Macquarie International Health Clinic Pty Ltd v Sydney Local Health District

Indemnity costs claim based on the 20 June 2017 settlement offer

1. By letter dated 20 June 2017, SLHD made the following offer to Macquarie, expressly identifying that the letter was an open letter ("open and capable of being relied upon by either party should the need to rely on that correspondence ever arise"): 1. Macquarie agrees that the Construction Deed is amended such that: (a) the timetable in Annexure A and the timetable promulgated by SLHD on 1 September 2016 are replaced by a revised timetable in the form attached [not here reproduced]; and (b) the references to "Sunset Dates" of 11 June 2018 and 30 June 2018, will mean that if a modified development consent is not obtained by 11 June 2018 or Macquarie has not declared the modified development consent is acceptable to it by 30 June 2018, then the Construction Deed, the Hospital Lease, the Car Park Lease and all other "Transaction Documents" (as defined in the Construction Deed) will terminate forthwith and neither party shall have any claim against the other; and 2. Subject to Macquarie so agreeing, SLHD will approve the Application being submitted to Council (notwithstanding SLHD's concerns with the Application, expressed in this letter and in previous correspondence).
2. In the 20 June 2017 letter, SLHD explained its position that: the Construction Deed was never intended to operate without a binding timetable nor was it ever intended that Macquarie would be granted an indefinite amount of time to obtain a development approval; and that the offer was consistent with the existing contractual regime "albeit that it allows Macquarie a more generous period of approximately 12 months (even from the present time) in which to obtain something less than a full Development Approval, being a modification of the Current DA". The letter stated that the offer was intended "to overcome the current impasse with respect to the Application in a manner consistent with the existing contractual regime".
3. In that letter, SLHD expressed the view that: In circumstances where Macquarie insists that the Application is reasonable and necessary, and that such insistence is based on its own expert advice, then despite SLHD's concerns with that Application, Macquarie ought to have no difficulty accepting the risk of any delay that is caused by Council's refusal and ultimately [the Central Sydney Planning Committees]' rejection of the Application.
4. SLHD requested that Macquarie let it know, if it did not accept the offer, why the offer was unacceptable to Macquarie (adverting in that context to the duty of utmost good faith). The letter stated: That said (and subject to seeing any reasons proffered by Macquarie in the event the offer is not accepted), it seems to SLHD there could be only one basis on which Macquarie would reject the above offer, including, as it does, such a generous amount of time for Macquarie to obtain a modification of the Current DA and to declare acceptable any conditions which are imposed. That is if Macquarie refutes the suggestion that a binding timetable ought to be in place and instead contends that time is "at large", with the result that Macquarie is not subject to any binding timetable at all in constructing the hospital (because, among other things, it does not believe it should be constrained by a reasonable and finite period to obtain an acceptable section 96AA modification). If the above offer is not accepted, pleased let me know whether that is Macquarie's position.
5. The letter concluded with the following: In the event that the above offer is not accepted, SLHD continues to reserve all of its rights, including: (a) the rights which have accrued to it as a result of service of the Notices which were served on 20 February 2017, 7 April 2017 and 29 May 2017; and (b) the right to rely upon this letter before the Court.
6. As SLHD had noted in its letter, cl 4.12 of the Construction Deed had made provision for the Transaction Documents to terminate forthwith in the event that development approval was not granted by the date required under the timetable annexed to the deed or Macquarie did not declare all conditions imposed on the approval to the development application by the date required for the development approval under the timetable. (Hence, SLHD maintains that the concept of the automatic termination of the Transaction Documents in the events specified in the 20 June 2017 offer was a concept present under the Construction Deed.)
7. SLHD maintains that acceptance of the offer contained in its 20 June 2017 letter would have resolved all of the issues in dispute in the proceedings. Pausing here, it is relevant to bear in mind the following chronology of events relating to the present proceedings: namely, that, after the respective default notices were served (in February, April and May 2017), the statement of claim was filed on 19 April 2017. At that stage, no allegations of improper purpose were made; and the relief sought included relief in relation to the then proposed May Modification Application (ultimately abandoned by Macquarie).
8. The 20 June 2017 offer was therefore made at a very early stage in the proceedings. It was made at a time when the parties had been corresponding for some time in relation to SLHD's proposal for a new timetable to be put in place in relation to the development provided for under the Construction Deed. (With hindsight, it is now apparent that the 20 June 2017 offer was made at a time when Macquarie was taking steps in relation to a significantly changed and expanded development; well beyond the scope of the development that had been approved by SLHD; but that was not drawn to SLHD's attention at the time.)
9. Macquarie rejected SLHD's open offer by letter dated 23 June 2017. It did not (as had been requested) explain in that letter why the SLHD offer was "not acceptable in its current form" but, instead, it proposed a new timetable (including extending the "sunset date" for obtaining development approval to 11 January 2019) and that the Construction Deed be varied to include, amongst other things: a variation to cl 2 (which required Macquarie to carry out the works in accordance with the timetable, time being of the essence, and gave SLHD an unfettered discretion in cl 2.5 to extend dates in the timetable for events outside the control of the parties), to introduce instead an alternative dispute resolution mechanism; and to cl 4 (which gave SLHD the discretion not to approve modifications outside the circumstances in cl 4.14), to insert instead an expert determination regime to determine Macquarie's right to advance further modifications should SLHD "object or delay".
10. Macquarie's counter-offer included the statement (but without elaborating on how it was proposed that this be done) that: It follows that the current litigation with Default Notices must be terminated and the issue of costs addressed.
11. Pausing there, that statement suggests that Macquarie was well and truly alive to the issue of costs in respect of the proceedings then on foot.

