PAYNE J: This judgment concerns competing costs applications, one made by each party, each seeking to vary a costs order made in the principal proceedings. The proceedings between the parties relate to events almost 18 years ago and these proceedings have been on foot in this Court for almost nine years. The legal costs on both sides of this dispute are each now far in excess of the total figure claimed by the Marshalls as damages in this litigation.
The litigation between these parties must come to an end. This judgment is my attempt to ensure that it ends now, although I hold out little hope that mine is the final word in litigation between these parties. Somewhat ironically, given the history of this matter, I have been told that the Court of Appeal of New York is awaiting these reasons before addressing a satellite costs dispute between these parties.
On 24 August 2017, I delivered the principal judgment in this matter: Marshall v Fleming [2017] NSWSC 1107. In what follows, familiarity with that decision is assumed and it should be read with these reasons. The orders made in that judgment were that the plaintiffs' (who I shall refer to as the Marshalls) amended statement of claim dated 22 November 2016 be dismissed, and that the Marshalls pay the defendants' (who I shall refer to as Kreindlers) costs of the proceedings as agreed or assessed.
After delivering judgment, both parties sought to vary the costs order I had made as follows:
1. by motion dated 7 September 2017, Kreindlers advanced a claim for variation of my costs order seeking indemnity costs on the bases of:
1. a submission that the Marshalls' case before me was hopeless and the conduct of the case by the Marshalls warranted the making of an indemnity costs order; and
2. three letters described as Calderbank offers made by Kreindlers to the Marshalls.
On 28 September 2017, written submissions were filed by Kreindlers.
On 12 October 2017, written submissions were filed by the Marshalls denying the proposition that the three letters relied upon by Kreindlers were capable of being regarded as Calderbank letters. No submissions were addressed to the claim that the Marshalls' case before me was hopeless and the conduct of the case by the Marshalls warranted the making of a special costs order. A very wide ranging notice to produce was served by the Marshalls.
On 16 October 2017, the parties came before the Court. It was apparent that there had been a fundamental misunderstanding by the Marshalls' representatives about the scope of the orders sought by Kreindlers. I expressed the view that the issues before me did not warrant the wide ranging notice to produce served by the Marshalls. Finally, the Marshalls identified a separate basis they asserted entitled them to a special costs order. I made the following orders:
"Notice to produce - 5 October 2017
1. Set aside the notice to produce dated 5 October 2017.
2. Each party pay their own costs of the notice to produce and the notice of motion dated 5 October 2017 seeking to set aside the notice to produce.
Special costs order - no reasonable basis of claim
3. Direct that by 4pm, 23 October 2017, the plaintiffs to file such further submissions on the question of whether or not a special costs order should be made on the issue of whether there was a reasonable basis for their claim.
4. Direct that by 4pm, 30 October 2017, the respondents to file any further submissions in reply on the question of whether a special costs order should be made by reason of the absence of a reasonable basis for the plaintiffs' claim.
Special costs order - "Calderbank" offers
5. Direct that by 4pm, 19 October 2017, the respondents provide a copy to the plaintiffs of the "billing guide" referred to in submissions today which was provided by the plaintiffs to the respondents in the trial.
6. Direct that by 4pm, 23 October 2017, the plaintiffs to respond in writing to the respondents, either providing the relevant document or explaining why the document cannot be provided.
7. Direct that by 4pm, 30 October 2017, the respondents file and serve such additional submissions or evidence about the Calderbank offers.
8. Direct that by 4pm, 6 November 2017, the plaintiffs file and serve any submissions or evidence in reply about the Calderbank offers.
Special costs order - motion dated 6 February 2013
9. If so advised, direct that by 4pm, 23 October 2017 the plaintiffs file and serve any motion together with any supporting evidence seeking a special costs order in respect of the notice of motion dated 6 February 2013.
10. Direct that by 4pm, 30 October 2017, the respondent file and serve any submissions or evidence in reply concerning any special costs order sought in respect of the notice of motion dated 6 February 2013.
The Court notes that if the parties seek to cross-examine a deponent of any affidavit which is filed, that application will be clearly noted in the accompanying written submissions. Subject to the Court receiving such notification, each of the applications addressed above will be dealt with on the papers and without further oral hearing.
