Letterbox Holdings Pty Ltd v Stephen John Kirkham & Anor

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

05698/02 Letterbox Holdings Pty Ltd v Stephen John Kirkham and Anor JUDGMENT 1 HIS HONOUR: By its Further Amended Summons the Plaintiff applies for leave to appeal pursuant to s 38(4)(b) of the Commercial Arbitration Act 1984 (NSW) (the Act). The Arbitrator, the Honourable J M N Rolfe QC, made an Interim Award on 1 November 2002 in which awards for costs were made in respect of several issues which arose during the conduct of the arbitration and in respect of its final outcome. The Defendants do not consent to the application. 2 Paragraph (a) of the Interim Award stated: "That Letterbox Holdings Pty Limited pay the costs of Mr and Mrs Kirkham on a solicitor and client basis of the claim made by Letterbox Holdings Pty Limited and of the cross-claim brought by Mr and Mrs Kirkham against Letterbox Holdings Pty Limited and the costs occasioned by the submissions as to costs on a party and party basis, such costs to be assessed if not agreed". 3 This application is concerned with so much of this award which provided that the Plaintiff pay the costs of the Defendants on a solicitor and client basis of the Defendants' cross-claim. 4 Also before the Court is the Defendants' Notice of Motion in which is sought leave to enforce the award of costs of 1 November 2002, judgment in terms of the award, an order that the costs be assessed and payable forthwith, and for a direction pursuant to s 202 Legal Profession Act 1987 (NSW). 5 Section 38(5) of the Act provides conditions which must be fulfilled before leave to appeal may be granted. It provides: "38(5) The Supreme Court shall not grant leave under subsection (4) (b) unless it considers that: (a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement; and

(b) there is: (i) a manifest error of law on the face of the award; or (ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law. " 6 As to the application of this provision, the observations of Priestley, JA in New South Wales v Coya (Constructions) Pty Ltd , (NSWCA, 4 August 1995, Unreported), are of fundamental importance. His Honour said: "... the New South Wales Parliament has taken note of the excesses that can grow out of commercial arbitration and passed laws intended to keep it within acceptable bounds. These laws have been directed in particular at narrowing very sharply the ways in which arbitrator's decisions can be challenged in the courts.

ARBITRATIONS AND APPEALS UNDER THE ACT. One object of the Act is to promote the private, prompt and speedy hearing of contractual disputes which the parties to the contract have agreed should be decided by arbitration.

To help achieve this object an appeal against an Arbitrator's award is allowed to the Supreme Court only in restricted circumstances. If all parties to the arbitration consent an appeal is permitted limited to questions of law arising out of the award, (s38(2) and s38(4)(a)). In the absence of such consent, if the Supreme Court grants leave to a party to appeal, then that party may appeal on any question of law arising out of the award, (s38(2) and s38(4)(b)). S38(5) says that the Supreme Court shall not grant leave unless the court considers that one of two sets of two conditions is fulfilled. The first condition is the same in each of the two sets of conditions: that the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement. The second condition of the first set of two conditions is that there is a manifest error of law on the face of the award. The second condition of the second set of two conditions is that there is strong evidence that the Arbitrator made an error of law and that the determination of the question may add or may be likely to add substantially to the certainty of commercial law.

S38(5) took its present form by an amendment to the Act made in 1990. Since then this court has indicated that the restrictions on appeals on questions of law arising out of awards of Arbitrators to the Supreme Court must be adhered to: Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 203; Natoli v Walker, 26 May 1994, unreported, Kirby P and Mahoney and Meagher JJA." Background 7 The nature of the case is conveniently summarised in the Further Amended Summons as follows: "In 1998 the plaintiff purchased a freight express business from the defendants, the purchase being completed at the end of 1998. The purchase was effected on the basis of representations made by the defendants to the plaintiff. In the plaintiff's claim the plaintiff contended that the defendants had engaged in misleading and deceptive conduct in contravention of section 52 of the Trade Practices Act 1974 as amended in that they misrepresented the character of the business, and hence its likely profitability, and also misrepresented the July-November accounts in that expenses were not accrued so as to appropriately match income and expenditure, with the consequence that post settlement an excessive amount of expenditure was brought to account in respect of December 1998 there by demonstrating a far less attractive position for the business. In the defendants' cross-claim, the defendant sought the payment of extra consideration under an escalator clause in the contract for sale of the business. By his award, the Arbitrator found that the plaintiff's case failed and also that the defendants' cross-claim failed. Notwithstanding the Arbitrator's findings he made an award on costs requiring the plaintiff to pay the defendants' costs in respect of the claim and cross-claim on a solicitor and client basis, such costs to be assessed if not agreed." 8 By his Interim Award published on 23 July 2002 on the issues of liability and damages the Arbitrator determined the issues arising under the claim and the cross-claim and held that both the claim and the cross-claim should be dismissed. The remaining questions before him were how the costs of the hearing should be paid as well as some subsidiary cost questions with which these proceedings are not concerned. The costs questions were argued before him on 19 September 2002. By his letter to the solicitors for the parties of 2 October 2002 the Arbitrator invited further submissions in respect of a matter which had not been hitherto addressed. Further submissions on behalf of the parties were put to him for consideration, and on 1 November 2002 he made the Interim Award on costs. 9 On the issue of costs of the Plaintiff's claim the Arbitrator concluded that the proper exercise of his discretion required an order that the Plaintiff pay the Defendants' costs on a solicitor and client basis. Although it is contended that the Arbitrator has no power to order costs on a solicitor and client basis, there is no challenge otherwise to that part of the award.

