Luxmore Pty Ltd v Hydedale Pty Ltd [2008] VSCA 212

1 This is an application on summons by the applicant company, the unsuccessful defendant in the proceeding. By leave granted this morning, the summons was amended so that it now seeks relief in three categories, and we deal with those in turn.

2 The first matter was an application for an extension of time for the service of a notice of appeal. Affidavit material has been filed on behalf of the applicant which makes clear that, by honest mistake of the legal representatives of the applicant, the service of the notice of appeal occurred outside the time fixed by the Supreme Court (General Civil Procedure) Rules 2005 (Vic). The extent of the delay was not great and there is no prejudice to the respondent company.

3 The application for extension was opposed by counsel for the respondent on the basis that the appeal was hopeless. It was submitted that there was no merit in what was said to be the central argument for the applicant, that propositions from partnership law were applicable to the particular commercial arrangement between these two companies. The interests of justice will almost always require that an extension of this kind be granted where there is an explanation for the non-compliance and there is no irremediable prejudice to the other party.[1] Of course there will be circumstances in which the appeal is so obviously hopeless that the Court could be satisfied that the extension would really be futile.[2] Here, although there may be force in the argument advanced by counsel for the respondent, we are not satisfied that the appeal is so obviously lacking in merit that the extension of time should be refused. For that reason we will order that the time be extended.

4 The second matter was an application by the applicant company for leave to appeal the orders made by the trial judge as to costs. There would, if leave were granted, need to be an amendment to the notice of appeal, which has hitherto been confined to the substantive grounds of appeal against the judgment. For reasons which follow, we have come to the conclusion that there should be no grant of leave to appeal.

5 On 25 April 2008, the applicant served an offer of compromise in the sum of $225,000 plus costs pursuant to r 26.03 of the Rules. The respondent plaintiff did not accept that offer. A later offer was made by the applicant by letter dated 8 August 2008 in the sum of $275,000 plus costs. The terms of that letter are not before the Court, but we are proceeding on the basis stated by counsel for the respondent that the letter did not signify any intention that an unusual order for costs would be sought in the event of the offer being refused and the plaintiff failing to achieve a better result.

6 As noted by this Court in Hazeldene's Chicken Farm Pty Ltd v Victorian Workcover Authority (No. 2),[3] when the consequences of the refusal of an offer are being considered, one relevant matter is whether the offeree was put on notice by the offeror that in the event of refusal, an application for indemnity costs or solicitor-client costs might be made. No such notice was given in this case. The learned judge ordered the applicant/defendant to pay the costs of the plaintiff/respondent up to and including 8 May 2008. From that date the defendant's costs were to be paid by the plaintiff. In each case the order was made for costs to be paid on a party-party basis.

7 The written submission for the applicant contends that:

His Honour fell into error in declining to make a special costs order in the circumstances of the case.

(a) His Honour did not give any or any adequate consideration as to whether Hydedale had acted reasonably in refusing to accept either of the offers made to settle the litigation.

(b) His Honour considered that [the applicant] should not be in any better position vis a vis an application for a special costs order by using a Calderbank letter rather than an Order 26 offer of compromise for its second and higher offer.

Hydedale's rejection of each of the offers to compromise was unreasonable. Rejection of the offers (and in particular the second Calderbank offer which added $50,000 to the calculated claims in an effort to avoid the expenses of the trial) should have been seen in the context of the detailed letter that accompanied the offer which set out in precise detail the method of calculation which was ultimately borne out by the reasons for decision. Hazeldene's Chicken Farm Pty Ltd v Victorian Workcover Authority [2005] VSCA 298 at [23]- [25], [30].

It is submitted that his Honour's discretion miscarried in that he failed to exercise the discretion that is reserved to him under the provisions of Order 26.08 to make an order other than an order for party/party costs. Instead his Honour treated the operation of the rule as mechanical. In doing so his Honour failed to address the question of whether the respondent had acted reasonably in rejecting either of the offers made to compromise the proceeding.

