Altium Limited v APGF Property Limited

Case •

[2010] NSWSC 732

•

6 July 2010

No judgment structure available for this case.
CITATION: Altium Limited v APGF Property Limited [2010] NSWSC 732
HEARING DATE(S): 18.02.10, 23.02.10
 
JUDGMENT DATE : 
6 July 2010
JUDGMENT OF: Nicholas J
DECISION: It is ordered that:
(1) Leave be granted to the plaintiff to discontinue the proceedings by filing a notice of discontinuance.
(2) Leave be granted to the defendant to discontinue the cross-claim by filing a notice of discontinuance.
(3) The defendant pay the plaintiff’s costs of the proceedings, including the cross-claim.
(4) The defendant pay the plaintiff’s costs of the costs application.
CATCHWORDS: PROCEDURE - Costs - Discontinuance of proceedings - Substantive proceedings, including cross-claim, not proceeding to final determination - Whether Plaintiff's conduct in commencing proceedings reasonable - Whether defendant's conduct prior to commencement of proceedings unreasonable - UCPR r 42.19 - Turns on facts - No question of general principle
LEGISLATION CITED: Uniform Civil Procedure Rules 2005
CATEGORY: Principal judgment
CASES CITED: Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32
Prodromos Anastasi Foukkare v Angreb Pty Limited [2006] NSWCA 335
Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194
PARTIES: Altium Limited - plaintiff
APGF Property Limited - defendant
FILE NUMBER(S): SC 09/289294
COUNSEL: J R J Lockhart SC – plaintiff
S T Chrysanthou - defendant
SOLICITORS: Mallesons Stephen Jaques - plaintiff
Dibbs Barker - defendant


IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Nicholas J

6 July 2010

09/289294 Altium Limited v APGF Property Limited

JUDGMENT

1 His Honour: On 9 October 2009 these proceedings were settled by agreement between the parties except for the question of costs. The present application concerned the terms of the orders for final disposal of the proceedings, and for costs.

2 The plaintiff is a software company which provides electronic design software for engineers.

3 The defendant is the trustee of the trust known as the ADPF Trust No 1 (No 1 Trust). On 4 June 2002 Elderslie Finance Corporation Limited (Elderslie) was appointed custodian of No 1 Trust and, on 14 April 2005, became the registered proprietor on its behalf of a property at Frenchs Forest which included an office block and warehouses (the property).

4 On 23 March 2002 the plaintiff entered into a lease with Guardian Funds Management Limited for level 3 of the property (the Level 3 lease). On 22 March 2008 Elderslie became the lessor following its acquisition of the property.

5 On 15 July 2006 the plaintiff entered into a lease with Elderslie in respect of level 2 and a warehouse of the property, terminating on 14 August 2008 (the Level 2 lease).

6 Some time prior to 14 August 2008 each of the Level 2 and the Level 3 leases was varied by agreement such that it was due to expire on 31 March 2009 (the termination date).

7 On 1 and 2 July 2008 receivers and managers were appointed to Elderslie, and on 22 September 2008 the court ordered the appointment of a liquidator.

8 In short, the main proceedings arise from a dispute concerning the extent of the make good obligations under the leases, the extent to which the plaintiff complied with those obligations upon its vacation of the premises on 31 March 2009, and questions of quantum including liability for a claim for rent. The proceedings were commenced by the plaintiff’s interlocutory application to restrain the defendant from dealing with a bank cheque for the sum of $480,000 issued to Elderslie pursuant to a call upon a bank guarantee provided under the leases for the amount of $485,000.

9 The plaintiff proposes that orders be made, by consent, granting leave to it to discontinue the proceedings by filing a notice of discontinuance, and granting leave to the defendant to discontinue the cross-claim by filing a notice of discontinuance. It also seeks an order that the defendant pay the costs of the proceedings including the cross-claim, alternatively its costs of its motion for interlocutory relief dated 16 June 2009, alternatively that each party bear its own costs of the proceedings, including the cross-claim.