The Plaintiff's claims 10 The Plaintiff claims that the requirements of each of s 38(5)(a), (b)(i) and/or (ii) are satisfied. 11 As to s 38(5)(a) it is submitted that the amount claimed by the Defendants as costs of the claim and cross-claim is $599,659.27. It is common ground that the proportion referable to the cross-claim is significant, apparently to the order of $200,000.00. If the Plaintiff is required to pay the Defendants' costs of the cross-claim on any basis its financial position will be substantially affected. 12 As to s 38(5)(b)(i) the Plaintiff claims that there are manifest errors of law on the face of the Interim Award which resulted in:

(a) the award of costs on a solicitor and client basis to be assessed or agreed; and

(b) the award of costs to the Defendants in respect of their unsuccessful cross-claim. 13 As to s 38(5)(b)(ii) the Plaintiff claims that the determination of the questions raised in this appeal are likely to add to the certainty of commercial law by clarifying the basis and type of costs award permitted to be made by arbitrators following the change to the costing regime in New South Wales arising from the amendments brought about the Legal Profession Reform Act 1993 (NSW). 14 It is convenient to first consider the Plaintiff's case in respect of the issues relevant to the requirements of s 38(5)(b)(i) and (ii). Jurisdiction to award costs on a solicitor and client basis 15 The Arbitrator proceeded on the basis that his jurisdiction to award costs on a solicitor and client basis is to be found in s 34(1) of the Act which provides: "34(1) Unless a contrary intention is expressed in the arbitration agreement, the costs of the arbitration (including the fees and expenses of the arbitrator or umpire) shall be in the discretion of the arbitrator or umpire, who may: (a) direct to and by whom and in what manner the whole or any part of those costs shall be paid, (b) tax or settle the amount of costs to be so paid or any part of those costs, and (c) award costs to be taxed or settled as between party and party or as between solicitor and client." 16 The first submission on behalf of the Plaintiff was that by reason of the effect of certain provisions of the Legal Profession Reform Act the Arbitrator had no jurisdiction to award costs on a solicitor and client basis. In particular, it was put that the enactment of para 45 of Sch 8 to the Legal Profession Act and of s 3 and Sch 3 of the Legal Profession Reform Act brought about the implied repeal to part of s 34(1)(c) of the Act with the result that an arbitrator no longer was empowered to award costs to be taxed or settled as between solicitor and client. That is to say, it was contended that the effect of the implied repeal was to delete from s 34(1)(c) the words "… or as between solicitor and client." so that it would read: "(c) Award costs to be taxed or settled as between party and party". 17 Paragraph 45 of Sch 8 to the Legal Profession Act provides: "The effect of Section 3 and Schedule 3 to the Legal Profession Reform Act was to omit a new Part 11 of the Legal Profession Act for the existing Part 11 and to insert a new Part 11 with the heading "Legal fees and other costs". 18 Reference was made to s 4 and Sch 6 to the Legal Profession Reform Act , by which consequential amendments were made to s 148(B)(1)(c) of the District Court Act 1973 (NSW) and to s 76(1)(c) of the Supreme Court Act 1970 (NSW) in the following terms: "The Court may order costs to be assessed on the basis set out in Division 6 of Part 11 of the Legal Profession Act 1987 or on an indemnity basis."