8 In oral argument, counsel for the applicant drew attention, quite properly, to passages of the transcript of his Honour's ruling on costs where his Honour stated, correctly, the test to be addressed when the non-acceptance of what is called a "Calderbank offer"[4] is under consideration. The test is whether the offeree's refusal of the offer was unreasonable in all the circumstances. Counsel for the applicant draws attention to the trial judge's expression of concern about the apparent difference between the result under r 26.08 when an offer of compromise is made and the result for which the defendant was contending in consequence of the rejection of a Calderbank offer. Under r 26.08(3), where a plaintiff rejects an offer of compromise and then obtains judgment for an amount less than the amount offered, the defendant is entitled to costs as from the date of the offer on a party-party basis (unless the Court otherwise orders).

It would have been open to the defendants to have delivered a second offer of compromise which it is true would not have increased the risk to the plaintiff, that is to say the risk of a greater order for costs but it would have increased the risk to the plaintiff in as much as the plaintiff would have a prospect of avoiding the order had it achieved a sum greater than $275,000. In all the circumstances I decline to give effect to the Calderbank offer in the manner proposed by counsel for the defendants.

10 In our view, the transcript of the argument on costs and of his Honour's decision makes clear that his Honour was applying the correct test - indeed, so much was conceded - and that in deciding against the defendant on its application for an order for indemnity costs, he took into account all the matters debated before him.

11 What was said by this Court in Hazeldene's Chicken Farm was meant to be of assistance to judges in approaching an application of this kind made consequent upon the rejection of a Calderbank offer. It would be wrong, however, to regard that decision as having prescribed a list of matters which must be taken into account in every case, such that a party failing to get a special order for costs could complain on appeal if one of the matters listed in paragraph 26 of Hazeldene's Chicken Farm was not specifically adverted to. The reasons of the Court in Hazeldene's Chicken Farm make clear that this issue is, like every question of costs, quintessentially in the discretion of the trial judge and is to be assessed in the circumstances of the case.

12 In the ordinary case, it is both appropriate and desirable that a costs question be decided at the conclusion of argument. Rarely will it be necessary for a judge to give detailed reasons for decision adverting to every matter debated in argument. This Court will assume, as should the parties, that every matter addressed in argument on costs has been considered. This Court will set its face against any proposition which would require judges disposing of questions of costs to give elaborate reasons.

13 In our respectful view, his Honour dealt in an entirely proper manner, at the conclusion of argument, with a relatively routine question of costs, and did so on the correct principle. Accordingly, leave to appeal in respect of the costs order will be refused.

14 The final matter is an application for a stay of execution. Counsel for the applicant properly conceded that the appeal, if successful, will only reduce the amount payable to the plaintiff, rather than eliminating the judgment sum altogether. The stay application was thereafter confined to that part of the judgment sum which would be recoverable by the applicant if it were successful in the appeal.

15 The principles applicable to stay of execution are well-known. The cardinal principle is that, save in exceptional circumstances, the victorious party at trial is entitled to the fruits of the judgment. In this case, what is said to constitute an exceptional circumstance is that the respondent company is 'the corporate alter ego of Mark Groves and its only source of income is professional fees paid for services provided by Groves'.

16 Paragraphs 9 and 10 of the outline filed on behalf of the applicant are as follows:

9. Hydedale is a company with a paid up capital of $2 of which Mark Groves is the sole director and secretary. An index search indicates that it holds no property assets and the evidence of Mr Groves at trial was that Hydedale was a single purpose service vehicle which he used in order to conduct his business of the provision of project management services. So much is confirmed in his affidavit filed in this Court. There is a real risk that if the judgment debt is paid over to Hydedale prior to the hearing and determination of the appeal that the appeal will be rendered nugatory in that the funds so paid will not be recovered or recoverable.

10. In answer to the concerns raised by [the applicant's] affidavit Mr Groves ... makes no more than a bald assertion that it is able to pay its debts as and when they fall due. In a matter in which information as to the true state of affairs of Hydedale's financial resources is peculiarly within Mr Groves knowledge he provides no information as to the nature and extent of Hydedale's assets and liabilities. This point is perhaps more forcefully made when one considers that the net effect of the costs orders made at trial (and before any questions raised by the application for leave to appeal are considered) are such that there is likely to be no net recovery of costs in the proceeding thus leaving Hydedale to bear the entire burden of the costs incurred by it in running the case.

