Plaintiff v Defendants

1. The trial of this proceeding involved the application for the modification or discharge of a restrictive covenant, restricting, amongst other things, the erection of more than one dwelling on the land. The central issue in the trial was whether the plaintiff had established that the proposed discharge or modification would not substantially injure the persons entitled to the benefit of the covenant.

2. On 7 April 2014, I delivered judgment in this proceeding (Wong v McConville & Ors [2014] VSC 148) granting the application, on the basis that the plaintiff had established that the proposed discharge or modification would not substantially injure the persons entitled to the benefit of the covenant.

3. On that day, Counsel for the plaintiff informed the Court that three 'without prejudice' letters save as to costs (commonly known as Calderbank offers) were served on the defendants. Each Calderbank offer was rejected by the defendants.

4. Accordingly, I made directions for the parties to file affidavits and written outline of submissions on the issue of costs.

5. The solicitor for the plaintiff, Michael Anthony Flemming, filed no fewer than four affidavits in support of the plaintiff's application for costs. The first affidavit (17 April 2014) exhibited two Calderbank letters, the first dated 8 August 2013 and the second 10 October 2013. The first offer was rejected by the solicitors for the defendants by email on 22 August 2013. The second offer was not accepted by the defendants.

6. The second affidavit of Mr Flemming (28 April 2014) produced materials relevant to the question of costs in the case of Suhr v Michelmore,[1] including a Calderbank letter, the orders of Pagone J made 14 June 2013 and the transcript of argument in relation to the question of costs (without the ruling).

7. The third affidavit of Mr Flemming (1 May 2014) produced a third Calderbank letter of 11 September 2013.

8. The fourth affidavit of Mr Flemming (23 May 2014) dealt with dealings between him, or members of his staff, and a representative of the defendants, Mrs Bev Leyden and with a solicitor acting on behalf of the defendants. The burden of this evidence was that the plaintiff had offered to enter into discussions with the defendants in relation to the application, but the offer was not taken up.

9. Under s 24 of the Supreme Court Act 1986, the power to award costs is in the discretion of the Court. Whilst the discretion is absolute and unfettered, it has to be exercised judicially, that is, not by reference to irrelevant or extraneous considerations, but upon facts connected with or leading up to the litigation: see for example Latoudis v Casey.[2] In the exercise of the discretion, practices or guidelines have developed: Oshlack v Richmond River Council.[3] These practices or guidelines are not legal rules that confine the exercise of the discretion: Norbis v Norbis;[4] Oshlack v Richmond River Council.[5]

10. Although costs are in the discretion of the Court, there is a settled practice (sometimes called a general rule) that in the absence of good reason to the contrary a successful litigant should receive his or her costs: Ritter v Godfrey;[6] Milne v Attorney-General for the State of Tasmania.[7] It is not, however, a legal rule devised to control the exercise of the discretion: Oshlack v Richmond River Council.[8]

11. The purpose of an order for costs is to indemnify or compensate the person in whose favour it is made, and not to punish the unsuccessful party. That purpose is a guide to the exercise of the discretion: Latoudis v Casey;[9] Ohn v Walton.[10]

12. It is rare for a successful plaintiff to be deprived of costs. The Court has previously held that applications under Section 84 of the Property Law Act 1958 are of a nature where the usual rule does not apply. It has been held, in effect, that the nature of the proceedings for the modification or removal of a restrictive covenant constitutes "special circumstances" and that a plaintiff should pay a defendant's costs even when successful: see Re Withers;[11] Stanhill Pty Ltd v Jackson;[12] Suhr v Michelmore.[13]

13. It seems to me that the general rule that costs follow the event is ordinarily not applicable in these applications because:

(a) Under the legislation the plaintiff must apply to the Court to modify or remove the restrictive covenant. Even where the owners of the land with the benefit of the covenant agree to the modification, for the registered title to be free of the restriction the owner of the burdened land must come to Court and the Court must be satisfied that the conditions for the exercise of the jurisdiction conferred by s 84 of the Property Law Act 1958 are satisfied;

(b) The plaintiff seeks to change an existing burden over the servient tenement (the plaintiff's land) which benefits the dominant tenement (the defendants' lands). It therefore seeks to remove or modify an existing legal (in the sense of equitable) right available to the defendants;

(c) The plaintiff will usually obtain an advantage, often a great advantage commercially, by the modification or removal sought;[14]

(d) Although the owner of the burdened land has a statutory right to apply for the modification or removal of the covenant, he or she must give notice to those having the benefit (as determined by the Court) and those having the benefit (whether given notice or not) are entitled to object and to maintain the status quo and hold the plaintiff to the covenant which binds him or her;[15]

(e) The decision of the Court to modify or discharge a restrictive covenant involves the exercise of a discretion.[16]

14. Accordingly, provided the defendants conduct the proceeding responsibly and do not make frivolous objections to the application, they should have their costs of the proceeding.

