Dodd v Arnold (No 2) [2009] NSWCA 19
Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298
Source
Original judgment source is linked above.
Catchwords
Dodd v Arnold (No 2) [2009] NSWCA 19
Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298
Judgment (3 paragraphs)
[1]
Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368
Roache v News Group Newspapers Ltd [1992] TLR 551
Shine v English Churches Housing Group [2004] EWCA Civ 434
Shorten v David Hurst Constructions Pty Ltd [2008] NSWSC 609
Sivritas v Sivritas [2008] VSC 580; (2008) 23 VR 349
SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323
State of New South Wales v Hamod & Ors [2011] NSWCA 376
Sun Candies Pty Ltd v Polites [1939] VLR 132
Team Dynamik Racing Pty Ltd v Longhurst Pty Ltd [2008] QSC 36
Tickell v Trifleska Pty Ltd (1990) 25 NSWLR 353
Wentworth v Wentworth (Unreported, NSW Supreme Court, Young J, 12 December 1994)
Texts Cited: R Derham, Derham on the Law of Set-off (4th ed, 2010)
R Meagher, D Heydon and M Leeming, Meagher Gummow and Lehane's Equity: Doctrines and Remedies (4th ed, 2002)
I C F Spry "Equitable Set-Offs" (1969) 43 ALJ 265
S B Granat "The Doctrine of Equitable Set-off" (1965) 5 MULR 76
Category: Interlocutory applications
Parties: Victor Lahoud (First Plaintiff/First Applicant)
Castle Constructions Pty Ltd (Second Plaintiff/Second Applicant)
Solidare Pty Ltd (Third Plaintiff/Third Applicant)
Representation: Counsel
S Philips (Plaintiffs/Applicants)
I M Neil SC (Defendant/Respondents)
Solicitors
McLachlan Thorpe Partners (Plaintiffs/Applicants)
Verekers Lawyers (Defendants/Respondents)
File Number(s): 07/255809
[2]
Judgment
1HER HONOUR: Before me for hearing in 2009 were disputes arising in separate proceedings (referred to as the damages proceedings and the audit proceedings) between two brothers (Joseph Lahoud and Victor Lahoud) and entities associated with one or other of them. The damages proceedings followed an order made earlier by Palmer J for the assessment of damages payable in respect of a breach his Honour had found of a settlement reached in February 2001 between the brothers of disputes between them in other proceedings. The audit proceedings related to the attempt by the Victor Lahoud parties to compel an audit of the "profit figures" relating to a particular property development in which the brothers had been involved (the Cammeray project) for which provision had been made in the settlement found by Palmer J to be enforceable. It is fair to say that the brothers had been in litigation for some years before their disputes first came before me (and they have continued to be in dispute since that time).
2In July 2009, I handed down my reasons for judgment in relation to the disputes initially before me. That resolved the damages proceedings. Relevantly, in the audit proceedings I held that the Victor Lahoud parties were entitled (pursuant to clause 2 of a Deed of Settlement entered into on 5 February 2007 in accordance with orders that had been made by Palmer J for the specific performance of the 2001 Terms of Settlement) to an audit of the profits of the Cammeray project (and that such an audit was not confined merely to an audit of the figures appearing in a document that had been annexed to the Terms of Settlement, as the Joseph Lahoud parties had contended).
3Further disputes then arose between the brothers as to the appointment of the auditor and the conduct of the audit (including a dispute as to the assertion made by the Joseph Lahoud parties, notwithstanding the findings made in the audit proceedings that had not been the subject of any appeal, to the effect that the subject of the audit was confined to the figures appearing in Annexure A to the Terms of Settlement). It is not necessary to consider in any detail the various matters that were in dispute prior to and during the course of the audit. To the extent that those may be relevant, they are set out in one or other of the various judgments I have by now given in relation to the Lahoud disputes. Suffice it to say that what the audit disputes culminated in were applications heard by me in October and November 2010 (in relation to which I published reasons on 10 November 2010, 24 November 2010, and 14 December 2010, respectively).
4The Joseph Lahoud parties appealed from various of the findings I had made on the applications before me in 2010 and the Victor Lahoud parties filed a cross-appeal in relation thereto. Those appeals came before the Court of Appeal last year and, on 19 December 2011, the Court of Appeal delivered its judgment ([2011] NSWCA 405), allowing the appeal by the Joseph Lahoud parties in part and dismissing the cross-appeal by the Victor Lahoud parties. The aspect on which the Joseph Lahoud parties succeeded on the appeal was as to the period for which they had been held liable for s 100 pre-judgment interest; the effect of the Court of Appeal decision being to reduce the amount of interest awarded in favour of the Victor Lahoud parties from the amount of $105,457.99 to the much lesser amount of $6,395.95. (The findings as to the audit, and the principal amount that Joseph Lahoud was obliged to pay following the audit having regard to the proper construction of clause 2 of the Deed of Settlement, were not disturbed.)
5The Court of Appeal set aside the costs order made on 14 December 2010 but only insofar as that costs order related to the costs of the "relevant proceedings" (as defined by Handley AJA at [64] of his Honour's judgment) and remitted to me all questions relating to those costs. As so defined, the relevant proceedings were the application (by notice of motion filed on 16 September 2010) by the Victor Lahoud parties (seeking relief including an order that the Joseph Lahoud parties pay the sum of $570,000 claimed under the Deed of Settlement arising from the outcome of the audit) and the cross claim filed on 29 September 2010 by the Joseph Lahoud parties challenging the validity of the audit.
6Senior Counsel for the Joseph Lahoud parties (Mr Neil SC) accepts that as the definition of the relevant proceedings (the costs of which were the subject of the remittal) did not include miscellaneous applications that had been made at the time (a stay application and an application to set aside a subpoena/notice to produce), that had been the subject of separate costs orders but were not argued in the Court of Appeal, the costs orders made by me in 2010 in relation to those applications remain in force. (In the scheme of things these costs are likely to be minor, nevertheless the fact that they are the subject of existing costs orders may be of some relevance when considering the present position of the respective parties.)
7For his part, Counsel for the Victor Lahoud parties (Mr Philips) concedes that, whatever might be the position otherwise taken on the present application, any costs orders in favour of the Victor Lahoud parties should not include costs referable to the argument on 19 November 2010 and 3 December 2010 in relation to pre-judgment interest (on which the Joseph Lahoud parties ultimately succeeded on appeal), which he assessed as taking somewhere in the order of half of the time on 19 November and a third on 3 December. In light of this it was suggested (and Mr Neil accepted that this would not be inappropriate) that if I were to find for the Victor Lahoud parties on the costs issues raised on the present application, the orders for the Joseph Lahoud parties to pay costs should not include the hearings on 19 November and 3 December 2010 and that each party should bear his or its own costs of those hearings.
8The question now before me is as to what order should be made in relation to the costs of the respective applications in relation to the audit (those being the relevant proceedings), having regard to the outcome of those applications and to the fact that the Victor Lahoud parties had not accepted either of two Calderbank offers made to them by the Joseph Lahoud parties (one before and one after the conduct of the audit) in relation to the settlement of the audit dispute.
9I note that in my December reasons for judgment, I had considered the reasonableness or otherwise of the rejection of those offers with reference to what would be the position if (contrary to the finding I had there made but which has now been determined to be the case) the Victor Lahoud parties' claim to pre-judgment interest from the time of the commencement of the proceedings did not succeed. Mr Philips therefore submits that this issue has already been determined by me (albeit that my decision on this aspect was obiter at the time) and that I should not now reach any different conclusion from that I had reached in late 2010 on this issue. Nevertheless, the question of costs having been remitted, it is incumbent on me to consider the question afresh. (I note that Mr Neil accepts that, in so doing, I should not be expected to disregard the fact that I have previously given consideration to the issues arising in relation to these cost offers. However, he maintains, and I agree, that what his clients have been given is an opportunity to re-argue those issues - a "second bite of the cherry". They have now done so, with a somewhat different emphasis in some respects than that which was given when the question of costs was first argued.)
10The Joseph Lahoud parties seek an order that the Victor Lahoud parties pay their costs of the proceedings incurred on and after 22 October 2009 on an indemnity basis or, in the alternative, an order for the payment to them of those costs on the ordinary party/party basis (notwithstanding that the result was a payment of an amount to the Victor Lahoud parties consequent upon the outcome of the audit that their primary position had been was not payable at all).
11What Mr Neil emphasises, in the context of the present application, is that as at the time the first Calderbank offer was made in October 2009 the audit process had not yet commenced. It is said (and logically it follows) that had that offer been accepted there would have been no need for the parties to expend any costs in relation to the audit (or the subsequent litigation). Hence it is submitted that all those costs (described as wasted or lost costs) were unnecessarily incurred.
12The force of Mr Neil's argument in this context is the clear public policy in discouraging wasteful and unnecessary litigation (that being one of the objectives recognised as underlying the approach both to offers of compromise and to Calderbank offers). The inference that, as I understand it, Mr Neil seeks to be drawn from the commencement and maintenance of the litigation in the face of the respective Calderbank offers is that the conduct of the litigation was due to the unreasonable attitude of the Victor Lahoud parties, which attitude should not be rewarded by a favourable costs order. That turns squarely on whether the rejection (or non-acceptance, as the case may be) of the respective offers was objectively unreasonable (since the inference of an unreasonable attitude in the maintenance of litigation can be drawn, logically, only if it was not reasonable to reject the offer that would have made the litigation unnecessary).
13For the Victor Lahoud parties, it is submitted, first, that it is incorrect to conclude, when assessing the offers, that the Victor Lahoud parties would have been better off had they accepted those offers (compared with the position in which they are now, following judgment at first instance and on appeal in relation to the audit disputes) and, second, that the offers in their terms were sufficiently uncertain to make the rejection/non-acceptance thereof not unreasonable.
Background
14As adverted to above, the background to the disputes the subject of the various applications heard by me in October/November 2010 have been set out in earlier judgments and I do not propose to repeat those matters in any detail.
15Following my judgment in July 2009 (in which I confirmed the entitlement of the Victor Lahoud parties to elect for an audit of the Cammeray project and the basis of that audit), it took some months for the appointment of the auditor and the commencement of the audit to take place. Mr Philips notes that the Victor Lahoud parties approached the Court in both September and November 2009 for orders in relation to the initiation of the audit process. There was criticism made, both at that time and later, by the Victor Lahoud parties as to the manner in which the Joseph Lahoud parties had acted in relation to the audit process. Whether some or all of that criticism was or was not justified is something on which I am not in a position to comment, the evidence at least in relation to some of the complaints not having been before me in late 2010. What is, however, relevant to note (in order to put the first of the Calderbank offers in context) is that before the first offer was made there had been at least one application (in September 2009) in which the Victor Lahoud parties were pressing for relief with a view to the commencement of the audit process (and the Joseph Lahoud parties were denying any entitlement on the part of the Victor Lahoud parties to an audit at all).
