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[2014] NSWSC 1448
Supreme Court of NSW
2014-10-27
McDougall J
Original judgment source is linked above.
Judgment 1HIS HONOUR: On 15 August 2014, I gave judgment, [2014] NSWSC 1096, concluding and ordering that the plaintiff's claim should be dismissed with costs. The defendants have now made an application for indemnity costs, based on a "Calderbank" offer. 2The nature of the proceedings is sufficiently summarised in paras 1 to 3 of my earlier reasons: [1] On 5 July 2013, the plaintiff (Prospect Resources) and the defendants (collectively, "the Consortium") entered into a "Subscription Agreement". Under that agreement, and on the terms set out in it, the Consortium agreed to subscribe for 325 million ordinary shares in the capital of Prospect, at an issue price of $0.012 per share. The total amount to be subscribed was $3.9 million. [2] Prospect says that the conditions governing the obligation to subscribe were satisfied, and that the Consortium was required to pay up. The Consortium says that the conditions were not satisfied and that accordingly it was entitled to (and did) terminate the subscription agreement. [3] The essential question for decision is whether a number of so-called "conditions precedent" set out in the subscription agreement were satisfied or waived.
Basis of the application for indemnity costs 3The application was made by notice of motion filed on 29 August 2014. It is supported by an affidavit of Mr Sims, a solicitor in the employ of the defendants' solicitor. Mr Sims deposes, and it is uncontentious, that: (1) On 15 November 2013, Mr Joseph Havlin wrote on behalf of the defendants to the plaintiff's solicitors. That letter seems to have been written in response to a letter of demand. In substance, Mr Havlin pointed out what he perceived to be problems with the case that the plaintiff sought to advance. (2) On 3 February 2014, after proceedings had been commenced (the summons and commercial list statement were filed on 29 November 2013, relatively shortly after Mr Havlin sent his letter just referred to), Mr Havlin wrote again to the plaintiff's solicitors. That letter set out what Mr Havlin said was a Calderbank offer. 4The fundamental point made by Mr Havlin in the first of those letters were as follows: ... (1) Pursuant to the terms of the Subscription Agreement your client was under an obligation to "reasonably satisfy" the Consortium that the conditions precedent to the Subscription Agreement had all been satisfied or waived by 5pm (WST) on 30 October 2013: see clauses 3.1(a) and 3.4 of the Subscription Agreement. (2) Clause 3.1(a) of the Subscription Agreement required your client to provide the Consortium on or before the Termination Date with a validly executed copy of the transaction documents listed in Schedule 2 of the Subscription Agreement, including the Senior Prospecting & Mining Agreement between Hawkmoth Mining & Exploration (Pvt) Limited, Martin Gunning Investments (Pvt) Limited, Falcon College Trust and your client (Mining Agreement). (3) Contrary to clause 3.1(a) of the Subscription Agreement, the Consortium was not provided with a validly executed copy of the Mining Agreement by 5pm on 30 October 2013, or at all. (4) Clause 5.2 of the Mining Agreement required, amongst other things, an: "initial environmental base line study relating to the Project Area, acceptable in terms of the laws of Zimbabwe, which shall include sufficient information so as to objectively and fairly reflect the environmental status and Rehabilitation Liabilities of the Project Area". (5) Contrary to those obligations, the Environmental Baseline Report for Bushtick Mine (Report): (a) Whilst purportedly dated "October 2013" was only provided to the Consortium on 7 November 2013, with no explanation as to the delay in producing it to the Consortium; and (b) Contains only perfunctory information. For example there are no details as to whether it complies with the laws of Zimbabwe, or details of the Rehabilitation Liabilities. (6) Further, the Consortium has not received the "sign-off" on the Report, as required by clause 5.3 of the Mining Agreement. (7) By failing to provide the Report to the Consortium on a timely basis, and in any event prior to 5pm on 30 October 2013, the Consortium was not given an opportunity to brief a qualified environmental consultant to evaluate amongst other things, whether the Report complied with Zimbabwe law and requirements and objectively reflected the environmental status and rehabilitation liabilities as of the signature date of the Mining Agreement. (8) Clause 5.4.3 of the Mining Agreement, required the production: "of an independent and objective report confirming the validity of the Project Rights, that it is in good standing and validly held by MGI, and that such company is entitled to transfer the rights contemplated [in the Mining Agreement] to ZMI in accordance with [the Mining Agreement]." (9) The Consortium has not received any report as required by clause 5.4 of the Mining Agreement. (10) The purported variation of the conditions precedent contained in the Mining Agreement (Conditions Precedent), by the Deed of Variation purportedly executed on 17 October 2013 (Deed of Variation), are of no effect given that (amongst other things): (a) the Consortium is not a party to the Deed of Variation and did not agree nor consent to the purported 'conversion' of the Conditions Precedent into conditions subsequent; (b) the Consortium relied on those Conditions Precedent in entering into the Subscription Agreement; (c) the Conditions Precedent in the Subscription Agreement were inserted for the benefit of the Consortium; and (d) the Deed of Variation (as far as the Consortium is concerned) is contrary to the objective of the Subscription Agreement. ... 