Though costs are a matter of discretion and each case stands on its particular facts, such cases as these indicate that, unless the objections taken are frivolous, an unsuccessful objector in a proper case should not have to bear the bitter burden of his own costs when all he has been doing is seeking to maintain the continuance of a privilege which by law is his.

16. The approach set out in Re Withers is consistent with other decisions of the Court, such as that by Gillard J in Re Markin,[17] Lush J in Re Shelford Church of England Girls' Grammar School[18] and McGarvie J in Re Ulman.[19] In Stanhill Morris J considered it to be a sound principle.[20]

17. The position is similar in New South Wales: see Walker v Bridgewood (No 2).[21] In Re Rose Bay Bowling and Recreation Club Ltd,[22] Long Innes CJ in Eq said of unsuccessful objectors to an application to vary a restrictive covenant that they had a clear legal right that was being attacked, and they were entitled to put their views before the court. In those circumstances, his Honour regarded the costs incurred by the objectors as necessarily incident to the application. Where those circumstances were present, his Honour thought it was only right and proper that the applicant should pay all the costs reasonably or necessarily incurred by reason of the application, including the proper costs of the objectors.[23]

18. The decisions in Re Withers and Stanhill were referred to with approval by Gzell J Walker v Bridgewood (No 2).[24] In that case, which concerned an application to extinguish a right of way (easement), Gzell J distinguished two situations. First, where the plaintiff is totally successful. The second where the plaintiff is only partially successful (in each case the defendants in seeking to protect their rights were not taking frivolous points). In the former he adopted the reasoning of Morris J in Stanhill and he was inclined to make no order as to costs. He said:[25]

It seems to me that in the circumstances where Mr Bridgewood and Mrs Pfeil had registered rights of way benefiting their lands, they were entitled to seek to protect those rights. Their method of protection was not, in my view, frivolous. In those circumstances, where the applicant has been totally successful, I would be inclined to make no order as to costs.

19. Where, on the other hand, the plaintiff is only partially successful (for example by reducing the number of proposed dwellings, or modifying the application in some other way before or in the course of the trial), or where there was some other event in the course of the proceeding that changed the scope or nature of the application, so that the plaintiff's case up to that point was not 'overwhelming',[26] then up to the event the objectors should have their costs and afterwards either the costs should be paid by the objectors or there should be no order as to costs.

20. In Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2),[27] the Victorian Court of Appeal said, in relation to Calderbank offers, that the critical question was whether the rejection of the offer was unreasonable in the circumstances. Deciding whether conduct is unreasonable involves matters of judgment and impression. The Court in Hazeldene held that, when considering whether the rejection of a Calderbank offer was unreasonable, a court should ordinarily have regard at least to the following matters:[28]

(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 compromiser offered;

(d) The offeree's prospects of success, assessed at the date of the offer;

(e) The clarity with which the terms of the offer were expressed; and

(f) Whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it.

21. In Luxmore Pty Ltd v Hydedale Pty Ltd[29] Maxwell P and Kellam JA noted that what was said by the Court of Appeal in Hazeldene was meant to be of assistance to judges in approaching an application for costs consequent upon the service of a Calderbank letter. The Court 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.[30] They remarked that it would be wrong to regard the decision as having prescribed a list of matters which must be taken into account in every case, such that a party failing to get a special order for costs could complain on appeal if one of the matters mentioned by the Court had not been specifically adverted to. Like every question of costs, it is in the discretion of the trial judge and is to be decided according to the circumstances of the particular case.

22. There are some aspects of the matters mentioned in Hazeldene relevant to this application that deserve further elucidation, as follows:

(a) There is no presumption that where such an offer is rejected, the offeree should pay indemnity costs where it receives a less favourable result;[31]

(b) The onus always lies upon the offeror to demonstrate unreasonableness in the offeree;[32]

(c) The policy objectives underlying the principle in Calderbank v Calderbank include:[33]

(i) That it is in the interests of the administration of justice that litigation should be compromised as soon as possible and so save both private and public costs.[34]

(ii) To indemnify an offeror whose offer is later found to have been reasonable against the costs thereafter incurred. This is considered reasonable because from the time of rejection of the offer the real cause of the litigation is the offeree's rejection of the offer;

(iii) To this end, a party in receipt of an offer of compromise should have some incentive to consider the offer seriously. That incentive is the prospect of a special order as to costs;[35]

(iv) It is nevertheless important not to discourage potential litigants from bringing their disputes to the Court;[36]

(d) It is undesirable that Calderbank letters be burdened with technicality;[37]

(e) Where the offer is made by a plaintiff, the requirement that the non-acceptance be unreasonable takes on a particular significance. A plaintiff may be supposed to be aware of the claim which it makes, including, even in a general way, its magnitude and its prospects of success. A defendant, however, faced with an offer of compromise may not have this awareness. If it appears that this lack of awareness is not due to its own default, it is difficult to conclude that its rejection of the offer was unreasonable;