16On 22 October 2009 (thus at a time when the Victor Lahoud parties were pressing for the audit, to which they had been held entitled, to commence but before an auditor had been appointed), the solicitors acting for the Joseph Lahoud parties wrote to the Victor Lahoud parties in a letter headed "Without prejudice save as to costs". (As Mr Neil notes, the offer was also made at a time when no entitlement to any amount payable consequent upon the, yet to be commenced, audit had arisen.) Relevantly, that letter was in the following terms:
Our clients have decided to make a commercial offer to finally resolve the ongoing Audit issues, that is any further claims on the basis of Clause 1 of the Terms of Settlement executed 6 February 2001 or Clause 2 of the Deed of Settlement dated 5 February 2007.
Our clients have instructed us to offer to your clients the amount of $346,027.17 in full and final satisfaction of all claims relating to clause 1 or clause 2 referred to above, to be evidenced by an agreed Deed of Release. Similar to the contention in your letter to us of 26 August 2009 this would be offset against amounts owed by your clients on costs orders when those matters are finalised. (my emphasis)
We cannot see the basis for engaging an auditor and/or further proceedings in light of this offer as it constitutes the full amount of the profit calculation of the Cammeray Project paid to the Joseph Interests.
17The offer was expressed to be open for a fortnight (until 5pm 5 November 2009). It was rejected summarily by the Victor Lahoud parties' solicitors' letter dated 27 October 2009.
18The auditor was appointed in November 2009. He delivered his report on 24 August 2010, concluding that the Cammeray project had resulted in a net loss of $16,454.89 and hence that the "audited profit" (for the purposes of clause 2 of the Deed of Settlement) was nil.
19Clause 2 of the Deed of Settlement provided, relevantly, that:
...The [Victor Lahoud parties] have provided written details of the profit calculation for the Cammeray Project which is Annexure "A" to the Terms of Settlement, and as at 6 February 2001, verily believed that those details were accurate. Either party may elect to have the figures audited by an accountant to be agreed, or in default of agreement as nominated by the President of the Institute of Chartered Accountants. If on audit, the audited profit exceeds the said profit calculation, [Joseph Lahoud] is to be paid one half of the difference by [the Victor Lahoud parties]. If the audit profit is less than the said profit calculation, [Joseph Lahoud] will pay the [Victor Lahoud parties] one half of the difference. The reasonable costs of the audit are to be paid by [Joseph Lahoud] in the event that the audited profit figure is the same or less than the said profit calculation. (my emphasis)
20The amount paid by the Victor Lahoud parties in February 2001 ($570,000) on account of the profit share in respect of the Cammeray project had been based on certain profit calculations. The audit determined, in effect, that those were incorrect in that the project had made a loss. Therefore, on the terms of clause 2, it is clear that the parties had anticipated that an amount would be repayable by the Joseph Lahoud parties. Leaving aside the question as to whether the audit had been conducted in accordance with the audit engagement, the only question was how much the Joseph Lahoud parties would be obliged to pay.
21On the basis that the audited profit was found to have been in a negative amount, the Victor Lahoud parties (relying on that part of clause 2 as highlighted above) asserted that the whole of the sum paid by them in February 2001 was repayable by the Joseph Lahoud parties (plus not only the auditor's fees but also their own legal or other costs of preparation for the audit). The Court of Appeal ultimately determined that assertion to be incorrect.
22On 31 August 2010, the solicitors acting for the Victor Lahoud parties wrote to their counterparts acting for the Joseph Lahoud parties asserting that Joseph Lahoud was now liable to repay the total sum that had been paid to him in February 2001 on account of the potential profit for the project, together with the costs of the audit. (The letter also expressed the view that Joseph Lahoud was liable to make equitable compensation to their client as he had had the benefit of the use of the funds since 6 February 2001.) A schedule was attached itemising the claim for interest on the amount that had been paid in February 2001 and a demand was made for the payment by 7 September 2010 of the sum of $1,186,210.66 in total, failing which it was said that recovery proceedings would be commenced.
23By this time, the parties were engaged in a process of costs assessment in relation to various of the costs orders that had already been made in the course of their litigious saga (of relevance when considering the operation of the second Calderbank offer). A Certificate of Determination of Costs had issued on 6 August 2010 in favour of the Joseph Lahoud parties in the amount of around $783,000 (that being the subject of an appeal commenced by the filing of a notice of appeal on 3 September 2010 in the District Court of New South Wales by the Victor Lahoud parties). (I understand that the outcome of that appeal has been that the Certificate has been set aside and the matter remitted to the Costs Assessor for costs assessment, in respect of which submissions are in the throes of being made at the present time.)
24In this context it is relevant to note that in Lahoud v Lahoud [2006] NSWSC 126, Campbell J (as his Honour then was) made an order, pursuant to s 101 of the Civil Procedure Act, for interest to be payable on the Joseph Lahoud parties' costs from the date on which they were paid to the legal representatives to the date on which the costs are ultimately paid by the Victor Lahoud (which interest is therefore still running pending the outcome of the costs assessments and does not cease on the final determination of those assessments per se). Campbell JA has since dismissed at least one application to vary the order in respect of interest on costs (Lahoud v Lahoud [2011] NSWSC 994).
25At [83] of his Honour's 2006 judgment, the basis on which interest on costs was ordered was as follows:
To the extent to which the plaintiffs have been out of pocket as a result of having to pay their lawyers' costs and disbursements, it is appropriate that the compensation which is recognised in the Court's order for costs take into account the fact that the plaintiffs have been out of pocket in that way: Hughes Bros v Trustees of the Roman Catholic Church [1999] NSWSC 1051 at [60]; Grogan v Thiess Contractors Pty Ltd & Anor [2000] NSWSC 1101 at [12]; Woods v Woods [2001] NSWSC 1108 at [29]; Australian Development Corporation Pty Limited v White Constructions (ACT) Pty Ltd (in liq) [2002] NSWSC 280 at [17]; Puntoriero v Water Administration Ministerial Corporation [2002] NSWSC 217 at [10]; Optus Networks Pty Ltd v Leighton Contractors Pty Limited [2005] NSWSC 156 at [9]; Roads and Traffic Authority v Cremona (No 3) [2005] NSWCA 13 at [34].
26Broadly, the formula adopted by his Honour in relation to the interest on costs provided for the Victor Lahoud parties to pay to the Joseph Lahoud parties interest on the costs and disbursements paid by the latter to their legal advisers in connection with the proceedings on the Allowed Percentage (as defined) of each amount of costs and disbursements actually paid by either of the Joseph Lahoud parties, from the date of payment by that party of each such amount of costs and disbursements until such time as the Victor Lahoud parties have paid the costs due to the Joseph Lahoud parties under any order made in these proceedings. (For the purposes of that order, the Allowed Percentage was defined as follows:
X - equals the total amount of costs and disbursements which the plaintiffs have paid or are liable to pay to their legal advisers in connection with these proceedings.
Y - equals the total amount of costs and disbursements allowed on assessment to the plaintiffs in connection with these proceedings.
The Allowed Percentage equals ((y/x ) x 100)%)
27On 7 September 2010 (coincidentally or otherwise, that being the date on which payment of the sum claimed under the Deed of Settlement plus interest had been demanded by the Victor Lahoud parties), the solicitors acting for the Joseph Lahoud parties wrote an open letter to the Victor Lahoud parties' solicitors asserting that the Audit Report was not an audit of the profit calculation forming Annexure A to the Terms of Settlement and therefore that the audit report was not in accordance with clause 2 of the Deed of Settlement and the joint letter of instruction to the auditor. The basis on which that assertion was made, given the findings that had been made in July 2009 as to that very issue and which were not the subject of any challenge at that stage, is not clear to me. The making of that assertion, at the same time as the second Calderbank offer was made, is something that may also be relevant as part of the background against which that second offer is to be assessed.
28The Joseph Lahoud parties asserted that the audit report "does not provide a valid basis for the enforcement of legal rights under the Deed of Settlement" and liability for the amount claimed was denied. Assertions of a denial of natural justice in relation to the conduct of the audit were made. The Victor Lahoud parties' claim to equitable compensation was denied.
29In that letter it was also asserted that, were clause 2 of the Deed of Settlement to be applicable, Joseph Lahoud would be obliged only to pay the sum of $346,027.17 and that the reasonable costs of the audit would not extend to the Victor Lahoud parties' own legal and accounting costs. (In both of those contentions the Joseph Lahoud parties were ultimately held to be correct.) The letter also asserted a right of set-off, namely that:
Finally, we point out that your clients are disentitled to the provision of any payment in their favour, while their liability (inter alia) under the Certificate of Determination of Costs dated 6 August 2010, in the amount of $783,027.39 (plus interest and other costs of assessment) remains unpaid.
30Against that background, on 7 September 2010, the Joseph Lahoud parties, though their solicitors made a second Calderbank offer to the Victor Lahoud parties, in a letter again headed "Without prejudice save as to costs", offering to pay the sum of $364,584.62 in full and final settlement of all claims relating to clause 2 of the Deed of Settlement dated 5 February 2007 (comprised of $346,027.17 for the audit claim; $16,991 for the audit costs claim; and $1,566.45 for interest from 24 August 2010 (the date of the audit) to 7 September 2010).
31That offer was expressed to be subject to the following condition:
This offer is conditional upon the subject amount of it being an offset against amounts owed by your clients to our clients under the Certificate of Determination of Costs dated 6 August 2010 in the amount of $783,027.39 (plus interest and costs of assessment)
32The offer was stated to be open for a period of 14 days from the date of the letter and was expressed to be made pursuant to and in accordance with the principles found in Calderbank v Calderbank [1975] 2 All ER 333. The letter indicated an intention of Joseph Lahoud to rely on the correspondence in any question of costs in any further proceedings relating to the audit matter. This offer was not accepted (there being apparently no response made to it at all).
33In strict monetary terms (leaving aside the effect of the condition to which the offer was expressly made subject, the contention that acceptance of the offer would entail giving up rights in relation to the ongoing costs assessment process, and any comparison of the position pertaining to interest as between an accepted offer and a judgment of the kind ultimately obtained in the Victor Lahoud parties' favour), this offer was marginally more favourable than the order ultimately made in the Victor Lahoud parties' favour (due to a very small difference in the interest component of the offer). Therefore, but for the matters referred to above (the import of the set-off condition; the effect, if any, of acceptance on the costs assessment process then on foot; and a consideration of the difference in outcome, if any, having regard to the availability or otherwise of interest on any accepted sum), there would be little doubt that the non-acceptance of the second Calderbank offer should attract the special costs consequences for which Mr Neil contends.
