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[2012] NSWSC 284
procedural. The Joseph Lahoud parties must pay the Victor Lahoud parties’ party/party costs of the relevant proceedings, except that each party must bear its own costs of the hearings on 19 November 2010 and...
This judgment is about who should pay the legal costs of a dispute over an audit and repayment relating to a development project. The Joseph Lahoud parties had made two offers to settle, each involving a set-off against costs they said the Victor Lahoud parties owed. Ward J accepted that the offers involved genuine compromise, but found that their terms left important uncertainty about when the set-off would happen, how interest would be treated, and, for the second offer, whether accepting it could affect a pending appeal about costs. The court therefore found that it was not unreasonable for the Victor Lahoud parties not to accept either offer. The usual rule that costs follow the event applied: the Joseph Lahoud parties had to pay the Victor Lahoud parties’ costs of the relevant proceedings, except for two specified hearing dates. The costs of the remittal hearing were left open.
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2 cited instruments linked from this judgment.
This is a costs judgment, not a fresh determination of the underlying audit dispute. Ward J was considering costs after the Court of Appeal remitted a defined part of an earlier costs order. The central question was whether the Victor Lahoud parties had acted unreasonably by rejecting or not responding to two settlement offers made by the Joseph Lahoud parties. The offers were made “without prejudice save as to costs” and were described by the judge as Calderbank offers ([8]-[13]).
The dispute arose from a long-running conflict between brothers Joseph and Victor Lahoud and associated companies. An earlier settlement provided for an audit of the Cammeray project profit figures. In July 2009, Ward J held that the Victor Lahoud parties were entitled to an audit, and that it was not limited to figures appearing in one annexure to the settlement terms ([1]-[3]). Disputes then followed about the appointment and work of the auditor, the amount repayable after the audit, and the legal consequences of the audit report.
The first offer, dated 22 October 2009, was made before an auditor had been appointed. The Joseph Lahoud parties offered $346,027.17 in full and final satisfaction of claims relating to the 2001 settlement terms or the 2007 deed. The offer said the amount “would be offset against amounts owed” on costs orders “when those matters are finalised” ([16]-[17]). The Victor Lahoud parties rejected it.
The audit report was delivered in August 2010. It found a net loss of $16,454.89, producing an audited profit of nil for the relevant calculation ([18]-[20]). The parties disputed how the deed applied. The Victor Lahoud parties claimed repayment of $570,000, audit costs, and interest. The Joseph Lahoud parties disputed liability and, alternatively, said the sum payable was $346,027.17 ([21]-[22], [27]-[35]).
The second offer, dated 7 September 2010, was for $364,584.62. It included $346,027.17 for the audit claim, $16,991 for audit costs, and $1,566.45 interest to that date. It was expressly conditional on the amount being set off against a costs certificate for $783,027.39, plus interest and assessment costs. The Victor Lahoud parties were appealing that certificate ([23], [30]-[32]).
In the underlying proceedings, Ward J rejected the Joseph Lahoud parties’ challenge to the audit report and rejected parts of the Victor Lahoud parties’ claims, including their claim to repayment of $570,000 and their claim for equitable interest. The Court of Appeal later reduced the pre-judgment interest awarded and remitted the relevant costs question ([4]-[5], [35]-[37]). Ward J ultimately ordered the Joseph Lahoud parties to pay the Victor Lahoud parties’ party/party costs of the relevant proceedings, except for the hearings on 19 November and 3 December 2010, for which each side was to bear its own costs ([144]).
The starting point was the ordinary rule that costs follow the event. Ward J had previously concluded that, in substance, the Victor Lahoud parties had succeeded on their claim under the deed: without pursuing the application, they would have recovered nothing because the Joseph Lahoud parties’ principal position was that no amount was payable ([38]-[40]). The question was whether the Calderbank offers justified a different costs order.
The court restated several principles. The party seeking special costs consequences bears the onus of showing that rejecting an offer was unreasonable ([43]). The assessment is made at the time the offer was made, not with hindsight after judgment ([45]). A Calderbank offer must involve a “real and genuine element of compromise” ([44]-[45], [55]). Relevant matters include the timing of the offer, the time given to consider it, the extent of the compromise, the apparent prospects at that stage, and the clarity of the terms ([45]).
Ward J did not accept that the offers lacked genuine compromise. In particular, the first offer was made when the Joseph Lahoud parties were denying any entitlement to an audit, but they offered what they regarded as the maximum amount that could be payable under the deed. The offer was therefore a genuine attempt to avoid an audit and further litigation, rather than merely an offer to pay a sum already conceded to be due ([60]-[63], [115]).
