Michael Hill Jeweller (Australia) Pty Ltd v Gispac Pty Ltd

Court of Appeal (NSW)|2024-11-21|Before: Bell CJ, Payne JA, Gleeson J

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

JUDGMENT

THE COURT: On 27 August 2024 the Court delivered judgment in the appeal in this matter, allowing the appeal in part and substituting a reduced judgment in favour of the plaintiff (Gispac Pty Ltd, the respondent in this Court). [1] Order 3 set aside the orders of the primary judge made on 31 January 2024, which included an order for costs in favour of Gispac, which was varied on 8 April 2024 to provide that the appellant Michael Hill Jeweller (Australia) Pty Ltd pay Gispac's costs of the proceedings "(a) on the ordinary basis up to 10 July 2020, and (b) on an indemnity basis on and from 11 July 2020". The Court did not, however, make any order in place of the costs order set aside, but directed the parties to file submissions as to the order for costs of the trial. Each party has filed written submissions in that regard.
By order 4, the respondent was required to pay the appellant's costs of the appeal. Each party has filed, within the period permitted by Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 36.16, a notice of motion seeking to vary that order. The appellant's notice of motion, filed on 3 September 2024, sought that the costs payable to it be assessed on the ordinary basis up to and including 17 June 2024, and thereafter on an indemnity basis. The basis of the application was an offer of compromise made on that date, in an amount which exceeded the appellant's liability as determined by this Court.

Variation of order for costs on appeal

There is a question as to whether both motions can succeed. That is, if costs are to be assessed on an indemnity basis after the rejection of an offer of compromise, is it possible to reduce the proportion of the costs to be paid? Consistently with the premise that the offer related to the proceedings globally, is the proper course to reduce only the costs payable before the offer, which will be assessed on the ordinary basis? This issue was not addressed by the parties, but can be resolved as a matter of principle. The offer of compromise being, as is generally both appropriate and necessary, in global terms, and assuming that there were separable issues warranting differential orders, the respondent's motion should be considered by reference to so much of the costs as are to be assessed on the ordinary basis.

