Plaintiff v Defendants

1 On 22 August 2008 I published my reasons for decision[1] following an eight day trial of all issues other than quantum of damages. I dismissed the claims of the plaintiff, Patrick Michael Foster, against both of the defendants. Mr Foster, in the proceeding, sued the firstnamed defendant, James Mario Galea, a former employee in his accounting practice, and the secondnamed defendant, Theresa Sgambaro, the proprietor of the accountancy practice, which employed Mr Galea following his departure from Mr Foster's practice. The claims arose out of the fact that at or about the time that Mr Galea moved from Mr Foster's employ to Ms Sgambaro's, most, if not all, of the clients who had been acquired through him by the Foster practice transferred their business to that of Ms Sgambaro. It was alleged that he improperly solicited them to transfer their business away from Mr Foster; that he surreptitiously diverted work from his employer and perhaps did the work himself, charging the acquired clients direct for it while still employed by Mr Foster or deferring billing them until after he had left; that he improperly took confidential information from Mr Foster; and that he breached a restraint covenant in his employment agreement when working for his new employer, Ms Sgambaro. Against her it was put that she knowingly received and benefited from the confidential information.

2 At the time of publishing my reasons counsel for Mr Foster did not resist the usual order for costs against his client. Application was made on behalf of Ms Sgambaro for a special costs order because she had made a Calderbank offer to Mr Foster to walk away from the litigation with each party bearing its own costs. I made an order that her costs from a date shortly after the offer be assessed on a solicitor and client basis.

3 A special costs order was also sought on behalf of Mr Galea. Reliance was placed on an unaccepted offer of compromise made on 15 December 2005 pursuant to O 26 to pay Mr Foster $100,000 plus costs. Needless to say, the eventual dismissal of his claim was a result not more favourable than the terms of the offer. Counsel for Mr Galea sought an order that his client's costs after the date of the offer be assessed on an indemnity basis.

4 This situation poses an interesting problem upon which there is surprisingly little binding authority. It arises in this way. The offer of compromise was expressed to have been made pursuant to O 26 and complied with the formal requirements of an offer made under Rule 26.02. It was expressed to be open for acceptance for a period of 14 days after service. The consequence of making such an offer to a plaintiff who recovers a sum not more favourable than that offered is that the plaintiff will have its costs from the defendant assessed on a party and party basis up to the date of offer and the defendant will have its costs from the plaintiff assessed on the same basis thereafter.[2] This rule has no operation in a case such as the present where the plaintiff fails entirely. In such a case the defendant will normally have its costs of the whole proceeding on a party and party basis. This position is not affected by Rule 26.08 or any other part of O 26 when an offer of compromise is made by a defendant.

5 Counsel for the defendant, accordingly, argued that I should treat the unaccepted offer of compromise as a Calderbank offer or alternatively as a matter which should enliven my discretion to increase the basis of taxation to one or other of the more severe bases contained in Rule 63.28.

6 On behalf of the plaintiff it was put that the offer cannot be treated as a Calderbank offer because it did not contain the usual statement that it was made on a without prejudice basis save as to costs. On this point it may be observed that the offer is not expressed to be without prejudice with the consequence of attracting the common law privilege. It could not, however, be deployed at trial having regard to Rule 26.05 which prohibits this in respect of an O 26 offer. Moreover, the offer did not contain the warning that, in the event the plaintiff recovers a result not more favourable than the offer, application will be made for a special costs order. Finally, it might be said that, had the plaintiff recovered judgment for a sum less than that offered, the incidence of costs would have been governed by Rule 26.08. In that event, it is unlikely that the court would entertain a special order for costs of the kind sought here simply because the amount recovered was very small. Why, then, should this result follow when the plaintiff recovered nothing?