10 In opposition, the defendant seeks an order that the statement of claim be discontinued and the plaintiff pay its costs of the proceedings on an indemnity basis, alternatively as agreed or assessed. It also seeks an order that the plaintiff pay its costs of the cross-claim on an indemnity basis, alternatively as agreed or assessed, and an order that the cross-claim be otherwise dismissed.

The leases

11 The relevant provisions of the Level 3 lease were:

          “Clause 1.1:
          As further security for the due performance and satisfaction of the Lessee’s obligations and liabilities to the Lessor under this Lease, the Lessee shall provide to the Lessor an unconditional Bankers Guarantee by a Bank licensed under the Banking Act, 1959, carrying on business in New South Wales in a form to the reasonable satisfaction of the Lessor undertaking to pay to the Lessor on demand the sum equivalent to six (6) months’ gross rent inclusive of outgoings which may be retained by the Lessor until such time as the Lessee shall have duly performed and satisfied all of its obligations under this Lease. The Lessor shall be entitled to call upon the said guarantee in or towards satisfaction of any amounts of rents or other moneys payable under this Lease or in or towards satisfaction of any amount which may become payable as a result of any breach by the Lessee of any of the covenants and conditions contained in this Lease PROVIDED ALWAYS that any such action or application shall not be deemed to be a waiver or release of any such breach.”
          “Clause 6.3:

          (a) The Lessee shall redecorate the premises throughout to the satisfaction of the Lessor before each of the dates specified in Item 10 of the Reference Schedule and the termination date. The term “redecorate” shall include the washing down of the whole of the premises including all partitions or additions made to the premises and the treatment as previously treated of all surfaces of the premises by painting staining polishing or otherwise to a specification approved by the Lessor AND also the replacing of all carpet/floor tiles which in the opinion of the Lessor’s building consultant are worn or damaged otherwise than by fair wear in need of replacement.

          (b) Should the Lessee fail to redecorate the premises by the dates specified the Lessor may undertake redecoration at the Lessee’s expense and the Lessee shall repay amounts so expended by the Lessor on demand.”

          “Clause 6.7:
          …
          (b) The Lessee shall prior to the expiration of the term of this Lease remove all partitions alterations and additions installed or made by the Lessee and make good damage to the premises (and, if required by the Lessor, to the common areas of the Estate of which the Lessee may have with or without the consent of the Lessor had exclusive use) caused by such removal fair wear and tear excepted (taking into account the condition of the premises as specified in Item 11 of the Reference Schedule) and where the term of this Lease shall be determined prior to the termination date the Lessee shall effect such removal and making good of damage within one (1) month after such determination PROVIDED THAT should the Lessor and the Lessee fall into any dispute concerning the making good of damage or the exception of fair wear and tear then either of them may refer the dispute to the Divisional Chairman of the New South Wales Society of Land Economists (or such member of the Society as he shall appoint) for adjudication as to whether or not the Lessee has complied with its obligations under this clause and the costs of such arbitration shall be borne by the Lessor and Lessee in equal shares.

          (c) If the Lessee shall not have completed such removal and making good on the expiration of the term of this Lease (or in the case of the determination of the terms of this Lease within one (1) month after such determination) THEN the Lessor may remove and store such partitions alterations or additions as the Lessee shall have failed to remove and the Lessee covenants to repay on demand all costs and expenses incurred by the Lessor in so doing and the Lessor may alternatively elect not to effect such removal in which case the Lessor shall by notice in writing given to the Lessee notify the Lessee that unless the Lessee shall have effected such removal within fourteen (14) days of the date of which such notice is given such partitions alterations or additions as have not been removed by the Lessee shall be forfeited to the Lessor and where the Lessee fails to comply with such notice such partitions alterations and additions shall at the expiration of such fourteen (14) day period become the property of the Lessor.”

