On 19 September 2019, the Court delivered judgment in this matter (Salloway Pty Ltd v Barlow [2019] NSWSC 1234).
In summary, the Court held that the plaintiffs were entitled to a declaration that the $250,000 loan advanced by the defendant to the second plaintiff, which was secured by a registered mortgage over the first plaintiff's North Avoca property, was forgiven. The Court made orders for specific performance requiring the defendant to do what is necessary to enable the mortgage to be discharged. The Cross-Claim brought by the defendant was dismissed. The Court also made an order that the defendant pay the plaintiffs' costs of the proceedings.
The plaintiffs indicated that they wished to make an application for a special costs order. The plaintiffs and defendant thereupon agreed on a timetable for the service of affidavits and written submissions in respect of such application. The parties agreed that following the receipt of such material, the Court would proceed to determine the application on the papers.
The plaintiffs rely upon the affidavit of their solicitor. Annexed to that affidavit is a letter dated 5 March 2019 which was written by the solicitor and sent by email to the defendant's solicitor at 5:34pm the same day. The letter, which is expressed to be made in accordance with the principles in Calderbank v Calderbank [1976] Fam 93, sets out the plaintiffs' contentions as to why they would ultimately prevail at any hearing of the matter. The letter further dismisses the defendant's contentions concerning the application of the penalty doctrine, and goes on to state that the defendant's position is without any real merit.
The letter makes an offer of settlement which was expressed to be capable of immediate acceptance and, if accepted, would create an immediately binding agreement. The terms of the offer included that:
1. the defendant provide a discharge of mortgage in registrable form in respect of the mortgage over the North Avoca property;
2. the parties negotiate and execute a long-form Deed of Settlement and Release to give effect to the agreement, which would include mutual releases in respect of the subject matter of the proceedings; and
3. following the execution of the Deed of Settlement and Release, the parties would seek to dismiss the proceedings by consent with no order as to costs, and any existing costs orders vacated.
The offer was expressed to be open until 5:00pm on 20 March 2019, which was nearly 15 days from the time the offer was received by the defendant's solicitor.
The offer might be described as a "walk away" offer. The plaintiffs conceded as much. In any event, the offer was not accepted by the defendant within the time provided for in the letter.
In his written submissions, counsel for the plaintiffs recited the well-known provisions and principles that apply with respect to the Court's discretion to award indemnity costs. It was submitted that the defendant's non-acceptance of the offer was unreasonable in circumstances where:
1. the proceedings were commercial in nature and the parties were represented by solicitors and counsel;
2. the compromise offered an opportunity for the saving of material sums in circumstances where the defendant would avoid the risk of having to pay the plaintiffs' costs incurred to that point;
3. the offer was made at an advanced stage in the proceedings after all the evidence had been filed and served, so the defendant was armed with all the information necessary to assess the prospects of her case with reasonable accuracy; and
4. the offer was open for 14 days, which was reasonable in the circumstances of the case.
In her written submissions, counsel for the defendant disputed that the offer constituted a genuine compromise. It was put that the outcome of the proceedings was always going to be an "all or nothing" one, and that the offer, in substance, offered nothing. Rather, the offer could be characterised as an invitation to capitulate designed merely to trigger costs sanctions (see Townsend v Townsend (No 2) [2001] NSWCA 145 at [5]; Herning v GWS Machinery Pty Ltd [No 2] [2005] NSWCA 375 at [5]; Russell v Edwards [No 2] [2006] NSWCA 52 at [6]-[7]).
Counsel also submitted that it was not unreasonable to refuse to accept the offer in circumstances where:
1. the defendant was entitled to have the issues the subject of the proceedings determined by the Court;
2. the law with respect to the doctrine of penalties and forfeiture is unsettled, in particular as to how the decisions prior to Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 should now be construed. Counsel also submitted that the application of the decision in Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 in respect of characterisation of penal clauses is still in the early stages of development, and there was thus uncertainty as to how the doctrine applied to unusual factual circumstances;
3. the contest between the parties was essentially a legal rather than a factual dispute. It was put that in these circumstances the fact that the offer was made after all the evidence had been served was of little significance;
4. the offer was open for acceptance for only 14 days when there was no particular need for such a short time. It was put that this time frame reflected the plaintiffs' use of the offer as an attempt to trigger costs consequences rather than as a genuine attempt to compromise the proceedings;
5. the defendant conducted the proceedings as efficiently as possible, and was guilty of no delinquency.
In reply, counsel for the plaintiffs accepted that the outcome of the proceedings was always "all or nothing", but disputed that there was no genuine compromise. Counsel reiterated his earlier submissions that "walk away" offers of the kind made in the present case can amount to a genuine compromise, and that it has been observed that in "all or nothing" cases, the only room for compromise may be in relation to costs (referring to Leach v The Nominal Defendant (QBE Insurance (Australia) Ltd) (No 2) [2014] NSWCA 391 at [43]).