7 There is abundant authority for the proposition that when an offer of compromise fails to satisfy the formal requirements of O 26, it may, nevertheless, be brought to account in the exercise of the court's general discretion as to costs.[3] For this purpose there is no requirement that the offer satisfy the formal requirements of a Calderbank offer that it be expressed to be without prejudice save as to costs. The significance of this expression is not that it confers upon the offer some special effect at the end of the trial[4] but, rather, that the usual privilege attaching to without prejudice offers at trial falls away when questions as to costs are to be determined. If an offer falls outside the O 26 regime, it is available for use by the parties unless it was made in terms or in circumstances which confer upon it the common law privilege, either generally or of the Calderbank type. Moreover, with respect to its effect upon the incidence of costs, it leaves the fairly mechanical regime of Rule 26.08 and enters the more flexible one of discretion as to costs.

8 The question which here arises is whether the offer of compromise may be taken out of the O 26 regime, not because it is ineffective for some formal or other deficiency, but because, in the circumstances, it has no work to do under that regime. Put another way, should I conclude that the failure of the rules to cater for the case where the plaintiff fails entirely is an indication that the attitude of the judges who made those rules is that, in such a case, a defendant should not, for that reason, receive a special order?

9 I find myself, therefore, in a situation where I am required to exercise my discretion under s 24 of the Supreme Court Act 1986 and am asked to have regard to the unaccepted offer as a factor in the exercise of this discretion. I was, of course, taken to the decision of the Court of Appeal in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2)[5] where it was held that the mere fact that the result achieved was less than the offer made does not shift the burden to the offeree to prove reasonableness. Rather, the onus lies always upon the offeror to demonstrate unreasonableness in the offeree. Furthermore, I was taken to the six circumstances which the Court of Appeal in that case said were matters which a trial judge should ordinarily have regard to in such a case. These are:

(a) the stage of the proceeding at which the offer was received;

(b) the time allowed to the offeree to consider the offer;

(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.[6]

I remind myself that the Judges of Appeal was not there engaging in a kind of judicial legislative process; they were simply giving a direction that these are the matters which the trial judge should ordinarily have regard to, in addition to such other matters as the judge might consider relevant. And, having had regard to these matters, it is for the judge to give to each such weight, if any, as seems appropriate. The fact remains that the discretion as to costs conferred by statute is an unqualified one and must, therefore, be exercised judicially having regard to the circumstances which the trial judge considers to be relevant to the particular case before him or her. I am mindful of the warning of Fullagar J in 1991 against any judicial attempt to fetter such a discretion.[7]

10 I was referred to authority in this court where trial judges have accepted that an unaccepted defendant's offer of compromise was a relevant factor in considering the offeror's application for a special costs order[8] and to my own early decision in Mutual Community Ltd v Lorden Holdings Pty Ltd.[9] In each of these cases the unaccepted offer was considered a significant factor warranting an order for costs more severe than a party and party costs order. Most of them, however, were decided before the Hazeldene's Chicken Farm case. In that case the Court of Appeal laid down the principle that a special order should not be made for non-acceptance of a Calderbank offer unless the offeror demonstrates that the offeree's failure to accept the offer was unreasonable.

11 This apparently simple test contains its own difficulties. The offeror, who bears the burden of establishing this, is very often not in a position to demonstrate that the response of the offeree was or was not unreasonable. Whether this is so may depend upon the legal advice given to the offeree and to evidentiary uncertainties known only to that party. The offeror cannot know these matters without piercing the veil of professional privilege. Moreover, what is meant by unreasonable in this context? It is certainly not that the offeree's case was so hopeless that it might be struck out as an abuse of process. The clue to its meaning must be found in the policy behind the court's acceptance that an offer may be used in this way. This is of course to compel the offeree to consider seriously the offer by introducing into its decision-making process the prospect that a failure to accept it may in the appropriate circumstances attract a cost penalty. Where a party makes a Calderbank offer which is reasonable in all the circumstances, especially in comparison to the offeree's prospects of success or where the offeree's prospects of success were not good,[10] the Court has displayed a readiness to make a special order. As I observed in the Lorden Holdings case, the policy of the court is to encourage litigating parties to undertake genuine settlement negotiations and, for the purpose, to face up to serious offers of settlement.

