This judgment addresses the issue of costs of the proceedings up to 8 April 2019.
The proceedings were concerned with part of Level 16 of the Aurora Place building in Phillip Street, Sydney. By its Summons, filed on 18 December 2017, the plaintiff sought a declaration that it did not enter into a binding sub-lease of the property as sub-lessee with the defendant as sub-lessor. On 3 September 2018, the defendant filed a Cross Summons seeking a declaration that the parties had entered into a binding sub-lease in respect of the property.
On 19 February 2019, the Court made orders by consent granting leave to the defendant to file an Amended Cross Summons in which the defendant removed the claim for declaratory relief and inserted a new claim to recover the amount of approximately $735,000 (plus interest) in unpaid rent under the alleged sub-lease, as well as a claim for damages. The Court also made orders pursuant to r 28.2 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") that the issues arising on the Summons be determined before all other questions in the proceedings.
The Summons came on for hearing on 25 March 2019. On 8 April 2019, the Court delivered judgment (Realm Resources Ltd v Aurora Place Investments Pty Ltd [2019] NSWSC 379). The Court determined that a binding sub-lease came into existence between the parties in August 2017. The Court dismissed the Summons and made an order that the defendant pay the plaintiff's costs of the proceedings to date. The order requiring the successful defendant to pay the unsuccessful plaintiff's costs was plainly made in error. An order was made on 24 May 2019 pursuant to UCPR r 36.17 correcting the error.
On 18 April 2019, the defendant filed a Notice of Motion seeking to vary the costs order. The motion sought orders that the plaintiff pay the defendant's costs of the proceedings up to and including 3 October 2018 on the ordinary basis, and from 4 October 2018 until 8 April 2019 on an indemnity basis.
On 24 May 2019, the Court made orders by consent standing the defendant's Notice of Motion over to a date to be fixed. Directions were also made for the filing and service of evidence in respect of the Amended Cross Summons, with the matter fixed for hearing on 16 December 2019.
Shortly before the hearing, the parties informed the Court that the issues arising on the Amended Cross Summons had been resolved. By consent, the Court entered judgment for the defendant in the sum of $1,150,000 and ordered that the plaintiff pay the defendant's costs of the Amended Cross Summons up to 2 December 2019 on the ordinary basis. The Court also made directions that the parties serve and provide written submissions in respect of the Notice of Motion filed on 18 April 2019, with a view to that matter being determined on the papers.
The defendant's application is to vary the costs order made on 8 April 2019, as corrected on 24 May 2019, so as to obtain indemnity costs in the period from 4 October 2018 to 8 April 2019. The basis of the application is the failure of the plaintiff to accept an Offer of Compromise that had been made on 3 October 2018 pursuant to UCPR r 20.26.
The defendant contends that it obtained a judgment on the plaintiff's claim no less favourable to it than the terms of the offer such that UCPR r 42.15A applied, with the consequence that the defendant is entitled to indemnity costs from 4 October 2018 unless the Court orders otherwise. The defendant submitted that the Court would not order otherwise as the offer was a genuine compromise in circumstances where the defendant's costs were more than $200,000 when the offer was made.
The defendant in fact served two Offers of Compromise on 3 October 2018. The first of these offers (styled "Offer 1") offered to compromise the whole of the plaintiff's claim (the Summons) on terms that judgment be entered for the defendant, with no order as to costs. The offer was expressed to be made in accordance with UCPR r 20.26 and was expressed to be open for acceptance for 28 days from the date of the offer.
The second offer (styled "Offer 2") offered to compromise the whole of the defendant's cross-claim (the Cross Summons) in the proceedings on terms that the Court grant a declaration to the effect that the parties entered into a valid and binding sublease in respect of the property in August 2017, and that each party bear its own costs of the Cross Summons. The offer was expressed to be made in accordance with UCPR r 20.26 and was expressed to be open for acceptance for 28 days from the date of the offer.
Each offer was also expressed to be conditional upon acceptance by the plaintiff of the other offer, such that the plaintiff was required to accept both offers for the compromise to be effective.
On 30 October 2018, the parties exchanged correspondence in relation to the two Offers of Compromise. In the first email sent at around 10:30am, the plaintiff's solicitor observed that the monetary effect of accepting the offers appeared to be that the defendant would retain and call upon a bank guarantee (of about $280,000) and retain an initial deposit (of about $40,000). It was stated that this would constitute a damages payment in the sum of nearly $320,000. It was stated that there was no such claim for damages in the Cross Claim formulated at that time, and that if the offers were accepted and the defendant subsequently decided to bring such claims, this would constitute an abuse of process. The plaintiff's solicitor sought confirmation that if the offers were accepted the defendant would not bring any further claim against the plaintiff in relation to the sublease. A response was requested by 4:00pm that day.