34What then followed was the filing by the Victor Lahoud parties of their notice of motion on 16 September 2010 (seeking declarations that Joseph Lahoud was liable to repay Victor Lahoud the sum of $570,000.00 and the reasonable costs of the audit, and orders that those amounts be paid, and claiming interest on the sum of $570,000 from 6 February 2001) and the subsequent cross-claim by the Joseph Lahoud parties seeking a declaration that no amount was payable by them but, in the alternative, a declaration that the amount payable was $346,027.17 and the auditor's fees.
35I handed down my reasons on the respective applications on 10 November 2010. In summary, I dismissed the Joseph Lahoud parties' challenges to the Audit Report; dismissed the Victor Lahoud parties' claim that the principal sum payable as a result of the audit was $570,000; rejected the Victor Lahoud parties' contention that the costs of the audit included legal costs; and rejected the Victor Lahoud parties' claim for interest on a restitutionary basis. On that occasion, the two Calderbank letters were tendered by the Joseph Lahoud parties and I stood the matter over for submissions on costs.
36When the matter came back before me for submissions on costs, the Victor Lahoud parties sought (and, over the objection of the Joseph Lahoud parties, I granted) leave to file a Further Amended Notice of Motion in which they claimed pre-judgment interest pursuant to s 100 of the Civil Procedure Act on the sum of $346,027.17 from 20 February 2007 or alternatively 11 July 2007 at the rates set out in Rule 36.7 of the Uniform Civil Procedure Rules.
37At [37]-[94] of my December 2010 judgment, in which I awarded pre-judgment interest from what has been shown to be the incorrect date, I considered the issue of costs and the import of the Calderbank offers. (As Mr Philips notes, of those paragraphs only the issues discussed in [37] -[81] are germane to the present remittal as the balance dealt with the costs of a stay application brought by the Joseph Lahoud parties and of an application to set aside a subpoena/notice to produce that had been issued in the context of the 2010 applications.)
38I was of the opinion that (although the ultimate findings as to the amount payable to the Victor Lahoud parties as a consequence of the audit were in accordance with the way in which the Joseph Lahoud parties had pleaded their alternative cross-claim), for the purposes of determining the relevant "event" (in order to apply the ordinary rule that costs follow the event), in substance the Victor Lahoud parties had been successful on their claim under the Deed. The Joseph Lahoud parties' principal position had been to deny any liability at all (based on their claims for denial of natural justice in the conduct of the audit and their contention that the auditor had failed to carry out the audit in accordance with the joint instructions, amongst other reasons because he had audited the profit of the project and not the "profit figures" annexed to the Terms of Settlement).
39If one applies the common sense test advocated by the English Court of Appeal in Roache v News Group Newspapers Ltd [1992] TLR 551 (namely, "[w]ho, as a matter of substance and reality, had won? Had the plaintiff won anything of value or anything he could not have won without fighting the action through to a finish? Had the defendant substantially denied the plaintiff the prize which the plaintiff fought the action to win?"), the answer must surely be that, without the filing and prosecution of the application, the Victor Lahoud parties stood to recover nothing of the amount that had been paid in February 2001 (since the Joseph Lahoud parties were denying that the audit had validly determined the profit amount from which any sum repayable under clause 2 of the Deed of Settlement could fall to be determined).
40I therefore considered that, other than if this followed as a consequence of the Calderbank offers, there should not be any reduction in the costs awarded to the Victor Lahoud parties as following the "event". I remain of that view.
41That leaves again the question as to whether a different costs order (to that which I consider would otherwise follow the event) should be made, having regard to the outcome of the Joseph Lahoud parties' appeal (and consequential reduction of the amount so ordered) in relation to pre-judgment interest. That requires a re-consideration of the reasonableness or otherwise of the non-acceptance by the Victor Lahoud parties of the respective Calderbank offers.
Legal Principles
42In my December 2010 reasons, I set out the principles applicable to the consideration of Calderbank offers largely by reference to what was said by Beazley JA in Commonwealth v Gretton [2008] NSWCA 117 at [40]. I noted the public policy underlying the rationale for special costs rules both at [54] of my December reasons and at [18] of my 25 November reasons. Since then, the Court of Appeal, in Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) [2011] NSWCA 344, has reiterated the public policy objectives underlying the offer of compromise procedures under the Rules and, by extension, those underlying the effect given to Calderbank offers. There, Basten JA, with whom McColl and Campbell JJA agreed, referred at [6] to the objects underlying the Offer of Compromise procedures under the then court rules as identified in Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724, including:
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;
To save the public costs which are necessarily 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
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 of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation. (my emphasis)
43Turning to the particular Calderbank offers in this case, the relevant question is whether it was unreasonable of the Victor Lahoud parties to reject (or not to accept) one or both of those offers. In this regard it is accepted that the onus of proving the reasonableness or otherwise of rejection of the offer lies on the party seeking to satisfy the court that it should exercise the costs discretion in its favour (Evans Shire Council v Richardson (No 2) [2006] NSWCA 61).
44In Miwa, the Court of Appeal confirmed, at [9], that both an offer of compromise under the rules and an informal offer must involve "a real and genuine element of compromise" (citing Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) [2006] NSWCA 120; 67 NSWLR 706 at [8]; and referring to the discussion in Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [25]); and that the appropriate inquiry is not as to the subjective intentions of the offeror (Hancock v Arnold; Dodd v Arnold (No 2) [2009] NSWCA 19 at [23]; Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 at [17]-[18]).
45Further, in Miwa, the Court of Appeal confirmed that "the response of the offeree must be assessed at the time it was made, and not with the benefit of hindsight resulting from a known outcome, recorded in a judgment", citing Regency Media at [33] (but went on to say that this should not entail a detailed investigation into the state of preparation or knowledge of the offeree as at the date of the offer). It was noted that relevant factors in determining whether the rejection of an offer was unreasonable included those identified by the Court of Appeal in Victoria in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; 13 VR 435, namely: the stage of the proceeding at which the offer was received; the time allowed to the offeree to consider the offer; the extent of the compromise offered; the offeree's prospects of success, assessed as at the date of the offer; the clarity with which the terms of the offer were expressed; and whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.
46In Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322, at [143]-[144], there considering an all-inclusive Calderbank offer (as it is submitted by Mr Philips that, in effect, these offers were since they spoke in terms of a full and final settlement of all claims), Basten JA seemed to accept that it may be relevant in some cases to take into account whether any query had been made by the offeree as to matters relevant to assess the offer (or the financial risk of proceeding with litigation). His Honour suggested that an offeree "genuinely seeking to assess its position" might be advised to seek more time and at [149] that the absence of any request for an extension of time to consider the offer in that case would be relevant in assessing reasonableness. However, in Barecall Pty Ltd v Hoban [2010] NSWCA 219, the fact that the offeree did not enquire into aspects of the offer (or the financial ability to make good the offer) that were subsequently raised when an indemnity costs order was sought based on the failure to accept that offer was not sufficient to lead to a conclusion that it was not unreasonable for the offeree in effect to reject that settlement offer. (There, Allsop P noted that there was evidence about the background of the offer that it was considered threw considerable doubt upon the genuineness of the offer and the ability of the offeree to make good upon any offer.)
47Therefore, the extent to which an inference adverse to the Victor Lahoud parties can be drawn, when assessing the reasonableness of the outright rejection or failure to respond to the respective offers, from the failure of the Victor Lahoud parties to raise any query as to the operation or the terms of the offer at the time it was made is unclear. It must, I think, be considered in the context of the history of the overall disputes between the parties.
Consideration of offers
48With the above in mind, I turn then to the respective offers in this case. The position in relation to some of the aspects noted in Hazeldene's Chicken Farm is the same in the case of both offers.
49Both foreshadowed that reliance would be placed on the offer if the dispute reached the point at which costs were to be argued (albeit that the first did so implicitly by the header "without prejudice save as to costs").
50Both allowed approximately two weeks for consideration of the offer (less than the 28 days provided under the offer of compromise procedure - a matter that it has been suggested may in some cases be relevant to take into account - see McColl JA in Elite at [117], where the offer was open only for 7 days, that "Prima facie, I see no reason why litigants who choose not to avail themselves of the rules as to Offers of Compromise should be in a better position than those who do, if they radically foreshorten the period in which an offer is open for consideration"). Here, however, there was no suggestion that the time allowed was insufficient for the Victor Lahoud parties to assess the offers.
51As to the offeree's prospects of success, in one sense the position was the same at both dates since it depended on the construction of clause 2 of the Deed of Settlement (the Joseph Lahoud parties' position, relevantly stated at the time of the first offer, being that even if (as the Victor Lahoud parties contended) the project had made no profit, the most that would be recoverable was the sum then offered). Although one point of difference (as emphasised by Mr Neil) was that at the time that the first offer was made the outcome of the audit was not certain (it not yet having even been commenced), the recovery by the Victor Lahoud parties of more than something in the order of either $346,000 of $570,000 cannot have been within either party's reasonable contemplation.
52Therefore, what the Victor Lahoud parties were required to assess at the time of the first offer was the reasonableness of that offer in the light of the possible range of outcomes of the audit (and the financial cost of the audit process together with any subsequent litigation that might be required to enforce any payment due on completion of the audit). (Although there was no entitlement to interest on any such sum at that stage, it is the fact that by reason of the set-off no interest could have been earned on that sum nor could it have been used to meet any costs liability at that stage that seems to me to be relevant. In other words, on one side of the equation the liability would be fixed and on the other side it would still be increasing.) By the time of the second offer there was a certain amount fixed by the audit from which the repayment amount was to be calculated and the offer fell to be assessed by reference to the possible range of outcomes first on the Joseph Lahoud parties' challenge to the validity of the audit and then on the construction of clause 2 of the Deed of Settlement. By that time there had also been a determination of the quantum of costs on which interest was running in favour of the Joseph Lahoud parties in respect of the earlier and not unrelated disputes (though that itself was the subject of a challenge).
53Insofar as the authorities in this area have referred to situations where the case is an 'all or nothing' case, there was room at the time both offers were made for there to be determinations both as to the outcome of the audit and as to the construction of the Deed that could potentially have led to a range of outcomes. (By the time of the second offer there was also the potential outcome that the audit itself would be held invalid, as the Joseph Lahoud parties contended.) Thus it is not a case that falls neatly into the category considered by their Honours in Regency Media at [29]:
As is usually the case in proceedings turning on an issue of contractual interpretation, this was an all or nothing case. The claims did not involve a process of evaluation or assessment in which the end result could vary over a range. Either one party or the other party was correct. Whilst a marginal difference between the offer and the result may constitute a real and genuine offer of compromise in a personal injury context, that is not generally true in an all or nothing case. (See Anderson Group supra at [9]; Robb Evans supra at [18].)