The response of a litigant in receipt of an offer of settlement will always be affected by the prospect that the sum which the sum might order including party and party costs may be less advantageous than the terms of the offer. Experience, however, shows that this prospect alone is not always sufficient to compel a litigant to face up to the offer. The further prospect of a super-added costs penalty if a reasonable offer be not accepted is a salutary inducement to an offeree to undertake this often painful task. Such a costs penalty will operate in different ways depending on whether the offeree is a plaintiff or a defendant. It may be sufficient for a defendant who makes an offer to pay part only of the plaintiff's claim that the plaintiff should thereby be put at risk for its costs on a party and party basis even though it be ultimately successful. On the other hand where a plaintiff makes the offer, the requirement of some inducement involves the imposition of a risk to the defendant that it may be required to pay something more than party and party costs where the offer be not accepted. In the present case, the costs consequence of the offer of compromise of June 1992 under Rule 26.08(3) would be that the Solicitors would be entitled to their costs on a party and party basis - a result which might have been expected irrespective of Order 26. Likewise, if the offer contained in the Solicitor's letter of February 1993 accurately reflected the result of the trial, the ordinary consequence would be that the Proprietor's Architect having failed, would be obliged to pay the costs of the Solicitors on a party and party basis. In these circumstances, consonant with the policy that makes it desirable that some added incentive be introduced, it seems to me appropriate that the threatened consequence of the non-acceptance of the offer, namely, the burden of costs at a level higher than would ordinarily be the case, is appropriate. [11]

12 There is, too, the countervailing policy that plaintiffs should not be discouraged from bringing arguable claims to the court.[12] But I am not at all confident that this is a consideration which touches the present question. In this case, the plaintiff has brought an arguable claim and there is no court process which will prevent him from doing so or which will stop him from pursuing it. The policy which is pre-eminent, in these circumstances is that of providing an incentive for a party to address the offer in a serious way so that the court is not obliged to determine a case which reasonable parties ought to have resolved by settlement. This policy is equally applicable to the case where there is some uncertainty or risk as to liability as it is to the case where there is uncertainty or risk attending the quantification of the claim. In each case the plaintiff is encouraged by the court to accept an offer discounted to reflect these risks and uncertainty.

13 How then is the court to determine whether the offeror acted unreasonably in not accepting the offer? How is the offeror to discharge the burden of establishing this?

14 The present case essentially turned upon questions of fact. To some extent, Mr Foster's case depended upon his evidence being accepted, but, essentially, its difficulties arose, from the outset from the fact that he had no direct knowledge of the matters he suspected Mr Galea to have been engaged in. He was, therefore, largely dependant upon the evidence of others, notably, the acquired clients who, he alleged, had been solicited or otherwise improperly dealt with by Mr Galea. As things turned out, his credit was successfully attacked and none of these acquired clients was called to give evidence. In these circumstances the Hazeldene's Chicken Farm principle requires Mr Galea to establish that in late 1995 Mr Foster should reasonably have appreciated that three years later his evidence may not be accepted and that the crucial witnesses would not be called and that his case might fail as a consequence? How can a defendant ever discharge such a burden? Were the witnesses not called because they were never going to be helpful or because they changed their evidence? Or was there some other reason?

15 On the question of whether Mr Galea was surreptitiously billing the acquired clients while he was still employed by Mr Foster, counsel for Mr Foster said in his opening:

Subpoenas have been delivered on a large number of his [Galea's] clients all of whom have uniformly denied having any accounting documents of any description at all.[13]

It is unlikely that these subpoenas were served in 2005 or that the likely responses of the addressees to them was then known. Furthermore, counsel for the plaintiff in his opening frankly acknowledged the difficulties which his client was then facing:

We have a great deal of hearsay evidence available to us which is not much use, we have subpoenaed some of the clients, all of whom have immediately contracted very serious illnesses, or members of their immediate family have, and they are all going to be very expensive to bring here, but nonetheless you can fairly say we are not receiving much cooperation from them in explaining what took place.

HIS HONOUR: Again you can't give evidence from the bar table of these matters unless you are going to lead that evidence, are we going to hear from the clients or not, that's the simple question?

COUNSEL: It is certainly our intention to, we have served subpoenas and we are calling upon them.

And later in his opening, his response to my enquiry as to the evidence to be led included the following:

COUNSEL: It is certainly intended to call several of the clients who have been the subject of subpoenas.