SLHD's submissions

1. SLHD contends that, from Macquarie's perspective, the 20 June 2017 offer was a material improvement from the then current contractual position under which (as I have held to be the case), by 20 June 2017, Macquarie had not remedied the defaults the subject of the February and April Default Notices and SLHD was therefore entitled to terminate the Construction Deed and Leases for Macquarie's un-remedied defaults (with the consequences that flowed from such a termination under the Transaction Documents).
2. SLHD submits that Macquarie's rejection of the 20 June 2017 offer was unreasonable and that it enlivens the discretion to award indemnity costs from the date on which it was unreasonably rejected, invoking the Calderbank principles.
3. As to the matters relevant in determining whether an indemnity costs order should be made (such as whether rejection of the offer was reasonable in the circumstances; the time frame in which the offeree had to consider the offer; whether the offer was expressly put in Calderbank terms; and the terms of the offer), SLHD says the following.
4. First, that the outcome offered to Macquarie in the 20 June 2017 offer was materially more favourable to it than the outcome obtained through the judgment; submitting, in this regard, that, on any view, the offer involved a genuine and substantial compromise and that, had the offer been accepted, all the issues in dispute would have fallen away.
5. Second, that Macquarie had all the information it needed as at 20 June 2017 meaningfully to assess the offer (noting that to the extent that Macquarie's claims raised a factual issue as to whether physical work under the Hospital Building Approval obtained in 1998 had been substantially commenced within five years of its issue, that was a matter wholly within Macquarie's knowledge and which did not turn on any evidence served by SLHD).
6. Third, that an inference is reasonably open that the reason Macquarie rejected the 20 June 2017 offer was because it had no intention of building a hospital in accordance with the original 1997 Hospital Development Approval as modified by the May Modification Application (rather, it wanted to build a very different development with a hospital hotel and 15 levels of seniors living apartments) (referring to the matters considered at [121]-[148], [155]-[179], [195]-[198] of the principal judgment). SLHD says that such an inference is strengthened by the terms of Macquarie's letter of 23 June 2017, which sought to introduce new terms into the Construction Deed which would have had the effect of removing SLHD's ability to withhold its consent to such a development and put it into the hands of an expert to determine whether Macquarie should be permitted to modify the development over SLHD's objection.
7. Fourth, that the offer was certain and capable of immediate acceptance by countersigning and returning a copy of the letter.
8. As to the time frame within which to consider the offer, SLHD submits that the 14 day period in which the offer was open for acceptance was a reasonable time frame in all the circumstances, noting that the parties were "sophisticated commercial entities with the benefit of highly competent legal advisers" and that they had been engaged in prolonged correspondence about the subject matter of the dispute for some time; and pointing to the fact that Macquarie was able to respond to the offer (and make a counter-offer) in three days.
9. As to the third of the factors referred to above (i.e., whether the 20 June 2017 offer explicitly stated that it was made on Calderbank terms and would be relied upon in an indemnity costs application), SLHD accepts (as is evident on the face of the letter) that the 20 June 2017 letter did not in terms state that it was made pursuant to the principles in Calderbank v Calderbank nor did it expressly state that, if not accepted, SLHD would rely on its non-acceptance in an application for indemnity costs. SLHD accepts that this is a relevant factor to take into account (Brymount Pty Ltd v Cummins [2005] NSWCA 69 - Brymount v Cummins). However, SLHD says that it is not determinative and emphasises that the letter stated that, if the offer was not accepted, SLHD reserved "the right to rely upon this letter before the Court".
10. It is noted by SLHD that there are no formal requirements for a Calderbank offer; rather, that Calderbank offers have been recognised as simply being offers that do not comply with the relevant rules of court relating to the making of offers of compromise (see Trustee for the Salvation Army (NSW) Property Trust v Becker (No. 2) [2007] NSWCA 194 at [27]; Grace v Thomas Street Café Pty Ltd (No 2) [2008] NSWCA 72 at [28]-[29]).
11. SLHD says that the absence of an express statement that the offeror will rely upon non-acceptance of the offer in an application for indemnity costs will not be fatal to the application if other circumstances are such as to constitute a strong claim to indemnity costs (referring to Globaltech Pty Ltd v Pareek [2006] WASC 30 (Globaltech v Pareek) at [28] per Johnson J; Ng v Chong [2005] NSWSC 385 (Ng v Chong) at [12], [14]).
12. SLHD submits that "a well-represented and sophisticated litigant" such as Macquarie ought to have understood the reference to the right of SLHD to rely on the letter in court as extending to reliance on the offer on the question of costs (a submission that would appear to be supported by the reference by Macquarie to costs in its counter-offer).
13. SLHD thus seeks an order that Macquarie pay its costs of and incidental to the proceedings on an indemnity basis from 5 July 2017, being the date fourteen days from the making of the 20 June 2017 offer.