          “Clause 9.2:
          The Lessor may elect to remedy at any time without notice any default by the Lessee under this Lease and whenever the Lessor so elects all costs and expenses incurred by the Lessor (including legal costs and expenses) in remedying such default shall be paid by the Lessee to the Lessor forthwith on demand.”
          “Clause 11.3:

          In addition to the rent and other moneys reserved by this Lease the Lessee shall pay –

          (a) the Lessor’s legal costs of and incidental to this Lease (including all stamp duty at any time payable);

          (b) all costs and expenses for which the Lessor shall become liable as a consequence of or in connection with any breach or default by the Lessee in the performance or observance of any of the terms covenants and conditions of this Lease.”

12 The relevant provisions of the Level 2 lease were:

          “Clause 7.1:
          …
          (c) The Tenant must, at its Cost:
              (i) immediately make good any damage to the Premises caused by any act or omission of the Tenant or of the Tenant’s Employees or by its or their use or occupancy of the Premises or by the installation use or removal of the Tenant’s Fittings;”

          “Clause 12.1:

          Each of the following is an Event of Default (whether or not it is in the control of the Tenant):
          …
          (c) the Tenant fails or refuses to carry out any repairs properly required by any notice within the time specified in that notice;
          (d) the Tenant fails to perform or observe any of its other obligations under this Lease; and”
          “Clause 12.4:
          The Landlord may, but is not obliged to, remedy at any time without notice any default by the Tenant under this Lease and do anything arising from the default that the landlord considers necessary, and whenever the Landlord elects to do so all reasonable Costs incurred by the Landlord will be a liquidated debt and must be paid by the Tenant to the landlord on demand.”
          “Clause 13.1:

          The Tenant must at the Date of Termination:

          (a) remove from the Premises all the Tenant’s Fittings; and

          (b) subject to clause 24 hereof return the Premises to a base building standard and repair any damage, marks or holes caused by the Tenant in complying with this clause 13.1.”
          “Clause 13.2:

          The Tenant must:

          (a) use its best endeavours not to cause or contribute to any damage to the premises in the removal of the Tenants Fittings, and make good any damage; and

          (b) leave the Premises in a clean state and condition.

          If the Tenant fails to do so the landlord may make good and/or clean the Premises at the Cost of and as agent for the Tenant and recover from the Tenant the Cost to the landlord of doing so as a liquidated debt payable on demand.”
          “Clause 13.4:

          The Tenant:
          …

          (b) must pay to the Landlord as a liquidated debt on demand any Costs incurred by the Landlord in exercising its rights under Clause 13.3, including any excess of Costs over money received in the disposal of the Tenant’s Fittings under Clause 13.3(b).”
          “Clause 15.2:
          On or before execution of this Lease the Tenant shall arrange for the issue to the Landlord of a Bank Guarantee for the amount specified in Item 20 of the Schedule to secure the Landlord against loss or damage resulting from any Event of Default.”
          “Clause 15.4:
          (a) (landlord may make demand) If any Event of Default occurs, the Landlord may without prior notice to the Tenant demand payment under the Bank Guarantee in or towards making good any loss or damage sustained by the Landlord as a result of that event.
          (b) (Landlord to give details) If the Landlord demands payment under the Bank Guarantee:
              (i) (unpaid Rent) in respect of unpaid Rent or other moneys payable under this Lease, the Landlord shall give the Tenant a written statement of the amounts unpaid;
              (ii) (other Events of Default) in order to reimburse the Landlord for expenditure incurred in remedying any other default by the Tenant, the Landlord shall give the Tenant relevant details of that expenditure (including, where appropriate, copies of the invoices and receipts for the amounts expended).”

Background

13 The evolution of the dispute is evidenced by communications between the parties which, relevantly, include the following.

14 On 7 September 2006 the plaintiff provided to Elderslie a bank guarantee for the amount of $485,000 with the HSBC Bank Australia Limited (HSBC) pursuant to the Level 2 and Level 3 leases.

15 By email of 4 March 2009 from the defendant’s agent to the plaintiff it was confirmed that the leases terminated on 31 March 2009 and that the plaintiff was responsible for the carrying out of make good work prior to that date. It included:

          “We engaged the services of Australis Facilities Management to prepare a Terminal Schedule of Dilapidations to assist the lessor in this process and document the rectification works required. Please find attached a full copy of their report which is self explanatory. The lessor would consider, if appropriate, an amicable settlement of the works being carried out.”