Counsel disputed the relevance of some of the factors relied upon by the defendant in support of the contention that it was not unreasonable to refuse to accept the offer. Counsel submitted that there was no reason to think that the defendant was not in a good of a position to assess the strength of her case by the time the offer was made. Counsel also submitted that the 14 day period in which the offer was open for acceptance was not unreasonable in the circumstances (referring to Brymount Pty Ltd v Cummins (No. 2) [2005] NSWCA 69 at [15]).
[2]
Determination
The relevant principles governing Calderbank offers are not in dispute. In short, for a valid Calderbank offer to be a basis for indemnity costs, the offer must represent a genuine compromise which the recipient unreasonably failed to accept (see Commonwealth of Australia v Gretton [2008] NSWCA 117 at [44]-[46]). Of course, all the relevant circumstances must be considered in determining whether it is appropriate to exercise the discretion to award indemnity costs.
As to whether there was a genuine compromise, it is well settled that a "walk away" offer of the kind relied upon by the plaintiffs is capable of engaging the principles in Calderbank v Calderbank (supra) provided the offer involves a significant element of compromise (see Botany Bay City Council v Latham (No 2) [2013] NSWCA 450 at [13]; Taheri v Vitek (No 2) [2014] NSWCA 344 at [10]-[11]; South Western Sydney Local Health District v Gould (No 2) [2018] NSWCA 160 at [6]). The significance of the degree of compromise is what distinguishes the offer from a mere invitation to capitulate (or a derisory offer) which will not usually trigger the Court's discretion to award indemnity costs unless it can be said that the claim or defence maintained by the recipient of the offer approaches the frivolous or vexatious (Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [31]; Prospect Resources Ltd v Molyneux [2015] NSWCA 171 at [93]). This distinction between an offer that contains a sufficient element of compromise, and one that is really an invitation to capitulate, is largely a matter of impression, as is the assessment of whether a failure to accept the offer was unreasonable in all the circumstances (see Prospect Resources Ltd v Molyneux (supra) at [94]).
The terms of the offer contained in the letter dated 5 March 2019 only involved compromise in respect of the costs of the proceedings. However, contrary to the defendant's submission, I do not think that the offer "offered nothing" in this regard. While there is no evidence of the actual costs incurred by the plaintiffs by the time of the offer, there can be no doubt that those costs would have been substantial. At the time the offer was made, the proceedings were at a relatively advanced stage. The proceedings had been before the Court for directions on three occasions and the plaintiffs had served at least two affidavits. It is evident that the plaintiffs had considered the legal issues in the light of the evidence that had been served by the defendant. In my opinion, the plaintiffs' offer involved a significant element of compromise. I do not think it should be regarded as an invitation to capitulate, or an offer designed merely to trigger costs sanctions. I note also that the plaintiffs had the benefit of an existing costs order, albeit of a modest nature, in respect of one of the directions hearings.
I consider that it was unreasonable for the defendant to decline to accept the offer. The legal questions for determination were not so uncertain that it was not possible for the defendant to undertake a reasonable assessment of the relative strengths and weaknesses of her case. This is so even allowing for the variations between the views expressed in Paciocco v Australia and New Zealand Banking Group Ltd (supra) in relation to the relevant enquiry for characterising whether a clause is penal. Whilst not unarguable, the cases advanced by the defendant (whether as to construction, penalty or relief against forfeiture) were in my view somewhat weak, and ought to have been seen to be so.
Moreover, the 14 (or 15) days in which the offer was open for acceptance was reasonable in the circumstances. The parties had served most if not all of the evidence upon which they relied in the proceedings by the time the offer was made. The issues for determination were well known to the parties. The defendant did not adduce any evidence to suggest that the time period provided in the offer was unreasonably short; there was no evidence that the defendant asked for more time to consider the offer.
I have considered the various matters raised by the defendant. However, it is my opinion that it is appropriate to exercise the Court's discretion to make an order for indemnity costs as sought by the plaintiffs. The defendant had an ample opportunity to consider the offer which contained a significant element of compromise. Rather than accept the offer, the defendant preferred to allow the issues to be determined by the Court. As submitted on her behalf, she was entitled to take that course, even if the failure to accept the offer was itself unreasonable. The various arguments advanced by the defendant were ultimately rejected by the Court. The defendant had been clearly warned that in those circumstances the plaintiffs would seek a special costs order as from 20 March 2019. The costs incurred by the plaintiffs from that date can be seen to be the result of the defendant's failure to accept the plaintiffs' offer. Accordingly, the Court will order that the defendant pay the plaintiffs' costs of the proceedings on the ordinary basis up to and including 20 March 2019 (the date of expiry of the offer), and on an indemnity basis thereafter.
[3]
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Decision last updated: 22 October 2019