5In the Calderbank offer, Mr Havlin referred back to his letter of 15 November 2013. He noted (as is uncontroversial) that the plaintiff had not responded to that letter before commencing proceedings. 6Mr Havlin then said: ... (2) By reason of the matters set out in our 15 November 2013 letter (including at paragraphs 1 to 12 inclusive of that letter), it is the Consortium's view that Prospect's claim for, amongst other things, specific performance of the Subscription Agreement, will not succeed at trial. (3) The Consortium nevertheless recognises that substantial costs will be incurred by all of the parties in the prosecution and defence of the Proceeding. (4) In the event that the Consortium succeeds at trial (as we expect), Prospect will also be liable to pay the Consortium's costs of and incidental to defending the Proceeding (and will also have to bear its own costs paid to its legal advisers). (5) In the interests of resolving this matter without the need for further costs or time to be incurred and purely on a commercial basis, the Consortium hereby offers to settle all matters in issue in the Proceedings, without admission of liability, on the following terms: (a) the parties agree to a mutual release of all claims arising out of or in connection with the Subscription Agreement; (b) Prospect agrees to discontinue the Proceeding against the Defendants with no order as to costs; (c) the Consortium agrees to pay to Prospect the sum of AUD$50,000; and (d) the above terms, amongst others, be included in a Deed of Settlement to be drafted by the Consortium. (6) This offer is made in accordance with the principles set out in Calderbank v Calderbank [1976] Fam 93; [1975] 3 All ER 333; [1975] 3 WLR 586. (7) In our respectful view, the terms of the Consortium's offer herein are more favourable to Prospect than the outcome if the Consortium succeeds at trial. (8) If Prospect were to accept this offer now, it would result in very considerable savings in time and costs for all parties and in Court Resources. (9) In the circumstances, we urge Prospect to give serious and proper consideration to this offer. (10) This offer is open to be accepted by Prospect until 5:00pm (Hong Kong time) on 14 February 2014, at which time it shall lapse and become incapable of being accepted. 7The affidavit of the plaintiff's solicitor, Mr McKeough, identifies and annexes copies of further offers made by the plaintiff to the defendants after the commencement of proceedings. Those offers were made on 19 February 2014 and (by way of separate offers of compromise, not capable of independent acceptance) on 30 July 2014.
The parties' submissions 8Mr Willinge of Counsel, for the defendants, acknowledged the discretionary nature of the power to order indemnity costs. However, he relied on non-acceptance of the Calderbank offer, in circumstances where (by reference to the earlier letter): (1) the basis on which the defendants asserted that they would succeed was made clear; and (2) in substance, the defendants succeeded before me for the reasons including those advanced in that letter. 9In those circumstances, particularly bearing in mind the plaintiff had given no reasons for not accepting the Calderbank offer, Mr Willinge submitted that the non-acceptance was relevantly unreasonable, so as to enliven (and justify the exercise of) the discretion to award indemnity costs. 10Mr Giles of Counsel, for the plaintiff, submitted that although the plaintiff's case had failed, it had been reasonably arguable. He noted that the claim was for in excess of $4 million (it being, he submitted and I agree, irrelevant whether it was considered as a claim for damages for breach of, or alternatively a claim for specific performance of, the Subscription Agreement). 11In those circumstances, Mr Giles characterised the defendants' offer as being "derisory, or [one which] at least involved a near capitulation by the plaintiff". 12Mr Giles submitted that it was relevant to bear in mind that no defence had been filed. 13In relation to the further negotiations proved by Mr McKeough's affidavit, Mr Giles submitted that it was relevant that, the defendant having made what was (he submitted) "an offer little better than a "walk away"" offer, did not engage in further commercial negotiation. 14Mr Giles laid considerable stress on the decision of the Court of Appeal in Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368. 15In reply, Mr Willinge submitted that the plaintiff's case had not been reasonably arguable or well arguable. He relied on findings I had made, to the effect that what I found to be fundamental factual difficulties with the plaintiff's case had been "frankly conceded" by its managing director, Mr Warner. 16Mr Willinge submitted that the characterisation of the offer as "derisory" or as one which "involved a near capitulation" could not be determinative. Further, he submitted, it was irrelevant that the offer had been made before any defence was filed, given that the defendants' summary contentions had been stated clearly in Mr Havlin's letter of 15 November 2013.
