argue that Interim Finance was the author thereof "because of the caveat and its insistence that it was a secured creditor for a small claim". The defendants point to the valuation evidence that showed that the property affected by the caveat was very large in value. They argue that though the claim was small in its original amount, the ambit of the debt claimed was a "moveable feast" in that, under the loan agreement, expenses incurred in the enforcement of the claimed debt would increase the amount of the claim (so it is argued that an attempt at a payment into court would have invited a dispute as to what sum needed to be provided to cover whatever the final position contended for by the plaintiff would be). The defendants note that Interim Finance has always proceeded on the basis that it was entitled to be wholly secured in respect of the whole of its actual and possible claims (and that it sought orders for the judicial sale of the charged property).
Interim Finance argues that the defendants "created the necessity to commence these proceedings". That argument is put on the basis that lodgement of the caveat did not of itself create any necessity for proceedings to be commenced by either of the parties; but the service of the lapsing notice did. It is submitted that the failure of the defendants' solicitors to return calls and answer correspondence after the lapsing notice was served and before Interim Finance's caveat would lapse pursuant to that notice left Interim Finance only one tenable option - to bring an application to extend the operation of the caveat - and "blocked any available alternatives (such as a further caveat)".
Interim Finance points to what was said by Darke J in Coleman v Hart-Hughes (No 2) [2017] NSWSC 902 at [30], to the effect that the proceedings there needed to be commenced to prevent the lapsing of the caveat and that it is generally incumbent upon a caveator in that situation to claim final relief to vindicate the interest claimed in the caveat. Interim Finance says that even if the caveat had been allowed to lapse or had not been lodged in the first place, only this Court is seized of jurisdiction to determine whether the property was charged to Interim Finance (Interim Finance having relied on an equitable charge arising out of the agreement for the lodgement of a caveat in the circumstances specified in the letter of offer).
As to the claim for indemnity costs, the defendants submit that the amount offered was not a silly or derisory amount and argue that, by reason of the caveat and the claims, the defendants were in the position that, unless they paid a sum or provided a security which Interim Finance agreed to accept, their property would remain encumbered until the issues in the summons were judicially determined.
Interim Finance submits that the offer made on 9 October 2016 was plainly unreasonable in circumstances where, as at the time the offer was made, the defendants "could not possibly have been unaware the filing fee payable on commencing the proceedings exceeded the amount offered". It is submitted that Interim Finance's failure to accept the offer was therefore plainly not unreasonable.

Determination

I remain of the view that the costs of commencing proceedings in this Court to extend the operation of the caveat and vindicate the interest claimed in the caveat were always likely to be wholly disproportionate to the relief that was claimed. I do not accept that Interim Finance had no other tenable option, when served with the lapsing notice, than to commence these proceedings. Another option would have been to allow the caveat to lapse and to have brought a claim for the moneys in a lower court or tribunal. The "necessity" for Interim Finance to commence these proceedings was attributable to its contention that it had security over the defendants' property for its small money claim and its desire to preserve that security. The decision to do so, no doubt for its own commercial reasons, is not something for which the defendants can be said to have been responsible - even taking into account that attempts to make contact with the defendants' solicitors in the period between service of the lapsing notice and the time it was due to expire were unsuccessful.
But for the attempt by the defendants to compromise the dispute, I might have remained of the view expressed at [116] of my earlier reasons that, in light of the disproportionality of the dispute, each side should bear its own costs. However, as has now become apparent, the defendants were cognisant of the costs considerations and had made an attempt to resolve the matter at an early stage of the proceedings. In those circumstances, irrespective of the arguments as to whether costs should be awarded on an indemnity basis (to which I will next turn), I am of the view that costs should follow the event and there should be an order that Interim Finance pay the defendants' costs of the proceedings.
As to whether the costs should be on an indemnity basis, two questions arise: first, whether the offer contained a real and genuine element of compromise, and whether it was unreasonable for Interim Finance not to accept the offer.
As to the first, the filing fee payable on lodgement of the summons was $2,951. By the time the offer was made steps had already been taken in the proceedings. I accept that, as at the time that the offer was made, it must have been clear to the defendants' legal representatives, if not to the defendants themselves, that the amount being offered would not cover the costs already incurred in the commencement of the proceedings, which by then included the interlocutory application, let alone any portion of the claimed debt. The letter made clear that the offer was being made for settlement on a "full and final" basis. In those circumstances it was tantamount to a "walk-away" offer (in fact it was likely, if accepted, to leave Interim Finance slightly worse off in terms of the costs it had already incurred than before it had commenced the proceedings).
What amounts to a derisory offer as opposed to being a sufficient element of compromise must to a large extent be a matter of impression. An offer to pay $3,000 towards a claimed $8,100 debt would, I accept, not be liable to be characterised as derisory. An offer to pay $3,000 in settlement of a claim for $8,100 in circumstances where costs of at least that much must already have been incurred by Interim Finance in pursuing the claim bears a very different complexion.
Whether or not a "walk-away" offer can ever involve a genuine element of compromise (and in Leichhardt Municipal Council v Green [2004] NSWCA 341 at [30]-[39], Santow JA was prepared to contemplate that such an offer could in a particular case be a genuine offer), in the present case the amount offered to compromise the dispute, as a practical matter, called upon Interim Finance to capitulate and to do so at a cost to it in the sense that it would not recoup all the costs incurred by it to that date. In those circumstances, though I accept that the offer was made in a genuine attempt to resolve the dispute, I consider that the element of compromise encompassed in the making of the offer was slight.
As to the second question, whether the defendants (who bear the onus) have established that it was unreasonable for Interim Finance not to accept the offer, I am not persuaded that they have done so. The offer was made at an early stage of the proceedings. The defendants had made their position clear in the letter as to their contention that none of the specified circumstances in which liability to pay the fees would have arisen had occurred, but the ambit of the factual matters in dispute was not then known and, on Interim Finance's view of events, there was a reasonable basis for the argument that liability for the fees had arisen. I consider that the position is not dissimilar to that explained by Bryson JA in Leichhardt Municipal Council at [59], namely (and adapting his Honour's words to accommodate that in the present case it is the plaintiff whose case did not succeed) that: The [plaintiff's] case did not succeed, but it was not a case which could not reasonably be argued … The only element of compromise in the offer was as to costs: otherwise it was a call on the [plaintiff] to capitulate and give up: the element of compromise was slight and the [plaintiff]'s ultimate lack of success does not to my mind demonstrate that the reasonable course for the [plaintiff] was to capitulate, nor does anything show that the [plaintiff] was delinquent in going on with the trial or in resisting the appeal.
For those reasons I am not satisfied that the costs order should be on an indemnity basis.

Order

Accordingly, I order as follows: 1. The plaintiff is to pay the defendants' costs of the proceedings on the ordinary basis.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 February 2018

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