11. Grant liberty to apply to each of the parties to the Chambers of Payne JA on 2 days' notice."
Orders 9 and 10 related to the issue raised for the first time on 16 October 2017 by the Marshalls. That issue was a claim under r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) by the Marshalls that Kreindlers ought to pay the costs of two motions which were before Harrison J in 2013. I will explain this claim in a little detail below. No party sought a further hearing and thus the motions have been considered on the papers. The parties each filed numerous documents in relation to the three issues addressed by the Court's orders as follows:
1. on 28 September 2017, Kreindlers filed their submissions on the notice of motion dated 7 September 2017;
2. on 28 September 2017, Kreindlers filed an affidavit of Christopher Robert Finn sworn 28 September 2017;
3. on 12 October 2017, the Marshalls filed submissions in response to Kreindlers' submissions on the notice of motion;
4. on 12 October 2017, the Marshalls filed an affidavit of Terence Louis Goldberg sworn 9 October 2017 on the notice of motion, which annexed exhibit "TLG-1";
5. on 23 October 2017, the Marshalls filed submissions in relation to whether there was a reasonable basis for their claim;
6. on 23 October 2017, the Marshalls filed a notice of motion seeking a special costs order in respect of the notice of motion filed by Kreindlers on 6 February 2013 determined by Harrison J;
7. on 23 October 2017, the Marshalls provided to the Court an affidavit of Terence Louis Goldberg sworn on 23 October 2017 which annexed exhibit "TLG-2";
8. on 30 October 2017, Kreindlers filed submissions in reply in relation to the claim for indemnity costs based on Calderbank offers, the hopelessness of the Marshalls' case and the Marshalls' application for costs of the notice of motion heard by Harrison J; and
9. on 6 November 2017, the Marshalls filed submissions in response to Kreindlers' submissions dated 30 October 2017.
[2]
No reasonable basis for the plaintiffs' claim
Given that Kreindlers' principal claim was that the Marshalls should be ordered to pay indemnity costs for the whole case, it is appropriate that I address this issue first.
[3]
Kreindlers' submissions
Kreindlers submitted that the Marshalls' claim as originally advanced, and as advanced at every point in time thereafter, was hopeless and ought to have been recognised as such by the Marshalls' legal representatives. It was submitted that "[e]very iteration of the plaintiffs' claim for indemnification contained fundamental flaws that were patent, and ought to have been obvious to any responsible competent legal practitioner". As a result, Kreindlers seek an order that the Marshalls pay Kreindlers' costs of the entire proceedings on an indemnity basis, other than those parts of the proceedings the subject of existing costs orders.
Kreindlers principally focussed on the difficulties with the evidence of the Marshalls' expert on New York law, Mr Holm. Kreindlers submitted that the change in the case relied upon by the Marshalls in this Court cannot be attributed to a change in Mr Holm's opinion "for there is no identifiable change of opinion on the part of Mr Holm". It was submitted that clear problems emerged with Mr Holm's opinion on indemnification as applicable to this case as early as 28 February 2013, the date of the first report of Kreindlers' expert, Mr Bellacosa.
Kreindlers submitted that it was only in and from Mr Holm's third report dated 31 August 2016 that a duty allegedly owed by Kreindlers to Ms Carruthers was identified as the basis of a claim for indemnification under New York law.
Kreindlers submitted that "it is not permissible for the Marshalls' legal representatives to simply wash their hands of responsibility for their reliance upon Mr Holm". Kreindlers submitted that Mr Holm's first two opinions were incapable of supporting the Marshalls' claim for indemnification. These reports identify Turner Freeman as the relevant third party for the purposes of the New York law of indemnification.
As was ultimately common ground, and as I found in the principal decision, a tripartite relationship is a necessary condition to a cause of action in indemnification. Turner Freeman, on the facts of this case, was not capable of being a relevant third party, as all parties ultimately accepted before me. The heart of Kreindlers' submission was that:
"It required no expertise in foreign law to identify that fundamental flaw in the analysis. … As a matter of Australian evidence law and Australian judicial method, Mr Holm's evidence in his First and Second Report could not prove the plaintiffs' claim for indemnification." (emphasis in original)
[4]
The Marshalls' submissions
The Marshalls submitted that Kreindlers' argument "…fails to appreciate that the only rational reason for the mid-trial change of case … was the belated realisation by Mr Holm, to his great credit, that the opinions in Mr Bellacosa's final report, in the light of the new authorities cited in it for the first time in 4 years … were well founded and unanswerable as regards the necessary triangulation relationship flowing from the realisation that no fiduciary duty was in fact owed by Kreindlers to Ms Carruthers".
The Marshalls submitted that the criticism of Mr Holm is unfair. Criticism of the conduct of the Marshalls' case, it was submitted, overlooks two facts. The first is that the case arose under foreign law, and did not merely involve specialised knowledge by experts in a field of endeavour where local law determined the parties' rights and obligations. Secondly, Mr Bellacosa "…for reasons we will never know - did not show his hand and disclose his best reasoning or his complete list of authorities until his final report served two working days before the trial". The Marshalls submitted that the proceedings "may (probably would) have settled back in 2013 if Mr Bellacosa had made his third report in early 2013 rather than in mid-2017".
[5]
Consideration
The Court may, in its discretion, order that costs be assessed on an indemnity basis: Civil Procedure Act 2005 (NSW) (CPA), s 98(1)(c); UCPR, r 42.5. Although not confined to established categories of cases, the discretion to order costs on an indemnity basis is to be exercised judicially and in accordance with principle: see, for example, Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 per McHugh J at [65]; Botany Bay City Council v Minister for Local Government (No 2) [2016] NSWCA 127 at [5]; Mohareb v Palmer [2016] NSWCA 378 at [53]; Treloar Constructions Pty Limited v McMillan (No 2) [2017] NSWCA 146 at [7].