(Although not specifically referred to in submissions, it may be noted that the same amendment was made to Compensation Court Act 1984 (NSW) s 18(2)(c), Land and Environment Court Act 1979 (NSW) s 69(2)(c) and Local Courts (Civil Claims) Act 1970 (NSW) s 34(1)(c)). 19 On behalf of the Plaintiff it was put that Sch 3 to the Legal Profession Reform Act effected a new regime in respect of costs wherein no provision existed for costs to be ordered or assessed on any basis other than that to be found in the new Div 6 of Pt 11 of the Legal Profession Act or on an indemnity basis. Thus, it was said, by repealing existing Pt 11 which did allow for taxation on a solicitor and client basis and enacting a new Pt 11 which did not, the legislation by implication repealed that part of s 34(1)(c) of the Act referred to. It was put that the heading of Subdiv 3 of Div 6 of Pt 11 Legal Profession Act namely, "Assessment of party/party costs", indicates that an assessment of costs by a costs assessor may proceed only on either one of two bases, that is, either on a party and party basis or on an indemnity basis. 20 The substance of the submission to the Court was the same as that considered by the Arbitrator in the following paragraphs of his reasons: "40. In its written submissions, Letterbox returned to the question whether I had any jurisdiction to award costs on a solicitor and client basis. Reference was made to the Legal Profession Act 1993, and it was submitted that I had no jurisdiction to order a quantification of costs except as may be assessed under section 208F of that Act or as agreed between the parties. It was further submitted that section 208F provided for the assessment of costs ordered by me on either a party and party or indemnity basis and there is no provision for assessment on a solicitor and client basis. It was therefore submitted that not only could I not make an order on that basis by the interim costs' order previously made "was made in excess of jurisdiction". The submission continued that in the light of section 208F the decision in South Australian Superannuation Fund can no longer have any meaningful application in this State "with the result that it may be open to an Arbitrator to be able to order indemnity costs", and that if those submissions were accepted "then it appears necessary for further submissions to be made by both parties on this question". 41. Section 208F is headed "Assessment of costs - costs ordered by court or tribunal" and provides:- "(1) When dealing with an application relating to costs payable as a result of an order made by a court or a tribunal, the costs assessor must consider: (a) Whether or not it was reasonable to carry out the work to which the costs related, and (b) What is a fair and reasonable amount of costs for the work concerned. (1A) An assessment must be made in accordance with the operation of the rules of the relevant court or tribunal that made the order for costs. (2) A costs assessor is to determine the costs payable as a result of the hearing by assessing the amount of the costs that, in his or her opinion, is a fair and reasonable amount. (3) If a court or a tribunal has ordered that costs are to be assessed on an indemnity basis, the costs assessor must assess the costs on that basis, having regard to any relevant rules of the court or tribunal. (4) The costs assessed are to include the costs of the assessment (including the costs of the parties to the assessment, and the costs assessor). The costs assessor may determine by whom and to what extent the costs of the assessment are to be paid. (5) The costs of the costs assessor are to be paid to the Manager, Costs Assessment". 42. In my view, Section 208F does not provide that costs are to be assessed on either a party and party or indemnity basis. The only reference to the assessment of costs on an indemnity basis is in sub-section (3), which is only activated if an order is made that costs be assessed on that basis. 43. It was agreed by Mr Underwood, in his submissions, that although there is no specific definition of a "Tribunal" it is "apt to include 'arbitrators' conducting arbitrations under the" Act. In those circumstances the costs, for the reasons to which I have referred, may be ordered either on a party and party or solicitor and client basis and, the order having been made, the obligation of the costs assessor is to assess costs conformably with that order. It seems to me that that is entirely consistent with sub-section (1A). 44. In the result I do not propose to vary the orders I have made that Letterbox pay Mr and Mrs Kirkham's costs on a solicitor and client basis." 21 In my respectful opinion, the Arbitrator's reasons and conclusion were entirely correct. Division 6 of Pt 11 of the Legal Profession Act establishes the procedure and machinery for the assessment of costs in various circumstances. Subdivision 3 (in which ss 208F, 208G, 208H and 208I are found) is concerned with the assessment of costs ordered by a court or tribunal. Sections 208F, 208G and 208H set out a range of matters for consideration by a costs assessor in assessing costs payable as a result of an order by a court or a tribunal. 22 I agree with the Arbitrator's view that s 208F does not limit the bases for assessment to either party and party or indemnity (Reasons, para 42). It is necessary to look to the order of the court or tribunal for the specification of the basis upon which the assessor is to proceed. 23 Further support for this view is provided by s 208I which provides:

"This Division does not limit any power of a court or a tribunal to determine in any particular case the amount of costs payable or that the amount of the costs is to be determined on an indemnity basis." Relevantly, s 34(1)(b) of the Act empowers an arbitrator to tax or settle the amount of costs to be paid, presumably upon the basis of the award envisaged by subs 1(c) being either party and party or solicitor and client. It seems to me that the effect of s 208I is to preserve the basis of a costs award with regard to which an arbitrator (as distinct from an assessor) may determine the amount to be paid. 24 Thus it seems reasonably plain that this legislation has nothing to say as to the jurisdiction of a court or a tribunal to make an order as to costs which may, or may not, result in an application for assessment, and an assessment, under Subdiv 1 and 3 of Div 6 of Pt 11 respectively. As the Arbitrator points out in para 43 above, the order having been made, the obligation of the costs assessor is to assess costs conformably with that order. 25 The principles relevant to the issue of implied repeal are stated in Saraswati v R (1991) 172 CLR 1 at 17, where Gaudron J said: "It is a basic rule of construction that, in the absence of express words, an earlier statutory provision is not repealed, altered or derogated from by a later provision unless an intention to that effect is necessarily to be implied. There must be very strong grounds to support that implication, for there is a general presumption that the legislature intended that both provisions should operate and that, to the extent that they would otherwise overlap, one should be read as subject to the other: see Butler v Attorney-General for Victoria (1961) 106 CLR 268, per Fullagar J, 276, and per Windeyer J, at 290. More particularly, an intention to affect the earlier provision will not be implied if the later is of general application … and the earlier deals with some matter affecting the individual…. Nor will an intention to affect the earlier provision be implied if the later is otherwise capable of sensible operation." 26 In my opinion the legislation relied upon by the Plaintiff deals with subject matter substantially different from that with which s 34(1) of the Act is concerned, which is the jurisdiction of an arbitrator to make an award as to costs. Analysis of the legislation leads inevitably to the conclusion that it would be contrary to well-settled principle to hold that it has, by implication, repealed s 34(1)(c) of the Act by omitting therefrom the words "… or as between solicitor and client". The submission must be rejected. 27 By way of further comment it seems to me that the amendments to court Acts referred to above consequential upon the enactment of the Legal Profession Reform Act give no support to the argument that the legislature overlooked the necessity to similarly amend the Act. Analysis of "Schedule 6 - Consequential Amendment of Other Acts" to the Legal Profession Reform Act shows amendments were made to many acts including sections of those which source the jurisdiction of various courts to make orders for costs. In my view the fact that no similar amendment was thereby made to the Act gives no support to the proposition that this was the result of some parliamentary oversight. Indeed, the terms of s 208I strongly suggest otherwise. The probable explanation for not so amending the Act is that parliament did not intend to do so, perhaps because it was aware of the differences between arbitral and court proceedings. 28 On this issue, the Plaintiff has not shown that there is an error of law, manifest or otherwise, on the face of the Interim Award that costs are to be on a solicitor and client basis. Accordingly, it has not met the requirements for leave under s 38(5)(b)(i) or (ii) of the Act.