(f) A decision to accept or refuse a Calderbank offer will ordinarily be based upon the offeree's prediction as to the likely outcome of the trial. An erroneous prediction may not be an unreasonable if at the time the offeree was, for good reason, in possession of insufficient information to make an proper assessment or if the circumstances upon which it was based later changed;[38]

(g) It does not follow necessarily from an adverse outcome for the offeree that rejection of the offer was relevantly unreasonable. Reliance on the outcome to show that rejection of the offer was unreasonable is a hindsight analysis;[39]

(h) The offer must be one capable of acceptance, such that an offer that is subject to approval by a third party will not constitute a Calderbank offer, but rather an offer to negotiate;[40] and

(i) The reasonableness of an offer, and the assessment of the reasonableness or unreasonableness of a rejection of an offer, will generally be assisted if the maker gives reasons why the offeror should succeed and/or the offeree should fail to do better than the offer. As Sundberg and Emmett JJ said in Dukemaster Pty Ltd v Bluehive Pty Ltd,[41] "a Calderbank offer...is unlikely to serve its purpose of attracting an indemnity award of costs if the rejecting applicant fails to recover more than what is offered, unless the offer is a reasonable one and contains a statement of the reasons the offeror maintains that the application will fail".

23. The plaintiff submitted that in the present case the rule in Re Withers should be displaced by the two offers that were served on the defendants:

(a) the first was served on the defendants on 8 August 2013 (the 8 August offer); and

(b) the second was on the defendants on 10 October 2013 (the 10 October offer).

24. In reliance on one or other of these Calderbank offers, the plaintiff seeks orders that:

(a) The plaintiff pay the defendants' costs on a standard basis to 8 August 2013 or 10 October 2013;

(b) The defendants pay the plaintiffs' costs on an indemnity basis from 8 August 2013 or 10 October 2013; and

(c) Such costs are to be taxed in default of agreement.

25. By the 8 August offer, the text of which is set out in the Schedule to these reasons, the plaintiff offered to compromise the proceeding by the defendants consenting to the modification of the covenant so as to allow the construction of no more than two dwelling houses on the land, subject to any changes arising from the plaintiff agreeing to do the following -

(a) Offset any second storey component of any new dwelling constructed by three metres from the northern boundary of Mr Zhang's land at 451 Pascoe Vale Road;

(b) Landscape the western and southern boundaries of the land with tall screening plants to soften any visual impact of any second dwelling from the beneficiaries' land;

(c) To screen any south facing habitable room windows on the second storey of any new dwelling constructed to a height of 1.7m to prevent any unreasonable overlooking into 451 Pascoe Vale Road;

(d) To pay $7000 compensation in total to the defendants (specifically apportioned between the several defendants with the largest portion going to Mr Zhang);

(e) To pay the defendants' costs of the proceeding "on a basis to be agreed or taxed in default of agreement and paid within 28 days or agreement or taxation".

26. Reasons why the offer should be accepted were set out and can be seen in the Schedule to these reasons. The time allowed to consider the offer was until 23 August 2013, that is no less than 14 business days from the date of the offer. The offer included the usual caution that "should this offer not be accepted, and that your clients gain a less favourable outcome at the merits hearing of the Matter, this letter will be produced on the issue of costs, an application being made for costs on an indemnity basis in accordance with the principles in Calderbank v Calderbank...".

27. This offer was rejected by the defendants. It was submitted by the defendants that:

(a) The concessions offered by the plaintiff in relation to setbacks and landscaping could not form any part of any Court Order modifying the covenant and in consequence would not bind subsequent owners/developers of the land;

(b) The extent of the offer was inadequate and did not address the objectors' central concerns about the modification permitting the construction of two, two-storey dwelling houses on the site;

(c) As at 8 August 2013 the evidence had not closed:

(i) An amended originating motion had been ordered to be filed and served by 9 August 2013;

(ii) The filing of the defendants' affidavits were ordered by 13 September 2013. Those Affidavits were not filed until 26 September 2013. Affidavits in reply by the plaintiff were due to be filed and served by 4 October 2013;

(iii) The Report from the defendants' expert witness, Mr Gattini, had not been received by them . His expert report was filed on 20 September 2013; and

(iv) Although the first report of the plaintiff's expert, Mr Easton, had been filed, his supplementary report was not filed until 14 October 2013.

28. The defendants submitted that the timing of this Calderbank offer put the defendants at a disadvantage, given that they (as lay persons) had not had the benefit of the advice of their expert witness, Mr Gattini, and had not received that advice until after the offer expired on 23 August 2013.