Indemnity costs - appellant's motion

The appellant's motion for indemnity costs was founded upon a letter sent by its solicitors on 17 June 2024 offering to discontinue the appeal on the basis that it pay the respondent $1.5 million. The offer did not comply with (and did not seek to invoke) the scheme for offers of compromise under the UCPR, r 20.26. Accordingly, under conventional principles, the appellant must satisfy the Court that it was unreasonable for the respondent to reject the offer, in order to justify a claim for costs on the indemnity basis from the day after the offer was made: see Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2). [2] That principle flows from the fact that an application for indemnity costs involves a departure from the general rule that costs are to be assessed on the ordinary basis under UCPR, r 42.2.
The Court in Miwa accepted six factors to be considered in determining whether the rejection of an offer was unreasonable: "12 In Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; 13 VR 435 the Court of Appeal (Warren CJ, Maxwell P and Harper AJA) identified the factors relevant to determining whether the rejection of an offer was unreasonable as including the following: '(a) the stage of the proceeding at which the offer was received; (b) the time allowed to the offeree to consider the offer; (c) the extent of the compromise offered; (d) the offeree's prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; (f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it.'" The list was not exhaustive, but no other factor was relied upon in the present case.
The appellant's offer was conveyed at about 4pm on Monday, 17 June 2024, in relation to an appeal listed for hearing on Thursday, 20 June 2024 with an estimate of two days. The offer required acceptance by 9am on Wednesday, 19 June 2024. The timing was relevant in two respects. On the one hand, the time for consideration of the offer was brief; on the other hand, because of the imminence of the hearing, the parties would have been fully informed as to the issues and thus well able to assess the strengths and weaknesses of their respective cases. That inference is confirmed by the fact that 24 hours later, on Tuesday, 18 June, the respondent replied rejecting the appellant's offer and making a counteroffer of its own. The counteroffer required payment by the appellant of $3.5 million; it was open for acceptance until 12pm on Wednesday, 19 June 2024.
Having regard to the factors identified in Miwa, it may be accepted that (i) the offer was made at a time when the parties were well placed to assess its reasonableness; (ii) sufficient time was allowed to consider the offer; (iii) although the offer referred, infelicitously, to being open for seven days, as well as stating in bold print the date by which acceptance was required, the infelicity did not cause confusion and the terms of the offer were clear; and (iv) the offer foreshadowed an application for indemnity costs in the usual manner. It remains to consider the extent of the compromise proposed, and the respondent's prospects of success assessed at the date of the offer.
In assessing the extent of the compromise, three considerations arise. The first is that the gross sum of $1.5 million (including costs) was in itself a significant amount in circumstances where the whole of the judgment of $2.26 million plus interest and costs was under challenge. The offer involved a significant element of compromise; it did not require effective capitulation by the respondent.
The second factor, relied upon by the respondent, was that the amount of the offer was explained, with curious precision, as comprising $500,162.30 by way of damages and $999,837.70 by way of costs. In its written submissions, the respondent seized upon the amount by way of damages being only marginally greater than the judgment it in fact obtained, when account was taken of accrued interest. On the other hand, the amount attributed to costs constituted almost a complete indemnity for the respondent's costs of the trial, although some allowance may also have been made for costs incurred in preparing a defence of the appeal.
The applicant relied upon the gross amount as constituting a reasonable compromise. The respondent's letter of rejection and counteroffer also dealt with the matter on a lump sum basis. Although the explanation of the breakdown of the offer was puzzling, nothing turns on that for present purposes.
The third factor concerns the assessment of the respective positions adopted by the parties. The respondent calculated its total entitlement following the trial, including interest and costs, as being in the order of $4 million. Its counteroffer of $3.5 million involved a reduction of 12.5% on the assumption that it maintained its indemnity costs order.
Assessing the reasonableness of each parties' position is not an exercise which can be undertaken with any degree of precision. The Court is required to eschew hindsight based upon the judgment which has been delivered; on the other hand, it can only assess reasonableness by reference to the relative strengths and weaknesses of the case which it has already determined. On one view, if there were no surprises arising from the hearing, and in circumstances in which each party had already filed and served written submissions, an offer which was three times greater than the amount of the judgment (including interest) but putting aside costs, was on the face of it, unreasonably rejected.
A fourth factor should be noted. Whilst the parties should have been well able to assess their chances of success or failure, given the imminence of the appeal hearing, the carrot provided by the offer was a significant amount, but the stick, being the threat of an indemnity costs order thereafter, carried little weight, most of the solicitors' work no doubt having been completed, and the difference between counsel's fees for a day's preparation and a day (or a day plus) of hearing was of relatively little consequence on a commercial assessment.
The offer was undoubtedly a reasonable one; the respondent was, with hindsight, misguided in rejecting it; but the question is whether the rejection was unreasonable. The respondent would have sought advice from those it had briefed to run the case on appeal. They should reasonably have identified (i) a real risk that the primary shortfall award might be overturned; (ii) that if it were, the indemnity costs order would fall away; (iii) even if the exclusivity award were upheld, the costs of the trial would probably be apportioned; (iv) there was some (lesser) risk that the exclusivity award would also be overturned; and (v) that there was likely to be an indemnity costs order if the shortfall award were overturned and an offer of more than four times the exclusivity award had not been accepted because rejection would be assessed as unreasonable. Acting reasonably, the respondent should have accepted that advice and accepted the offer: it was unreasonable not to.
In contrast to the rules relating to the costs consequences of offers of compromise complying with UCPR Pt 20, the Court has a broad discretion as to whether to order that costs be assessed otherwise than on the ordinary basis, pursuant to UCPR, r 42.2. However, if a Calderbank offer is unreasonably rejected, in the absence of any countervailing consideration indemnity costs should follow. While the effect may be small, it is appropriate to amend the order made to vary the general rule in accordance with the appellant's notice of motion.