Macquarie's submissions

1. Macquarie advances the following reasons in resisting the application for indemnity costs based on its non-acceptance of the 20 June 2017 offer.
2. First, that the letter was sent before the Termination Notices had been issued and therefore was sent before the issues in the proceedings (which at their core challenged the validity of those notices) had been fully or properly framed, including by reference to such notices.
3. Second, that the timetable which was attached to the 20 June 2017 offer was in different terms (and included different and additional steps) to the revised timetable issued by SLHD in September 2016 (the September Timetable) which had been referred to and was the subject of the Default and Termination Notices which were the subject of the proceedings. Consequently, it is said that the subject matter of the 20 June 2017 offer was "completely different" from the subject matter with which the proceedings were concerned.
4. Third, (as SLHD accepts) that no reference is made in the 20 June 2017 offer to Calderbank principles, nor is there any reference to any intention by SLHD to rely on the offer to pursue indemnity costs if the offer was not accepted. While the 20 June 2017 offer is expressed as an open offer, it is noted that it makes no reference to the proceedings or what would happen to them if the offer were to be accepted. Macquarie submits that it "cannot possibly" constitute an attempt to compromise or settle the proceedings or the particular dispute (i.e., the validity of the Default and Termination Notices) which was the subject matter of the proceedings.
5. Fourth, it says that the 20 June 2017 offer does not contain any element of compromise on the part of SLHD; rather, it is said, acceptance of it by Macquarie would have represented complete capitulation with respect to its position "both within and outside of the proceedings".
6. Macquarie accepts that a failure to refer, in express terms, to Calderbank principles in an offer may not necessarily be determinative of the discretionary question as to whether costs might be awarded on other than the ordinary basis. However, it submits that, in order for any offer to form a basis for departure from the general rule, it must, at the very least, put the recipient on notice that the offeror intends to rely on the offer on the question of costs and that indemnity costs would be pursued if the offer is not accepted. Otherwise, it is said, the policy which underpins the making of such offers (i.e., the promotion of the settlement of disputes) would be thwarted.
7. Macquarie argues that the 20 June 2017 offer does not "even implicitly" refer to Calderbank principles or the possibility of an application being made for indemnity costs if the offer is not accepted, noting that there is no reference in the offer to costs or to the proceedings. It is said that, given that the offer is an open one, the general reservation of rights (including to rely upon the letter before the court) in the last paragraph of the 20 June 2017 offer cannot amount to any implicit notice that the letter may be used to ground an application for indemnity costs. It is said that the express language of the second paragraph of the 20 June 2017 offer (namely, that it is an open letter and cannot be treated by Macquarie as "without prejudice") makes it plain that, at the time that it was sent, SLHD eschewed any future possibility that the 20 June 2017 offer might be relied upon as an offer made pursuant to Calderbank principles. (It is not clear to me how this is said to be the case - on the face of the letter the reservation of a right to rely upon the letter before the court is not qualified in any way.)
8. Macquarie says that SLHD has not identified any authority in which a party has successfully relied upon an offer which was not, in substance, a Calderbank offer or where there was no notice given that the offer may, if not accepted, be relied upon on the question of the costs of proceedings (or indeed where the offer was made before material events had occurred or without any reference to the subject proceedings). It is noted that in Brymount v Cummins, both offers relied upon were expressly, or in substance, Calderbank offers (referring to [15]) and that in Ng v Chong, one of the offers was "technically flawless", while the substance of the other offer, which Macquarie accepts was not expressly a Calderbank offer, was not disclosed in the judgment of Hamilton J (and therefore Macquarie argues that it cannot be assessed as to whether it was, in substance, such an offer).
9. Macquarie notes that in Globaltech v Pareek, the offer relied upon did not precisely state that the offeror intended to seek an order for indemnity costs but instead said that the offeror would pursue their rights to recover all permissible costs; and that in that case, Johnson J said (at [28]): … I consider it important that a party who makes an offer of compromise with a view to seeking indemnity costs, if appropriate, should explicitly say so. The absence of that statement will not necessarily be fatal to the application if other circumstances are such as to constitute a strong claim to indemnity costs. However, in this case, because of my views with respect to the matters raised by the plaintiffs in support of an application for indemnity costs expressed above, I consider the absence of a clear statement of the intention to apply for indemnity costs to be one of the factors which has led me to conclude that the application should be refused.
