Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Export Services Inc

Court of Appeal (NSW)|2011-09-16|Before: Macfarlan JA, Young JA, Hammerschlag J, MacFarlan JA

R Merkel QC/D J Higgs SC/T Maltz (Appellant) F C Corsaro SC (Respondents) Solicitors:

Meerkin & Apel (Appellant) Koffels (Respondents) File Number(s): CA 2010/228608 Decision under appeal Citation: Western Export Services Inc v Jireh International Pty Limited [2010] NSWSC 622 Date of Decision: 2010-06-11 00:00:00 Before: Hammerschlag J File Number(s): SC 2004/175257

Judgment 1MACFARLAN JA : The Court delivered judgment in this appeal on 1 June 2011 ( Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Export Services Inc [2011] NSWCA 137) (the "Principal Judgment"). This judgment deals with various issues relating to costs that have been the subject of written submissions lodged, and affidavits filed, by the parties. I shall use the same abbreviations as were used in the Principal Judgment. 2The Principal Judgment reduced the award of damages made at first instance in favour of WES against Jireh in the amount of $9,660,235 to the amount of $1,195,946. The Court found in Jireh's favour on the issues before the Court related to the construction of the Letter Agreement and the implication of a term concerning commission in the Letter Agreement, but found against Jireh on its contentions that WES had engaged in misleading and deceptive conduct and had breached a fiduciary duty that it owed to Jireh. Jireh was also unsuccessful on an issue concerning the existence in the Letter Agreement of an implied term entitling it to terminate the Agreement. 3Issues that Jireh raised at first instance but did not pursue on appeal included whether the parties intended the Letter Agreement to create legal relations; whether the Letter Agreement was vitiated by unilateral mistake; whether WES was estopped from claiming under the Letter Agreement; whether the Letter Agreement was frustrated; and whether the Letter Agreement should be rectified. Jireh raised these issues in opposition to WES's claim on the Letter Agreement but was unsuccessful in relation to each of them. 4The issues that now require determination are as follows: (a) What order should be made concerning the costs of the proceedings at first instance? (b) What order should be made concerning the costs of the appeal? (c) Is Jireh is entitled to a special order in respect of the costs at first instance by reason of a Calderbank offer that it contends that it made? (d) Is Jireh entitled to a special order for costs by reason of a conversation that it asserts occurred between Mr Dan Daniels (acting on its behalf) and Mr David Cisneros (acting on behalf of the respondents)? (e) Should enforcement of the monetary judgment to which WES is entitled be stayed until costs orders have been made, and entitlements assessed, so that any net amount of costs to which Jireh is entitled can be set off against the judgment in favour of WES? 5I shall deal with each of these issues in turn.

WES ' s submissions 6WES accepted that consideration of the outcome of the proceedings at first instance had to take account of the reduction of its monetary judgment on appeal. However it submitted that even on this basis it was successful at first instance, because it obtained a substantial monetary judgment, and that the usual rule that costs follow the event should apply. 7WES submitted that the fact that it obtained a judgment for a sum far less than the $36,000,000 claimed in the last version of its Statement of Claim (the Third Further Amended Statement of Claim) did not require a departure from that usual rule because there was no basis for the assumption implicit in Jireh's submissions that: "had the claim only been for $2.17 million [being $1.19 million plus interest] (and not $36 million), the parties would have conducted the proceedings in a different manner and that this difference would have resulted in the costs that the parties incurred in conducting these proceedings being less" (WES's Written Submissions dated 28 June 2011 [2.6] - [2.7]). 8WES further submitted that "[t]he central premise of [Jireh's] defence at the trial was that the Letter Agreement did not give rise to legally enforceable obligations", that the primary judge found this premise to be untenable and that eight of the eleven issues that the primary judge had to decide arose out of defences that Jireh raised to avoid what the primary judge found was "a clear and unequivocal intention to contract" reflected in "the parties' dealings up to and beyond the entry into the Letter Agreement" (ibid [2.8], referring to the primary judge's judgment at [240]).