17 The concern of the applicant is that, if the judgment sum were paid over to the respondent company and the applicant then succeeded on the appeal, the company now said to be solvent might by then be in no position to repay the judgment sum. In response, Mr Groves has sworn an affidavit, stating relevantly as follows:

I further say in relation to the allegations in paragraph 9 of the [applicant's] affidavit that Respondent has now been actively trading for approximately 18 years. It operates in project management/construction and development. It is well established in the market place and has much business that is either repeat business or referred from previous clients. Its the sole vehicle through which I conduct my business as project or development manager or builder. It is able to pay its debts as and when they fall due.

18 We accept that difficulties may arise where a corporate vehicle has no assets of its own and is dependent for its income on its ability to provide to third parties the services of an individual. In this case, the respondent company earns its income by providing to third parties the services of Mr Groves in project management, construction and development. Following the payment of the judgment sum in accordance with the judgment below, steps could - in theory - be taken to remove the assets of the respondent company, including its source of income, such that in the event of a successful appeal it would be impossible for the applicant to recover that part of the judgment sum which would ex hypothesi be recoverable.

19 The Court will approach such a circumstance with two points firmly in mind. First, when the relevant individual - on whose work the company depends, and who controls the company - swears an affidavit that the company is able to pay its debts and is and has for a long time been actively trading, the Court will take those sworn statements at face value, absent some reason for doubting their veracity. It would be, of course, a very serious matter for any such statement to have been made falsely or disingenuously. Secondly, if the Court refused a stay in reliance on a statement of this kind and it emerged subsequently that some such asset-stripping of the respondent company had occurred, the successful applicant could come back to this Court and seek such further remedy in execution of the successful appeal order as this Court might be able to provide.

20 As to the first of these points, Mr Groves says that the respondent company is able to pay its debts as and when they fall due. He is thus conveying, in the clearest terms, to this Court and to the applicant that he will not allow that position to change so as to prejudice the recovery of any amount should the appeal succeed. As this Court said in Interactive Networks Services Pty Ltd and Anor v NPV WA Securities Pty Ltd,[5] there is an obligation on the legal representatives of a company in these circumstances to draw attention to any matter known to those representatives which might suggest that the present financial position would change in the future. Plainly enough, the Court must not be misled.

21 Not only has counsel for the present respondent put forward no qualification to what is said in the affidavit but he said that his client would have no difficulty with the propositions which we have just set out. Counsel made clear that his instructions accorded with what we have just said. That is, this is a solvent company and, so far as is known to its controller and director, it will continue to be so. There is nothing known to the director which would suggest that the company will have any difficulty repaying any amount owed to the applicant should the appeal succeed.

22 On that basis, and subject to those remarks, we refuse the stay application. We are not satisfied in the circumstances that there is any exceptional circumstance which would warrant the respondent being denied the fruits of the judgment pending the hearing and determination of the appeal.

23 The last matter we wish to record is this. It seemed us that there was, relatively speaking, a small amount in issue on the appeal. We therefore invited counsel to consider whether there should be mediation before the appeal is heard. The experience in the Court of Appeal over the last three years is that appeal mediation has been remarkably successful, with a fifty percent success rate. Even though one side has won at trial and one has lost, each party has to assess its risks of winning or losing on the appeal. The cost-benefit advantages of mediation are the same before an appeal as before a trial. Commercial parties like those involved in this appeal should be ready to pursue a commercial resolution of their dispute.

24 In the event, counsel for the applicant indicated that his client would support mediation, but counsel for the respondent said his client saw no benefit in it. In the circumstances, we declined to order mediation.

[1] See The State of Queensland and Anor v JL Holdings Pty Ltd [1997] HCA 1; (1996) 189 CLR 146, 155 (Dawson, Gaudron and McHugh JJ), 174 (Kirby J).

[2] Gallo v Dawson (No 2) [1992] HCA 44; (1992) 66 ALJR 859; Hughes v National Trustees Executors & Agency Co of Australasia Ltd [1978] VicRp 27; [1978] VR 257, 263; Gallo v Dawson [1990] HCA 30; (1990) 64 ALJR 458, 459; Jackamarra v Krakouer [1998] HCA 27; (1998) 195 CLR 516, [7] (Brennan CJ and McHugh J).

[3] [2005] VSCA 298; (2005) 13 VR 435.

[4] See Calderbank v Calderbank [1975] 3 WLR 586.

[5] [2006] VSCA 225, [31] (Neave JA), [36] (Maxwell P).