10. Macquarie submits that, on a fair reading of the offer (which referred in detail to aspects of the May Modification Application), the 20 June 2017 offer was not directed towards the issues which were subsequently the focus of the proceedings (namely the validity of the Default and Termination Notices) and does not contain any offer which was germane to such issues. In these circumstances, it is said that the absence of any statement of an intention to apply for indemnity costs (or any reference to any costs consequences) in the 20 June 2017 offer should, in and of itself, be fatal to SLHD's application for indemnity costs made in reliance on the failure by Macquarie to accept such an offer.
11. In any event Macquarie, submits that it was not unreasonable for it not to accept the 20 June 2017 offer because (if accepted) the offer: involved Macquarie agreeing to a "completely new and different timetable" for the purposes of the Construction Deed; involved the acceptance by Macquarie of "sunset dates" with respect to the obtaining of a new Development Approval which were not present in the Construction Deed (or the September Timetable) and an acceptance that, if these dates were not met, then all of the Transaction Documents would terminate forthwith (an outcome said not to have been contained within the Construction Deed or the September Timetable); and represented, in substance, "a complete overhaul and rewriting of the Timetable under the Construction Deed" (not merely the extension by SLHD of the dates by which existing steps in the Timetable under the Construction Deed had to occur, which it was subsequently held that SLHD had contractual power to do - see [328] of my principal judgment).
12. Macquarie characterises the 20 June 2017 offer as being, in terms, part of a negotiation process with respect to Macquarie's May Modification Application and a mutually acceptable revised Timetable under the Construction Deed (pointing to the first full paragraph of the 20 June 2017 offer, to which I have already referred).
13. It is submitted that the reference to overcoming the "current impasse" in the first full paragraph with respect to the May Modification Application makes it plain that the 20 June 2017 offer was not an attempt to compromise the dispute relating to the validity of the Termination Notices or the September Timetable (submitting that it was, rather, intended to overcome the impasse with respect to Macquarie's Modification Application and to try to negotiate a mutually agreeable outcome in this regard). Thus, it is submitted that it was not unreasonable for Macquarie not to accept the 20 June 2017 offer but instead to offer its own alternative proposal.
14. Macquarie points to the observations in the principal judgment to the effect that some of its arguments with respect to the validity of the Termination Notices and the September Timetable were at least strongly arguable or cogent or had some force (referring in particular to what was said at [315], [319] and [323]) and submits that acceptance of the 20 June 2017 offer would have involved, in substance, abandoning these arguments "and a complete capitulation" by Macquarie with respect to the core subject matter of the proceedings. It is submitted that, on the findings ultimately made, it was not unreasonable for Macquarie not so to abandon its position on these issues. (Somewhat inconsistently with that last proposition, Macquarie submits that it is not a relevant exercise, in applying the discretion with respect to indemnity costs, to compare the ultimate position of the parties at the conclusion of the proceedings with the potential outcome if the offer relied upon had been accepted; rather that the test is whether, at the time the offer was made, it was unreasonable for the offer not to be accepted.)
15. Macquarie, thus, contends that, viewed at the time the offer was made (without the benefit of any hindsight analysis), it was not unreasonable for it not to accept the offer.
16. Macquarie also cavils with the proposition that it had all relevant information available to it as at the date of the 20 June 2017 offer for it properly to assess the offer. It submits that, as at June 2017, SLHD had not advanced most of the arguments which it subsequently advanced, and with respect to which it has succeeded, at the trial of the proceedings. Further, Macquarie says that the mere fact that it was able to make a counter offer to the 20 June 2017 offer within 14 days does not, in and of itself, mean that the period of 14 days provided for it to accept the offer was a reasonable period of time.
17. Finally, Macquarie says that the inference which SLHD seeks to have drawn (that it rejected the 20 June 2017 offer because it had no intention of building a hospital in accordance with the original 1997 Hospital Development Approval as modified by the May Modification Application) is not available; rather, it says, the inference should be drawn that the offer was not accepted because, inter alia, it was not acceptable to Macquarie (seemingly, an argument somewhat circular in its reasoning - that it was not accepted because it was unacceptable says nothing as to why it was unacceptable and hence why it was not accepted).