Varying the order for costs

It remains to consider the respondent's motion seeking to vary the order as to the costs of the appeal so that it pay only 50% of the appellant's costs. The basis of that application is that there were separate or severable issues on which it was successful.
The applicable principles were stated by this Court in Elite Protective Personnel Pty Ltd v Salmon (No 2) [3] in the following terms: "6 Where there are multiple issues in a case the Court generally does not attempt to differentiate between the issues on which the appellant was successful and those on which it failed. Unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed: Waters v P C Henderson (Aust) Pty Ltd (Court of Appeal, 6 July 1994, unreported). 7 As the appellants submit, the commencing position is that costs follow the event so that a successful party is entitled to costs. In relation to trials it has been said that it may be appropriate to deprive a successful party of costs or a portion of the costs if the matters upon which that party was unsuccessful took up a significant part of the trial, either by way of evidence or argument: Sabah Yazgi v Permanent Custodians Limited (No 2) [2007] NSWCA 306 (at [24]). A similar approach is adopted in the Court of Appeal. If the appellant loses on a separate issue argued on the appeal which has increased the time taken in hearing the appeal, then a special order for costs may be appropriate which deprives the appellant of the costs of that issue: Sydney City Council v Geftlick & Ors (No 2) [2006] NSWCA 374 (at [27]). 8 Whether an order contrary to the general rule that costs follow the event should be made depends on the circumstances of the case viewed against the wide discretionary powers of the court, which powers should be liberally construed: State of New South Wales v Stanley [2007] NSWCA 330 (at [18]) per Hislop J (with whom Beazley JA and Tobias JJA agreed)."
These principles have subsequently been applied in many cases and were restated in Bostik Australia Pty Ltd v Liddiard (No 2). [4]
The phrase "dominant or separable" should not be applied as if it were a statutory test. It involves two concepts, each of which should be treated flexibly. Most cases will involve multiple issues and one expects a judgment to be structured accordingly. A number of issues may arise from a common factual basis, so that it is difficult to disentangle them. Further, disentanglement may work at different levels. One issue may be entirely separate from others, and thus truly separable. On the other hand, it may not be possible to state a fraction of the time taken in preparation, or presentation at trial, of that issue. For that purpose, it may not be sufficiently dominant to warrant separate treatment in relation to costs.
The term "separate treatment" is itself imprecise. Such treatment may involve a separate costs order. For example, in a civil claim for damages, where liability is established but the claimed loss is not, separate orders may be made as to liability and damages. On the other hand, the distinction may not be so clear, but the court may be able to satisfy itself that the length of a trial would have been reduced by a significant proportion of the time and resources devoted to it had a particular matter not been raised. Again, a 10% reduction might suggest that the issue was not sufficiently dominant to warrant a variation of the usual order. In the case of an appeal which has been completed within a single day, some adjustment to the usual costs order would, in many cases, not be appropriate unless the issue were so clearly separable that the resources devoted to its preparation could readily be identified and allowed for. Often the exercise will require a degree of speculation, or explanation based on a reassessment of the parties' preparation, which is either not warranted or is inappropriate. While accepting the importance of costs for the parties, the Court should be wary of encouraging satellite litigation with respect to the precise nature of a costs order. In Oikos Constructions Pty Ltd t/as Lars Fischer Construction v Ostin (No 2), [5] a case discussed in relation to the costs of the trial, an issue which was treated as clearly separable, but involved a low proportion of the outcome on the appeal, did not lead to a reduction of the costs of the appeal, but, conversely, did affect the order for the costs of the trial.
Furthermore, while a successful party may be deprived of costs, either in part or in whole for misconducting litigation, generally it would not be appropriate to deprive a successful party of costs of claims or defences which were not unreasonably maintained, even if not made good. Nor should the parties be discouraged from seeking settlement on the basis that adverse costs orders may be limited by the unsuccessful party winning some points but losing the game. Indeed, there is also a risk that there will be demands on the Court to resolve all issues, where that is not necessary to dispose of the proceedings, so that the unsuccessful party can seek to reduce the expected adverse costs order. Nor is it insignificant that the parties exchanged offers of compromise intended to dispose of the proceedings on a global basis.
Bearing these considerations in mind, the Court is not persuaded that the costs of an appeal which was completed in a single day, where the appellant achieved a large degree of success, should be awarded by reference to separable issues. Rather, the "event" for the purposes of the costs rule, should be assessed by reference to the financial outcome. The appellant sought a judgment in its favour, but in the event reduced its liability from some $2.26 million (plus interest) to some $360,000 (plus interest). That is a proportionate reduction of 84%. The respondent should pay the appellant 84% of its costs of the appeal. Taking into account the variation required on account of the offer of compromise, that proportion should apply to costs incurred before 18 June 2024.