The defendant's solicitor responded by email at around 5:15pm. It was stated that neither offer was intended to compromise any claim for damages or debt. The defendant's solicitor went on to state that if the Court granted a declaration to the effect that the sublease was valid and binding, the defendant intended to pursue claims for debt or damages at a later stage. The defendant's solicitor denied that any such proceedings would constitute an abuse of process.
The plaintiff's solicitor replied to this email at around 5:40pm. The solicitor referred the defendant's solicitor to the High Court's then recent decision in UBS AG v Tyne [2018] HCA 45. The email stated that had the plaintiff accepted the offers to compromise the proceedings (in which a claim for damages or debt could have been brought), the plaintiff could obtain a permanent stay of any later proceedings brought by the defendant.
The Offers of Compromise were not accepted within the 28 day period allowed.
The plaintiff contends that the offers did not involve any genuine compromise because, had they been accepted, the defendant would not only have completely succeeded on the claims then made in the proceedings, it would have been able to retain an amount of about $320,000. It was pointed out that the defendant considered that it would retain the right to bring proceedings for debt and damages at a later stage. The plaintiff submitted that the offers really called for a total capitulation on the plaintiff's part, yet its claim was clearly not frivolous or vexatious. The plaintiff further submitted that the full parameters of the dispute were uncertain at the time the offers were open, and it was not until February 2019 that the defendant amended its claim to include claims for unpaid rent and damages.
There was no suggestion that the Offers of Compromise did not meet the requirements of UCPR r 20.26. Neither was it disputed that the defendant obtained a judgment on the plaintiff's claim no less favourable to it than the terms of "Offer 1". In these circumstances, UCPR r 42.15A is engaged such that the offeror has a prima facie entitlement to indemnity costs. However, the Court retains a discretion to decline to order indemnity costs (see Toyata Finance Australia Ltd v Gardiner (No 2) [2016] NSWCA 181 at [14]; Mega-top Cargo Pty Ltd v Moneytech Services Pty Ltd [2016] NSWCA 3 at [5]). In this context, principles similar to those that apply in respect of Calderbank offers have developed in relation to Offers of Compromise made under the relevant rules of Court (see Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [5]-[8]). Accordingly, it is well established that such offers must involve a real and genuine element of compromise (see Fabre v Lui (No 2) [2015] NSWCA 312 at [6]).
In my opinion, the offers made by the defendant did involve a real and genuine element of compromise. By the time the offers were made, the proceedings had been on foot for more than 9 months and had recently been set down for hearing. It would be expected that both parties would have expended significant amounts in legal costs up to that time. There is evidence that the defendant had in fact incurred almost $230,000 in costs by the time the offers were made. Acceptance of the offers would thus have entailed the defendant foregoing the possibility of obtaining a substantial costs order against the plaintiff. In these circumstances, I do not think that the offers involved only a trivial or derisory element of compromise, or should be regarded merely as demands for capitulation. That seems to me to be the case even if acceptance of the offers may have had economic consequences beyond the immediate ambit of the proceedings as then constituted.
The offers were made in relation to the only claims then being made in the proceedings, namely, the respective claims as to whether a valid and binding sub-lease had been entered into. There was no lack of clarity about the question, even if its resolution involved some complexity. When the offers were made, each party was, or ought to have been, in a position to make a considered assessment of its prospects of success on that question, and make decisions as to compromise on that question accordingly.
I have taken into account the fact that the defendant asserted that it was open to it to pursue debt and damages claims at a later stage, but against that, the plaintiff asserted that if it accepted the offers, the defendant would be precluded from taking that course. Both sides were well equipped to protect their own interests in relation to the litigation.
Viewing the circumstances overall, I am not persuaded that there is a sufficient basis to warrant the making of a costs order that departs from the prima facie position embodied within UCPR r 42.15A.
Accordingly, the Court will vary the existing costs order made on 8 April 2019, as corrected on 24 May 2019, so that it becomes an order in the following terms:
Order that the plaintiff pay the defendant's costs of the proceedings:
(a) up to and including 3 October 2018 on the ordinary basis; and
(b) from 4 October 2018 to 8 April 2019 on an indemnity basis.
The Court will further order that the plaintiff pay the defendant's costs of the Notice of Motion filed on 18 April 2019.
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Decision last updated: 27 February 2020