29 The second submission of the Plaintiff was that the Arbitrator erroneously took into account the rejection by the Plaintiff of the offers made on behalf of the Defendants by Mr Maxwell orally on 18 December 2000 and by his letter of 5 June 2001. It was contended that he was precluded by s 34(6) of the Act from taking into account these matters in the exercise of his discretion on the question of costs because the offers were not offers of compromise made in accordance with rules of court. It was submitted that the subsection qualified the discretion conferred on the Arbitrator by s 34(1) in that the only type of offer to be considered was an offer of compromise within the meaning of subs (6). There being no reference in it to any other form of offer, the proper construction of s 34 required the application of the principle "expressio unius, exclusio alterius" (sic). The section, so it was said, evidences the intention of the legislature to exclude from consideration on the question of costs any form of offer which was not an offer of compromise. 30 The Arbitrator explained the offers in his reasons as follows: "7. In support of an application for indemnity costs or, alternatively, costs on a solicitor and client basis, Mr McKeand relied on an affidavit of his instructing solicitor, Mr D J Maxwell, sworn on 5 September 2002. There was no objection to any part of that affidavit and Mr Maxwell was not required for cross-examination. The affidavit dealt with two main reasons why costs should be paid on one or other of the bases to which I have just referred. The first was that on 19 December 2000 (sic) Mr Maxwell had a telephone conversation with the solicitor for Letterbox, Mr W L Hewett, in which , inter alia, Mr Maxwell told Mr Hewett that Mr and Mrs Kirkham were "prepared to walk away if" Letterbox was. He noted this conversation on annexure "B" to his affidavit and Mr Hewett's response "No way Star say O/C's coy was worthless". The letters "O/C" means "Our Clients", ie Mr Maxwell's. On 5 June 2001 Mr Maxwell wrote a "Without Prejudice" letter to Mr Hewett stating:- "Our clients offer of settlement of this dispute with your client was put during the course of the writer's telephone conversation with your Mr Hewett on 18 December 2000 and was during that same telephone conversation rejected out of hand by Mr Hewett. Our instructions are that our client's offer was in fundamentally the same terms as an offer of settlement conveyed to Mr Kirkham by Mr Mullen of your client back in October 1999. For the record, our client's offer of settlement was that all parties to the subject dispute "walk away" and be responsible for their own costs and expenses in any way connected with the dispute. We are instructed by our clients to again make to your client(s) an offer of settlement of the dispute on those same terms. Such offer of settlement will remain open for acceptance only until 4pm this Friday, 8 June 2001. Please obtain your client's instructions and let us know the outcome". No response was received to this letter until 8 May 2002 when Mr Hewett wrote to Mr Maxwell a letter stated to be "Without Prejudice Save as to Costs". The letter stated, inter alia, that Letterbox "believes that it is incumbent upon it to at least try to extend to your client an offer in an attempt to resolve the matter". It continued that Mr Hewett had been instructed to offer to resolve the matter by the payment to Letterbox by Mr and Mrs Kirkham of $2.3m, the calculation of which was then set out in some detail. The offer remained open for acceptance until 5pm on Wednesday 15 May 2002. It was not accepted. " 31 Sections 34(5) and (6) provide: "(5) Where a sum of money has been paid into the Court in accordance with the rules of court in satisfaction of a claim to which an arbitration agreement applies, the arbitrator or umpire shall, in exercising the discretion as to costs conferred on the arbitrator or umpire by subsection (1), take into account both the fact that money was paid into the Court and the amount of that payment. (6) Where in accordance with rules of court an offer of compromise has been made in relation to a claim to which an arbitration agreement applies, the arbitrator or umpire shall, in exercising the discretion as to costs conferred on the arbitrator or umpire by subsection (1), take into account both the fact that the offer was made and the terms of the offer." 32 It was common ground that the Defendants' offers were not offers of compromise within the meaning of subs (6). 33 The Arbitrator invited submissions from the parties as to the effect of subs (5) and (6) of s 34 in the circumstances described in his reasons: "39. The problem I foresaw was that sub-sections (5) and (6) made no reference to any offer in the nature of a Calderbank letter offer and, accordingly, on 2 October 2002 I wrote to the solicitors for the parties stating, inter alia:- "I shall be pleased if you will advise me whether any party wishes to put any submissions based on either or both of sub-sections (5) and/or (6) of section 34 of the Commercial Arbitration Act in regard to the claim for costs on a solicitor and client basis arising from the offers made by Mr Maxwell orally in December 2000 and by letter in June 2001. I have raised the point as there may be a question of jurisdiction involved". 34 The issue to which he was directing attention was whether an arbitrator in the face of those subsections could have regard to an offer made in a Calderbank letter (Reasons, para 45). With reference to the submissions put to him on behalf of the Plaintiff the Arbitrator went on to say: "46. These submissions did not suggest that the legislative framework precluded consideration being given to a Calderbank letter offer rather they went to questions of discretion. The reasons for this, if I may say so with respect, would appear to be that there is authority for the proposition that sub-section (6) and, inferentially, sub-section (5) do not preclude an arbitrator, in the exercise of his or her discretion, having regard to an offer made by way of a Calderbank letter: Mideco Manufacturing Pty Limited v Tait (1989) VR 50. 