COUNSEL: That's Mr Lando, Mr John Lando, Mr Velisha, I think it is Stan Velisha the way he is commonly described, Mr Westerndorp, Herman Westerndorp. There is one further, but the name has escaped me and my instructor simultaneously.

COUNSEL: As I say, they have not been cooperative to date, so I can't give Your Honour the advantage of what it is anticipated they will say. We know what they have said to us in the past, but whether they will repeat that is a different question.

COUNSEL: There has always been as I said subpoenas to produce served on a number of clients, and I'm sorry, that's right, the fourth witness is Mario Checuti, but unless there has been a marked change in approach by those, I don't believe there has been any documents produced in answer to those subpoenas.

HIS HONOUR: So do you want me to make any orders about the subpoenaed documents? Or are you content to accept that they are just not going to comply with the court order?

COUNSEL: They have sworn affidavits surprisingly saying that they don't have any accounting documents, two people who have sworn those affidavits were being subpoenaed as witnesses, I am content to leave it until they give evidence.[15]

And when the time came for the plaintiff's case to be closed, I enquired of his counsel:

HIS HONOUR: Are there more witnesses coming? You expressed some uncertainty about it when you opened. Now is the time to bite the bullet I fear.

COUNSEL: I think that's right, there are four witnesses that have been subpoenaed, to date they have not appeared on any of the occasions they have been asked to, and I would just like to take some final instructions as to which way we will jump. [16]

In fact no further witness was called. The suggested subpoenas were not called upon and no orders were sought to compel the attendance of the addressees.

16 In the course of argument regarding costs, counsel for the plaintiff made similar observations. It seemed to me, and I told counsel this, that I ought not to act upon statements of this nature from the bar table unless the other parties consented. That consent was not forthcoming. As things stood, therefore, there was an unexplained failure by the plaintiff to call crucial witnesses.

17 Counsel for Mr Galea then submitted that, even if the plaintiff had succeeded on liability, his chances of recovering judgment greater than the amount of $100,000 were remote. He reminded me that the evidence of both Mr Galea and Mr Foster was that early in January 2004 each of them was aware that many, if not all of the acquired clients, would follow Mr Galea to his new employment. In these circumstances, the measure of damages which the plaintiff might expect to receive would be calculated by reference to the income lost during in the relatively short time that these clients would remain as his clients[17]. The question of quantum was not the subject of the trial before me and I did not have the benefit of evidence and argument as to this. Nevertheless, I cannot avoid forming the preliminary view that it seems improbable that the plaintiff, if successful, would have received the sum contained in the unaccepted offer of December 2005. This tempts me to conclude that the plaintiff in this case was certainly unwise, if not unreasonable, in not accepting the offer.

18 I return to the fundamental question as to the reasonableness of the plaintiff's non-acceptance of the offer. In approaching this task I make a number of assumptions in the absence of evidence or inference to the contrary:

• that the offer was communicated to the plaintiff;

• that he had available to him competent legal advice as to matters of procedure in the Court, as to his chances of success and as to his chances of recovering a judgment no less advantageous than the offer;

• that, subject to what appears below, he had available to him sufficient information about the litigation and the risks he was facing in it to make an informed decision whether to accept the offer.

I then bring to the task what I know about this litigation, my experience of many years' experience as counsel and judge.

19 In terms of the six matters which I must have regard to, I conclude as follows:

(a) The offer was made in late 2005 when the proceeding had been on foot for nearly two years. The proceeding had been transferred to this Court from the County Court some months earlier upon the application of the plaintiff shortly after he had joined Ms Sgambaro as defendant. At that stage he was seeking against her injunctive and other relief. Little, if anything, had been discovered by her as to her dealings with the acquired clients who had migrated to her practice, and little from Mr Galea. This information might have been helpful both on liability as well as on quantum.

(b) The offer was made nine days before the Christmas break, but I do not think this is a matter of concern. The consideration of an offer in serious litigation is not something which might reasonably be deferred until after a holiday. In any event it may well be that the period from 24 December to 9 January is not counted.[18]

(c) The offer was, as best I can understand things as they then stood in the plaintiff's camp, a very handsome one.