Jireh ' s submissions 9Jireh submitted that if the Court did not accept its submissions concerning the alleged Calderbank offer and Mr Daniels' conversation with Mr Cisneros (to which I will later come), the appropriate order was that Jireh pay 20 per cent of WES's costs of the proceedings at first instance, subject to the preservation of certain limited costs orders that Jireh obtained in relation to interlocutory steps in the proceedings. 10Jireh submitted that when account was taken of the judgment on appeal it succeeded on "the most economically significant aspect of the case" (the construction issue) (Jireh's Written Submissions dated 17 June 2011 [18]), and WES recovered only 3 per cent of its claim of $36,000,000. It described this monetary result as "worse than a draw" (ibid, heading to [20]).

Determination 11The approach to be taken in determining an issue such as the present was described by Hodgson JA in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 2) [2011] NSWCA 171 in the following terms: "In a case such as this, a court must make a broad evaluative judgment, which to a considerable extent must be based on impression derived from its own hearing of the case and its own consideration of the evidence and submissions below and submissions on appeal, rather than by detailed references to the contents of particular parts of transcripts, exhibits and submissions" (at [6]). 12Notwithstanding that the judgment that WES obtained represented only a small proportion of its claim, WES should in my view be regarded as having been successful for the purposes of the rule that prima facie "the costs follow the event" (Uniform Civil Procedure Rules, r 42.1). Certainly the proportion of the claim recovered was low but nevertheless WES obtained a substantial judgment, for an amount in excess of $1,000,000 before interest. 13I consider however that there is force in a submission made by Jireh that WES's claim was so large that it could be regarded as capable of threatening the continued existence of any but the most extraordinarily large company. It was therefore one that was liable to be met with resistance involving an element of desperation that might not have been present if the claim had been for a much lower amount, for example, one in the vicinity of that for which judgment was ultimately recovered. This factor may to some extent explain why Jireh raised such broad-ranging grounds of opposition to WES's claim. In these circumstances I consider that WES's entitlement to costs should be reduced to some extent to reflect the fact that it recovered only a small proportion of its claim. 14In WES's favour on the question of costs is that it not only recovered a substantial judgment but also, when account is taken of the outcome of the appeal, was successful on most of the issues that were litigated, including those concerning intention to create legal relations, misleading and deceptive conduct and breach of fiduciary duty. These issues appear to have consumed most of the time taken in preparation for and during the hearing at first instance. 15Taking these factors into account, my view is that Jireh should be ordered to pay 65 per cent of WES's costs of the proceedings at first instance, other than such parts of the interlocutory proceedings as were the subject of costs orders in Jireh's favour (these orders being preserved).

Mr Cisneros and Mr Meier ' s costs 16Mr Cisneros and Mr Meier were not parties to WES's principal claim against Jireh but were cross-defendants to Jireh's cross-claim in which Jireh made allegations against both WES and them, inter alia, of misleading and deceptive conduct and breach of fiduciary duty. 17As Jireh pointed out, there was however no real distinction for the purposes of the litigation between Messrs Cisneros and Meier on the one hand and WES on the other (Jireh's Written Submissions dated 17 June 2011 [13(a)]). They had common representation and the former were treated as the alter ego of the latter. In these circumstances it is in my view appropriate that the costs to which Messrs Cisneros and Meier are entitled as successful parties to the proceedings should be reduced by the same percentage as that by which those to which WES is entitled should be reduced. 18In their submissions on the present costs questions, there was an issue between the parties as to whether Messrs Cisneros and Meier incurred any costs separate from those incurred by WES. This is an issue which should be resolved on the assessment of costs. Each of WES, Mr Cisneros and Mr Meier will have the benefit of an order for costs. The assessor will need to determine the extent to which costs were incurred by each of them. If Mr Cisneros and Mr Meier were not charged costs by their lawyers in addition to those charged to WES, they will have no basis for recovery of costs from Jireh.