16 The enclosed report (the Australis report) contained an estimate of costs to make good the leased premises in the total sum of $382,871.68. This included items for rent for two months of Level 2 and the warehouse in the sum of $121,766.32, and of Level 3 in the sum of $83,969.42, being a total for rent of $205,735.74. The balance of the estimate attributable to make good and related costs was the sum of $177,135.93.

17 By email of 18 March 2009 to the plaintiff, the defendant requested advice on the status of vacation of the building, and the required make good of the premises according to the dilapidation report by 31 March 2009.

18 By letter of 23 March 2009 to the defendant’s agent, the plaintiff noted receipt of the Australis report, and sent a copy of the make good proposal which it had obtained (the Altium report), being for the total sum of $42,800. For Level 2 the amount proposed was $7,500, and for Level 3 the amount proposed was $28,500. The letter included:

          “We believe that the proposal which we obtained correctly reflects our obligations under the Lease and intend to carry out work in accordance with this proposal.
          …
          You have suggested that we are liable to pay rent during the make good period. We note that the Lease ends on 31 March 2009 and that there is, in fact, no ongoing obligation to pay rent.
          We will proceed with removal of the fit commencing on Monday 31 March 2009.”

19 By letter of 24 March 2009 to the plaintiff, the defendant’s solicitors demanded the carrying out of the make good items referred to in the Australis report prior to vacating the premises on 31 March 2009. The letter included:

          “… Should your company fail to make good the premises by the 31 st March 2009 then our client will not be able to use the premises from 31 st March 2009 until the make good has been carried out and will suffer loss and damage.
          If the make good of the premises does not occur by the 31 st March 2009 the day you must vacate the premises then our client will call upon the securities held to reimburse it for loss or damage suffered as a result of your company’s failure to carry out the make good, as detailed in the dilapidation report by the termination date.”

20 By letter of 25 March 2009 the plaintiff’s solicitors informed the defendant’s solicitors that its obligations under the leases were correctly reflected in the proposal which it had obtained. It included:

          “…(c) In the absence of evidence that your client has a tenant ready to take possession of the premises, there is no meaningful way in which it can be said that your client will ‘not be able to use the premises’.
          …
          (e) You will no doubt have advised your client of its obligation to mitigate its damages for any alleged breach.
          (f) It is patently clear from the material available that having the work carried out by our client’s contractors, will involve significantly lower costs than the proposal obtained by your client.
          (g) Should your client in fact prevent our client from having access to carry out the required make good work, your client will have failed in its obligations to mitigate its damages.
          (h) We have advised our client that injunctive proceedings should be initiated to prevent application of the security provided for the lease other than in accordance with your client’s proper entitlements.
          You are asked to confirm that no action will be taken in respect of the securities without our client being given not less than fourteen (14) days’ notice of your client’s intention to do so.
          This letter will be quoted on the issue of costs if your client’s agreement in this regard is not received.”

21 By letter of 26 March 2009 to the plaintiff’s solicitors, the defendant’s solicitors denied that the work the plaintiff proposed correctly reflected its obligations. The letter included:

          “…3. The bottom line position is that our client is entitled under the lease to have vacant possession of the premises on 31 March 2009 on the basis that all required make good works had been completed by that date. If your client carries out the necessary works to the satisfaction of our client prior to 31 March, there will be no issue between the parties. If not, our client will look to your client for damages for whatever costs are incurred in completing the make good work and for any delay in having the premises available in a completed state after 31 March 2009.
          4. The injunctive proceedings threatened in your paragraph (h) are not appropriate, have no basis and will be strenuously resisted. If there is any access by our client to the security provided for the lease it would be in accordance with our client’s proper entitlements.
          5. Our client declines to provide the undertaking set out in the second last paragraph of your letter. We are instructed to accept service of any proceedings.”

22 On 31 March and 1 April 2009 the plaintiff carried out make good work at the premises. Further access was denied the next day.