Costs of trial

The costs order made at trial, which was set aside by order 3 made by this Court, included an order for assessment of part of those costs on an indemnity basis. Because that aspect of the order was not opposed before the trial judge, the offer of compromise made by the respondent was not identified in the judgment. No reference having been made to that offer of compromise in submissions in this Court, it may be inferred that the respondent failed to better the offer by the judgment obtained in this Court. There is no suggestion that the appellant made an offer of compromise which is relevant to the costs of the trial. Accordingly, any order will be for costs to be assessed on the ordinary basis.
The appropriate order for the costs of the trial must be based on the results obtained on appeal. Thus, it is true that the respondent was partly successful in its claims, but that success was limited to a small fraction of the amount of the trial judgment and a somewhat smaller fraction of the amount claimed at trial. As in this Court, the trial judge identified the two primary bases of the claims by Gispac as a failure to pay amounts identified in the "shortfall invoices", based on the annual quantities required to be purchased under the sales agreements, and breach of the requirement that the appellant obtain the products the subject of the sales agreements exclusively from the respondent. [6] So far as quantum was concerned, the judge summarised the claims as follows: "8 In final submissions, Gispac put its claim for damages in the alternative. Its primary claim is for liquidated damages for breach of the take or pay provision in cl 18.2 in the amount of $2,259,971.40 (Gispac did not press its claim for GST in respect of this amount). Alternatively, Gispac claims damages for breach of the annual quantity provision in cl 18.1 during the applicable term of the Sales Agreements (either a 4-year, 2-year, or 1-year term): $2,012,545 (4-year), $1,018,932 (2-year) or $569,623 (1-year). In the further alternative to damages under cll 18.2 or 18.1, Gispac claims damages for breach of the exclusivity provision in cl 17, again depending upon the applicable term of the Sales Agreements (but there is no exclusivity claim for a 1-year term): $465,129 (4-year) or $13,206 (2-year). Gispac abandoned its claim for storage costs under cl 18.2(b) in final submissions (T112.16)."
The matter as to which the appellant was ultimately successful (the shortfall invoices) accounted for some 80% of the amount claimed by the respondent as the plaintiff in the court below. The respondent submits, however, that many of the defences which the appellant raised were rejected by the trial judge. Further, the costs of preparation were exacerbated by the appellant's challenge to the assessment of losses, although those issues were not the subject of contested evidence before the trial judge, the evidence having been completed in a single day.
In Access Training Group Ltd v Jane [7] Basten AJA noted, with respect to the principles stated in Bostik v Liddiard (No 2) and the raising of unsuccessful defences: "220 These principles have been restated from time to time, sometimes with more citation of authority and sometimes with a focus on the specific matters in issue. In considering whether a party should be deprived of its costs because it has failed on particular issues, it may be important to have regard to whether or not it was the moving party. As Burchett J noted in Australian Conservation Foundation v Forestry Commission: [8] 'A party against whom an unsustainable claim is prosecuted is not to be forced, at his peril in respect of costs, to abandon every defence he is not sure of maintaining, and oppose to his adversary only the barrier of one hopeful argument: he is entitled to rise his earthworks at every reasonable point along the path of assault. At the same time, if he multiplies issues unreasonably, he may suffer in costs.'"
In Griffith v Australian Broadcasting Corporation (No 2) [9] Hodgson JA (with whom Basten JA and McClellan CJ at CL agreed) also noted a distinction as between a defence and a claim: "19 Further, in my opinion, the underlying principles concerning costs identified in Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121] and Ohn v Walton (1995) 36 NSWLR 77 at 79 (referred to in Turkmani at [13]) suggest that the application of these principles may not be exactly the same for successful defendants as for successful plaintiffs. In the former case, the defendant has been caused to incur costs in defending a claim which the decision in the case has wholly rejected, and has thus determined should not have brought about the incurring of any costs at all. In those circumstances, it may be considered appropriate that the defendant have costs associated with reasonable defences, even if they ultimately proved to be unsuccessful and severable. In the latter case, the plaintiff has chosen to bring the whole proceedings and thereby to incur costs and cause costs to be incurred which otherwise would not have been incurred; and in those circumstances, it may be seen more readily as appropriate that the plaintiff be liable for the costs of unsuccessful severable claims or issues, even if it was reasonable to include those claims or issues. 20 Most of the cases in which these principles have been considered are cases where a successful plaintiff (or appellant) has not recovered full costs. Two cases which did concern successful defendants (or respondents) give some support to the distinction I have drawn in the previous paragraph: Yazgi v Permanent Custodians Ltd (No 2) [2007] NSWCA 306 at [24]-[25], and Sydney Ferries v Morton (No 2) [2010] NSWCA 238 at [18]. …"