The decisive difficulty was the set-off language. For the first offer, the court accepted that set-off against an unquantified costs liability was not necessarily unavailable simply because the liability had not yet been assessed. But availability did not mean it would operate automatically. The court’s inherent jurisdiction to set off judgments and costs orders was discretionary, and the offer did not state clearly when or how the set-off would occur ([69]-[82], [94]).
Ward J considered that the first offer could reasonably be read as postponing the set-off until the costs matters were finalised. If so, the Victor Lahoud parties could remain exposed to interest accruing on the costs liability during that period, while the offer made no provision for interest on the amount offered. The wording left uncertainty about whether the set-off would be treated as effective on acceptance or only at a later date ([96]-[100], [103]-[110]).
The second offer presented a related but distinct uncertainty. It specified a costs certificate for a fixed amount, but that certificate was under appeal. Acceptance might have been construed as accepting the stated costs liability or as limiting the Victor Lahoud parties’ ability to continue their appeal. Ward J did not decide that such a construction would necessarily be correct. It was enough that the construction was open, and that the resulting uncertainty was relevant to whether non-acceptance was unreasonable ([116], [123]-[125]).
The wider context also mattered. The parties had a long history of distrust and disputation. The court noted that the Joseph Lahoud parties’ contemporaneous open letter repeated a challenge to the audit on a basis already determined against them in 2009. That context helped explain why the Victor Lahoud parties might be concerned about how the offers would later be interpreted or applied ([131]-[139]). The judge treated the failure to raise questions about the offers at the time as relevant, but not decisive, given the history and the conduct of both sides ([135]).
Before this decision, the judgment identifies the established framework for Calderbank offers and costs. A party asking the court to impose special costs consequences must establish that the offer was a genuine compromise and that the offeree acted unreasonably by declining it. The reasonableness assessment is objective and looks to the circumstances when the offer was made, rather than the eventual result alone ([43]-[45], [55]).
The judgment also records the public policy objectives of formal offers of compromise and, by extension, Calderbank offers. These include encouraging realistic settlement, avoiding unnecessary private and public litigation costs, and shifting costs where a reasonable offer is rejected and the litigation thereby continues unnecessarily ([42], referring to the objectives discussed in Maitland Hospital v Fisher (No 2)).
On set-off, Ward J distinguished a set-off between judgments or costs orders from equitable set-off as a defence to a monetary claim. The former is a procedural exercise of the court’s inherent jurisdiction, intended to prevent injustice and conducted as a matter of discretion. The judgment notes that an unquantified costs liability does not itself prevent set-off where the liability is certain, but the court still decides whether set-off is appropriate ([72]-[82], [94]).
The decision’s contribution is its application of those principles to settlement offers whose value depended on a future set-off against costs. It shows that an offer may be a genuine compromise and still fail to justify special costs consequences if its practical operation is materially uncertain. In particular, the timing of a set-off and the effect of acceptance on a pending costs appeal may matter. This is not a rule that set-off language always makes an offer unclear. Ward J expressly accepted that a clear, understood regime might avoid that problem ([99]-[100]).
The judgment does not establish a general rule that an offer must separately provide for interest. Rather, it treats the continuing interest orders in this dispute as a relevant feature of the comparison. Interest was running on the costs liability under earlier orders, and the offers did not clearly explain how that ongoing liability would be affected ([24]-[26], [104]-[110], [140]-[143]).
At [45], Ward J explains that “the response of the offeree must be assessed at the time it was made, and not with the benefit of hindsight”. In plain English, an offer is not judged solely by comparing it with the eventual judgment. The court considers the information and circumstances existing when the offer had to be assessed.
At [55], the judgment says a Calderbank offer must contain “a real and genuine element of compromise”. The court is looking for a genuine settlement proposal, not a demand for the full amount claimed dressed up to trigger a costs advantage. Here, the court found that the offers did involve compromise, particularly because the Joseph Lahoud parties were disputing liability but offered to pay amounts to resolve the dispute ([115]).
At [94], Ward J explains that an unquantified costs liability could still potentially be set off, because the liability to pay costs was certain even though the amount was not. But the court emphasises that set-off would remain discretionary. In plain English, the amount did not have to be finally calculated before set-off could be considered, but neither party could assume that set-off would happen automatically.