Determination

1. There is no dispute that, the 20 June 2017 offer not being a formal Offer of Compromise under the Uniform Civil Procedure Rules 2005 (NSW), the onus lies on SLHD to satisfy the Court that the costs discretion should be exercised in its favour (see SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37]; Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 at [26]); and that there is no presumption in favour of indemnity costs notwithstanding that (as is here the case) the ultimate judgment may be more favourable to the offering party than the terms of the offer.
2. As noted earlier, SLHD referred to Brymount v Cummins, where Beazley JA, as Her Excellency then was, identified (at [14]) the following factors as relevant to determining whether costs should be awarded on an indemnity basis where a Calderbank offer had been made: whether rejection of the compromise offer was reasonable in the circumstances; the time frame in which the offeree had to consider the offer; and whether the letter of compromise explicitly stated that the offer was made in Calderbank terms, the exact conditions of the offer, and whether indemnity costs would be pursued if the offer was rejected.
3. Determination of whether rejection of an offer was unreasonable is an evaluative judgment made by reference to the terms of the offer and all the relevant surrounding circumstances (see King Network Group Pty Ltd v Club of the Clubs Pty Ltd (No 2) [2009] NSWCA 204 at [11]).
4. It is relevant to keep in mind the rationale for special costs orders. The Court of Appeal in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 reiterated the public policy objectives of special costs orders referring (at [6] per Basten JA, with whom McColl and Campbell JJA) to the objects underlying the offer of compromise procedures under the then applicable court rules that had been identified in Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724, as including: 1. To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff's real claim which can be placed before its opponent without risk that its "bottom line" will be revealed to the court; 2. To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and 3. To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation.
5. See also the earlier observations in Commonwealth of Australia v Gretton [2008] NSWCA 117 by Beazley JA, as Her Excellency then was, as to the public policy considerations that underpin the making of favourable costs orders where a Calderbank offer has been made (at [41]), those being the encouragement of settlement of disputes as soon as possible and the discouragement of wasteful and unreasonable behaviour by litigants.
6. Ultimately, the question is whether, in all the circumstances, the failure to accept the offer "warrants departure from the ordinary rule as to costs".
7. In the present case, I consider that reliance on the 20 June 2017 letter is problematic for SLHD because of the fact that it was not expressed as a Calderbank offer, nor did it make reference to reliance on the letter in the context of any costs issues. While I accept that this is not determinative, and I accept that Macquarie is a sophisticated litigant (well versed in court processes and the costs issues that may arise) and represented by competent solicitors, I consider it relevant that what was there being proposed was in the context of correspondence seeking to overcome an impasse as to timetabling issues; and that what was left, that was not addressed by the letter, was how the litigation then on foot was to be determined.
8. Moreover, at the time that the 20 June 2017 letter was issued, the present proceedings were at an early stage. Certainly, not all the issues that subsequently arose had then been identified in the pleaded claims (and, in particular, the Termination Notices had not then been issued). While I accept that the stated intention to rely on the open letter in court is capable of extending to reliance in the context of costs issues, I am not prepared to accept that it was a sufficiently clear reference of intention so as to enable SLHD to rely upon the making (and non-acceptance) of the offer so as to bring the letter within the realm of the Calderbank jurisprudence.
9. As to the other objections raised by Macquarie, I consider that there was sufficient time for the offer to have been considered (particularly since, by that stage, Macquarie was well familiar with the issues that had been raised by SLHD as to the proposed modification application and the proposed September Timetable), even apart from the fact that Macquarie was in a position to formulate its own proposal within a much shorter period of time.
10. Further, I consider that the 20 June 2017 letter contained a genuine element of compromise (as to this requirement, see Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375; Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) [2006] NSWCA 120; Leichhardt Municipal Council v Green [2004] NSWCA 341 and the observation in Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWSC 790 by Bergin J, as her Honour then was, that "there is no rule that an optimistic offer is not a genuine offer"). Such an element of compromise can be found, not least, in the acceptance of the May Modification Application (if that be approved by Council), something to which SLHD did not accept it was required to consent. I do not consider that the offer required a complete capitulation on the part of Macquarie (as is submitted now by Macquarie) at all.
11. Nor does the fact that SLHD proposed a different timetable (in terms of steps and time frames) from that which had been contemplated in the Construction Deed (and, indeed, from that which it was ultimately found it was valid to impose) of itself mean, in my opinion, that it was reasonable for Macquarie not to accept it. What was clearly in dispute (and by then had been for some time) was the concern by SLHD that there be a revised timetable put in place by which Macquarie would be bound. Macquarie itself, in the correspondence of 23 June 2017, seems to have accepted that it was reasonable for there to be a revised timetable (as must indeed have been obvious and for which SLHD had then been pressing for some time).
12. What (perhaps among other things) Macquarie seems to have objected to (relevantly) in the offer was that the consequence of failure to meet that timetable would lead to termination of the Transaction Documents; but that, of course, was what had been contemplated under the Construction Deed itself. In that context, there is force in the proposition that rejecting that aspect of the offer (alone) would not have been reasonable.
13. However, I consider that the actual timeframe there proposed (and the steps involved) was something about which reasonable minds may have differed and that it was not unreasonable for Macquarie to press for its preferred timetable in that regard (particularly in light of the serious consequences that would flow if the timetable were to be accepted but it was ultimately not able to be met). While Macquarie's case on construction of the relevant provisions of the Construction Deed did not succeed, it was not a case which was not reasonably arguable.
14. Furthermore, I do not draw the inference that, by the time of the 20 June 2017 offer, Macquarie had no intention of building the original hospital at all, though the evidence clearly establishes that its preference at that time (and the energy it was devoting to the proposed planning of the development) related to the much expanded proposal that it wished to pursue (as I outlined in my principal judgment).
15. Although Macquarie complains that SLHD's submissions suggest that reasonableness can be assessed by reference to the final result, I consider that, properly understood, that is not what is being submitted by SLHD; rather it should be understood as submitting that reasonableness of rejection of the offer can be assessed by comparing what was then being offered as against the potential outcome of a contested hearing (and one such potential outcome must necessarily have involved a result adverse to Macquarie) and (as is relevant when considering whether, the discretion having been enlivened, it is appropriate to exercise that discretion) that the outcome offered to Macquarie in the 20 June 2017 offer was materially more favourable to it than the outcome obtained through the judgment. It is on the basis of a comparison between the potential outcome of litigation that one can assess whether a particular offer involves a genuine and substantial compromise. (As to whether, had the offer been accepted, all the issues in dispute would have fallen away, that depends to some extent on whether it is accepted that the letter implicitly dealt with costs implications of the offer.)
16. Balancing the relevant factors, and particularly where the offer made in the 20 June 2017 letter was not clearly expressed to be in reliance on the Calderbank principles, I have concluded that it was not unreasonable for Macquarie (at that early stage in the proceedings) not to accept that offer and I will therefore not make the indemnity costs order sought by SLHD in respect of the costs of the proceedings since July 2017. That said, I am prepared to make an indemnity costs order in relation to part of the costs of the proceedings, as I explain below.