54In relation to both offers, it is submitted by Mr Philips that they did not involve any element of compromise by the Joseph Lahoud parties but simply offered to pay, subject to conditions, the precise amount which the Victor Lahoud parties have been found to be entitled to recover under the Deed, with no allowance for interest to accrue on that sum until the date that payment is made or credit given.
55It is clear that a Calderbank offer must involve "a real and genuine element of compromise" to attract the operation of the special costs rules (Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375; Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2); Leichhardt Municipal Council v Green [2004] NSWCA 341). It has been said that where an offer is in substance a demand for payment of the full amount claimed, or a formal offer "designed simply to trigger the entitlement to indemnity costs", or requires dismissal of the claim, then the necessary element of compromise may be lacking (see Tickell v Trifleska Pty Ltd (1990) 25 NSWLR 353 at [355]; Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at [368]; Shorten v David Hurst Constructions Pty Ltd [2008] NSWSC 609 at [6]; Bennette v Cohen (No 2) [2009] NSWCA 162 at [40]-[41]). What must be considered is whether the offer represented or formed part of a genuine attempt to reach a negotiated settlement (Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited (No 2), [2009] NSWCA 12 at [19]).
56I note, in this regard, that in Leichhardt Municipal Council the Court said at [21]:
There is little appreciable difference between saying that an offer should not in the court's discretion attract costs sanctions in the circumstances and saying that an offer is not a genuine offer of compromise in the circumstances. Both depend upon a value judgment of the offer and the conduct of the parties in the circumstances of the claim. (my emphasis)
57Mr Philips relies on two additional matters applicable to the consideration of both offers. First, it is said that, while neither offer dealt expressly with the question of costs per se, by their terms (particularly the reference to the offers being in full and final satisfaction of all matters) the offers must be taken to be inclusive of costs. It is said that this is significant because at the time the first offer was made the Victor Lahoud parties had the benefit of a cost order in their favour arising from the motion dealt with by me on 10 September 2009 and, at the time the second offer was made, they had the benefit of a further cost order which arose from the motion decided on 12 November 2009. It is said that the costs involved in both orders are not insubstantial (estimated to be in the vicinity of $20,000 on a solicitor and client basis). Under the result they ultimately achieved, the Victor Lahoud parties are entitled recover these costs (as assessed). Had the offers been accepted the Victor Lahoud parties would have forgone the right to recover such costs, and would therefore have been worse off to that extent. (The difficulty I have with this proposition is that had either of the offers been accepted the costs of the stay and subpoena applications would not have been incurred.) (To the extent that the offers were all inclusive, that may give rise to the practical difficulties of assessment of the offers on the Smallacombe line of authority but that is a different issue.)
58Secondly, it is noted that both offers were expressed as being in respect of all claims arising from clause 2 in the Deed of Settlement. Mr Philips notes that there is currently before the Court of Appeal a Notice of Motion in which the Victor Lahoud parties seek to have the question of 'delay damages' arising from the failure of the Joseph Lahoud parties to comply with their obligations under clause 2 (following the observations made at [46] in the judgment of the Court of Appeal). It is submitted that if the Victor Lahoud parties succeed in having any such damages awarded in their favour, they will have achieved an ultimate result that far exceeds the amounts offered in either of the Calderbank offers. As to the claim for delay damages (that the Victor Lahoud parties are presently seeking leave to pursue), Mr Neil submits that this is an inchoate claim, which was not part of the landscape against which reasonableness of non-acceptance of either of the offers should be assessed. I agree that this is something that cannot readily be assessed in the context of the position as it was when at least the first of the offers was made (and not accepted) and, to the extent that a damages component was not included in the 16 September notice of motion the position would be the same at the time of the second offer.
59Apart from the factors that are applicable to both offers, there are points of difference between the two offers (and hence the offers must be separately considered on these aspects). The first is the time at which each was made but the more significant difference lies in the terms in which the respective offers were expressed.
First Calderbank offer
Our clients have instructed us to offer to your clients the amount of $346,027.17 in full and final satisfaction of all claims relating to clause 1 or clause 2 referred to above, to be evidenced by an agreed Deed of Release. Similar to the contention in your letter to us of 26 August 2009 this would be offset against amounts owed by your clients on costs orders when those matters are finalised.
60As noted above, at the time that the first Calderbank offer was made the audit had not commenced. The Victor Lahoud parties were contending that the profit of the Cammeray project was not $692,034.54 (a belief or contention as to which having been the basis on which the February 2001 payment was made) but a lesser sum. Mr Neil submits that the maximum that the Victor Lahoud parties could have recovered in that event was half of any reduction in the Cammeray profit as assessed by the auditor.
61Mr Neil emphasises that there was at that stage no claim on foot for any particular amount and no entitlement to any amount under the Deed of Settlement (nor any entitlement to any interest on any potential payment). Thus it is submitted that, to the extent that the Victor Lahoud parties' criticism of the offer is that it was an offer to offset a particular amount against as the Joseph Lahoud parties' unquantified costs orders, the unspoken premise of that criticism (namely, that what was being offered was not of the same character as that against which it was to be off-set) is incorrect since both the audit claim and the costs orders were at that stage unquantified amounts. (That said, if the amount there offered had been payable on acceptance of the offer, then the Victor Lahoud parties would have been in a position to earn interest on that amount or to direct it to be paid on account of the costs liability, which would have halted the interest running on the 2006 costs orders for that amount of the costs.)
62Mr Neil submits that what the Victor Lahoud parties were invited by the first offer to consider was not what the result of the litigation might be but what the outcome of the audit might be; and that what Joseph Lahoud had correctly recognised was that his maximum potential liability was $346,027.17. Thus it is said that, in assessing reasonableness of the rejection of this first offer, what the Victor Lahoud parties were considering was the sum (or perhaps more precisely the agreed ability to set-off such a sum against a future quantified liability for costs) of around $346,000 as against an entitlement at that stage to nothing.
63As adverted to earlier, the force of that submission lies in the proposition that the audit was unnecessary (as was the subsequent litigation) if Joseph Lahoud was offering, in advance, to accept that he would be liable under any such audit for the maximum payable under the Deed of Settlement. In that sense, the early timing of the offer is significant in that it was consistent with the public policy objective underlying the principles applicable to Calderbank offers of encouraging early settlement and discouraging wasteful and unnecessary litigation.
64The second relevant difference between the two offers lies in the terms in which they contemplated that the sum offered therein would be the subject of a set-off. (In essence, it is the set-off component of both offers from which the force of Mr Philips' submissions on costs largely derive, since this is what is said to make the offer sufficiently unclear as to make it not unreasonable to reject; and to make the offer far less favourable to the Victor Lahoud parties than the position in which they were placed by the ultimate judgment.)
65Mr Philips points to the wording of the first offer (namely the statement that the payment offered "would be off-set against amounts owed ... on costs order when those matters are finalised") as indicating that what was being offered was not the actual payment of the amount of $346,027.17 by the Joseph Lahoud parties but a promise to offset that sum (in the future) against an as then (and still now) unquantified liability for costs.
66Mr Neil accepts that the letter noted that the amount so offered "would be" set off against amounts owed by the Victor Lahoud parties to the Joseph Lahoud parties on account of costs, but submits that this was not a condition of the first offer. I accept that it was not stated to be a condition. However, I read the assertion that the amount "would be" set off "when" the costs matters were finalised reads as a clear statement that this was how the offer was to operate - namely that there would be a set-off at some time in the future when the costs matters were finalised and that until then no amount would be payable.
67Had the offer been accepted, it would surely not have been open to the Victor Lahoud parties immediately to enter judgment and enforce as a judgment debt the agreement to pay the sum in question. The Victor Lahoud parties would surely have been taken as having accepted the offer in light of the statement that there was to be a set-off. I see that in practical terms as a condition of acceptance of the offer. It must reasonably (or at least not unreasonably, if there be a relevant rather than simply semantic difference between the two concepts) have been understood to mean that no payment would actually be made to Victor Lahoud unless and until the costs matters were finalised (and subject to the ultimate result of any set-off).
68(In that regard, although, as Mr Philips notes, the offer was silent as to what would occur if the Victor Lahoud parties ultimately had no liability for costs, or that such liability turned out to be less than the sum offered, I accept the submission of Mr Neil that the concept of set-off is well known and that had there been no liability (or a lesser liability) for costs against which the Calderbank sum was to be off-set, then the logical consequence would be the payment of the Calderbank sum or what was left of it to the Victor Lahoud parties. I cannot see any real scope for uncertainty reasonably arising as to that aspect of the first offer.)
69It is submitted by Mr Neil that such a set-off would have been inevitable and that the offer simply indicated that the amount for which Joseph Lahoud would become liable (if the offer were accepted) would be set off against any amount for which the Victor Lahoud parties were liable for costs (without anticipating the result of the assessment, or inhibiting its conduct in any way). I accept that the fact that the first offer contemplated a set-off against an unquantified costs liability did not of itself inhibit the cost assessment process (though I am not satisfied that the same can confidently be said of the second offer, for reasons set out when considering that offer). What I do not accept is that the inevitability of set-off, if this is meant to suggest that it would operate automatically and that there would be no element of discretion.
Set-off
70The proposition seems to be that the letter did no more than state what would be the position in relation to set-off in any event, or that a set-off would have been inevitable. I am not convinced that this is necessarily the case.
71If the hypothesis is that the Calderbank offer, once accepted, would have given rise to a liability on the part of the Joseph Lahoud parties for the amount offered that could have been the subject of a judgment in the Victor Lahoud parties' favour at that time (although the obligation to pay the sum was fixed for performance at a time in the future), then what seems to be envisaged (by the proposition that there would inevitably have been an entitlement to a set-off is a set-off) of a judgment as against an unquantified costs order.
72There is authority that where the issue considered is whether a judgment can be set-off against a costs order, the appropriate power being invoked is not the statutory jurisdiction applicable for a common law set-off, nor the general equitable principles of set-off, but the inherent jurisdiction of the Court as exercised over its own proceedings.
73In Australian Beverage Distributors v Evans & Tate Premium Wines Pty Ltd [2006] NSWSC 560, White J considered that:
Notwithstanding ABD's submissions to the contrary, set-off of judgments for costs in different actions and in different courts has long been allowed, as has the set-off of judgments for costs against judgments for debt or damages. Such set-offs do not depend upon the statutes of set-off, or the general equitable jurisdiction, but on the control a court exercises over its own proceedings. The jurisdiction is explained in many cases dealing with claims by solicitors to assert a lien over a judgment for costs in favour of their client where the opposite party has obtained judgment against their client in the same proceedings or in other proceedings (Edwards v Hope (1885) 14 QBD 922 at 926-927; Reid v Cupper [1915] 2 KB 147; Puddephatt v Leith (No 2) [1916] 2 Ch 168 especially at 173-174; Re a Debtor No 21 of 1950 [1951] 1 Ch 612 at 617-618).