Some principles in relation to the award of indemnity costs where a party maintains a case which it should have known was hopeless were described in Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; [1993] FCA 801, where Sheppard J said at [19]:
"[19] French J dealt with the matter again in J-Corp Pty Limited v Australian Builders Labourers Federation Union of Workers - Western Australian Branch, (Federal Court of Australia, 19 February 1993, unreported). He referred (at 5) to Fountain and his earlier decision in Tetijo. In relation to Fountain he said (at 5):-
'Although there is said to be a presumption in such cases that the action was commenced or continued for some ulterior motive or in wilful disregard of known facts or clearly established law, it is not a necessary condition of the power to award such costs that a collateral purpose or some species of fraud be established. It is sufficient, in my opinion, to enliven the discretion to award such costs that, for whatever reason, a party persists in what should on proper consideration be seen to be a hopeless case. …'"
I am authorised by UCPR r 36.16 to revisit the costs order I made in the principal proceedings on the basis of Kreindlers' motion seeking the variation of that order.
This case has a long and unhappy history. As is clear from the principal decision, the case ultimately put to this Court was hopeless, not least because that case was not pleaded. The question is whether in all the circumstances I should exercise my undoubted discretion to vary the costs order I have made and award costs on an indemnity basis.
It is common ground that Mr Holm's reports dated 30 April 2012 and 19 May 2014 identified a case which was unarguable. Simply put, indemnification under the law of New York did not recognise any duty on the facts of this case to the Marshalls' lawyers Turner Freeman as Mr Holm had originally opined.
As a result, on 15 November 2016 the Marshalls amended their statement of claim and an order was made that the Marshalls pay Kreindlers costs of the notice of motion for amendment filed 14 October 2016, which I interpret as including costs thrown away by the amendment.
I do not propose effectively to overturn the costs order made by consent in November 2016. The fact that an apparently reputable expert changed his opinion after considering the reports of a competing expert is not a basis for determining that the Marshalls persisted in what should on proper consideration, have been seen to be a hopeless case. The Marshalls amended their pleading to reflect the expert's changed opinion and were ordered to pay costs on an ordinary basis arising from that amendment. I do not propose, in the exercise of discretion, to order that costs be assessed on an indemnity basis prior to this amendment.
The case developed in Mr Holm's reports dated 3 August 2016 and 25 April 2017 which was the subject of the pleading before me was that the relevant third party was Ms Carruthers and although Kreindlers did not owe her a fiduciary duty, it was sufficient for a cause of action of indemnification under the law of New York that Kreindlers believed that it owed such a duty to Ms Carruthers.
Whist there was an obvious issue in bringing a case which involved a cause of action arising under New York law in a New South Wales Court on the basis of an expert report in which no specific authority under the law of New York was cited, beyond general principle, Mr Holm's report dated 3 August 2016 was apparently credible. Whilst, acting properly, the Marshalls' Australian legal advisors should have known based on the evidence then available that their case was weak, it was not hopeless.
When Mr Bellacosa's report dated 25 April 2017 was considered alongside Mr Holm's report dated 25 April 2017, however, a competent Australian lawyer should have known that the case advanced on behalf of the Marshalls was hopeless. The authorities cited by Mr Bellacosa in his report dated 25 April 2017 left no legitimate room for the case which had been propounded up to that point by the Marshalls.
The issue which arises is that Mr Bellacosa's report dated 25 April 2017 was only received by the Marshalls' advisors a few days before the trial was due to commence on 1 May 2017. It was apparent to me during the evidence given by Mr Holm that he had not closely considered the contents of Mr Bellacosa's report dated 25 April 2017, or the authorities referred to in that report. The Marshalls accept as much, describing in their submissions Mr Holm's surprise at being referred to authorities which they earlier described as "critical". How it was that Mr Holm had not considered the authorities referred to in Mr Bellacosa's report dated 25 April 2017 was not the subject of evidence before me.
The slim possibility that Mr Holm's evidence about the content of New York law would be preferred to that of Mr Bellacosa was extinguished by Mr Bellacosa's report dated 25 April 2017. When asked to comment upon the substance of Mr Bellacosa's 25 April 2017 report in evidence before me, Mr Holm essentially accepted the fundamental tenets of that report. Based upon Mr Bellacosa's report dated 25 April 2017, when considered alongside Mr Holm's report dated 25 April 2017, the case that was opened in the trial was hopeless, and, acting properly, should have been known to be hopeless by the Marshalls' Australian representatives.
In the exercise of my discretion, I propose to amend the order for costs that I made to order that the Marshalls pay Kreindlers' costs of the trial on the ordinary basis until 30 April 2017 and pay Kreindlers' costs on an indemnity basis thereafter.