Costs thrown away by amendments made in the fourth further amended statement of claim

1. I turn now to deal with the costs effectively thrown away by the amendments made in the fourth further amended statement of claim (filed in Court on 19 March 2019) which abandoned many of the claims which had previously been made, including: that the timetable in the Construction Deed had been rendered obsolete ([34]-[35]); that SLHD was required to consent to the May Modification Application ([59A]-[60C]); that SLHD engaged in statutory unconscionable conduct ([60D]-[60G]); that the requirements in the September Timetable were unreasonable ([61]-[62]); that SLHD had promulgated the September Timetable, issued default and termination notices and refused the May Modification Application in bad faith for a collateral purpose ([63F]-[63I]); and that Macquarie was entitled to relief against forfeiture ([65]).
2. SLHD submits that there is no reason why the usual order should not be made consequent upon leave having been given to file the fourth further amended statement of claim and hence says that Macquarie should be ordered to pay SLHD's costs thrown away by the amendments. It is said that such costs are likely to be substantial, as a significant volume of expert evidence was directed to the reasonableness of SLHD's refusal to consent to the May Modification Application and the reasonableness of the various dates stipulated in the September Timetable.
3. Macquarie accepted at the time that there would be costs consequences from the abandonment of these claims, suggesting that this could be dealt with after the entirety of the case had been heard (see T 14.29-33); and it does not here oppose the making of a separate order that those costs be paid on the ordinary basis.