74This passage was cited with approval by Giles JA in State of New South Wales v Hamod & Ors [2011] NSWCA 376, with Beazley and Whealy JJA agreeing.
75The nature of the Court's inherent jurisdiction in this respect is discussed in R Derham, Derham on the Law of Set-off (4th ed, 2010) at s 2.103 and 2.104, where a distinction is drawn between the nature of a set-off as between costs and judgments and the nature of equitable set-off as developed in the jurisdiction of the Court of Chancery. Derham says that:
In the first place, equitable set-off is a defence to an action to enforce payment of a debt or other monetary obligation, the defence operating in equity as a complete or partial defeasance of the plaintiff's claim. A set-off of judgments and orders, on the other hand, is not a defence in that sense. Essentially, it is a procedural device which determines the amount for which execution may issue, and which may provide a ground for a stay of enforcement. Secondly, the practice of setting off judgments and orders was developed in the common law courts (as opposed to courts of equity) long before the Judicature Acts. It is true that the availability of the set-off has been described as an 'equitable' jurisdiction. However, that expression was used in the sense of justice and fairness, as opposed to the jurisdiction of the Court of Chancery.
The true basis of the set-off is the court's inherent jurisdiction. Its purpose is to prevent absurdity or injustice, and to do that which is fair. It has long been accepted that the inherent jurisdiction is confined to judgments in the same action, or the same court, without it being suggested that the claims nevertheless must be closely connected as for an equitable set-off.
76Some English Court of Appeal cases have drawn a distinction between a set-off of costs orders against other costs orders and a set-off as between debt and damages on the one hand and costs orders on the other. In Lockley v National Blood Transfusion Service [1992] 1 WLR 492, Scott LJ said (at 497):
A set-off of costs against costs, when all are incurred in the prosecution or defendant of the same action, seems so natural and equitable as not to need any special justification. I would expect a party objecting to the set-off to give some special reason for that objection.
77However, Scott LJ went on to say that, although it was not wrong in principle to set off costs against damages, it was less obvious that a set-off against damages would always be justified. Lockley has been referred to with approval in Klein v Jeffcoat [1996] EWCA Civ 686, Gorman v Carter [1998] EWCA Civ 1038, Elphick v Elliot [2003] 1 Qd R 362 and Danidale Pty Ltd v Abigroup Contractors Pty Ltd (No. 2) [2007] VSC 552.
78While these cases may suggest that further considerations may come to bear upon whether a judgment for debt or damages can be set-off against a costs order, Derham says (at s 2.104) that:
Further, in so far as the Court of Appeal in the Lockley case was reticent to accept that a set-off of costs against damages would always be justified, it is nevertheless the case that the courts have been prepared to order a set-off of costs against a judgment for damages and costs, or of costs against a judgment for debt and costs, or of costs against any future sums which may be ordered to be paid on the taking of partnership account between the parties. In truth, the distinction between damages and costs was not an important issue in the cases in which the jurisdiction was developed.
79Therefore, the inherent jurisdiction is rightly invoked where a party, in the course of the same proceedings, pleads a prior order of costs obtained by it against the other party as a defence to a judgment debt. This has been applied in a number of recent English and Australian cases, including Gertig v Davis (2003) SASR 226 (costs set-off against damages in the same action), Dodds v Premier Sports Australia Pty Ltd (No.2) [2004] NSWSC 389 (costs against damages in the same proceedings), and Shine v English Churches Housing Group [2004] EWCA Civ 434 (damages against interlocutory appeal costs).
80Once properly invoked, however, the availability of set-off is a matter for the Court's discretion, based on similar factors as those taken into account in respect of matters of costs generally (Lockley at 497) (hence the doubt I have as to the proposition that such a set-off would be inevitable). These factors include the public interest, the efficient administration of justice and the conduct of the parties (Miller v DPP (No.2) [2004] NSWCA 249 at [13]). In cases where set-off is concerned, a particularly important consideration is the insolvency of one of the parties (Wentworth v Wentworth (Unreported, NSW Supreme Court, Young J (as his Honour then was), 12 December 1994)). Any delay between obtaining the costs order and having the costs assessed may also be a factor (Miller v DPP (No.2) at [7]-[8]). Logically, there seems no reason why a court would not also take into account in the exercise of this discretion the overall disputes between the parties (and the fairness of a set-off operating at a time that interest on other costs orders between the parties was still running, at least if it was not made clear at that time as to how the set-off was to apply to those interest orders).
81Any express conditions imposed on the costs order may also be taken into account in founding or refusing a right to set-off. In Hamod, the Court of Appeal considered a claim for set off between two orders for costs. The respondent had obtained a costs order against the appellant on an interlocutory application and the judge on that occasion ordered that the costs "be assessed and payable forthwith". The costs had yet to be assessed or paid when the substantive proceedings concluded and the appellant obtained a gross sum costs order against the respondent. Giles JA refused an application by the appellant to have the two costs orders set-off. His Honour considered the fact that the interlocutory costs were to be payable forthwith plainly indicated that the judge on that occasion contemplated that those costs should be paid before the proceedings were concluded and any right to set-off could be said to arise (at [49]). This was a legitimate factor to be then taken into account when considering whether or not set-off should be subsequently granted. In Hamod, there was no error where the discretion was exercised to refuse set-off in light of that factor.
82I accept that the availability of set-off does not turn on whether or not the sum against which the set-off is to operate (here, the costs orders) is certain (that is, the quantum has been determined) as opposed to uncertain (hence the different character of the two off-setting amounts in the present case is not determinative). This proposition rests on two lines of reasoning. First, with respect to the court's inherent jurisdiction, a number of decided cases have allowed set-off of a costs order against an unliquidated and undetermined sum. Second, with respect to the general equitable jurisdiction, a number of cases also support the proposition that set-off arises between liquidated and unliquidated sums.
83As to the first, in Sivritas v Sivritas [2008] VSC 580; (2008) 23 VR 349 an application was made for set-off between a costs order and the proceeds from a sale of land. At the time of the application, the sale had yet to proceed and therefore the quantum to be set off against was not determined. Kyrou J, in the course of considering the jurisdiction to grant the application, cited Fryberg J in Team Dynamik Racing Pty Ltd v Longhurst Pty Ltd [2008] QSC 36 in support of the proposition that set-off in respect of costs flows from the Court's inherent jurisdiction rather than its equitable jurisdiction and that the Court's inherent power in relation to costs is general and discretionary. His Honour had there noted that the discretion "ought not to be limited by a search through the categories of equity which ... does not seem ... likely to be a process of greater clarity or certainty than the exercise of an undefined inherent jurisdiction". Kyrou J then went on to say at [21] that:
With respect, there is much to commend Fryberg J's approach. In the ordinary course, the Court adjudicates on the parties' substantive conflicting claims (whether they arise in contract, tort, equity or otherwise), before it makes a decision on costs. While it makes sense to apply the impeachment principle as between the parties' substantive claims, in the sense that one claim may go to the root of, be bound up with or impeach the other claim, it will usually be artificial to describe an order for costs, which is made after the Court has already assessed the parties' claims, as going to the root of, being bound up with or impeaching a claim that the Court has already upheld.
84Although the case was argued on principles of equitable set-off, Kyrou J also considered the outcome of the application under the inherent jurisdiction and said at [39] that, had the matter been left to be determined in accordance with the Court's inherent jurisdiction in relation to costs rather than equitable principles, he would have concluded that the circumstances of this case overwhelmingly supported the making of a set-off order in favour of the plaintiff.
85With respect to the question regarding the appropriateness of the fund against which the costs order was to be set off (the quantum of costs also at that point being yet to be determined), Kyrou J accepted that the case went one step further than cases which considered that costs could be set off against debt or damages, but said that (at 35):
The fact that the first and second defendants' entitlement to a share of the net proceeds of sale of the Land does not involve a payment to them by the plaintiff does not preclude a set-off in respect of the liability the first and second defendants have to pay two-thirds of the plaintiff's costs. ... As the Land is the only substantial asset that the plaintiff and the first and second defendants own, the sale of the Land pursuant to an order of this Court will create a pool of funds that will be used to satisfy the parties' entitlements, including costs. A set-off of entitlements from a common pool of funds is appropriate in a case such as this.
86On this point, Kyrou J relied on two English cases: Klein v Jeffcoat and R (On the Application of Bateman) v Legal Services Commission [2001] EWHC Admin 797. Klein v Jeffcoat concerned an order by the trial judge that costs of the proceedings be set-off against any future sums, which the plaintiffs might be ordered to pay the defendants upon a taking of accounts of the partnership. On appeal, the contention that set-off could not be ordered between the costs and the unquantified sum arising from an account was rejected by the Court of Appeal. Similarly, Bateman concerned a series of proceedings regarding the revocation of legal aid certificates. In one proceeding, the applicants succeeded in obtaining a costs order against the Legal Services Commission. The Commission then sought a set-off of those costs against any order that might be made in favour of the Commission in pending proceedings between the parties in relation to the same subject matter. Munby J held that, first, there was the jurisdiction to grant such set-off and, second, that the application for set-off was in recognition that any costs which the Commission paid would be dissipated and set-off in those circumstances provided some security for any future costs or orders in favour of the Commission such that justice and fairness required the set-off order sought.
87With respect to the second line of reasoning, the proposition that the fact that the sum of money to be set-off against is undetermined does not affect the availability of set-off can be tested with reference to the Court's equitable jurisdiction, which often overlaps with the Court's inherent jurisdiction in cases concerning set-off of costs orders.
88In Meagher Gummow and Lehane's Equity: Doctrines and Remedies (4th ed, 2002), the learned authors state succinctly at [37-045] that equitable set-off can be pleaded in reply to an unliquidated claim, citing I C F Spry "Equitable Set-Offs" (1969) 43 ALJ 265 and S B Granat "The Doctrine of Equitable Set-off" (1965) 5 MULR 76. Further, they note that equitable set-off is available in reply to an unliquidated claim is logically consistent with the position that an unliquidated claim can found a plea for set-off. At [37-045], the authors state that:
At common law a claim could not ground a plea for set-off unless it was liquidated (see, for example, Fong v Chilli (1967) 11 FLR 495), but in equity it seems tolerably clear that a claim for an unliquidated amount would suffice. Lord Cawdor v Lewis (1835) 1 Y & C Ex 427; 160 ER 174 is one example of that. Piggot v Williams (1821) 6 Madd 95; 56 ER 1027 is another. There is Victorian authority to the contrary effect, that is, that no equitable claim can ground a plea of set-off unless it is be liquidated: it is Sholl J's decision in Bayview Quarries Pty Ltd v Castley Development Pty Ltd [1963] VR 445. However, this case must be regarded as erroneous as his Honour did not cite relevant Chancery authorities, and relied entirely on authorities dealing with common law set-off. Equally misleading, if it is meant to apply to equitable set-offs, is the dictum of Dixon J in McDonnell & East Ltd v McGregor (1936) 56 CLR 50 at 62; [1936] ALR 324 at 328:
My opinion is that a liquidated cross-demand cannot be pleaded as an answer in whole or in party to a cause of action sounding in [unliquidated] damages or vice versa.