[6]
Kreindlers' submissions
Kreindlers submitted that they made three offers to the Marshalls to bring these proceedings to an end on terms that are better than the position the Marshalls presently find themselves in. They submitted that there were three offers made by Kreindlers to the Marshalls that constitute Calderbank offers:
1. an offer made on 18 August 2014 to pay the Marshalls AUD$50,000, with each party bearing their own costs. This offer was open for 28 days (the first offer);
2. an offer made on 17 August 2015 that the Marshalls walk away and pay their own costs. This offer was open for 28 days (the second offer); and
3. an offer made on 21 April 2017, which was only open for acceptance until 24 April 2017, to pay the Marshalls AUD$400,000 inclusive of costs. This offer was available for acceptance up to 4pm on 24 April 2017, effectively three business days (the third offer).
Kreindlers submitted that the Marshalls ought to pay the costs of the proceedings from the date of the first offer, or one of the subsequent Calderbank offers, on an indemnity basis.
As at the date of the first offer, Kreindlers submitted that, on the Marshalls' best case, the costs orders they had in their favour totalled approximately $405,000. Kreindlers based this figure on costs estimates in relation to the costs of five separate proceedings, three of which have not been determined:
1. judgment of the NSW Court of Appeal, now registered in New York, totalling AUD $165,340;
2. judgment of the NSW Court of Appeal in the amount of AUD$84,410;
3. costs of the application before Rothman J totalling AUD$79,637 (that is 75 per cent of the AUD$106,170.64 Turner Freeman bill provided by Mr Goldberg in his affidavit sworn 9 October 2017);
4. costs of the application for a stay in the NSW Court of Appeal totalling AUD$16,500 (that is 75 per cent of the Turner Freeman estimate $22,000 provided by Mr Goldberg in his affidavit sworn 9 October 2017); and
5. costs of the application before Barr AJ totalling $60,000 (that is 75 per cent of the AUD$80,000 - $100,000 Turner Freeman estimate provided by Mr Goldberg provided by Mr Goldberg in his affidavit sworn 9 October 2017).
Kreindlers accepted for the purposes of the exercise the Court is presently conducting, that the first offer was asking the Marshalls to forego their entitlement to these costs. However, Kreindlers submitted that accepting the offer was still reasonable because it would have avoided the professional fees, disbursements and the New York law expert fees, in addition to costs incurred by the Marshalls themselves, which were to come. On this basis, Kreindlers submitted that the first offer was reasonable.
It was submitted that the Marshalls' position "did not get any better" by the time of the second offer. It was submitted, "if anything, the plaintiffs' position became worse". In Kreindlers submission, the offer remained reasonable, even absent the offer for the payment of $50,000 to the Marshalls.
In relation to the third offer, Kreindlers submitted that the only relevant change was that interest had accrued on the costs that had already been assessed. It was submitted that the Marshalls were still in a position to avoid their own costs of the hearing, and the liability to pay Kreindlers' costs of the hearing which were not the subject of existing costs orders. In Kreindlers' submission, it was unreasonable not to accept their offer to pay $400,000 to the Marshalls.
[7]
The Marshalls' submissions
In their submissions dated 12 October 2017, the Marshalls submitted that none of the offers relied upon by Kreindlers constitute Calderbank offers. In support of this submission, the Marshalls argued that the following features "disqualify" the offers as Calderbank offers:
"(a) the offers seek to compromise existing adverse costs orders made against the defendants in these proceedings which has yet to be quantified;
(b) they seek to set aside existing adverse costs orders made against the defendants in two sets of proceedings in the Court of Appeal in this Court, which have now been quantified but had not been at the date of the letters;
(c) they seek to set aside a judgment and costs orders (that is, orders for the costs incurred in New York) made against the defendants in the Supreme Court of New York in respect of the enforcement of the adverse costs orders made against the defendants by the Court of Appeal in this Court; and
(d) they seek to set aside orders made by the New York Court of Appeal against the defendants requiring them to secure the plaintiffs for the judgement suffered by the defendants as a condition of their right to appeal from the judgment given by the Supreme Court of New York for enforcement of the orders made by the Court of Appeal of this Court."
The consequence of the offers here not constituting Calderbank offers, it was submitted, is that the Court's power to exercise its discretion as to costs by interfering with the general rule in UCPR r 42.7 is not engaged in this case.
In written submissions filed on 6 November 2017, the Marshalls made submissions in relation to each of the three Calderbank offers, in the event this Court found them to be Calderbank offers. In relation to the first and second offers, the Marshalls submitted that asking the Court to determine the reasonableness of refusing these offers is "invit[ing] the Court to make a decision on reasonableness which is speculative, having regard to the indeterminate nature of the countervailing rights as to costs."