SLHD's submissions

1. Where the parties are not agreed is as to the costs of the abandonment of a subset of the allegations (namely, the allegations that were formerly contained at [63F]-[63I] of the third further amended statement of claim).
2. SLHD submits that the costs thrown away by reason of the abandonment of those claims should be paid on an indemnity basis. SLHD maintains that these claims were serious allegations of conduct engaged in by a statutory authority in bad faith and for an improper and collateral benefit, noting that Macquarie alleged that SLHD intentionally caused or sought to cause it commercial harm through such conduct.
3. The abandoned bad faith allegations relevantly included that: SLHD's decisions to issue the September Timetable and the August and October Termination Notices and to refuse its consent to the May Modification Application were made: for a collateral purpose, in breach of SLHD's obligation to act in good faith and reasonably ([63GA.5], [63GB.1]); in order to protect the revenue earned by RPAH from patients who elect to be treated as private patients within RPAH, which revenue would decrease if Macquarie were to construct a co-located private hospital ([63GA.6]); and so as to enable SLHD to take advantage of the substantial increase in the market value of the site by reletting the site on more favourable terms or selling the site ([63GB.2]). The abandoned allegations also included the allegation that SLHD's promulgation of the September Timetable and issue of the February and April Default Notices and August and October Termination Notices was wrongful and done with deliberate design intended to cause or bring about circumstances intended to defeat Macquarie's interest in the Construction Deed and Leases ([63H]).
4. It is submitted that Macquarie never had a proper basis for making these allegations (the bad faith allegations). Reference is made in this regard to the affidavit of Dr Wenkart sworn 23 November 2018 in support of the application to file the third further amended statement of claim. It is submitted that it is clear from that affidavit that the introduction of the allegations of collateral purpose was not prompted by the emergence of any evidence suggesting that SLHD in fact took the contractual steps it did for the collateral purposes alleged; nor were the amendments prompted by anything disclosed in SLHD's evidence, through any discovery or as a result of Macquarie having become aware of documents relating to the impugned decisions.
5. SLHD says that the highest to which Dr Wenkart's evidence rose was that Macquarie had identified what it contended was an "incentive" for SLHD to adopt the contractual positions it had taken. It is noted that, when asked for particulars of all of the facts, matters and circumstances on which Macquarie relied to make the bad faith allegations (i.e., that SLHD took the contractual positions it did for the collateral purposes alleged), the only particulars provided were of the existence of an "incentive" to maximise revenue from privately insured patients treated in RPAH.
6. SLHD says that the proposed amendments made serious allegations based on no more than pure conjecture; pointing to the statements by Dr Wenkart in his affidavit that: he read a number of public reports from mid-2017 onwards which addressed complaints made by private health insurers that public hospitals were persuading patients admitted to public hospitals to elect to be treated as a private patients; he concluded from those reports that private patients within public hospitals such as RPAH were a key source of revenue and that NSW Health was incentivising and encouraging the treatment of private patients in public hospitals; he concluded from an RPAH job advertisement and a message on RPAH's phone answering service that RPAH was actively engaged in seeking out private patients; and, following his unsuccessful attempts to influence various Members of Parliament and the NSW Government (including the Premier, the Minister for Health, the Minister for Finance, Services and Property and two Parliamentary Secretaries) and SLHD's Chairman to intervene to cause SLHD to accede to Macquarie's demands, he formed the opinion that the real reason SLHD was defending the litigation Macquarie had commenced against it was because SLHD had acted for a collateral purpose of deriving financial advantage.
7. Dr Wenkart described this process of reasoning in his affidavit as follows: 30. Once this happened it caused me to reach an understanding of what I believe to be the real reasons for the ongoing litigation. This was not just an anti-Wenkart historical approach but something more significant which I felt must be a money matter. 31. This alerted me to explore how and why this became a money matter. Over the following months, I slowly began to put together the pieces from the various documents that I had read. At about this time, being between May and July 2018, it became increasingly clear to me that the issue of the treatment of private patients in public hospitals and its benefits to SLHD at RPAH was the focus. It was, in my mind, a major motive that stood out for the continuing litigation by SLHD against [Macquarie]. … 34. With this information as well as information I had gleaned since early 2017, I began to form a view that the ramifications of the current and continuing approach by the NSW Department of Health was to maximise private patient revenue through the public hospital system regardless of the impact on private hospitals. I further began to form the view, based on the above information, that the financial benefits of treating private patients were so significant that SLHD had every incentive to block a private hospital on the RPAH precinct. … 36. On the basis of the matters set out above, it is my belief that the danger to the revenue stream that RPAH earns from the treatment of private patients is a major financial reason for SLHD's refusal to cooperate with [Macquarie] in the construction of the PAPH. In light of the material in TRW-3, I formed the opinion in or about August 2018 that if [Macquarie] were to construct and operate the PAPH, the revenue generated by SLHD from private patients would substantially decline/stop. It is primarily to protect this revenue source that I believe SLHD issued the September 2016 Timetable, issued the default notices, issued the termination notices and refused to sign the Modification Application.
8. SLHD submits that the history of the introduction of [63GA] and [63GB] into the third further amended statement of claim is telling, arguing that those allegations were first advanced only after it became clear (during the hearing of Macquarie's discovery application on 17 October 2018) that Macquarie's "extensive" discovery request (including all documents going to SLHD's state of mind and reasons for making the decisions it did) could not be supported on the basis of the existing pleading.
9. It is submitted that an inference is available that the allegations in [63GA] and [63GB] were advanced for the purpose of obtaining the broad ranging discovery originally sought by Macquarie in the hope that such documents might support Dr Wenkart's speculation as to SLHD's purposes in taking the contractual position it did; and that such an inference is further supported by the abandonment of the allegations at trial without any explanation.
10. SLHD submits that, in the circumstances, it is appropriate that Macquarie pay SLHD's costs thrown away by the abandonment of these allegations (that is, SLHD's costs of responding to the allegations including giving discovery by reference to them) on an indemnity basis (referring in this regard to Parisi v Nigro [2006] NSWCA 121 (Parisi v Nigro) at [14]-[16]; Picone v Velos [2007] FCA 1183 (Picone v Velos) at [95]).