At [100], the court concludes that the first offer’s set-off term created enough uncertainty that it was not unreasonable to read it as postponing payment until the costs matters were finalised. The practical significance was that interest on costs might continue to accrue during the delay.
At [125], the court identifies the particular uncertainty in the second offer: accepting an offer tied to a specified costs certificate might have affected the Victor Lahoud parties’ appeal against that certificate. The judge did not resolve the hypothetical interpretation conclusively. The point was that the possibility was relevant to the reasonableness of not accepting the offer.
At [141], Ward J’s conclusion is direct: “it was not unreasonable of the Victor Lahoud parties to reject (or not to accept) either offer.” At [143], the judge explains the consequence: the offers did not warrant departure from the ordinary rule that costs follow the event.
The reasoning is most directly relevant where a party relies on a Calderbank offer to seek a different costs order after judgment, and acceptance would involve a set-off against costs orders or a costs assessment.
The specific features that mattered here were: the offer made settlement conditional on, or linked it to, a set-off; the timing of that set-off was unclear; interest continued to accrue on the costs liability; and, for the second offer, the costs certificate was subject to a pending appeal ([96]-[100], [116]-[125], [130]). A similar issue may arise where the offeree could reasonably be concerned that accepting an offer would affect an appeal, assessment, or other unresolved costs issue. The judgment does not say that such concern will always make non-acceptance reasonable. It treats the uncertainty as one part of the whole factual context.
The decision also illustrates that an offer can be a genuine compromise without its rejection necessarily being unreasonable. The court separated the question of whether the offers contained a real compromise from the question of whether the offeree should reasonably have accepted them ([115], [141]).
The parties’ history may also be relevant where it bears on how the offer’s terms could reasonably be understood. Here, Ward J considered a long-running and distrustful relationship, but did not treat that history as excusing all conduct or as independently deciding the costs issue ([134]-[139]).
The judgment itself cannot establish how later courts treated Lahoud v Lahoud [2012] NSWSC 284. The supplied text contains no decisions subsequent to 27 March 2012 that cite or apply this judgment. It would therefore be unsupported to describe any later judicial treatment, whether approval, distinction, or criticism.
The authorities Ward J discusses are earlier authorities, not later treatment of this decision. For example, the judgment relies on the Court of Appeal’s discussion in Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) [2011] NSWCA 344 about the public policy objectives of offers of compromise and the need for a genuine compromise ([42]-[45]). It also discusses State of New South Wales v Hamod [2011] NSWCA 376 in relation to the court’s discretionary power to set off costs orders ([74], [81]). Those authorities inform Ward J’s reasoning, but they do not show how subsequent courts have treated Lahoud.
The judgment leaves open how a differently worded offer would have affected the result. Ward J observed that if there had been an understood or agreed regime for how the set-off would operate, a general reference to set-off might not have created the same uncertainty ([99]). The reasons do not specify the exact wording that would have removed every possible concern.
The judgment also does not decide whether acceptance of either offer would, as a matter of contract or procedure, actually have affected the costs assessment or appeal. For the second offer, the possibility that acceptance could be treated as conceding the specified certificate was enough to inform the reasonableness assessment. The judge expressly treated the ultimate construction as a moot point ([124]-[125]).
The decision does not resolve how a court should quantify or compare interest effects where the offer amount is to be set off against costs that are still being assessed, particularly where the interest calculation itself depends on an earlier costs order and a formula based on assessed costs. Ward J noted that the operation of that calculation had not been made clear ([108]-[110]).
Finally, the judgment records that the Victor Lahoud parties were seeking to pursue a claim for “delay damages”, but that claim was not determined in this costs judgment. Ward J treated it as an inchoate claim that could not readily be included in assessing the reasonableness of the offers on the information then relevant ([58]). The decision therefore does not determine whether that claim would succeed or how it might affect any later costs question.
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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
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:
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 March 2012
Lahoud
Lahoud
[2007] VSC 552
[2005] VSCA 298
[2000] VSC 163
[2008] VSC 580
[2008] QSC 36
(1991) 25 NSWLR 358
(1992) 27 NSWLR 721
(1992) 37 FCR 445
(2008) 23 VR 349
(1990) 25 NSWLR 353
(1967) 11 FLR 495
(1936) 56 CLR 50
(1993) 42 FCR 97
The Joseph Lahoud parties must pay the Victor Lahoud parties’ party/party costs of the relevant proceedings, except that each party must bear its own costs of the hearings on 19 November 2010 and 3 December 2010; the court reserved the costs of the remittal hearing for further submissions.