Decision 17In my view, it was relevantly unreasonable for the plaintiff simply to ignore (as, on the evidence, it seems to have done) the Calderbank offer. Although the Calderbank offer did not itself set out the reasons why the defendants took the position they did, it did refer back expressly to the letter of 15 November 2013. As I have noted, that earlier letter set out in summary form the defendants' contentions. The reason why the failure to engage with the offer was, in my view, unreasonable can be explained quite simply. 18This is not a case where the ground on which the defendants succeeded was one which became apparent only at some time after its commercial list response had been filed, or only shortly before the hearing. On the contrary, the defendants' letter of 15 November 2013 pointed out why it was that, in their view (and mine) the plaintiff had failed to satisfy certain of its obligations under the "conditions precedent" set out in the Subscription Agreement. 19Further, and of key importance, it is apparent from Mr Warner's evidence that the plaintiff had no basis, or at least no reasonable basis, for believing that it had satisfied the conditions precedent. As I noted in my reasons at [98] to [101], this was clear in respect of at least two of those conditions: [98] On 28 October 2013, an organisation known as EnviroSmart produced a document which was apparently intended to be the "initial environmental baseline study relating to the Project Area" referred to in cl 5.2 of the SPMA. The EnviroSmart document did not comply with the requirements of cl 5.2 in many respects. Mr Warner frankly conceded this in his evidence (T59.14-.34, T74.4-77.28). It is not necessary to go to the detail. [99] Also on 28 October 2013, Prospect received a letter from a delegate of the Mining Commissioner of Zimbabwe, addressed "To Whom It May Concern". That letter said: This serves to confirm that Special Grant No.5849 has been duly registered in terms of section 291 of the Mines and Minerals Act of Zimbabwe (Chapter 21:05) to Martin Gunning Investments. Furthermore Martin Gunning Investments are free to mine this Special Grant. [100] That was the only document produced which purported to meet the requirements of cl 5.4.3 of the SPMA. Plainly, it did not. Again, Mr Warner frankly conceded this (T62.10-63.10). Again, it is not necessary to go to the detail. [101] The deficiencies in what are now said to be the cl 5.2 "environmental baseline report" and the cl 5.4.3 "independent and objective report" must have been apparent at the time, had Mr Warner (or anyone else) turned his mind to the documents. Those deficiencies were not made known to the Consortium. Neither the documents themselves nor an adequate statement of their content was given to the Consortium. 20I accept, as Mr Giles pointed out, that there had been an antecedent debate between the parties as to who it was that had the right to waive the conditions precedent. I resolved that debate, which was essentially a question of construction, in favour of the construction advanced for the plaintiff. But that does not really assist, in circumstances where, as is plain from Mr Warner's evidence, the plaintiff had no reason for thinking that the conditions precedent had been satisfied. Nor does it assist in circumstances where I concluded, as a matter of fact, that there had been no waiver. 21I have not overlooked that it was the plaintiff's case that satisfaction was demonstrated, or could be inferred, from a deed of variation made on 17 October 2013 (see at [12] of my reasons) or alternatively from a letter written on 28 October 2013 (see at [13] of my reasons). However, for the reasons I gave at [67] to [84], the deed (to which the defendants were not parties) could not demonstrate satisfaction in circumstances where, although it stated the fact of satisfaction, its own language confirmed that the fact, as to which satisfaction was said to have been reached, did not exist. 22Further, for the reasons I gave at [86] to [111], the letter (which was not written to or by the defendants) did not have that effect. In this context, it should be noted that the letter was inconsistent with what the defendants had been told, as was the deed of variation (see at [103] of my reasons), and that it was given to the defendants, without any supporting documentation, with less than two days for them to consider and assess it (see at [104] of my reasons). 23In my view, it is evident that the plaintiff recognised, before commencing proceedings, that it could not demonstrate satisfaction in fact of the relevant conditions precedent, and that it sought to create a situation, first by the deed and then by the letter, to overcome this unfortunate but evident factual defect. The course that it took involved, in effect, rewriting history, in an attempt to demonstrate that something which plainly did not exist, or had not been satisfied, in fact did exist or had been satisfied. 24In those circumstances, given the clear explanation, in the letter of 15 November 2013, of the weakness of the plaintiff's position, I think it was relevantly unreasonable for the plaintiff to commence proceedings without, so far as the evidence shows, engaging in any way with the reasoning set out in that letter. 25I accept that the defendants failed to engage with the further offers made by the plaintiff. I do not see that that has any bearing on the issue of indemnity costs. 26I do not propose to discuss the decision in Regency Media. This case turns, as do most, on its own facts. To my mind, little is to be gained by considering reasons given in a case based on different facts, where the entitlement was said to arise not from a non-acceptance of a Calderbank offer but, rather, from non-acceptance of an offer of compromise under the UCPR. 27There are two other points to deal with. One is that Mr Giles commented adversely on what he submitted were the disproportionate costs that the defendants say they have incurred. That does not seem to me to be relevant. Even if costs are ordered to be paid on the indemnity basis, it does not follow that all the costs charged and paid will be allowed on assessment. It is a matter for an assessor to decide what (if any) of the costs claimed should not be allowed. 28The second point is that the notice of motion sought that indemnity costs should be payable from the date the offer of compromise was made rather than from the date specified for its acceptance. There was no point taken that the latter, rather than the former, date should apply. Accordingly, it is not necessary to consider what in any event may be a point of little practical substance.
Conclusion and orders 29The defendants have made good their entitlement to indemnity costs. 30I vary order 2 made on 15 August 2014 by ordering that the costs payable pursuant to that order be assessed on the ordinary basis up until 3 February 2014 and on the indemnity basis thereafter. 31I order the plaintiff to pay the defendants' costs of the defendants' notice of motion filed on 29 August 2014.
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: 27 October 2014
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