WES ' s submissions 19WES's primary submission was that Jireh and WES should bear their own costs of the appeal as WES succeeded on a number of substantial issues (misleading and deceptive conduct, fiduciary duty and the termination point) that were clearly separable from the issues upon which Jireh succeeded (the construction and commission implied term issues). WES contended that Jireh's inclusion in the appeal of the issues upon which WES succeeded resulted in the appeal hearing extending from one day to two days. It submitted that "[o]f the 124 paragraphs of the Court's judgment, only 44 paragraphs (35%) dealt with the issues upon which [WES] was unsuccessful " (WES's Written Submissions dated 28 June 2011 [3.5], original emphasis).

Jireh ' s submissions 20Jireh submitted that it succeeded on the appeal and that costs should follow the event.

Determination 21On my assessment, significantly more than half of the hearing time on appeal was devoted to issues upon which Jireh failed. Argument on the construction and commission implied term issues, upon which Jireh succeeded, was by contrast relatively confined. Jireh's success on these latter issues enabled it to obtain a very substantial reduction of the judgment awarded against it at first instance. However, because of its failure on the other issues, a judgment of not insubstantial size (in the order of $1,200,000) remained. In these circumstances it cannot therefore be said that Jireh was wholly successful, even if one confines attention to the orders ultimately made and not to the issues argued. 22In my view the appropriate order is that Jireh be paid 25 per cent of its costs of the appeal. I consider that such an order would aptly reflect the fact that, in terms of the orders made, Jireh had considerable but not complete success as well as the fact that Jireh was unsuccessful on many of the issues that were argued. These issues occupied more than half of the hearing time. 23For similar reasons to those that I gave in relation to costs at first instance (see [16] - [18] above), I consider that the position of Messrs Cisneros and Meier, so far as any appeal costs orders in their favour are concerned, should be the same as that of WES. Those parties had common representation and Messrs Cisneros and Meier had no additional interests in the issues argued on appeal to those of WES. As WES is not entitled to any appeal costs order in its favour, Messrs Cisneros and Meier should not be either. 24However the position is in my view different in relation to possible liability of Messrs Cisneros and Meier under a costs order in favour of Jireh. It seems to me that Messrs Cisneros and Meier should not have any liability, shared with WES or otherwise, for the costs of the appeal. This is because Messrs Cisneros and Meier were, in a strict sense, only concerned with the cross-claim and were successful on appeal in respect of all issues relating to the cross-claim. The order relating to appeal costs that I would make in Jireh's favour would therefore be against WES, and WES alone.

THE CALDERBANK OFFER 25Jireh contended that it was entitled to an order for its costs of the proceedings, on an indemnity basis, from a date "soon after" it sent a letter dated 18 February 2008 offering to settle the proceedings (Jireh's Written Submissions dated 17 June 2011 [26]). Relevantly, the offer was expressed in these terms: "1. payment of $A2,000,000, $A500,000 upon settlement and further payments of $A500,000 at 6 monthly intervals thereafter. 2. payment of 4% of the net sale price of the business of Jireh International after payment of all creditors. 3. settlement subject to negotiation and execution of settlement documents including mutual releases." 26WES contended that there were a number of reasons why this offer did not have the effect for which Jireh contended. It is in my view sufficient to refer only to the submission made by WES concerning point 2 of the offer quoted above, as that submission is well-founded and clearly demonstrates that Jireh's claim to a special costs order based upon the letter of 18 February 2008 must fail. 27WES's submission was that because point 2 did not reflect the relevant terms of the Letter Agreement, for WES to agree to that point, and therefore to the offer as a whole, WES would have had to accept a substantially different arrangement than that for which the Letter Agreement provided. WES contended that this deprived the offer of the character of a simple offer to pay an amount in settlement of the proceedings that was allegedly more than the amount that WES ultimately recovered. 28Point 2 of the letter of 18 February 2008 should be considered in the light of cl 5 of the Letter Agreement. Clause 5 was in the following terms: "In consideration for the above services and in furtherance of the relationship between the parties, upon the sale or transfer of any interest of JIREH INTERNATIONAL PTY LTD., JIREH INTERNATIONAL PTY LTD. shall, upon the closing of the sale or transfer, pay to WES a total of four percent (4%) of the sales price of that interest." 29There are at least two principal differences between cl 5 of the Letter Agreement and point 2 of the letter of 18 February 2008. One is that the former operates "upon the sale or transfer of any interest of JIREH INTERNATIONAL PTY LTD" whereas the latter operates on the sale "of the business of Jireh International". This difference in the subject matter of the sale could well be significant in particular circumstances. The second difference is that the former entitles WES to commission on the "sale price of that interest" whereas the latter refers to "the net sale price ... after payment of all creditors". The potential for a significant difference in this respect also is obvious. 30The offer made by the letter of 18 February 2008 would thus, if accepted, have involved a substantial variation to the Letter Agreement. It is not possible in these circumstances to conclude that WES acted unreasonably in not accepting it because the appropriateness of agreeing to such a variation was a matter for commercial judgment on WES's part. The letter is therefore of no assistance to Jireh on the question of costs.