(a) At the time the 8 August 2013 offer was made all facts relevant to the case the defendants had to meet were known, including the existence of the freeway overpass, the location of the subject land at the corner of the subdivision, the relevant provisions of the planning scheme in force at the time, and the existence of newly constructed large houses in the locality with amenity impacts similar or greater to the additional dwelling proposed;

(b) At the time of the offer all of the plaintiff's evidence, save for Mr Easton's supplementary report, had been filed and served;

(c) The defendants clearly failed to achieve a better outcome at the trial than they were offered, that is, in addition to the same variation of the Covenant that the Court ultimately granted, they were offered monetary compensation, an additional 3 metre set back of the upper level of the proposed second dwelling, landscaping and their legal costs; and

(d) While the principle in Re: Withers might be important from a policy perspective, there is a countervailing argument in favour of discouraging unmeritorious litigation. That is, the principle should not displace the defendants' duty to examine their own case with a realistic assessment as to its prospects.

30. There are several aspects of the 8 August offer that lead me to conclude that it was not unreasonable for the defendants to reject it, that is, that the plaintiff has not satisfied me that it was unreasonable to reject it, as follows:

(a) The stage of the proceeding at which the offer was made: There are usually no pleadings in cases of this kind, and there were none in this case. At the time the offer was made, and closed, the defendants had not, and had not been required to, file their evidence, including expert evidence. Nor had significant evidence in response to the evidence of the defendants, notably the Supplementary Report of Mr Easton, been filed or served.[42] Thus the stage at which the offer was made preceded a full consideration of the relevant material. The prime focus of that material was the expert opinion of Mr Gattini, upon whose views the defendants were well entitled to depend in considering the offer, and Mr Easton's response to it in October 2013. Another important element of the defendants' evidence was the evidence of Mr Zhang concerning the effects of the proposed modification on the amenity of his, and his family's, occupation of the neighbouring land. The defendants were entitled to consider the entirety of the evidence when considering their position.

(b) The time allowed to the offeree to consider the offer: 14 days was allowed. Considered in isolation, that time is not unreasonable. This factor, however, must be considered in this case in conjunction with the first factor. The ability of the defendants, as a group, to consider the offer and arrive at a reasoned view must necessarily have been affected by the fact that they are brought together as neighbours. They were apparently not otherwise associated with one another. They lived at quite separate locations within the subdivision. They were encouraged by the Court's orders to combine their resources so as to reduce costs. This, I infer, was likely to make it more difficult and time consuming to arrive at a decision. This is a matter that the plaintiff's advisers ought to have known. Having regard to the state of the evidence at the time, either the offer was made too early, or insufficient time was given for them to consider the offer.

(c) The extent of the compromise offered: This factor is intertwined with the 'clarity' factor, and is considered separately below at paragraphs 35 to 43.

(d) The offeree's prospects of success, assessed at the date of the offer: This factor is affected by the stage of the proceeding at which the offer was made. Without the Report of Mr Gattini, and the response of the Supplementary Report of Mr Easton (not filed until 14 October 2013), the relevant factors leading to the outcome were not all exposed. It is only with the 'bright light of hindsight'[43] that a clearer picture emerges.

(e) The clarity with which the terms of the offer were expressed: See paragraphs 35 to 43 below.

(f) Whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it: This was clearly satisfied.

31. Like the 8 August offer, by the 10 October offer, the text of which is also set out in the Schedule to these reasons, the plaintiff offered to compromise the proceeding by the defendants consenting to the modification of the covenant so as to allow the construction of no more than two dwelling houses on the land, subject to any changes arising from the plaintiff agreeing to do the following -

(a) To instruct her architect to redesign the proposed new dwelling so that any second storey component is constructed predominantly on the northern portion of the Land;

(b) To landscape the western and southern boundaries of the Land with plants to help screen any second storey component of the proposed second dwelling;

(c) To screen any south-facing habitable room windows to a height of 1.7m;

(d) To reimburse "your clients' legal and consultants'" costs arising of this proceeding.

32. Reasons why the offer should be accepted were set out and can be seen in the Schedule to these reasons. The reasons are similar to, but more extensive than, the reasons given in the 8 August offer, save that there is no offer of monetary compensation. In particular, that the offer "alleviates significantly the risk to the beneficiaries of the Covenant associated with a negative Order as to costs of the proceeding", and "it assists significantly with a majority of the matters raised in the affidavits of the defendants in relation to visual impact, potential for over-shadowing and other concerns as to amenity".

33. The time allowed to consider the offer was until 17 October 2013, that is 7 days from the date of the offer. The offer included the usual caution that "should this offer not be accepted, and that your clients gain a less favourable outcome at the merits hearing of the Matter, this letter will be produced on the issue of costs, an application being made for costs on an indemnity basis in accordance with the principles in Calderbank v Calderbank...".