23 By letter of 2 April 2009 to the defendant’s solicitors, the plaintiff’s solicitors acknowledged that the make good work had not been carried out prior to expiry of the term, and requested access to the premises for that purpose. They advised that the work for Level 2 and the warehouse had been completed at a cost of about $4,000. With regard to Level 3 they advised that, given access, the work could be completed within two weeks at a cost of about $40,000. They invited prompt inspection to verify the make good work on Level 2 and at the warehouse.

24 By letter of 14 April 2009 to the defendant’s solicitors, the plaintiff’s solicitors noted that no access had been given. It included:

          “We repeat that our client is ready and willing to carry out the make good work. Any loss which is suffered by your client in delaying the make good work must be borne by your client. Our client will not be responsible for any excessive costs which are incurred if your client in fact has the work performed by contractors who charge in excess of the amount for which our client could have completed the work. Any attempt to recover from our client “rent” beyond the last day of the lease will be resisted in the absence of any evidence that the Lessor suffered any loss of rental otherwise obtainable.”

25 By letter of 20 April 2009 to the plaintiff’s solicitors, the defendant’s solicitors advised that the “required work” would be carried out by the defendant, denied the cost of such was excessive, and said that it would seek to recover “… its costs of meeting (the plaintiff’s) make good obligations”.

26 By letter of 29 April 2009 to the defendant’s solicitors, the plaintiff’s solicitors sought a joint inspection of, and independent condition report for, Level 3 prior to commencement of make good work by the defendant. It included:

          “We would be pleased if you would formally confirm that your client will not present the Bank Guarantee without giving to our client not less than seven (7) business days written notice of its intention to do so. If a satisfactory response in this regard is not received within two (2) business days of the date of this letter this letter will be quoted in our client’s application for injunctive relief which will be lodged upon expiry of the two days notice.
          It is noted that as the make good work for level 2 and the warehouse has been completed and as it appears clear that there is no loss of rental income resulting from non completion of the make good work prior to the premises being vacated the only purpose for which the proceeds of the Bank Guarantee could be applied by the Lessor is the make good work in respect of level 3. The amount of the Bank Guarantee significantly exceeds any possible liability on our client’s part in this regard. Our client proposes that the present Bank Guarantee should be returned in exchange for a Bank Guarantee for an amount sufficient to cover the possible claim relating to level 3, which the Lessor could have. We would be pleased if your client would agree to an arrangement of this nature.”

27 By letter of 5 May 2009 to the plaintiff’s solicitors the defendant’s solicitors declined the request for a joint inspection of Level 3, and claimed the plaintiff had not met its make good obligations for Level 2 and the warehouse. The proposal in respect of the bank guarantee was rejected.

28 By letter of 7 May 2009 to the plaintiff’s solicitors, the defendant’s solicitors explained the relationship between the defendant and Elderslie, and advised they did not act for the receivers of Elderslie. They advised they would accept service of proceedings on behalf of the defendant.

29 On 25 May 2009 the plaintiff was informed by HSBC that at Elderslie’s request “… via PriceWaterhouseCoopers executed by Timothy Cuming …” a payment by bank cheque payable to Elderslie in the amount of $480,000 was made under the bank guarantee.

30 The letter of 27 May 2009 from the plaintiff’s solicitors to the defendant’s solicitors disputed entitlement to payment under the guarantee. It included:

          “4 Your clients are aware that there is a genuine dispute between the parties as to the value of the makegood obligations of our client under the Leases. In various correspondence to Altium, Elderslie then sought a payment in lieu of make good in excess of $400,000. This amount is close to ten times what Altium estimates the cost of completing the make good to be. Altium’s estimate is about $50,000 and does not include “lost rent” as a component.
          5. Our client repeats that on no view of the relevant obligations is our client liable to your clients in any amount approximating the amounts your clients have claimed to be entitled to.
          …
          8 We hereby request that Elderslie and PricewaterhouseCoopers (“PWC”) provide a written undertaking by return letter that they will not take any steps to deal further with the money received under the bank guarantee until steps are taken to resolve the question of whether a [sic] those companies had any proper legal basis for drawing down upon that guarantee, or whether doing so has placed them in breach of their contractual obligations. In particular, until this question is resolved, we require a written undertaking of those companies that they will not distribute, cause to distributed, or participate in or facilitate in any way the distribution of that money to any third parties, including to the creditors of Elderslie.”