MR DANIELS ' AFFIDAVITS 31Jireh also contended that a conversation that it said occurred between Mr Daniels on its behalf and Mr Cisneros on the respondents' behalf on 19 March 2010 (shortly prior to the commencement of the hearing at first instance) provided the basis for an order that the respondents pay on an indemnity basis Jireh's costs incurred after a date soon after the conversation. As there is a dispute about the admissibility of Mr Daniels' evidence of the conversation, the Court has not yet been apprised of its terms. However, it is plain that Mr Daniels asserts that he made an offer of compromise that was not then, or at any later stage, accepted. 32The dispute as to admissibility arises out of the fact that the alleged conversation occurred on the day that the parties attended a court-ordered mediation session and at the premises at which the session occurred. WES submitted that the evidence was inadmissible because it was evidence of a conversation that occurred "in a mediation session" within the meaning of that expression where used in s 30(4)(a) Civil Procedure Act 2005 (" CP Act "). 33Section 30 relevantly provides: "(1) In this section, mediation session includes any steps taken in the course of making arrangements for the session or in the course of the follow-up of a session. ... (4) Subject to section 29 (2) [which is not of present relevance]: (a) evidence of anything said or of any admission made in a mediation session is not admissible in any proceedings before any court or other body, and ... " 34WES also contended that Jireh's reliance on the conversation conflicted with a Mediation Agreement and a Confidentiality Agreement, both of which were binding upon Jireh. These Agreements each rendered communications "within the mediation" confidential. None of the parties suggested in their submissions on this issue that that expression had any different meaning than that of the expression "in a mediation session" in s 30(4) CP Act , except for such difference as might be attributable to the inclusive definition of "mediation session" in s 30(1). 35I should add that WES also relied upon the general law but in light of the conclusions I have reached below it is unnecessary to deal with that basis of objection to the evidence. 36In these circumstances it is necessary to consider whether the alleged conversation occurred "in a mediation session" or "within the mediation" on the one hand or outside the mediation on the other. 37The affidavit evidence adduced by the parties differed as to the precise circumstances in which the alleged conversation occurred. In light of the views that I have formed, it is convenient to deal with the issue by assuming in Jireh's favour that it occurred in the circumstances described in affidavits of Mr Rudolph Selles and Mr Daniels that Jireh filed. 38Mr Selles attended the mediation on 19 March 2010 in his capacity as Group Legal Counsel of the group of companies of which Jireh is a member. His affidavit evidence included the following: "9 The mediation process included the mediator holding a meeting of all of the parties, and then passing messages and offers backwards and forwards. 10 Sometime late in the evening the mediator came into the room where the Jireh team had been located for most of the day. At the time we were packing up our belongings getting ready to leave the mediation venue because it was late and the parties were so far apart. When the mediator came in he said to us words to the effect of: ' the parties are miles apart; there is nothing further that can be done '. 11 The mediator then left the room, and we re-commenced packing up our belongings in order to leave the venue. Dan Daniels then said to the persons present in the room words to the effect of ' I'm going to go speak to David Cisneros direct, leave it to me. ' 12 Mr Daniels then left the room and did not return to the room for a significant period of time. On his return he told the persons present in the room that he had had a one-on-one discussion with Mr Cisneros. The mediator was not present in the room when Mr Daniels returned. I cannot recall where he was at the time. 13 The mediator was not involved in these discussions, and was not acting as a ' go-between' at this time. 14 Mr Daniels' meeting with Mr Cisneros occurred right at the end of the day, and just before the Jireh team left the venue" (Affidavit of 8 July 2011). 39In a subsequent affidavit Mr Selles said: "9 ... The mediator did not enter the Jireh team room at any time after Mr Daniels had spoken to Mr Cisneros. ... 13. There was no formal adjournment of the mediation by the mediator" (Affidavit of 20 July 2011). 40Mr Daniels gave affidavit evidence in similar terms. In addition he said that his discussion with Mr Cisneros had taken place "in another room in the venue which was not currently in use" (Affidavit of 8 July 2011 [7]), had taken almost an hour (ibid [8]) and had commenced with Mr Daniels saying words to the effect: "It is obvious that the mediation has failed, let's talk as two businessmen and see if we can find a commercial, not a legal, solution that is workable for both organisations" (ibid [9]). 41In his second affidavit of 25 July 2011 Mr Daniels described the relevant words said by the mediator as to the effect: "there is no chance of a settlement in this matter as the parties are too far apart; the mediation is over" (at [5]). 