In relation to the third offer, the Marshalls submitted that:
"…it is impossible to make any confident, let alone a reliable, assessment of value of the parties' countervailing rights as to costs in 3 Courts (NSWSC, NSWCA and the New York Supreme Court), not to mention the (as yet undetermined) costs of Kreindlers' pending appeal to the New York Court of Appeal (the hearing of which has been stayed until this proceeding is concluded)…"
The Marshalls also drew the Court's attention to the following submission made by Kreindlers in their written submissions filed on 30 October 2017:
"The offer made on the date to pay the plaintiffs $400,000 was one that on any view ought to have been accepted. Instead, it was met with silence, the subsequent communication by the plaintiffs being the offer made on 5 May 2017 … which, despite the supposed "tectonic shift" by Mr Holm, the plaintiffs sought payment of $550,000. It is no coincidence that this is the same as the lower end of the range of Mr Goldberg's estimate of the value of the existing costs orders in the plaintiffs' favour."
The Marshalls submitted that this communication is wholly inconsistent with the contention that it was unreasonable for the Marshalls to reject the offer.
In relation to the costs incurred by the Marshalls, an affidavit of Mr Goldberg sworn on 9 October 2017 and filed on 12 October 2017 was read. Mr Goldberg estimated that as a result of existing orders for costs, and subject only to any set-off based on an assessment of the costs order made by me, Kreindlers will eventually be liable to pay the Marshalls an amount of approximately AUD$550,000 to AUD$570,000, a figure not quite twice the amount claimed as damages from Kreindlers in the litigation before me. Mr Goldberg based this estimate upon existing costs orders made after assessment and costs in proceedings that have yet to be assessed. I have outlined Mr Goldberg's estimates below.
Costs of proceedings that have been assessed:
1. the judgment of the NSW Court of Appeal on 8 December 2011 in the amount of AUD$150,343.12 to be paid by Kreindlers to the Marshalls which was entered in the Supreme Court of New York on 14 September 2015 in the amount of USD$154,167.48. Mr Goldberg says that an interest rate of nine per cent is payable on the judgment in New York. Accordingly, the amount recoverable by the Marshalls in New York is estimated at AUD$234,966.26. The amount due in New South Wales is estimated at AUD$273,136,31; and
2. the judgment of the NSW Court of Appeal on 5 May 2017 in the amount of AUD$84,410.86. The amount of interest due is AUD$2,670.36. This judgment has not been filed and entered in the Supreme Court of New York. Accordingly, the amount recoverable for this judgment in New South Wales is AUD$87,081.22.
Costs of proceedings that have not been assessed:
1. the costs order made by Rothman J on 19 February 2010. Mr Goldberg provided a Turner Freeman bill in the amount of AUD$106,170.64 in relation to this proceeding;
2. the costs order made by the NSW Court of Appeal on 26 June 2012 made in favour of the Marshalls. This costs order has not been assessed. Mr Goldberg estimated the costs of defending the motion amount to about AUD$22,000;
3. the costs order made by Barr AJ on 26 June 2012 in favour of the Marshalls. Mr Goldberg estimated the costs incurred in defending this motion amount to about AUD$80,000 to $100,000; and
4. the reserved costs of the motion before Harrison J. Mr Goldberg says he does not have a bill for the costs incurred in defending this motion. He estimated that the costs incurred by the Marshalls amount to about AUD$60,000 to $70,000.
[8]
Consideration
In McMillan (No 2) the Court of Appeal (Beazley P, Gleeson JA and Emmett AJA) said at [7]-[10]:
"[7] The Court may, in its discretion, order that costs be assessed on the indemnity basis: CPA, s 98(1)(c); UCPR, r 42.5. Although not confined to established categories of case, the discretion to order costs on the indemnity basis is to be exercised judicially and in accordance with principle: see, for example, Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 per McHugh J at [65]; Botany Bay City Council v Minister for Local Government (No 2) [2016] NSWCA 127 at [5]; Mohareb v Palmer [2016] NSWCA 378 at [53].
[8] The making, and rejection, of a Calderbank offer is one factor which may, but will not necessarily, cause the Court in its discretion to order costs on the indemnity basis. Barrett JA explained in Whitney v Dream Developments Pty Ltd (2013) 84 NSWLR 311; [2013] NSWCA 188, at [57], that an offer will qualify as a Calderbank offer:
'… only if the maker of it is shown to intend that the fact of its non-acceptance may be deployed as a basis for seeking a special costs order in the event of that party's ultimate success in the action. Everything therefore depends on the message conveyed by the offer itself and any covering letter or other attendant circumstance.'
[9] The rejection of an offer of that type may cause the Court to make an order that costs be assessed on the indemnity basis if the Court is satisfied that (1) the offer was a genuine offer of compromise and (2) the rejection of the offer was unreasonable: see, for example, Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [8].
[10] Although no fixed form of words is required for an offer to constitute a Calderbank offer, an indication that the offer will be relied on in relation to the question of costs should a verdict more favourable than the offer be achieved "is the essence of a Calderbank offer": per Bathurst CJ in Whitney v Dream Developments Pty Ltd at [42]. The 7 November 2014 letter does not embody an offer of the type contemplated for the reason that it fails this essential requirement."