The respondent submitted in this Court that the appellant had at trial: [10] "mounted five standalone defences: conventional estoppel, misleading or deceptive conduct, unconscionability, illusory consideration and penalties. Each defence was rejected by the primary judge and (correctly) not challenged on appeal. Gispac should have its costs of trial incurred in addressing and dealing with those time-consuming defences".
Because there was no challenge to the dismissal of the defences on appeal, this Court can only assess their reasonableness by reference to the judgment below. The factual findings on which the analysis was based were succinctly stated by the trial judge at [24]-[27] and [174] (the latter being unchallenged evidence of the principal witness for the appellant). It may be inferred that a defence based on "illusory consideration" was treated as being without reasonable foundation; [11] similarly, the claim that the operative clause in the sales agreements was a penalty was without reasonable foundation. [12] Nevertheless, it appears that the remaining defences, based on the course of conduct between the parties, neither extended the evidence required at trial, nor could be described as an unreasonable multiplication of issues.
The respondent also objected to the cost of preparing expert reports to deal with points raised by the appellant. Although the disputes ultimately fell away, the quantum of losses suffered was an issue on which the respondent bore the onus of proof and there was no material before this Court to establish that the challenge to quantum, although ultimately abandoned, was not undertaken in good faith, nor that the evidence put forward was unreasonable. The respondent noted that it was "complex", in part, it appears, due to the formulation of alternative factual premises. [13] However, the need to ensure that experts provide opinions based upon potentially variable factual findings is not novel and, again, the formulations were not said to be unreasonable.
Those matters aside, the circumstances which arose in this case are not dissimilar to those in Oikos (No 2). Proceedings brought by homeowners in the District Court claiming damages from a builder for two kinds of defect gave rise to a judgment of some $169,000 in favour of the plaintiffs. The appeal was upheld with respect to damages for what were characterised as "type 1 defects" leaving an amount of $35,550. The plaintiffs objected both to an order that they pay the builder's costs of the appeal and also submitted that, as the successful parties below, they should have their costs of the trial. [14]
Accepting that, having recovered part of its claim in the District Court, the plaintiffs were a "successful party" for the purposes of r 42.1 giving them a prima facie entitlement to their costs, White JA noted that "[a] successful party may be denied the whole of its costs or may be required to pay costs in respect of its failure on particular issues, even though that party did not act unreasonably in raising or defending the issues on which it failed". [15] White JA continued: "17 The claim for type 1 defect damages, on which Oikos succeeded on appeal and ought to have succeeded at trial, was both severable from [the plaintiffs'] claim for type 2 defect damages, and the dominant issue."
Having acknowledged that the plaintiffs were successful at trial on the type 2 defect issue, but that the builder was successful on the type 1 defect issue that was substantially more complex, the Court held that the builder had more success than the plaintiffs. [16] In the result, the plaintiffs were required to pay 50% of the builder's costs of the trial. [17]
At least in part, that order was attributable to the findings that the type 1 defects on which the builder was successful not only accounted for the bulk of the claim against it, but was also the dominant part of the case in the sense of involving more evidence and taking longer to determine. [18] That reasoning does not operate in the present case. Although the exclusivity claim on which the respondent was successful was briefly dealt with both in this Court and below, it turned upon one of two major issues. Those issues were, first, whether the standard terms and conditions had been incorporated into the relevant sales agreements and, secondly, whether the term imposing an obligation to order an "annual quantity" was engaged. The appellant won on the second issue, but not the first. The first issue was relevant to the second issue, but also to the exclusivity claim.
The appellant submitted that the shortfall claim was the dominant matter and that the exclusivity claim amounted to less than 10% of the primary judgment, the written submissions and the transcript. However, that exercise ignored the common element of both claims, namely the need to establish the incorporation of the standard terms and conditions, on which the respondent succeeded. The fact that the part on which the appellant succeeded was, apart from the financial aspect, not a dominant part, should result in a reduction of the respondent's costs, but not an order in the appellant's favour. Further, account should be taken of the fact that at least two of the five affirmative defences relied on by the appellant appear to have lacked substance. Whilst the apportionment exercise is very much a matter of impression, the appropriate outcome is that the appellant pay 40% of the respondent's costs of the trial.