Macquarie's submissions

1. As noted above, Macquarie accepts that an order should be made that it should pay the costs thrown away by reason of the amendments made by the fourth further amended statement of claim. However, it disputes that it should be ordered to pay any of these costs on the indemnity basis.
2. Macquarie argues that there is no basis for such an order. It does not accept that there was no proper basis for making the allegations in paragraphs [63F]-[63I] of the third further amended statement of claim and says that the fact that they were abandoned does not necessarily mean that there was no proper basis for the allegations being made.
3. In any event, it is submitted that the abandonment of the allegations reduced the length of the final hearing and resulted in a saving of hearing time and costs for both parties. It is submitted that the circumstances here are quite different from those in Parisi v Nigro (where the vacation of a hearing date of an appeal was obtained on the basis of late allegations of fraud but where subsequently both the allegations of fraud and the whole appeal was withdrawn). There, an order for indemnity costs was made from the date the fraud allegations were made to the withdrawal of the appeal. It is noted by Macquarie that, in the present case, the subject allegations were withdrawn before the final hearing of the proceedings, which withdrawal had the effect of narrowing the issues in the proceedings (and thereby shortening the length of the final hearing).
4. Macquarie submits that the "mere abandonment" of certain allegations should not, in the ordinary course, result in an indemnity costs order being made with respect to the abandoned matters, noting that an indemnity costs order pre-supposes some relevant unreasonable action, including relevant misconduct, in connection with the conduct of the proceedings by the person against whom the order is made (referring to Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 (Oshlack)). It is submitted that otherwise parties may be discouraged (out of fear of receiving an indemnity costs order with respect to the abandonment of particular issues) from engaging in the responsible conduct of proceedings and abandoning aspects of their claim.
5. Macquarie points to the fact that SLHD does not submit that Macquarie engaged in any unreasonable or relevant misconduct in the proceedings, but only that certain allegations were brought without a proper basis. It is submitted that the fact that these allegations were abandoned before final hearing cannot amount to any unreasonable conduct or relevant misconduct on the part of Macquarie; rather, that this represents reasonable conduct on the part of Macquarie (in that, as adverted to already, the abandonment of certain allegations reduced the length of the hearing and the number of issues to be determined). It is said that the alternative, of continuing to press, rather than abandon, certain allegations (which it appears to accept may, on the evidence as it emerged during the process of preparation for trial, have had "limited prospects of success") would have been far less reasonable than the course actually adopted by Macquarie.
6. Macquarie contends that it should not be visited with an indemnity costs order in circumstances where it has conducted itself reasonably by abandoning (rather than maintaining) certain allegations.

Determination

1. As to the concept of "misconduct", in the context of costs applications, in Hooker v Gilling (No 2) [2007] NSWCA 214 (at [22]) by McColl JA (with whom Ipp and Basten JJA agreed) referred to McHugh J's definition of "misconduct" in Oshlack (to which Macquarie has here referred) at [69] as conduct sufficient to disentitle a successful party from its prima facie entitlement to costs as "misconduct relating to litigation, or the circumstances leading up to the litigation". In Oshlack, his Honour went on to say: Thus, the court may properly depart from the usual order as to costs when the successful party by its lax conduct effectively invites the litigation; unnecessarily protracts the proceedings; succeeds on a point not argued before a lower court; prosecutes the matter solely for the purpose of increasing the costs recoverable; or obtains relief which the unsuccessful party has already offered in settlement of the dispute. [footnotes omitted]
2. In the present case, allegations of the kind ultimately abandoned (of bad faith or improper/collateral purpose) are serious allegations to make and, not unlike allegations of fraud, they are allegations that should not lightly be made and, when made, should be properly pleaded and particularised (Picone v Velos at [95]; Sgro v Australia Associated Motor Insurers [2015] NSWCA 262).
3. It is clear from the evidence to which SLHD has referred that at the time leave was sought for the allegations to be made, they were based on little more (if anything) than speculation or conjecture by Dr Wenkart as to SLHD's underlying motivation in the litigation. The basis put forward for such speculation seemed to me to be flimsy at the time and Macquarie has pointed to nothing since then to suggest, to the contrary, that there may have been a proper basis for the making of such allegations at the time.
4. No doubt the abandonment of those claims reduced the length (and cost) of the hearing. (It also meant that Dr Wenkart's evidence was not read and that he was not made available for cross-examination on the affidavits he had sworn in the proceedings - though preparation for such cross-examination would no doubt have already occurred.) However, by the time the allegations were abandoned (without advance notice or explanation) SLHD had already been put to the expense of a discovery exercise structured in part around the bad faith allegations and the matter had been prepared for hearing on the basis that this was a case that SLHD had to meet.
5. Whether or not the inference of "fishing" is drawn (and I must say that the scope of the discovery categories as initially sought certainly had the flavour of a party seeking to trawl though materials in the hope of finding a case), it remains the position, in my opinion, that serious allegations were being made without any real foundation and based on mere suspicion by Dr Wenkart of an improper motivation on SLHD's part.
6. In those circumstances, if it be necessary for there to be a finding of unreasonable conduct in order to sustain an indemnity costs order in relation to the costs thrown away by such amendments, I would be satisfied that such a finding should be made. As it is, it is not necessary in my opinion to go that far. Suffice it to say that the overriding statutory purpose is not met by encompassing the making (and then withdrawal at the start of the trial) of serious allegations of bad faith or collateral/improper purpose with impunity, as would be the case were a special costs order not to be made in respect of those costs. To the extent that this extends the concept of relevant "misconduct" beyond that considered in Oshlack, I consider it to be within the spirit of the reasoning in that case and supported by the clear recognition that serious allegations of this kind should not lightly be made.

Orders

1. For the above reasons, I make the following orders: 1. Macquarie pay the costs thrown away by the amendments made in the fourth further amended statement of claim filed 19 March 2019, on the ordinary basis other than in relation to the abandonment of the allegations previously made in [63F] to [63I] of the third further amended statement of claim. 2. Macquarie pay the costs thrown away by the making and subsequent abandonment of the allegations previously made in [63F] to [63I] of the third further amended statement of claim on an indemnity basis. 3. Save as ordered above, Macquarie pay SLHD's costs of the proceedings on the ordinary basis.

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: 01 November 2019