42He also said that he believed that when the "Jireh team" left the mediation venue after he had given a short report to it on his discussion with Mr Cisneros that "the WES parties were still in the venue" (at [14]). 43One matter deposed to by Mr Michael Lee, a solicitor in the employ of the respondent's solicitors, which Jireh's witnesses did not dispute in their affidavits in reply, is that the meeting between Mr Daniels and Mr Cisneros took place in the "settlement conference room". This was apparently the room in which a conference of the parties with the mediator was held at the commencement of the day (Mr Lee's seven paragraph affidavit dated 30 June 2011). 44In my view the Court should not take a narrow approach in considering what is a discussion "in a mediation session" or "within the mediation" for the purposes of s 30 CP Act or mediation or confidentiality agreements of the type applicable here. The provisions containing these expressions are designed to encourage full and frank settlement discussions between parties and it has long been accepted that resolution of disputes by compromise, whether facilitated by mediation or not, is in the public interest. It would conflict with this policy to confine confidentiality protections within narrow bounds. 45The policy underlying these provisions accords with that underlying the privilege attaching under the general law to settlement discussions. A description of the latter was given by Oliver LJ in Cutts v Head [1984] Ch 290 at 306 in the following terms: "That the rule rests, at least in part, upon public policy is clear from many authorities, and the convenient starting point of the inquiry is the nature of the underlying policy. It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice in the course of the proceedings. They should ... be encouraged fully and frankly to put their cards on the table ... The public policy justification, in truth, essentially rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the questions of liability." 46Gleeson CJ (with the concurrence of Mahoney JA and Priestley JA) referred with approval to this passage in Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 522. 47Bergin J (as her Honour then was) took a similar approach in a mediation context in Sharjade Pty Ltd v RAAF (Landings) Ex-Servicemen Charitable Fund Pty Ltd [2008] NSWSC 1347. Her Honour said in that case: "34 The restriction on admissibility of communications at a mediation [is] regarded as acceptable on the ground that such restriction promotes the public interest and assists the administration of justice by facilitating uninhibited communication and the increased prospect of settlements." 48Adopting this approach, I have concluded that the conversation relied upon by Jireh (assuming that it occurred) took place both "in a mediation session" and "within the mediation". The conversation took place on the day of a court-ordered mediation at the venue at which the parties had gathered with the mediator for the purpose of attempting to compromise their dispute. The assumed offer in question was put by Mr Daniels (on Jireh's behalf) to Mr Cisneros (on the respondents' behalf) before either "team" left the venue at the end of the day and was apparently put whilst those two gentlemen were in the settlement conference room. 49For a conversation to be part of a mediation it was not of course necessary that the mediator be present. Many conversations in mediations take place between representatives of opposing parties without the mediator being present. The fact that, on Jireh's account of events, the mediator said words suggesting that he thought that his role had concluded did not mean that the mediation was over. In my view, the mediation (and the "mediation session" taking place on that day) continued at least whilst the parties remained in the mediation venue and continued to talk about compromise. It is unnecessary for the purposes of arriving at this conclusion to have recourse to the potential extension to the concept of "mediation session" mandated by s 30(1) CP Act . 50For these reasons I do not consider that the evidence that Mr Daniels would give of a settlement offer having been made on Jireh's behalf on 19 March 2010 would be admissible. Accordingly Jireh should not be afforded the opportunity to call that evidence. The result is that Jireh has not established any basis for a special costs order to be made in its favour. 51I note that the respondents contended that if, as in my view has proven to be the case, they were successful on this issue, they should be awarded the costs of determination of the issue. Those costs will not have been insignificant because to deal with it there has been a need for the preparation of affidavit evidence and additional written submissions. However I do not think that any special costs order should be made concerning the issue. Considerable work was in any event required to be done after the Principal Judgment because of the various issues concerning costs. This was only one of a number of inter-related issues. Further, in forming a view as to the appropriate costs order on the appeal I have taken account of the fact that Jireh has been unsuccessful on this issue.