Reasoning in relation to the 10 October offer

34. There are several aspects of the 10 October offer that lead me to conclude that it was not unreasonable for the defendants to reject it, that is, that the plaintiff has not satisfied me that it was unreasonable to reject it, as follows:

(a) The stage of the proceeding at which the offer was made: The trial was fixed for 21 October 2013, and had been fixed on 26 July 2013. The defendants had filed their evidence, including expert evidence. The significant evidence in response to the evidence of the defendants, notably the Supplementary Report of Mr Easton, had not been filed or served. Mr Easton's Supplementary Report of October 2013 was exhibited to his affidavit of 11 October 2013 and filed (and presumably served) on 14 October 2013. The stage at which the offer was made preceded by a few days the presentation of all the relevant material. That is, Mr Easton's response to Mr Gattini's Report. The defendants were entitled to consider the entirety of the evidence when considering their position.

(b) The time allowed to the offeree to consider the offer: 7 days was allowed. Considered in isolation, and having regard to the looming trial date, that time is not unreasonable. As with the 8 August offer, this factor, however, must be considered in conjunction with the first factor. The matters I identified in this connection in paragraph 30(b) above are applicable here too, save that the state of the evidence was significantly more advanced. But it was not complete. The real time allowed is from the time of service of the Supplementary Report of Mr Easton (about 14 May 2013) to 17 October 2013. Having regard to the inherent difficulties in obtaining instructions from a disparate group of defendants, that was insufficient time for them to consider the offer.

(c) The extent of the compromise offered: This factor is intertwined with the 'clarity' factor, and is considered separately below at paragraphs 35 to 43.

(d) The offeree's prospects of success, assessed at the date of the offer: This factor is affected by the fact that the Supplementary Report of Mr Easton was not filed until 14 October 2013. The relevant facts leading to the outcome were not all exposed. Moreover, as I have noted below in paragraph 43, the application at this time had as its first ground reliance on s 84(1)(a). The dispute in that aspect of the matter, and the prospects of success for the defendants on that ground being good, provided a distraction from the ground on which ultimately the plaintiff has succeeded. There is again a danger of seeing the outcome through the lens of hindsight.

(e) The clarity with which the terms of the offer were expressed: See paragraphs 35 to 43 below.

(f) Whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it: This the offer clearly did and it is not an issue.

35. The submission by the defendants that the concessions offered by the plaintiff in relation to setbacks and landscaping, in each of the 8 August and 10 October offers, could not form any part of an order of the Court modifying the covenant, has particular significance in this case. In this regard, the plaintiff submitted that the setback provision in the offer of 8 August could be made the subject of a negative stipulation (for example, that any dwelling at the rear of the burdened land shall not be closer than three metres to the southern boundary). The plaintiff's counsel also submitted that the other elements of the offers could also be the subject of negative stipulations. I do not think that this is correct. It is, in my view beyond human ingenuity to turn a positive agreement to plant tall screening plants along the western and southern boundaries of the land into a negative stipulation. It must be remembered in this context, that it is immaterial whether the wording of the covenant is positive or negative. What is essential is that the covenant is negative in substance: Shepherd Homes Ltd v Sandham (No 2).[44]

36. The 8 August offer fails as an effective Calderbank offer first, as I have said above, because at the stage at which it was made the defendants did not have all of the evidence necessary for a decision to be made whether or not to accept it. Accordingly at the time it was open for acceptance it was not unreasonable for the defendants to reject it. But the form of the offer provides another fundamental reason why it is not unreasonable for the defendants to have rejected it. The fact that the positive elements of the offer are not capable of forming a part of a negative stipulation in a necessarily "restrictive covenant", means that the acceptance of the offer could not in itself have given effect to a modification of the covenant in a way which incorporated the elements offered.

37. There is a further reason for concluding that both offers were not capable of acceptance. That is, in both their language and in their substance, they amount to an invitation to treat, or negotiate, the formulation of a covenant to give effect to the broad and generalised proposals they contain, proposals which smack of planning conditions. This highlights a difficulty where a Calderbank offer is made either by a plaintiff or by a defendant in an application to modify or discharge a restrictive covenant. The difficulty is putting a proposition that is capable of acceptance without entering into negotiations and a drafting exercise which, in any event, will be subject to the exercise of the Court's supervision and discretion.

38. The observations of the Court of Appeal in Apostilidis v Klenik (No 2),[45] to which I have referred to above, are but an illustration of a wider principle. That case concerned an offer that required the approval of the Australian Taxation Office for it to be effective. These offers necessarily require that the parties draft amendments to the restrictive covenant burdening the plaintiff's land and present them to the Court for its approval. Although it may be that offers of this kind are capable of acceptance in a general sense, the working out of how they are given effect is not straightforward.