47. In that case Gobbo J considered various questions including the effect of section 34(5A) of the Victorian Commercial Arbitration Act, which is in the same terms and sub-section (6) of the Act. In that case offers had been made by correspondence and not in accordance with the rules of court. 48. His Honour recognised that the letters did not comply with the rules of court and, at pages 56-57, said: "I have concluded that the offer of compromise in the present case does not meet the obligation I have referred to, in that it does not contain a statement that it is served in accordance with part 2 of O26 of the Rules. This does not mean that the offer is wholly ineffective, but it does mean that it cannot properly be described as being an offer of compromise made in accordance with the rules, within the strict meaning of section 34(5A)". 49. His Honour then considered the effect of a Calderbank letter and, at page 58, after considering submissions made against the application of such a letter, he said: "On the material as it stands there would not seem to be any good reason why the two letters should not be admissible on the issue of costs and why the arbitrator should not be able to have regard to them in the exercise of his discretion". 50. Accordingly, as I understand it, his Honour was saying that whilst section 34(5A) required an arbitrator to have regard to an offer of compromise made under the rules of court, that did not preclude the arbitrator, in exercising his or her discretion in relation to costs, having regard to other circumstances, such as an offer made by way of a Calderbank letter. A contrary result would, in my opinion, have been very surprising having regard to the desirability of commercial settlements being reached as expressed by Rogers J in Masssiter . 51. Mr McKeand's submissions pointed out that section 131(2)(h) of the Evidence Act 1995 permitted the tender of such a letter on the question of costs, even though the letter did not state that it was written without prejudice "save as to the question of costs". No submission was made to the contrary of this". 35 In my opinion, no proper construction of subs (6) could lead to the conclusion that it qualified or limited the wide discretion provided by subs (1) other than by the specific direction to the Arbitrator to take into account both the fact that the offer of compromise was made and the terms of the offer. Subsections (5) and (7) similarly oblige the Arbitrator to take into account the matters specified therein. These subsections do not curtail the ambit of discretion provided under subs (1) which is to be exercised with regard to the circumstances of the case in hand. Thus it seems to me that for the proper construction of s 34 the application of the principle "expressio unius personae vel rei, est exclusio alterius" simply does not arise, and the submission must be rejected. 36 In my respectful opinion the Arbitrator correctly concluded that he was not precluded in the exercise of his discretion from having regard to the offers in this case. On this issue the Plaintiff has not shown that there is an error of law on the face of the Interim Award and thus has not met the requirements for leave under s 38(5)(b)(i) or (ii) of the Act. Inconsistent findings 37 A question of law posed by the Plaintiff was in these terms: "(e) whether it was open to the Arbitrator to make a finding on costs based upon a finding in his reasons for costs which was inconsistent with and the converse of another finding made by him in his reasons on the question of liability and damages in the arbitration". 38 The Plaintiff's written submission on this question was in the following terms: "In his reasons for his award on the question of liability the arbitrator found that the plaintiff's claim was one which was being pursued in anticipation of a claim by the defendants for extra compensation under the sale agreement by way of "earn-out" (see paras 130-133). Notwithstanding this finding as to motivation the arbitrator in his reasons on costs made a contrary finding to the effect that the defendants' unsuccessful cross-claim would not have been pursued but for what ended up being the plaintiffs' claim (arbitrator's reasons para 59)". 39 When one turns to paras 130-133 of the Interim Award on the issues of liability and damages and reads them in context, it will be seen that the Arbitrator undertook an analysis of some correspondence between Mr Kirkham and Mr Mullen being letters dated 21 April, 22 April, 1 May, 18 May, 1999 and the communication from Mr Mullen to Mr Breene of Bradfield & Scott which was Exhibit 5. At para 133 the Arbitrator said: "I find it very hard to reconcile this letter, sent on 30 April 1999, with Mr Mullen's letter to Mr Kirkham of 18 May 1999, save on the basis that Mr Mullen was wanting the best of both worlds. He wanted Mr Kirkham to remain, if that was possible; but he did not want to pay him any earn-out, if that was possible. If one has been misled or deceived one, particularly with the business acumen of Mr Mullen, does not hold back to mount a defensive claim, particularly when there was no need to do so. It is also difficult to reconcile the complaints about the December accounts with the reports furnished to the board on 16 February 1999 in relation to the December position. However, this letter is of considerable significance in providing an insight into Mr Mullen's methods of operation. It showed he was not interested in seeking any redress from Mr Kirkham in relation to the sale, but rather that he wanted to be in as strong a negotiating position as possible to retaliate to any claim that Mr Kirkham may bring against LBH. It showed that this was his stance even though he said he had reason to believe Mr Kirkham may have acted improperly. This leads to the obvious conclusion that he was content with the purchase, but wished to resist any claim by Mr Kirkham".