STAY OF ENFORCEMENT AND SET-OFF 52Jireh contended that because "[i]t is likely to be impossible to know which camp will pay a 'net' amount to the other until the costs in this dispute are assessed" and because WES is "an admittedly impecunious corporation" the Court should, first, extend a stay that it said is presently in force on enforcement of the monetary judgment in favour of WES until all costs have been agreed or assessed and, secondly, should provide for there to be a set-off of any balance of costs due to Jireh against the judgment in favour of WES (Jireh's Written Submissions dated 17 June 2011). 53I do not agree that either step should be taken as I do not consider that, in light of the costs orders that I have proposed, there is any significant prospect of there being a net balance of costs due to Jireh. Whilst on my view Jireh will be entitled to 25 per cent of its costs of the appeal, this will inevitably be more than offset by the 65 per cent of their costs of the proceedings at first instance to which the respondents will be entitled. This is clear from the fact that the interlocutory steps at first instance were extensive and the final hearing occupied some 13 hearing days. In contrast the hearing on appeal occupied two days.

ORDERS 54The parties have agreed that the total amount of pre-judgment interest to which WES is entitled is $974,563.51 to 30 June 2011. The parties should agree on the amount referable to the period from 1 July 2011 to the date of this judgment, or shortly thereafter, and submit a consent order to enable judgment to be entered for the principal amount referred to in the Principal Judgment and interest. 55I propose the following orders in addition to those made on 1 June 2011: (1) Direct that if the parties are able to agree on the amount of interest to which WES is entitled they lodge within 14 days of the date of this judgment short minutes of order identifying the amount of the judgment inclusive of interest that should be entered in favour of WES in lieu of that ordered on 1 June 2011. (2) Liberty to each party on three days' notice to apply to the court for the appeal to be relisted in the event that the parties are unable to reach agreement as to the amount of interest that should be awarded. (3) Order Jireh to pay 65 per cent of the respondents' costs of the proceedings at first instance, save for costs incurred in relation to interlocutory matters that are the subject of costs orders made in Jireh's favour. (4) Note that such costs orders as to interlocutory matters are to remain unaffected by the orders made on appeal. (5) Order that WES pay 25 per cent of Jireh's costs of the appeal. (6) Grant the respondents certificates under the Suitors' Fund Act 1951, if qualified. 56YOUNG JA : I agree with Macfarlan JA. 57TOBIAS AJA : I agree with Macfarlan JA.

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 September 2011

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