      It threatened an application for an interlocutory injunction restraining Elderslie and PWC from dealing with the money if the undertakings were not given, and continued:
          “11 In the meantime, please immediately provide details of the basis on which your clients assert a right to draw down on the bank guarantee in the amount of $480,000. We refer you again in this regard to your client’s obligations under Clause 17.4(b)(ii) [sic] of the Level 2 lease and your client’s obligation under the Leases and at general law to, in any circumstances, draw down on the guarantee only in such amount as represents loss actually and demonstrably suffered.”

31 By letter of 28 May 2009 to the plaintiff’s solicitors, the defendant’s solicitors denied the allegations in respect of the undertakings sought. It included:

          ”2 … However, without any admissions whatsoever that the requested undertakings are reasonable or necessary, we are instructed to confirm that we are holding the cheque for $480,000 in favour of Elderslie Finance Corporation Limited and are instructed to retain this cheque in escrow. We are advised that our client does not intend to deposit the cheque until it becomes necessary to meet the costs of the make good works currently in progress and which are estimated to reach the invoice stage in four to six weeks’ time.”

32 In another letter of 28 May 2009 to the plaintiff’s solicitors, the defendant’s solicitors stated:

          “2.3 As to paragraph 4, our client denies that Elderslie sought a payment in lieu of make good in excess of $400,000. Please see paragraph 1.11 above and please forward us a copy of any correspondence alleged to seek such a payment. As to Altium’s estimate of $50,000, please see paragraph 1.12 above.
              The bank guarantee was drawn down for the benefit of our client to cover the following estimated amounts:
              Make good expenses $156,000;
              Cost of removing debris/rubbish $2,970;
              Cost of security guards $1,720.40;
              Compensation for rent foregone during make good period;

          …
          2.4 As mentioned in our letter of 28 May 2009, we are instructed to hold the cheque for $480,000 in escrow until receipt of accounts from Facilities Fix. We understand that Facilities Fix will send 4 interim accounts for approximately 25% each off of the total contract amount of $156,000. The final account will be sent on or about 4 June 2009 and the remaining accounts will be sent progressively over a period of six to eight weeks from 19 May 2009.

          2.5 Our client will undertake and advise a final reconciliation including:

              make good costs;
              rental compensation component;
              legal costs.

              Our client will then draw down on the bank cheque in respect of the amounts set out above and return the remaining funds to your client.”

33 The necessity for interlocutory relief was denied and notice was given that any application would be resisted.

34 By letter of 2 June 2009 to the defendant’s solicitors, the plaintiff’s solicitors repeated the demand for undertakings. It included:

          “1.2 Your client has proffered nothing more than a statement of current intention coupled with an estimate that it will be 3 - 4 weeks before relevant invoices will be received by your client. However, at such time as those invoices are received, as we understand the position from your letter, your client still purports to have a right to immediately pay out monies from the cheque it obtained by drawing down on the bank guarantee without further reference to our client.

          1.3 This position is unacceptable. On the evidence you have provided us, your client's calculation of its loss is unreasonable and well exceeds the amount of damages to which it may be entitled under the leases. The scope of work for which it has apparently contracted similarly exceeds the ambit of works necessary to remedy any breach of the leases for which our client may be responsible.

          1.4 On that basis, we apprehend the immediate threat that your client will at some point in the near future receive an invoice for an amount relating to work in respect of which it is not entitled to draw down on the bank guarantee, and yet apply the guarantee monies to payment of such invoice.
          …
          1.6 In addition, and in any event, we request that your client undertake not to deposit the cheque or otherwise take any step to deal further with the money obtained under the bank guarantee without giving our client 5 business days prior written notice of its intention to do so.