In one sense the debate about whether the letters of offer here were proper Calderbank offers is an arid one. I will assume, without deciding, that the Court may in the present case, in its discretion exercised judicially and in accordance with principle, order that costs be assessed on an indemnity basis: CPA, s 98(1)(c); UCPR, r 42.5.
The making, and rejection, of a Calderbank offer is one factor which may, but will not necessarily, cause the Court in its discretion to order costs on an indemnity basis. No fixed form of words is required for an offer to constitute a Calderbank offer. The three letters here under consideration each contained a clear indication that the offer would be relied on in relation to the question of costs should a verdict more favourable than the offer be achieved.
The rejection of an offer of the type contained in the three letters may cause the Court to make an order that costs be assessed on an indemnity basis if the Court is satisfied that (1) the offer was a genuine offer of compromise; and (2) the rejection of the offer was unreasonable.
The first two offers were essentially offers to capitulate. In Herning v GWS Machinery Pty Ltd (No. 2) [2005] NSWCA 375, the Court of Appeal (Handley, Beazley and Basten JJA) said at [5]:
"[5] The general approach adopted in this Court is that where an offer involves 'no real element of compromise' but merely 'invites capitulation by the appellant' it will not result in a variation of the usual costs order." (references omitted)
In County Securities Pty Limited v Challenger Group Holdings Pty Limited (No 2) [2008] NSWCA 273, McColl JA (Spigelman CJ and Beazley JA agreeing) said at [32]:
"[32] An offer with no real element of compromise in it, which is designed merely to trigger the costs sanctions, will not be treated as a genuine offer of compromise. Whether or not an offer is a genuine offer of compromise or merely a demand to capitulate depends upon an assessment of all the circumstances of the case at the time." (references omitted)
Whilst the third letter is perhaps in a slightly different category, in relation to all three of the letters of offer, I am not satisfied that the offers contained a genuine offer of compromise. I am not satisfied that it was unreasonable of the Marshalls to reject any of the offers.
An assessment of the reasonableness of the Marshalls' conduct in refusing to accept the offers must take into account their prospects of success. I have found that at the time each offer was made (that is before Mr Bellacosa's report dated 25 April 2017), acting properly the Marshalls advisors should have understood that they had a weak but not hopeless case.
An assessment of the reasonableness of the Marshalls' conduct in refusing to accept the offers must also take into account the extant costs orders obtained by the Marshalls against Kreindlers. This case is unusual in the number of unsuccessful attempts by Kreindlers to have the proceedings brought by the Marshalls determined other than on a final basis. This may or may not reflect a difference in legal culture between Australia and the United States. Whatever the cause, by reason of costs orders made which are unaffected by the outcome of the final hearing, Kreindlers had a very substantial contingent liability in costs to the Marshalls before the first offer was made. That contingent liability did not change at the time of the two subsequent offers.
An assessment of the reasonableness of the Marshalls' conduct in refusing to accept the offers must also take into account the fact that an amount was offered significantly below the estimate Mr Goldberg has made of the likely costs liability of Kreindlers to the Marshalls, which I accept (subject to the costs before Harrison J addressed below).
Finally, the third offer, made on 21 April 2017 of AUD$400,000 was only open for acceptance until 24 April 2017, the day before Mr Bellacosa's critical report was served. Although the offer was in an amount close to the substantial contingent liability in costs Kreindlers had to the Marshalls, I do not regard the rejection of the offer in those circumstances as unreasonable or warranting the award of indemnity costs.
[9]
The costs of an application before Harrison J in 2013
The final issue I must determine is the Marshalls' claim that I amend my costs order to provide that Kreindlers pay the Marshalls the costs of the motions heard before Harrison J in 2013.
It will be recalled from the principal judgment that in January 2012, as a result of the first decision of the Court of Appeal, the Marshalls fundamentally recast their case against Kreindlers and filed an amended statement of claim in which all previously pleaded causes of action were abandoned in favour of a new case pleaded solely as a common law or equitable duty of indemnification arising under New York law.
On 6 February 2012, Kreindlers sought an order that a member of the New York Panel of Referees, under the Memorandum of Understanding between the Supreme Court of New South Wales and the Court of Appeal of New York, be appointed to act as a referee for inquiry and report on the questions of New York law raised by the plaintiffs.
This is the motion, together a motion filed by the Marshalls seeking to strike out Kreindlers foreign law notices, which came before Harrison J, where Kreindlers was successful. As I recorded in my principal judgment at [106]-[107]:
"[106] On 20 March 2014, in allowing the appeal, Bathurst CJ (Beazley P and Meagher JA agreeing) held that [Harrison J] erred in failing to identify the question of law to be determined by the referee, as required by the UCPR: Marshall v Fleming [2014] NSWCA 64 at [27].