40 According to the chronology the Defendants' offers were made on 18 December 2000 and 5 June 2001. On 26 July 2001 the Arbitrator was appointed. The Plaintiff's Statement of Issues is dated 22 October 2001 and its further Amended Statement of Issues is dated 21 May 2002. The arbitration was heard between 25 May and 13 June 2002. 41 Even a cursory reading of the passages from each interim award, with regard to the history of events according to the chronology, demonstrates that there is no inconsistency of findings as submitted. These paragraphs from the liability and damages award provide no support for the submission that the Plaintiff's motivation in pursuing its claim as litigated was somehow in anticipation of a claim by the Defendants. The so-called claims or allegations the subject of the correspondence and communications in April and May 1999 referred to in these paragraphs cannot be understood as akin to the claim referred to in para 59 of the reasons for the costs award. Obviously the notion of the defensive claim referred to in this part of the liability and damages award is different from, and is incapable of comparison with, the claim by the Plaintiff which was considered in the costs award. 42 In any event, and assuming for the argument that the Plaintiff has accurately described the findings of the Arbitrator as to the motivation of each party, it is difficult to see an inconsistency between a finding that the Plaintiff's motivation in bringing its claim was in anticipation of a claim which might be brought against it by the Defendant, and a finding that the Defendant would not have brought its cross-claim but for the Plaintiff's claim against them. 43 In my opinion the agitation of this issue has revealed no error of law within the meaning of s 38(5)(b)(i) or (ii) of the Act. For completeness I add that the Plaintiff has also failed to satisfy the second limit of subs (5)(b)(ii) in that it cannot be said that determination of the question may add, or may be likely to add, substantially to the certainty of commercial law. It is obvious that the issue is limited to the facts of this case.