This dictum was condemned by Woodward J in D Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10.
89Although Sivritas and Klein were discussed above in considering the court's inherent jurisdiction, they were also both expressed as cases applying principles of equitable set-off.
90The classic case expounding the doctrine of equitable set-off is Rawson v Samuel (1841) Cr & Ph 161, where the Lord Chancellor held that there would not be set-off between a claim for damages and a claim for an account between the parties, on the basis that:
We speak familiarly of equitable set-off, as distinguished from the set-off at law; but it will be found that this equitable set-off exists in cases where the party seeking the benefit of it can shew some equitable ground on being protected against his adversary's demand. The mere existence of cross-demands is not sufficient; Whyte v O'Brien [(1824) 1 Sim & St 551l 57 ER 218]; although it is difficult to any other ground for the order in William v Davies [(1829) 2 Sm 461; 57 ER 860], as reported. In the present case, there are not even cross-demands, as it cannot be assumed that the balance of the account will be found to be in favour of the Defendants at law. Is there, then, any equity in preventing a party who has recovered damages at law from receiving them, because he may be found to be indebted, upon the balance of an unsettled account, to the party against whom the damages have been recovered?
91This case generally stands for the requirement (for an equitable set-off) to establish that the set-off impeaches the title of the party entitled to the claim which founds the set-off, to be essentially bound up with or to go to the root of that party's entitlement (Re Just Juice Corp Pty Ltd; Jones v Commonwealth (1992) 37 FCR 445).
92However, insofar as that case also considers a cross-demand for moneys that may be owed upon taking an account, and rejects that as a basis of equitable set-off, the case is concerned with a question of contingent liability on the cross-demand. That is, where the liability cannot be determined before the account is taken, as it may be just as likely that the plaintiffs will be owed money by the defendants as vice versa, there is no basis upon which equitable set-off can be pleaded as a defence to the claim for damages. Where liability is uncertain, as opposed to liability being certain and quantum being yet undetermined (such as the unliquidated claim for breach of warranty pleaded successfully in answer to a claim for purchase price of a business in Sun Candies Pty Ltd v Polites [1939] VLR 132), it does not seem that any support may be found in Rawson v Samuels to support a refusal of equitable set-off.
93Turning back to the present case, if (on the hypothesis that the Calderbank offer had been accepted) what would then be the subject of a set-off is characterised as a judgment debt, then the above principles would apply. If acceptance of the offer would not have permitted the entry of judgment in the Victor Lahoud parties' favour (for whatever reason) but would simply have given rise to a contractual obligation, then what would be the subject of the set off would be not a judgment debt (or a judgment imposing liability to pay a sum in the future) per se, but rather some form of contractual obligation short of a judgment debt. Nevertheless, even if that were the case, the above principles would still apply by way of analogy (noting the comments of Derham referred to above).
94Therefore, had the offer not included a condition as to set-off and had it been accepted by the Victor Lahoud parties, I accept that the Joseph Lahoud parties would have been in a position thereafter to plead, in defence (by way of set-off) to a claim for that amount, the orders for costs in their favour (even though those costs were not as then quantified), since although the amount owed for costs was then undetermined the liability to be pay costs was certain. The uncertainty of the sum would not be a prima facie bar to a set-off in either the inherent jurisdiction or applying the principles of equitable set-off. However, in that case while a set-off under the Court's inherent jurisdiction would have been available, it would still have been a discretionary remedy. (Whether such a set-off would also be available in equity would require consideration as to whether the costs orders impeached the title to the damages.) Relevantly, not only would such a set-off not operate automatically, it might have been subject to conditions (and, in particular, conditions to clarify the import of the set-off on the operation of the interest orders that had been made in 2006).
95(In passing, I note that had the Joseph Lahoud parties, at the time the offer was made, considered that the condition for a set-off added nothing to, or was merely confirmatory of, the position that would in any event have applied on acceptance of the offer, it would have been a simple matter to say that in the letter (and it might be thought that the statement as to set-off that was made in the first offer was then unnecessary). The tenor of the offer suggests that an entitlement to set-off might not have been taken as a given at the time. I note this only in the context that there has been criticism of the Victor Lahoud parties' position in relation to the consideration of the offers at this stage as involving an element of reconstruction. In that respect, so too may the Joseph Lahoud parties' position be characterised.)
96In any event, whether or not a set-off would have applied had the offer made at the time not contained any such condition and had it then been accepted, that does not seem to me to address the uncertainty as to the time at which any set-off would have operated under the terms of the offer (a matter of relevance having regard to the ongoing costs disputes, in light of the 2006 orders for the payment of interest on costs which meant that interest was running on the unquantified costs).
97In oral submissions, I understood Mr Neil's contention in this regard to be that the effect of the first offer was that there would be a notional set-off as to costs as at the date of acceptance (so that there would be no interest accruing on that portion of any later assessed costs as from the date of acceptance of the offer). However, with respect, that does not seem to me necessarily to follow from the terms in which the offer was couched (particularly having regard to the use of the conditional tense in the expression "would be" and the future time frame indicated by the words "when ... finalised").
98The letter seems to me to be not unreasonably read as an offer that when and if, in the future, the costs matters were 'finalised' there would at that stage be a set-off between the amount then determined to be owing by way of costs and the amount that the Joseph Lahoud parties were offering to pay in respect of moneys that might in the future become payable on the audit of the Cammeray project profit figures (assuming that audit were carried out). If so, then as a practical matter it would not be unreasonable to assume that the total amount, against which the agreed sum was to be offset, at that stage would include any interest payable on those assessed costs (calculated in accordance with the 2006 orders from the time at which those costs had been paid out by the Joseph Lahoud parties to the time of the payment or notional payment by way of the off-set for those costs). I am not convinced that it would necessarily have followed, had the offer been accepted, that interest would cease to run on $346,000 odd of the assessed costs from the time of acceptance of the Calderbank offer.
99Whether or not this would have been the effect of an agreement constituted by acceptance of the offer the real question, when looking at the reasonableness of rejection thereof the relevant question seems to me whether it was open to read the offer in such a way. I think it was. If so, then was the ensuing uncertainty as to how the set-off would operate such as to make rejection of the offer reasonable? Had there been an understood or agreed regime already in place as to how such a set-off would operate, then I would have been inclined to think that an offer referring in general terms to the set-off would not necessarily be so uncertain as to make rejection of it not unreasonable. However, in the present case it is not clear that there was any such agreed understanding or regime.
100Therefore, I consider that the reference in the first offer to set-off did impose a practical condition on acceptance of the offer (it not being open to the Victor Lahoud parties to accept the offer and immediately call for payment of the sum in question) and that the operation of the set-off was sufficiently uncertain as to make it not unreasonable to read it in the fashion for which the Victor Lahoud parties now contend.
Would the Victor Lahoud parties in fact have been better off?
101Turning then to the comparison between the position of the Victor Lahoud parties had they accepted the first Calderbank offer, Mr Neil submits they would have been in a far better position than they are in (following the final result in the Court of Appeal) because they would have had, since the date of acceptance, a set off of that sum against their liabilities to Joseph Lahoud for costs (or, had it been determined that such liabilities were less than that sum, an entitlement to the balance) and would not have incurred the subsequent costs and expenses in relation to the audit and the audit disputes.
102In relation to those "lost" or wasted costs, Mr Neil emphasises that the costs and expenses of the audit process were needlessly expended since, if the offer had been accepted no audit would have taken place at all; this is not a submission that simply because further costs have been incurred the offeree is worse off having not accepted the offer - a submission that would run counter to what was said in by Basten JA in Robb Evans at [22] (and later adopted in Regency Media) that:
Whether or not the offer involved a genuine compromise [there in the context of a formal offer of compromise] must be assessed by reference to the rule pursuant to which the offer was made. That rule refers to an offer to compromise a claim in proceedings on specified terms. ...The fact that a party which failed to accept an offer incurs costs in pursuing litigation to a result which is less favourable to it than the offer, is not a factor which is material to determining whether the offer itself was a genuine offer of compromise for the purposes of r 20.26. (my emphasis)
103Mr Philips places weight on the fact that the offer was silent as to the question of interest (and in particular whether the Victor Lahoud parties would have an entitlement to interest on the $346,027.17, while the quantum of any costs liability was being ascertained). Mr Neil submits that there was no ambiguity as to the concept of an off-set and that it necessitated no concession in relation to the issue of interest. It was submitted that the proffered amount would simply be adjusted according to the amount for which the Victor Lahoud parties were ultimately be found liable in costs.
104Much of the debate before me on this occasion was in relation to the comparison of the position in which the Victor Lahoud parties now are and the position in which they would have been had the offer been accepted (and the uncertainty of the operation of the set-off in this regard) in assessing the reasonableness of the rejection of both of the offers centred on the question of interest. The significance of this, obviously, is that while the costs liability remained unquantified (and unpaid), the Victor Lahoud parties were exposed to a continuing liability for interest.
105Mr Neil submits that as at the time of the first Calderbank offer the Victor Lahoud parties had no right to interest in connection with the Cammeray project under the Deed of Settlement. I accept that is the case. There was no provision for interest to be payable under the Deed of Settlement so that the Victor Lahoud parties would only have a claim for interest as such (noting that they are now seeking to run a damages delay claim in lieu) once there was a determination as to the audit claim (or at the very least once the audit report set a profit figure and a demand was made for payment of the money said then to be due under the Deed of Settlement as a result thereof).
106However, I am not persuaded that this means that at the time of consideration of the first offer interest was a neutral consideration, as has been submitted by Mr Neil. True it is that an entitlement to statutory interest on any moneys payable in connection with the project would (as the Court of Appeal has determined) arise only once there was a right to the moneys under the Deed. Nevertheless, the fact that interest was continuing to run on the costs liabilities is a factor to be taken into account in determining whether a decision to reject an offer that made no provision for interest was unreasonable. Hence, Mr Philips submits that the first offer was unreasonable because the Victor Lahoud interests would not then have had the benefit of interest running on the amount so accepted which they now have had since the judgment (an amount now in the order of about $65,000 and increasing at around $103 per day).