[107] Further, a specific referee needed to be appointed under r 20.14, not a panel from which a referee may be selected (as Order 1 in this instance did). Bathurst CJ also held that the primary judge erred in making an order which in terms assumed that the Memorandum of Understanding would be engaged in the way the order contemplated or that it otherwise provided a basis for the making of an order in the terms made: [27]. Bathurst CJ noted at [26] that the Memorandum of Understanding was intended to provide an effective and inexpensive method by which questions of foreign law can be determined:
'… However, that method involves the co-operation of the parties both in identifying the questions of law arising on particular facts and assumptions (and possibly alternative sets of facts and assumptions) and agreeing to be bound by the result. It is regrettable having regard to the amount involved in these proceedings that the parties could not or would not co-operate to achieve this end. …'".
While the Court of Appeal set aside Harrison J's orders and awarded the Marshalls the costs of the appeal, they specifically remitted the question of costs before Harrison J to the trial judge. The effect of my order following the trial is that as the successful party, Kreindlers is entitled to its costs of the motions before Harrison J.
The Marshalls seek an order that Kreindlers be ordered to pay the costs of those motions.
[10]
The Marshalls' submissions
The Marshalls submitted that Kreindlers ought to pay the costs of the motions before Harrison J. It was submitted that the making of a costs order in their favour followed from the Court of Appeal finding against Kreindlers.
Extensive material was filed before me by the Marshalls about the various positions the parties took about these motions. In addition, submissions about jurisdiction and evidence were made by the Marshalls which were not made in the Court of Appeal "because now is the time to put them".
The essence of the Marshalls' submission was that the referral motion was "doomed to fail at a jurisdictional level [by failing to appoint a referee under the Memorandum of Understanding] and at an evidentiary level in the absence of agreed questions of foreign law".
In essence, the Marshalls motion concerning foreign law notices was a complaint about various procedural aspects of Kreindlers' conduct, being that the notices were late and "notably uninformative". To the extent that there was a substantive complaint, it was that Kreindlers impermissibly re-characterised the Marshalls complaint as in substance a malpractice suit, which was time-barred, rather than a claim for indemnification, which was not.
The Marshalls accepted that they did not obtain a finding before Harrison J or in the Court of Appeal that Kreindlers' foreign law notices were inadequate but submitted that the inter-relationship between the referral motion and the foreign law notices motion, and the way each was disposed of by the Court of Appeal, meant that Kreindlers should be ordered to pay the costs of both motions.
[11]
Kreindlers' submissions
Kreindlers submitted that the genesis of the application before Harrison J was the decision of the Court of Appeal in Fleming v Marshall [2011] NSWCA 86 in relation to forum non conveniens. A key factor in Spigelman CJ rejecting Kreindlers' argument that New South Wales was a clearly inappropriate forum was the availability of a mechanism to refer questions of law for determination by New York judges. It was this, Kreindlers submitted, that inspired the notices of motion ultimately heard by Harrison J.
Kreindlers submitted that none of the grounds upon which the Marshalls sought to resist the referral to New York advanced by Harrison J succeeded in any court. It was submitted that, to the extent the application before Harrison J involved a challenge to the foreign law notices filed by Kreindlers, that application was not disposed of and there was no "event" to which any usual rule as to costs could attach.
Kreindlers submitted that there is no basis for the Marshalls to be awarded the costs of their applications before Harrison J as, having been reserved, they should simply be costs of the proceedings as provided by the UCPR.
[12]
Consideration
I will proceed on the basis that I have jurisdiction pursuant to s 14 of the CPA to vary my order for costs in the way the Marshalls submit. I have, however reached a clear conclusion that the Marshalls' submissions that they should be awarded the costs of the motions before Harrison J must be rejected.
This was always, in truth, a case about the content New York law. As I pointed out in my principal judgment at [97]-[98]:
"[97] Macfarlan JA [in the first Court of Appeal judgment] recorded that it was common ground that if New York law were the proper law of Kreindlers' retainer, the whole of the plaintiffs' case (as then pleaded) would fail by reason of the expiry of all relevant limitation periods:
'[45] Furthermore senior counsel for the Marshalls conceded during the hearing of the appeal that the Marshalls' proceedings against Kreindlers would fail if New York law were found to be the proper law of the Kreindlers' Retainer Agreement. The basis of this concession was a conclusion that under New York law a three year limitation period existed for the commencement of proceedings on each of the causes of action upon which the Marshalls sued and that the Australian proceedings were not, and any future New York proceedings would not be, commenced within that period. This concession was a corollary of the Marshalls' submission that one of the reasons that New South Wales was not a clearly inappropriate forum was that the Marshalls could not bring proceedings in New York because they would be statute barred. Kreindlers did not submit that a three year time bar did not apply under New York law and should therefore be taken to have implicitly accepted that the current proceedings should proceed upon the basis that such a time bar was applicable. Neither party suggested that if proceedings were commenced in New York, the New York court would apply any law other than New York law.'