39. Another aspect of the offers that is a factor in my assessment of whether or not it was reasonable or unreasonable for the defendants to reject them is the contrast between the substance of the offers in this case and the offer that was made and apparently taken into account by Pagone J in Suhr v Mitchelmore.[46] The plaintiff put into evidence the transcript of the argument in the costs debate in that case, the text of the Calderbank offer as well as the order as to costs, but not his Honour's Ruling.[47]

40. In that case the relevant restriction was a height restriction. A considerable period before the commencement of the trial, when not all the evidence was filed, the defendants had made an offer to the plaintiff to modify the height restriction sufficiently to enable the plaintiff to build a dwelling of a kind that he wanted to build. Although the offer was open only for 24 hours, it was capable of acceptance because of its simplicity and because it was a single figure variation of a height restriction. By contrast, in this case not only are there aspects which are not susceptible to inclusion in a restrictive covenant, but those aspects which are capable of formulation as negative stipulations in substance still require both drafting and approval by the Court.

41. It was not suggested on behalf of the plaintiff that the offers should be considered solely in terms of a private treaty between the parties to this litigation. Clearly, an agreement could have been entered into substantially in the terms of the offers made and, subject to working out some finer detail of the position of the second dwelling and the nature of the landscaping and screening offered, these might have been the subject of a deed of settlement or other agreement to compromise the claim. But it was not on that footing, as I have said, that the Calderbank offers were advanced. Nor was it appropriate to put them at that level because it is in the nature of the application for the modification of the covenant that it binds the successors in title of both the burdened and the benefitted lands. A private agreement between the participants in this proceeding would not bind their successors in title, at least not bind the successive owners of the land burdened with the covenant, and that was the main game.

42. For these reasons I have formed the view that the rejection of each of the two relevant Calderbank offers was not unreasonable at the time the offers expired. I am also of the view that the defendants conducted the proceeding responsibly at least up to the time that the plaintiff abandoned the ground under s 84(1)(a) of the Act, which was the first day of the trial.[48]

43. That then points to the last matter of general significance. Until the day of the trial, the defendants came to defend an application that had a much wider import for them. Until the trial commenced, the application for modification of the covenant was based in the first instance on the power in s 84(1)(a) of the Act. That power turns in the first place on establishing that 'by reason of changes in the character of the property or the neighbourhood ... the restriction ought to be deemed obsolete'. That was the subject of significantly differing views of the experts, Mr Easton and Mr Gattini. The abandonment of that ground removed a significant area of evidence and debate from the contest. It also affected what might have been the assessment of the defendants prospects of success at the time of the 10 October offer, for at that time the evidence supported a view, objectively assessed, that on that ground of the application the defendants had good prospects of success. It is easy to see with hindsight that the ground relied on, being that available under s 84(1)(c) (the proposed discharge or modification will not substantially injure the persons entitled to the benefit of the restriction) should succeed, but by no means was it reasonable to see that as certain at the time of the 10 October offer, and the presence of the dispute regarding the abandoned ground under s 84(1)(a) provided a distraction.

44. The ground under s 84(1)(a) was also important to the defendants generally because it would, if successful, have provided significant precedential value for the modification of other similar covenants burdening properties in the neighbourhood. The defendants were well justified in resisting the application when it included that ground. Moreover, despite the fact that the defendants lost the contest over whether the ground in s 84(1)(c) was established, their conduct of the trial was neither frivolous nor irresponsible. It is, in my view, only the application of hindsight which leads to a view that they should have known they would lose that contest.

45. After the plaintiff's opening, the trial became one focused on the impact of the proposed modification on Mr Zhang and his family, the neighbours to the immediate south of the burdened land. Not only was Mr Zhang entitled to seek to protect the established right arising under the covenant, it is also relevant that the trial was anticipated to occupy only one day (and in the end went over to the second day until nearly lunchtime). It is difficult for parties in the position of the defendants in the circumstances of this case to 'abandon ship', as it were, within such a short time-frame. They may have justifiably considered that the bulk of the legal costs had been incurred up to that time.

46. The approach taken by Gzell J in Walker v Bridgewater (No 2) might suggest that in these circumstances the correct approach is to allow the defendants costs up to the first day of the trial, when it became quite clear that there was to be no reliance on s 84(1)(a) of the Act, but to make no order as to costs thereafter. However in this case, as I have said, the defendants were in difficult position when they learnt that there was definitely no reliance on s 84(1)(a) of the Act. For all practical purposes they were locked into the trial, as there was little to be saved by seeking to resolve the matter at that point.

47. In the result, the established practice in applications of this kind should be followed, and the plaintiff should pay the defendants' costs of the proceeding, including this costs application, on the standard basis.