107Secondly, Mr Neil submits that interest would have been payable by the Victor Lahoud parties in respect of the Joseph Lahoud parties costs the subject of the earlier costs orders only in relation to so much of the costs as were then payable as a consequence of any acceptance of the offer (ie that the operation of the set-off would be that there was a notional reduction in the costs payable as at the date of acceptance of the offer by the amount of $346,000 odd). He submits that the set-off would occur at the moment the offer was accepted and that the reference in the letter to the time "when" the cost matters were "finalised" was because only then could accounts be taken. (In this regard, Mr Philips notes that there have been two unsuccessful applications since the judgment in 2009 to vary the interest orders made in 2006 and submits that it cannot simply be said that if the offset had notionally taken place at the date of acceptance of the offer then interest would have ceased to run in favour of the Joseph Lahoud parties from the date of acceptance.)
108Mr Neil, in effect, submits that had the offer been accepted in 2009, then the Joseph Lahoud parties could only have claimed by way of costs whatever was the final assessed sum less the $364,000 odd and that interest would have been calculated from the date of acceptance of the offer on that balance only. (How that interest calculation would have been carried out, having regard to the formula that had been adopted in 2006 in relation to the interest on costs so ordered was not made clear to me. For example, it is not clear how the interest proportion for the $346,000 off-set would be factored into the formula that appears to average out the costs having regard to the concerns raised by Campbell J, as his Honour then was, as to the fact that not all costs might be accepted on a costs assessment and the difficulty of determining what costs were paid in relation to what aspect of the matter.)
109The proposition put by Mr Philips, however, is that in fact had the Victor Lahoud parties accepted the first offer they would have been in a less favourable position than they are at present because they would not have the benefit of the enforceable judgment (and interest running on such judgment in their favour at certain rates as determined by the rules of court); that, even assuming a set-off was inevitable, and that it were to be calculated as at today's date, the amount of interest which the Victor Lahoud parties would have foregone if they had accepted the first offer is at least $55,560 (not including any interest in the period from the making of the offer to 24 August 2010), increasing at the rate of about $103 per day from now until the date that the liability of the Victor Lahoud parties for the Joseph Lahoud parties' costs has been finally determined.
110With hindsight, I consider that I may have dismissed too readily in late 2010 the similar argument that there was a benefit in obtaining an enforceable judgment in the context of assessing the reasonableness of rejection of the offer. It is not the benefit of the judgment per se on which, as I understand it, Mr Philips relies for this submission, but the fact that there was no component of interest in the offer, so that if the offer had been accepted, the Victor Lahoud parties would have been at risk of the costs process being delayed while the Joseph Lahoud parties were protected by the interest orders already obtained in their favour.
111(Also, in relation to the relevance of the interest factor, if I may so call it, Mr Neil submits that the Victor Lahoud parties would have been better off not spending $86,000 on legal costs (as would have been the case had the offer been accepted) even if they would not then have received the benefit of some $55,000 in interest for the relevant period that they will now receive as a result of the judgment. Mr Philips dismisses this argument by reference to the fact that as statutory interest is continuing to run, the differential between those two amounts will continue to decrease. The import of the opposing submissions on this aspect of the argument seems to be the uncertainty as to the time likely to be required in order to reach an ultimate costs determination, that to some extent at least depending on the lengths to which each party was prepared to go in contesting the determination.)
112Insofar as Mr Neil's submission referred to the lost or wasted costs incurred after the rejection of an offer, Mr Philips submits that these are not to be taken into account in determining whether the offeree is in a better (or no worse) position in the ultimate result than it would have been if the offer had been accepted; rather that the relevant comparison is to compare the position in which the offeree would have been had the offer been accepted with the position ultimately achieved, irrespective of whatever costs were incurred after the rejection of the offer. As noted in my earlier reasons (and as supported by what was said by Basten JA in Regency) an offeree who rejects a Calderbank offer will almost inevitably incur costs after such rejection in prosecuting or defending the relevant claim, and to that extent will be worse off for having rejected the offer. However, as explained in argument, I think Mr Neil's submission in this regard goes to the public policy argument; not to the comparative benefits of the offer.)
113Finally, in this regard, I note that Mr Neil submits (and I consider this submission to carry much weight) that there was no relevant ambiguity in the offer "from the point of view of somebody who is not looking to find ambiguity in the offer, but who is looking to give effect to it, to give a reasonable construction to it" (T 9.12). I consider this submission in the context of both offers in due course. For present purposes, I accept that the fact that interest was continuing to run on the costs orders was a factor that it was not unreasonable for the Victor Lahoud interests to have taken into account when assessing the first of the Calderbank offers.
Deed of Release
114A further basis on which it was submitted that the rejection of the first offer was not unreasonable was that, even if the offer had been accepted, the parties' agreement was to be evidenced by a Deed of Release, the drafting and execution of which would have involved further negotiations and the potential for further dispute. I accept that the offer in its terms referred to a deed of release being prepared. Given the saga of this dispute from 2001 (and, ironically, the fact that it emanated from a dispute in relation to Terms of Settlement that themselves provided for execution of a deed, that being the subject of the claim for specific performance before Palmer J), there is force in the submission that it was not unreasonable for the Victor Lahoud parties to be sceptical of an offer that might or might not lead to a binding deed, although had this been the only factor I doubt that it would have been sufficient to make rejection of the offer not unreasonable.
Element of Compromise
115As to the submission that the first offer involved no genuine element of compromise because it involved only an offer to pay the maximum amount that Joseph Lahoud considered he might on the worst version of events be liable, the element of compromise is to be assessed by reference not only to the claim (if any) made by the Victor Lahoud parties at the relevant time but also to the Joseph Lahoud parties' position as to that claim. The Victor Lahoud parties had not quantified the claim in 2009 but were maintaining that the project had not made a profit; the Joseph Lahoud parties were maintaining that there was no entitlement to an audit. The fact that the Joseph Lahoud parties offered the amount for which, on their assessment, was the maximum amount that they could be liable does not seem to me to deprive the offer of a genuine element of compromise. Rather, it seems to me to involve a significant compromise - a party who maintained that there was no entitlement to an audit and no liability for any sums in relation to the project was offering to pay what he assessed his maximum potential liability to be (in order to avoid the further costs of an audit). That must be a genuine element of compromise in my view.
[3]
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Decision last updated: 27 March 2012
Second Calderbank offer
Our clients' [sic] offer to pay your clients in full and final settlement of all claims relating to clause 2 of the Deed of Settlement dated 5 February 2007 [the sum of $364,584.62]. ... This offer is conditional upon the subject amount of it being an offset against amounts owed by your clients to our clients under the Certificate of Determination of Costs dated 6 August 2010 in the amount of $783,027.39 (plus interest and costs of assessment).
116I have referred above to the factors that are the same in relation to both offers. Even in relation to the aspects where the offers differ, the same issues arise, though in a different context (so, for example, the question of set-off arises when considering the second offer, as arose in the context of the first offer, although in relation to the second offer it is not necessary to consider whether the reference to set-off operated as a condition given the express terms of the offer). As to the timing of this offer, it is relevant to note that the amount of the costs liability had by then been fixed by the Certificate of Determination (though, as noted, there was an appeal on foot in relation thereto).
117Insofar as it is submitted by Mr Neil that the Court of Appeal found that this was a better result [61] than the Victor Lahoud parties ultimately achieved (and it is submitted that it is a far better result because not only the costs of the proceedings but also the costs of the Court of Appeal would have been avoided had the offer been accepted), Mr Philips disputes that the Court of Appeal made any finding in that regard (on the basis that the Court of Appeal simply observed that the Victor Lahoud parties did not better the offer) and that, as a matter of fact, it is incorrect to assert that the ultimate result achieved by the Victor Lahoud parties following the determination of the appeal is worse than the terms of the second Calderbank offer.
118Again, as Mr Philips notes, the fact that the offeree ends up worse off than if the offer had been accepted does not of itself warrant departure from the ordinary rule (as was observed by Giles JA in SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37], his Honour noting in effect that the question is whether in all the circumstances the failure to accept the offer "warrants departure from the ordinary rule as to costs") and that a failure to accept a Calderbank offer will justify a departure from the ordinary rule only if it constituted a genuine offer of compromise and it was unreasonable of the offeree not to accept it (referring there to Lahoud v Lahoud [2011] NSWSC 1186 at [13] per Campbell JA and the authorities therein cited).
119Mr Philips emphasises the following as to why non-acceptance of the second offer was not unreasonable: that acceptance of the offers may have involved acceptance of a particular outcome in the ongoing costs assessment or of some as yet unknown interest calculations; uncertainty might arise as to which amounts or rights of action would be involved in any offset; interest calculations subsequently provided may have contained errors; and acceptance would have led to further rather than less uncertainty.
120In essence, the basis on which it is submitted that acceptance of the second offer (like the first) would not have led to a better result than that which was ultimately achieved by the Victor Lahoud parties, however, was the proposition that the payment proffered was subject to being offset against amounts owed by the Victor Lahoud parties under the Certificate of Determination of Costs which was then under challenge by the Victor Lahoud parties (which has since been set aside) and did not address the issue of interest accruing on the sum of $346,027.17 for the period while the ultimate liability of the Victor Lahoud parties for costs remained uncertain (as is still the case).
121It is submitted that what the Victor Lahoud parties have now obtained is an unconditional and enforceable judgment for a certain sum which carries with it interest running under the rules of court until payment is made or credit is given; they are now entitled to payment by the Joseph Lahoud parties of a sum of approximately $418,578 (comprising $346,027.17 by way of principal sum, $6,365.17 in pre-judgment interest, $16,991.00 in auditor's fees and $49,195 in post judgment interest) plus interest accruing at a sum in the order of $103 per day. This is compared with the sum of $364,574.62 offered by way of offset by the Joseph Lahoud parties. (I should add that the inclusion of the auditor's fees in this equation seems to me to be at the least neutral since no auditor's fees would have been incurred had the offer been accepted.) Mr Philips notes that the disparity between the result achieved and the amount offered will continue to grow as interest accrues on a daily basis until the costs liability is determined.
122Further, it is submitted that the Victor Lahoud parties are better off in that there is now no scope for uncertainty, ambiguity or dispute arising in relation to the respective rights and obligations of the parties under clause 2 of the Deed of Settlement whereas in circumstances where the offer was conditional upon it being set off against an as yet undetermined liability for costs, and acceptance of it may have amounted to an acceptance of a disputed liability for costs, in all likelihood it would have led to greater rather than less scope for uncertainty and dispute.
123In respect of the question of unreasonableness, Mr Neil submits that (as a matter of construction) the condition (at the time at which it was imposed) did no more than reflect the existing position in that such a set off was inevitable. I have considered this argument in the context of the same argument raised in relation to the first offer. Any such set-off would have been in the Court's inherent jurisdiction (or, if not, its equitable jurisdiction) and subject to the exercise of the Court's discretion.
124The second offer differs relevantly in this regard in that it specifies the amount of the costs against which the offered amount is to be off-set. While that seems to me to remove some of the uncertainty as to the operation of the set-off, it adds a further component of uncertainty, namely the question whether, by accepting the offer, the Victor Lahoud parties could be said to be conceding the position in relation to the amount by which the offer was to be off-set.