(d) The offeree's prospects of success were, as I have mentioned, largely dependant upon the evidence of the witnesses which he might have called. There is no evidence upon which I can form a conclusion as to why they were not called.

(e) The offer itself was clear enough. It was to pay $100,000 plus costs on the appropriate scale. There was some argument addressed to the fact that it was expressed to be in satisfaction of all of the plaintiff's claims in the proceeding. This could not sensibly be construed to include his claims against Ms Sgambaro.

(f) The question whether the offer foreshadowed the consequence now sought in the event of non-acceptance is more problematic. I have already drawn attention to the effect the offer might have had pursuant to Rule 26.08 had the plaintiff succeeded on liability but recovered less than the sum offered. This was not spelt out in the offer but it would be understood by any legally qualified reader who must be taken to be familiar with the operation of O 26. Nothing was said in the offer as to the course the firstnamed defendant might take in the event that the plaintiff should fail on liability. This may be a serious deficiency in the offer in a case such as the present where Mr Foster's attention might have been focussed upon Rule 26.08 by the reference to O 26 in the document. But, on reflection, I do not consider that, properly advised, he would have been under any misapprehension as to the implications of the offer in that event.

20 This said, I find great difficulty in concluding the Mr Foster's reaction to the offer was anything but unreasonable. It was a handsome offer in the circumstances. I am aware of no circumstance in existence then or now which might lead him to conclude that he had a real prospect of achieving a better result at trial. Rather the contrary, I am satisfied that he must have realised that he was facing a serious risk that his claim might fail and also the risk that, if successful, it would not produce a judgment in the sum offered. A reasonable plaintiff would have included in any consideration of this offer a substantial discount for these risks. My impression of him at the trial is that Mr Foster was a man driven by anger, fuelled by the suspicious circumstances which attended the events of late 2003 and January 2004, and ready to jump to all manner of conclusions adverse to Mr Galea. I suspect that this was his attitude in late 2005. The receipt of an offer of such a sum may well have had the consequence of providing yet another indication to him that his case had a strength which in truth it lacked. A more reasonable response would have spared both him and Mr Galea the financial and other burdens of the continuance of the litigation for another three years and of the resultant trial. The plaintiff accepts that Mr Galea should have his costs of the proceeding on a party and party basis so that he would be required to bear the financial burden of the differential between those costs and those costs actually incurred in defending this case. There is to my mind no good reason to impose upon him this additional burden. I will order that the firstnamed defendant's costs be assessed on a party and party basis up to and including 15 January 2006 and thereafter on a solicitor and client basis.

[1] [2008] VSC 317.

[3] Mideco Manufacturing Pty Ltd v Tate [1989] VicRp 6; [1989] VR 50 at 57, per Gobbo J and the cases there referred to.

[4] Compare an offer of compromise which is given special effect by Rule 26.08.

[5] [2005] VSCA 298; (2005) 13 VR 435.

[6] [2005] VSCA 298; (2005) 13 VR 435 at 442 [25].

[7] Leighton Contractors Pty Ltd v Kilpatrick Green Pty Ltd [1992] VicRp 83; [1992] 2 VR 505 at 512-3 (discretion to grant or refuse leave to appeal against an arbitrator's award not to be fettered by the "Nema Guidelines").

[8] Development Ventures Pty Ltd v Bayside Health [2003] VSC 111 at [25], per Osborn J; Farrell v CSL Ltd (No. 2) [2004] VSC 551 at [14], per Bongiorno J; Stipanov v Mier (No 2) [2006] VSC 424 at [8], per Hollingworth J.

[9] (Unreported), 28 April 1993, BC9303878

[10] Porter v Lachlan Shire Council (No. 2) [2006] NSWCA 252 at [8].

[11] Unreported, 28 April 1993, BC9303878 at p 13.

[12] Aljade and MKIC v OCBC [2004] VSC 351 at [60], per Redlich J.

[17] AMP Services Ltd v Manning (No. 2) [2007] FCA 82.

[18] See Rule 3.04(1). I express myself cautiously because there was no argument presented as to the application of this rule.