The exercise of discretion 44 The Arbitrator rejected the Plaintiff's submission that the Defendant should be ordered to pay the Plaintiff's costs of the cross-claim on a solicitor and client basis (Reasons para 34). He went on to say that he did not consider "… that costs should be payable other than on a party and party basis on the cross-claim. This observation is subject to the question of the effect of the offer of settlement, which was made and rejected". 45 He expressed the view that the claim and cross-claim must be viewed as one piece of litigation (Reasons, para 35). 46 The Arbitrator considered (Reasons, para 52) that an offer requires a party to evaluate its case and to make some decisions as to the likelihood of success. He found that by the time of receipt of Mr Maxwell's letter of 5 June 2001, the Plaintiff, over a period of 18 months, had failed to prepare its case even to the stage of making an evaluation of the prospects of success. 47 He said: "53. So far as the claim was concerned, it had been formulated originally in December 1999. Thereafter, and indeed several months before that, according to what is asserted in Mr Maxwell's letter of 5 June 2001, which was not disputed, offers of settlement had been made. By the time of the receipt of Mr Maxwell's letter of 5 June 2001, Letterbox had had some 18 months to assess its position including, of course, the damages it alleged it had suffered. Mr Hewett had had the benefit of Mr Star's views on the issue of damages. It is obvious from the history of the matter leading up to the vacating of the original hearing date that Letterbox had not given any proper attention to these matters. No acceptable explanation was given for the failure by Letterbox to do this, although there was some explanation given for its failure to be ready to proceed on the first hearing date. 54. Part of the basis for that failure was subsequently denied. Nonetheless, the simple fact is that over a period of 18 months Letterbox had failed to prepare its case even to the stage of making an evaluation of the prospects of success. As damages was the gist of the claim made, it was clearly, in my opinion, unreasonable for Letterbox to have commenced the litigation without any satisfactory evidence of that component. This conduct, in my opinion, amounted to "unreasonable conduct": Rosniak . Reasonable conduct on the part of a party contemplating commercial litigation would demand that early steps be taken to assess the various elements of its case. Subject to one matter, to which I shall refer in a moment, when all the circumstances of this case are considered, going back to the initial disputes between the parties which had manifested themselves by mid-1999 and led to the letter form Letterbox of December 1999, the failure by it to be in a position to respond to the offer, having regard to oral notice of the offer in December 2000, by June 2001, amounts, in my view, to "unreasonable conduct", which must, in my opinion, be taken into account in determining how to exercise the discretion. In my opinion the inability to better the offer when made amounted to unreasonable conduct to which I am entitled to have regard, in the exercise of my discretion in determining how costs should be awarded." 48 He proceeded as follows: "56 …. Letterbox must have been aware that it was a serious offer and, so far as it is relevant, there can be no doubt that it was an offer put forward with a view to resolving the litigation. The terms of Mr Maxwell's letter could not, in my opinion, have been more plain. 57. The question, which then arises, is the consequence of these conclusions. So far as Letterbox's claim is concerned the result is that they provide a further basis to support the view to which I have come as to the basis on which costs of the claim should be paid. 58. The more difficult question is how the costs of the cross-claim should be adjusted, if at all. 59. In my opinion, the proper conclusion is that the cross-claim would not have been pursued, but for the claim. That would accord with the probabilities and it was stated by Mr Maxwell in his affidavit, which was not objected to nor sought to be challenged. As I have said the cross-claim was not in any way futile and Mr and Mrs Kirkham proved a substantial, although not a sufficient, amount in relation to it. I have also remarked that the litigation was, in essence, one piece of litigation. 60. Although this aspect of the matter has given me cause for concern, it seems to me that the proper exercise of discretion demands that Letterbox should pay Mr and Mrs Kirkham's costs of the cross-claim. After all, I am satisfied that it was Letterbox's failure to settle, which led to this lengthy arbitration, including the time spent in fighting the cross-claim. As, in my opinion, the conduct of Letterbox was unreasonable, I consider the costs should be paid on a solicitor and client basis". 49 The Plaintiff submits that its challenge to the award of costs to the Defendants in respect of the unsuccessful cross-claim raised the following questions of law: "(1) Whether an offer by a party to "walk away" from a dispute with each party paying his own costs, where there is both claim and cross-claim, can be construed in respect of the determination of costs on the cross-claim as an offer without condition to abandon the cross-claim with each party paying his own costs; (2) If a party makes an offer to settle a cross-claim by agreeing to a dismissal on the basis that each party pays his own costs does the other party secure a better outcome if the cross-claim is simply found to fail". 50 In substance the Plaintiff submitted that the Arbitrator fell into error by interpreting the Defendants' offers as consisting of two separate and distinct components, one being an offer in respect of the Plaintiff's claim, the other being one in respect of the Defendants' cross-claim. It was said that the Arbitrator proceeded on the erroneous basis that the discrete offer as to the cross-claim was capable of acceptance. It was said that, upon its proper construction, this "walk away" offer was one offer as to which the acceptance of one component was conditional upon acceptance of the other. It was put that the Arbitrator wrongly found the Plaintiff's conduct was unreasonable by reason of its non-acceptance of the offer as to the cross-claim, there being no such discrete offer capable of acceptance. 51 The Plaintiff contends that the erroneous approach of the Arbitrator is evidenced in para 52 of his Reasons, particularly by the statement: "In the present case there was no difficulty, so it seems to me, in that part of the offer whereby Mr and Mrs Kirkham agreed to abandon their cross-claim and to pay their own costs". 52 In order to resolve the questions raised by the Plaintiff it is necessary to read the contents of para 52 in the context of the reasoning expressed in paras 53-60. 53 The thrust of the reasons in these paragraphs demonstrates that the failure of the Plaintiff to evaluate its case and to make some decision as to the likelihood of success was unreasonable. Obviously, by the expression "its case", was meant the Plaintiff's case or position in respect of the entire litigation including its claim and the cross-claim. The point made by reference to that part of the offer whereby the Defendants agreed to abandon their cross-claim and to pay their own costs was that the Plaintiff would have no difficulty in evaluating that element of the dispute. Absent explanation or excuse this was a factor taken into account in concluding that it was unreasonable for the Plaintiff to pursue the litigation when it had failed to responsibly evaluate its prospects of success. 54 Furthermore, the Arbitrator's reasons indicate to me that he kept in mind the principle that, generally, costs follow the event and that, for the purpose of this case, he treated the entire litigation as the event. The circumstances in which the litigation came to be commenced and maintained were in evidence, and entitled the Arbitrator to take a broad view of its outcome on the question of costs. He found that the Plaintiff was responsible for the litigation, the components of which were the claim and the cross-claim. Importantly, he found that the prosecution of the Plaintiff's claim was unreasonable but for which there would have been no cross-claim. I think it is fairly clear that the exercise of his discretion did not turn merely on a finding that the Plaintiff's unreasonable conduct was its rejection of so much of the offers as related to the cross-claim. (I should also observe that the Arbitrator did not overlook the fact that the offers, which were expressed to be for the settlement of the "dispute", were put on behalf of the Defendants prior to the commencement of the litigation).