We act for Rebecca Wong in the above matter known as SCI 2013/02552 (Matter). In an attempt to compromise the Matter as soon as is reasonably possible, we are instructed to make the following settlement offer (Offer):

1. your clients consent to the modification of the Covenant affecting the Land so as to allow the construction of no more than 2 (two) dwelling houses, subject to any changes arising from the following:

2. our clients agree to offset any second storey component of any new dwelling constructed by three (3) metres from the northern boundary of 451 Pascoe Vale Road;

3. our clients agree to landscape the western and southern boundaries of the Land with tall screening plants to soften any visual impact of any second dwelling from the beneficiaries' land;

4. our clients agree to screen any south-facing habitable room windows on the second storey of any new dwelling constructed to a height of 1.7m to prevent any unreasonable overlooking into 451 Pascoe Vale Road;

5. within 14 days of your clients' acceptance of our client's offer, our client will pay your clients $7,000 compensation pursuant to s84 of the Property Law Act 1958, distributed as follows:

i. $3,000 to Xin Zhang of 451 Pascoe Vale Road, Strathmore;

ii. $1,000 to Daniel and Diana McConville of 8 Loeman Street, Strathmore;

iii. $1,000 to Daniel Smallacome of 71 Hillsyde Parade, Strathmore;

iv. $1,000 to Barbara Joan Haverfield of 58 Hillsyde Parade, Strathmore; and

v. $1,000 to Avraam Markopolous of 48 Bournian Avenue, Strathmore.

6. our client will pay your clients' costs of this proceeding on a basis to be agreed or taxed in default of agreement and paid within 28 days of agreement or taxation.

This offer will remain open until close of business on 23 August 2013 (no less than 14 days).

1. it provides a greater degree of safeguard of residential amenity than might otherwise be imposed under the relevant Planning Scheme;

2. it removes the risks, delays and uncertainties inherent in litigation; and

3. it provides an appropriate level of financial compensation to the beneficiaries of the Covenant.

Further, given the unusual circumstances of the Land, being on the periphery of the subdivision; close to the Tullamarine Freeway overpass; on a corner site; and otherwise having limited neighbouring residential exposure we suggest that the application, if successful, will have next to no precedential value for other land within the subject estate.

We advise that should this offer not be accepted, and that your clients gain a less favourable outcome at the merits hearing of the Matter, this letter will be produced on the issue of costs, an application being made for costs on an indemnity basis in accordance with the principles in Calderbank v Calderbank [1975] 3 All ER 333 and Cutts v Head [1983] EWCA Civ 8; [1984] 1 All ER 597 and adopted in the decisions of Gillard J in MT Associates Pty Ltd v Aquamax Pty Ltd & Cooks Body Works Pty Ltd [2000] VSC 163 and Ashley J in Clarke & Anor v ABC & Anor [2001] VSC 274.

Such costs may be sought from the Defendants on a joint and several basis. Previous experience suggests such costs may be in excess of $20,000.

We wrote to you by letter dated 8 August 2013 in order to convey our client's offer to your clients, the Defendants in this matter. That offer was open to be accepted by your clients as a means of improving their individual and collective positions in the event our client succeeds in obtaining the Orders sought at trial, and in the event the Court awards costs on an indemnity or other basis against the Defendants.

You subsequently responded that our client's offer was declined by your clients.

As you know, we continue to act for Rebecca Wong in the above matter known as SCI 2013/02552 (Matter). In a further attempt to compromise the Matter before trial, we are instructed to make the following settlement offer (Offer).

That your clients consent to the modification of the Covenant affecting the Land to allow the construction of no more than 2 (two) dwelling houses, subject to any changes arising from the following:

1. our client agrees to instruct her architect to redesign the proposed new dwelling so that any second storey component is constructed predominantly on the northern portion of the Land;

2. our client agrees to landscape the western and southern boundaries of the Land with plants to help screen any second storey component of the proposed second dwelling;

3. our clients agree to screen any south-facing habitable room windows to a height of 1.7m;

4. our client will reimburse your clients' legal and consultants' costs arising of this proceeding.

1. it provides a greater degree of safeguard of residential amenity than might otherwise be imposed under the relevant Planning Scheme;

2. it removes the risks, delays and uncertainties inherent in litigation;

3. it alleviates significantly the risk to the beneficiaries of the Covenant associated with a negative Order as to costs of the proceeding; and

4. it assists significantly with a majority of the matters raised in the affidavits of the Defendants in relation to visual impact, potential for over-shadowing and other concerns as to amenity.

Further, we remain of the view given the unusual circumstances of the Land, being on the periphery of the subdivision; close to the Tullamarine Freeway overpass; on a corner site; and otherwise having limited neighbouring residential exposure we suggest that the application, if successful, will have next to no precedential value for other land within the subject estate.

We advise that should this offer not be accepted, and that your clients gain a less favourable outcome at the merits hearing of the Matter, this letter will be produced on the issue of costs, an application being made for costs on an indemnity basis in accordance with the principles in Calderbank v Calderbank [1975] 3 All ER 333 and Cutts v Head [1983] EWCA Civ 8; [1984] 1 All ER 597 and adopted in the decisions of Gillard J in MT Associates Pty Ltd v Aquamax Pty Ltd & Cooks Body Works Pty Ltd [2000] VSC 163 and Ashley J in Clarke & Anor v ABC & Anor [2001] VSC 274.