Costs of post-judgment motions

As to the respective notices of motion seeking to vary the orders with respect to the costs of the appeal, there should be no order as to costs, meaning that each party must bear its own costs of both motions.
The costs of the further submissions as to the costs of the trial should be costs in the appeal.

Orders

The Court makes the following orders: 1. Vary order 4 made on 27 August 2024 to read: The respondent is to pay - 1. 84% of the appellant's costs of the appeal incurred on or before 17 June 2024 assessed on the ordinary basis, and 2. the appellant's costs of the appeal after 17 June 2024 assessed on an indemnity basis. 1. In addition to the orders made on 27 August 2024, make the following order: Order that the defendant (Michael Hill) pay 40% of the plaintiff's (Gispac Pty Ltd's) costs of the trial. 1. Direct that the costs of the further submissions regarding costs of the trial be costs in the appeal.

Endnotes

Michael Hill Jeweller (Australia) Pty Ltd v Gispac Pty Ltd [2024] NSWCA 211.
[2011] NSWCA 344 at [16].
[2007] NSWCA 373 (Beazley, McColl and Basten JJA).
[2009] NSWCA 304 at [38] (Beazley, Ipp and Basten JJA)
[2021] NSWCA 98 (White JA, Basten and Macfarlan JJA agreeing) (Oikos (No 2)).
Gispac Pty Ltd v Michael Hill Jeweller (Australia) Pty Ltd [2024] NSWSC 18 at [6] (trial judgment).
[2024] NSWCA 204.
(1988) 81 ALR 166, 169; [1988] FCA 225.
[2011] NSWCA 145.
Respondent's written submissions on costs, 10 September 2024, par 6.
Trial judgment at [180].
Trial judgment at [234], [241].
Respondent's written submissions on costs, par 7.
See fn 7 above; Oikos (No 2) at [4]-[9].
Oikos (No 2) at [15].
Oikos (No 2) at [28].
Oikos (No 2) at [30].
Oikas (No 2) at [28]. 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: 21 November 2024

At a glance

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