55 My understanding of the Arbitrator's reasons leads me to the conclusion that they do not give rise to the questions which the Plaintiff contends to be questions of law as set out in para 49 above. The determination of the question of costs as to the cross-claim did not depend upon the construction of the offers so as to differentiate between claim and cross-claim. Also, the determination did not involve consideration of questions usually raised in costs disputes concerning Calderbank letters or offers of compromise and applicable rules of court. Indeed, the Arbitrator stated (Reasons, para 35) that in the circumstances of this case it would be inappropriate and artificial to do so, for example, with respect to the Plaintiff's outcome where the offer had not been accepted. 56 In short, the Arbitrator found that the Defendants had become involved in litigation which should not have been commenced had the Plaintiff acted reasonably in regard to the offers, or at all. It is fair to infer that he found that the Plaintiff knowingly took a commercial risk in pursuing the litigation and rejecting the offers (Reasons, para 56). The cross-claim was an incident of this litigation. His conclusion was that the circumstances justified an award so that the Plaintiff should bear the costs of the whole of the litigation which included those of the cross-claim, even though the Plaintiff was successful on the cross-claim. As he said (Reasons, para 60): "After all, I am satisfied that it was Letterbox's failure to settle, which led to this lengthy arbitration, including the time spent in fighting the cross-claim". 57 Section 34(1) of the Act confers a broad discretion. It does not declare that costs automatically follow the event. The discretion must be exercised judicially in accordance with established principles and factors directly connected with the litigation (see generally Oshlack v Richmond River Council (1998) 193 CLR 72 at 96-98). The primary purpose of an award of costs is to indemnify the successful party and, unless the circumstances justify departure from it, the general principle is that a successful party in litigation is entitled to an award of costs in its favour. As explained by McHugh J in Oshlack (supra page 97) at para 69: "69. The traditional exceptions to the usual order as to costs focus on the conduct of the successful party which disentitles it to the beneficial exercise of the discretion. In Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd , Devlin J formulated the relevant principle as follows: No doubt, the ordinary rule is that, where a plaintiff has been successful, he ought not to be deprived of his costs, or, at any rate, made to pay the costs of the other side, unless he has been guilty of some sort of misconduct. "Misconduct" in this context means misconduct relating to the litigation, or the circumstances leading up to the litigation…" 58 In this case it cannot be said that the Arbitrator erred in treating the entire litigation as the relevant event and in finding that the claim and the cross-claim were attributable to the Plaintiff's misconduct in relation to it. It appears to me that he perceived that the real question as to costs in the circumstances was not the entitlement of a party separately in respect of claim or cross-claim, but the overall entitlement or obligation from or to the other. His decision was based on the finding as to the Plaintiff's unreasonable conduct which, as a matter of justice, led to an overall obligation to the Defendants for their costs in respect of each component of the litigation. In my opinion, the facts found by the Arbitrator provided a proper basis for the discretionary award made as to the costs of that component of the litigation which was the cross-claim, and justified departure from the ordinary rule. 59 The Plaintiff has not established that the Arbitrator erred in the exercise of his discretion in making the costs award in respect of the cross-claim. Having demonstrated no error of law on this issue, manifest or otherwise, the Plaintiff has not met the requirements for leave under s 38(5)(b)(i) or (ii) of the Act. 60 With regard to this issue I am of the view that not only is there no evidence that the Arbitrator made an error of law, but also that the determination of the question as to the exercise of discretion in making the costs award in this case is not one which may add, or may be likely to add, to the certainty of commercial law as required by subs (5)(b)(ii). It seems reasonably clear that the issues raised in these proceedings turn on the particular facts and circumstances of this case as found by the Arbitrator, and in my view the determination of them could have no wider application ( Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203, (supra) per Sheller, JA at 4 p 226). Conclusion 61 For the reasons given the Plaintiff has failed to satisfy the requirements of s 38(5)(b)(i) and (ii) of the Act and, accordingly, leave to appeal under s 38(4)(b) is refused. I would order that the Further Amended Summons be dismissed. 62 In the circumstances it is unnecessary to decide the question raised under s 38(5)(a) of the Act. 63 With respect to the Defendants' Notice of Motion, it is noted that at the hearing, Senior Counsel for the Plaintiff informed the court that he did not wish to be heard if the Plaintiff's application for leave was unsuccessful. 64 In the circumstances it is appropriate that I direct the Defendants to bring in short minutes of orders which give effect to the reasons for decision. Failing agreement, as presently advised I would be inclined to make orders in terms of those sought in the Notice of Motion.

The parties may also address me in relation to costs. 65 Arrangements should be made with my Associate by 28 March 2003 for the relisting of this matter. -o0o-

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