In the event, the costs may be sought from the Defendants on a joint and several basis. We estimate such costs to be in excess of $20,000.

This offer is open for acceptance until close of business, 17 October 2013.

[1] [2013] VSC 284.

[2] [1990] HCA 59; (1990) 170 CLR 534, 537; cited with approval in Oshlack v Richmond River Council [1993] HCA 11; (1998) 193 CLR 72, 86.

[3] [1993] HCA 11; (1998) 193 CLR 72, 86.

[4] [1986] HCA 17; (1986) 161 CLR 513, 537.

[5] [1993] HCA 11; (1998) 193 CLR 72, 86.

[6] [1920] 2 KB 47, 52; Donald Campbell and Co Ltd v Pollak [1927] AC 732, 809.

[7] ((1956) [1956] HCA 48; 95 CLR 460, 477.

[8] [1993] HCA 11; (1998) 193 CLR 72, 86.

[9] [1990] HCA 59; (1990) 170 CLR 534, 563 per Toohey J, Mason CJ agreeing; McHugh J at 567.

[10] (1995) 36 NSWLR 77, 79.

[11] [1970] VicRp 38; [1970] VR 319 (Re Withers).

[12] [2005] VSC 355 (Stanhill).

[13] Unreported, Pagone J, 3 June 2013 after judgment in Suhr v. Michelmore [2013] VSC 284.

[14] For example see the observations of Anderson J in Re Withers at 319-20;

[17] [1966] VicRp 69; [1966] VR 494.

[19] (1985) VConVR 54-178.

[21] [2006] NSWSC 284 (Gzell J).

[22] (1935) 52 WN (NSW) 77.

[23] Per Gzell J in Walker v Bridgewood (No 2), [5].

[24] [2006] NSWSC 284, [9]-[12].

[25] [2006] NSWSC 284, [13].

1. [26] Brown v State Transit Authority of New South Wales [2000] NSWSC 802; Walker v Bridgewood (No 2), [10].

[27] [2005] VSCA 298; (2005) 13 VR 435, 441-2 ('Hazeldene').

[28] Settlement Group Pty Ltd v Purcell Partners (No2) [2014 ]VSCA 68, [5].

[29] (2008) 20 VR 481; [2008] VSCA 212, [11].

[30] Foster v Galea (No 2) [2008] VSC 331, [9].

[31] Hazeldene, [19]; Oversea-Chinese Banking Corporation v Richfield Investments Pty Ltd [2004] VSC 351; Fletcher Insulation (Vic) Pty Ltd v Renold Australia Pty Ltd (No 2) [2006] VSC 293, [13]-[17], Byrne J.

[32] Hazeldene, [19]; Foster v Galea (No 2) [2008] VSC 331, [9].

[33] The policy objectives are more fully set out in Hazeldene at [21].

[34] Hazeldene, [21]; M.T. Associates Pty Ltd v Aqua-Max Pty Ltd [2000] VSC 163, [72].

[35] Fletcher Insulation (Vic) Pty Ltd v Renold Australia Pty Ltd (No 2) [2006] VSC 293, [13]-[17], Byrne J.

[36] Oversea-Chinese Banking Corporation v Richfield Investments Pty Ltd [2004] VSC 351, [60]; Hazeldene, [22].

[37] BMD Major Projects Pty Ltd v Victorian Urban Development Authority [2007] VSC 441, [5].

[38] Premier Building & Consulting Pty Ltd v Spotless Group Ltd (No 13) [2007] VSC 516, [13], Byrne J.

[39] Rickard Constructions v Rickard Hails Moretti and Ors [2005] NSWSC 481, [17] per McDougall J.

[40] Apostolidis v Kalenik (No 2) [2011] VSCA 329, [61]-[64] (the offer was subject to approval by the Australian Taxation Office, in effect).

[41] [2003] FCAFC 1, [8].

[42] Mr Easton's Supplementary Report of October 2013 was exhibited to his affidavit of 11 October 2013 and filed (and presumably served) on 14 October 2013.

[43] See Grynberg v Muller [2002] NSWSC 350, [48].

[44] [1971] 1 WLR 1064, 1067; Fitt v Luxury Developments Pty Ltd [2000] VSC 258, [151] per Gillard J.

[45] [2011] VSCA 329, [61]-[64].

[46] [2013] VSC 284.

[47] Affidavit of Michael Anthony Flemming sworn 28 April 2014, Exhibits MFA-13, 14 & 15.

[48] The plaintiff's written Outline of Argument filed and served in the week before the trial commenced appeared only to rely on s 84(1)(c). However, there had been no clear abandonment of the ground under s 84(1)(a) until the plaintiff's counsel opened the case, at which point Mr Miller, counsel for the defendants raised the question whether the application was to be limited to the former ground, which was confirmed: Transcript, 21 October 2013, p 3.