[98] In January 2012, presumably as a result of the decision of the Court of Appeal, the plaintiffs fundamentally recast their case against Kreindlers. The plaintiffs filed an amended statement of claim in which all previously pleaded causes of action were abandoned in favour of a new case pleaded solely as a common law or equitable duty of indemnification arising under New York law."
The first Court of Appeal, in rejecting Kreindlers' argument that New South Wales was a clearly inappropriate forum, took into account the availability of the mechanism to refer questions of law for determination by New York judges. As Bathurst CJ noted at [26] of the second Court of Appeal judgment, the Memorandum of Understanding was intended to provide an effective and inexpensive method by which questions of foreign law could be determined. It is a matter of considerable regret that this potentially effective and inexpensive method was not used to determine the questions of New York law raised in the present case. It was a matter for the parties to appoint a referee under the Memorandum of Understanding and agree appropriate questions for referral.
Having considered the voluminous correspondence put before me, it is clear that it was the intransigence of the Marshalls' representatives which was the principal cause of the failure to adopt this potentially effective and inexpensive method by which questions of New York law could have been determined.
There is no reason to think that there would have been any difficulty in appointing a referee under the Memorandum of Understanding. I reject the Marshalls' submission that the correspondence does not support a finding of a lack of co-operation on their part in identifying questions of foreign law. In the letters referred to by the Marshalls as supporting their position, Kreindlers clearly identified draft questions of foreign law. Those draft questions were met by the Marshalls with an obdurate refusal to engage in any constructive dialogue. The Marshalls' correspondence asserted that "fundamental flaws" in the Kreindlers' draft questions had the effect that the Marshalls would not themselves identify appropriate questions for referral. Having studied the draft questions posed by Kreindlers, I reject the criticism of those questions by the Marshalls. No doubt those questions, and the facts to be assumed in answering those questions, could have been improved. That was no basis, however, for the obstructive approach adopted by the Marshalls.
The correspondence between the parties is also replete with assertions made by the Marshalls' representatives that that as Kreindlers had proceeded with their forum non conveniens claim before the first Court of Appeal they had thereby "made a binding election" not to seek an effective and inexpensive method of resolution of the dispute under the Memorandum of Understanding. That suggestion was risible and was summarily rejected by Harrison J at [16].
This is a case which cried out for an effective and inexpensive resolution of the questions of New York law. Kreindlers sought to achieve that with the motion for referral before Harrison J.
I have reached a clear view that Kreindlers should have their costs of seeking a just, quick and cheap outcome which was wholly consistent with s 56 of the CPA. This was the clear intention of the motion seeking to deploy the Memorandum of Understanding which was before Harrison J. The Marshalls' intransigence in opposing any co-operative and inexpensive resolution of the key issue of New York law should not be rewarded by an order for costs. Kreindlers' ultimate and complete success on the questions of New York law before me has the result that Kreindlers should have their costs of the motion concerning the Memorandum of Understanding before Harrison J.
As to the costs of the motion concerning the competing foreign law notices, I decline to exercise my discretion to vary the costs order earlier made. Dealing with the substance rather than the form of that dispute, Kreindlers' foreign law notice correctly stated that the Marshalls' pleading did not disclose a cause of action in indemnification. By the time the motion proceeded, the Marshalls had Mr Bellacosa's first report. I reject the criticism of that report by the Marshalls.
It is clear on the evidence before me that the Marshalls' foreign law notice the subject of the motion did not contain material which reflected the content of New York law. Harrison J records at [6] that the Marshalls were relying on, for the purpose of the motion about foreign law notices, the 2012 expert report from Mr Holm, which all parties now accept did not describe the law of New York correctly. The Marshalls had, at the time of the hearing of the motion, Mr Bellacosa's first report, which correctly described the content of New York law and about which no legitimate criticism can be made.
I decline to exercise my discretion to vary the costs order I made when disposing of the principal proceedings to award the Marshalls their costs of pursuing a determination about a matter of foreign law where the position being advanced by Kreindlers in that dispute was correct and the position being advanced by the Marshalls was fundamentally wrong.
[13]
Conclusion and orders
For these reasons I propose pursuant to UCPR r 36.16 to amend order 2 made on 24 August 2017 and order that:
1. the Marshalls pay Kreindlers' costs of the trial on the ordinary basis until 30 April 2017;
2. the Marshalls pay Kreindlers' costs of the trial on an indemnity basis thereafter.
I otherwise dismiss the motion filed by Kreindlers dated 7 September 2017. Given Kreindlers limited success, the Marshalls should pay 50 per cent of Kreindlers costs of that motion.
The Marshalls motion dated 23 October 2017 is dismissed. The Marshalls must pay Kreindlers costs of that motion.
[14]
Amendments
05 December 2017 - Typographical errors corrected in cover sheet at para [81]
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Decision last updated: 05 December 2017