125It seems to me that there is scope for uncertainty as to the operation of the second offer in that regard, namely whether acceptance of the offer that was made expressly conditional on it being set-off against a costs assessment specified as a fixed sum may have implicitly involved an acceptance of that costs assessment (and thus precluded the Victor Lahoud parties from pursuing the appeal then on foot in the District Court). Whether the offer would ultimately have been so construed is a moot point; what is relevant is that if such a construction was open then the uncertainty of the operation of the set-off in this regard is also a matter going to the reasonableness of the offer not being accepted.
126As to the submission that it was an all-in offer and involved no genuine element of compromise, Einstein J, in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (Formerly GIO Insurance Ltd) [2006] NSWSC 583, said at [40]-[41]:
It has been held that a Calderbank letter which is expressed to be "inclusive of costs", is insufficiently precise to qualify as a Calderbank offer, for the reason that the offeree is placed in a position of not being able to determine the appropriate amount to attribute to the substantive claim and the costs incurred in advancing it: Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97 at 102; Hanave Pty Ltd v LFOT Pty Ltd (formerly Jagar Pty Ltd) [1998] 1429 FCA 11, BC9805993 (Smallacombe Pty Ltd v Lockyer Investments Co Pty Ltd was referred to by Young J in Rosser v Maritime Services Board (NSW) (No 3) (unreported, Supreme Court of New South Wales, 25 November 1997, Young J, BC9706221). (my emphasis)
127The need for the offeree to be in a position to make an informed assessment of the value of what is being offered was considered in Elite, where McColl JA considered Victorian authority where it had been held that a Calderbank letter could be expressed to be on an all-inclusive basis (M T Associates Pty Ltd v Aqua-Max Pty Ltd [2000] VSC 163 per Gillard J, observing that many cases were settled on an "all in" basis and "[t]here is little difficulty in making an assessment of the likely amount of the claim and costs").
128After considering the divergent lines of authority on inclusive of costs Calderbank offers, McColl JA came to the following conclusion (from [111]):
...The underlying premise of such cases rests in the proposition that an offeree cannot be said to have acted unreasonably in not accepting an offer expressed to be inclusive of costs, because the offeree does not have an adequate opportunity to consider the offer and because of the difficulties posed when a court comes to consider the reasonableness of the offeree's conduct in rejecting/not accepting it. In other words such an offer presents practical difficulties.
...
In Smallacombe (at 102) Spender J opined that "all-in" offers "would not promote the finality of litigation, but fragment it", a proposition implicitly recognised by Cole J (as his Honour then was) in W Jeffreys Holdings Pty Ltd v Appleyard and Associates (1990) 10 BCL 298 when he said "[g]reat difficulty is encountered if offers are framed in Calderbank letters on an inclusive of costs basis. It leads to ex post facto and unsubstantiated estimates of what costs may have been at a given date". (my emphasis)
129Those concerns seem to me to be equally applicable in circumstances such as the present, where the Court is being asked well after the event to construe the import of a condition for the offered sum, on acceptance, to be treated as an off-set.
Conclusion
130It seems to me that the force of the Victor Lahoud parties' position lies in the uncertainty as to the operation of the set-off against costs orders (not so much because the amount of those orders was still the subject of dispute but because, until they were finalised, interest continued to run on whatever might be the ultimate amount of those costs, having regard to the 2006 judgment awarding interest on costs).
131Mr Neil submits (and I accept) that there is an element of reconstruction in the submissions now made as to the lack of unreasonableness in the Victor Lahoud's rejection/non-acceptance of the offers. That element of artificiality arises because there was no question raised at the time of the offers to indicate any uncertainty or ambiguity in the mind of the Victor Lahoud parties as to the operation of either offer.
132Mr Philips submits that this is in effect the same argument that I had considered and addressed in [55] of my earlier reasons as follows:
The Joseph Lahoud parties submit that the effect of the Calderbank offers is they should have an order for costs in their favour on an indemnity, or alternatively party/party basis having regard to the offers that were made. Mr Epstein submits that it must be taken into account the fact that there was no response at all to the 7 September 2010 letter, and an outright rejection of the earlier letter. He notes that no issue as to the ambiguity or enforceability of the offer was raised by the Victor Lahoud parties (which one might have thought cast doubt on the suggestion that it was reasonable for them to reject the offer on that basis or that they had indeed rejected the offer on that basis).
133I accept that any uncertainty or ambiguity then perceived in the offer was not raised as a basis for its rejection, nor was it raised as a query, at the time the offer must be assumed to have been in the course of being assessed.
134In my December judgment I said, at [70]-[71],
In assessing the reasonableness of the rejection of both offers, one factor of relevance in my view is the climate of suspicion and distrust which seemingly exists between the relevant protagonists. It might be thought from the brief history of the litigious saga in which the brothers have been involved that over the past decade almost any issue that was capable of dispute was disputed. In those circumstances, it is perhaps not unreasonable for the Victor Lahoud parties to have been suspicious that in accepting such an offer they might inadvertently be giving up an advantage or an entitlement in relation to the costs process.
It is submitted by Mr Philips that acceptance by the Victor Lahoud parties of the offer could arguably have amounted to an acceptance of whatever outcome in terms of quantum of costs flowed from the costs assessment process and have involved the abandonment by the Victor Lahoud parties of his contention, (which had already been raised in the costs assessment process) that the Joseph Lahoud parties were not entitled to any payment with respect to their costs. While the correspondence does not in terms suggest that this would have been the result of acceptance, I accept that the history of the litigation would not give anyone confidence that if there were to be an argument of that kind open to be taken then it would not ultimately have been run. (And in circumstances where the disputes before me had emanated originally from an agreement for the compromise of other proceedings, it might be thought that there was room for scepticism as to the extent to which reliance might comfortably be placed on acceptance of an offer of this kind.)
135The failure to raise any query as to the operation of the offer then being made is not simply unfortunate (since it deprived the Joseph Lahoud parties of an opportunity to clarify what was meant) but there is much force in the submission that it is not in accordance with the co-operative manner in which this Court requires modern litigation to be conducted. However, it is also apparent that the parties have been in bitter dispute for a long time and I am not by any means satisfied that there has not been unreasonableness exhibited (and technical points taken) on both sides (which may provide an explanation at least to some extent for the failure of the Victor Lahoud parties to engage in correspondence in relation to the offers at the time that they were made). The Victor Lahoud parties were complaining at that time of delay on the part of the Joseph Lahoud parties in progressing the audit at all. Therefore, the failure to respond in any way to the substance of the offers is a relevant factor but must be seen in the context of the distrust between the parties at that stage.
136The force of the Joseph Lahoud parties' position on the present application is that the public policy objectives underlying the special costs orders following offers of compromise or Calderbank offers include discouraging wasteful litigation (and the inference that an unreasonable rejection of such an offer casts on the behaviour or attitude of the offeree).
137As a general matter, Mr Neil submits that the policy considerations underlying Calderbank offers are such that it would be wrong to allow anyone to abstract themselves from the consequence of that public policy that arises by reason of their very "litigiousness". Public policy interest in discouraging wasteful litigation are thus said to trump the litigious characteristics of any party. That submission was put on the basis that it cannot be said, by a party in the position of the Victor Lahoud parties, that it is "more reasonable for me to be unreasonable because I am unreasonable".
138It is at this point that the open letter sent at the same time as the second offer seems to me to be of some relevance. In that letter, the Joseph Lahoud parties maintained a position as to the invalidity of the audit by reference to the basis on which the auditor had proceeded to review the profit of the project, not the "profit figures" annexed to the Terms of Settlement. This was the very issue that had been determined against them in the July 2009 reasons. I am not satisfied that the Victor Lahoud parties can be said to have been acting unreasonably if they were suspicious of what technical points might in future be raised by the Joseph Lahoud parties as to the operation of the costs offers in the context of the Calderbank offer then put.
139In other words, what might otherwise have been seen as unreasonable conduct on the part of the Victor Lahoud parties in not accepting an offer of this kind (sought to be justified by concerns now, but not formerly, raised as to the operation of the set-off) may well not be unreasonable when seen as a response to otherwise unreasonable stances earlier adopted by the Joseph Lahoud parties (of which the letter written at the time of the second offer seems to me to be an obvious example).
140In any event, I consider that the import of the continuing interest calculations was a significant factor to take into account when assessing the offers that had been made and the uncertainty (or the scope for uncertainty) as to that issue by reference to the terms of the offers made it not unreasonable to reject those offers.
141In summary, I do not think it can be said that the offers contained no genuine element of compromise, but I do think that there was uncertainty at least in relation to the first offer as to the time at which the set-off was to operate and in relation to the second offer as to what effect acceptance would have on the ability of the Victor Lahoud parties to pursue their costs arguments in relation to the District Court appeal. Those matters, together with what might reasonably have been such as the imperative, from the Victor Lahoud parties' perspective, to obtain a judgment in order to obtain the benefit of interest that would otherwise not run on the amount offered by way of off-set, lead me to conclude that it was not unreasonable of the Victor Lahoud parties to reject (or not to accept) either offer.
142I have been troubled by the proposition that the refusal to make an order other than the ordinary order following the event as I have identified it might be said, in effect, to reward unreasonable behaviour contrary to the public policy objectives underlying the Calderbank principles. I agree that, had the offers been accepted, costs would not have unnecessarily been incurred in determining the liability consequent upon the audit and, in the case of the first offer, there would have been no need of an audit at all. However, the context in which the interest component was not addressed in the offers (yet must have been present to the minds of all parties at that stage) and (though I do not suggest that is a determinative factor) there seem to have been examples of unreasonableness on each side in the conduct of the litigation that might not unreasonably have caused concern as to how the offer might later be contended to operate.
143After considering the above, I have concluded that in all the circumstances the reinstatement in effect of the earlier costs orders will not operate to reward unreasonable behaviour but, rather, will acknowledge that it was not unreasonable for the Victor Lahoud parties to take into account the interest consequences of acceptance of an offer, couched as both offers were, which was to operate as a set-off against a costs liability as yet unquantified and on which interest would continue to run until payment. Accordingly, I am not satisfied that the non-acceptance of the Calderbank offers warrants departure from the ordinary rule that costs follow the event in relation to the relevant proceedings.
Orders
144For the reasons set out above, I order that the Joseph Lahoud parties pay the costs of the Victor Lahoud parties, on a party/party basis, of the relevant proceedings (as defined in [64] of the judgment of Handley AJA in the Court of Appeal) save that each party should bear its own costs of the hearings on 19 November 2010 and 3 December 2010.
145I will hear any submissions as to why the costs of the remittal hearing should not follow the event.