          1.7 We require those undertakings by no later than 5pm tomorrow. If those undertakings are not received, our client currently intends to seek urgent injunctive relief against your client dealing with the cheque obtained by drawing down on the bank guarantee. If our client is forced to take this action, it will also seek an order as to costs.

          1.8 Please also provide further clarification as to the terms upon which your client holds ‘in escrow’ the cheque obtained by drawing down on the bank guarantee.

          1.9 Our client repeats its assertion that your client has acted in disregard of our client’s rights and the clear intention expressed in the lease terms by drawing down almost the whole of the amount on the bank guarantee prior to sustaining actual liquidated amounts of loss. Our client intends to vigorously assert its rights in relation to this conduct.”


      The letter detailed the dispute as to the reasonable cost of the make good work, and contested the claim that the Australis report accurately reflected the extent of the plaintiff’s obligations, and denied any entitlement to rent.

      The letter also included:
          “3.1 The course pursued by your client of immediately drawing down almost the whole of the guarantee and then only subsequently seeking to justify the amount of the drawdown from invoices yet to be rendered is wholly contrary to the intention disclosed by a reading of clause 15.4 of the Level 2 and Warehouse Unit 3 lease. So much is evident upon a reading of that clause, and in particular the part extracted in our letter of 27 May 2009. This is particularly so when the relevant expenses are in dispute.”

35 By letter of 12 June 2009 to the plaintiff’s solicitors, the defendant’s solicitors confirmed their rejection of the plaintiff’s claim, and declined to provide the undertaking.

36 By summons filed 16 June 2009, returnable on 19 June 2009, the plaintiff commenced these proceedings, supported by the affidavit of Mr Kayvan Oboudiyat sworn 15 June 2009. The relief claimed included an order restraining the defendant from presenting, cashing, or otherwise dealing with the cheque issued by HSBC under the bank guarantee, or authorising Elderslie to do so; and a declaration that the drawing down of the amount of $480,000 under the bank guarantee was in breach of the Level 2 and Level 3 leases. Damages and costs were also claimed. By notice of motion also filed 16 June 2009, the plaintiff sought leave to join Elderslie as a second defendant, and sought orders similar to those in the summons.

37 Mr Oboudiyat was the executive vice chairman of the plaintiff. In his affidavit he deposed, inter alia, to the following:

          “44 Based on the facts and matters set out in paragraphs 25 to 29 above, and the failure of Elderslie and APGF (which I understand from Dibbs Barker’s letters dated 28 May 2009 to be currently holding the cheque) to provide undertakings that it will not deal with the cheque, I believe there is a real risk that APGF may cause or allow Elderslie to cash the cheque and distribute the monies thereby obtained without reference to Altium, in purported satisfaction of damages suffered, including in payment of third party creditors for work undertaken, in circumstances where it is the position of Altium that such amounts are not payable and do not represent loss for which Altium is liable under the leases.

          45 Based on the facts and matters set out in paragraphs 30, 31 and 36 to 43 above, I believe there is a real risk that Elderslie may cash the cheque and distribute the monies thereby obtained, in circumstances where any subsequent action against Elderslie for damages in respect of it so doing may be rendered nugatory due to its financial position.”

38 In accordance with the short minutes of order made on 19 June 2009, an interlocutory regime was established for the future conduct of the proceedings. Relevantly, an undertaking was given to the effect that the defendant would not pay monies under the bank guarantee to Elderslie.

39 The following orders were made:

          “3. That the cheque paid by HSBC to the defendant, pursuant to the Bank Guarantee, in the amount of $480,000 be paid into the trust account of the defendant’s solicitors, Dibbs Barker (the Retained Sum).

          4. Subject to order 5, below, Dibbs Barker undertakes not to release the Retained Sum to any person until the determination of these proceedings.

          5. Upon the defendant presenting invoices from tradespeople for rectification works to any of Level 2, Level 3 or the Warehouse of 12A Rodborough Road, Frenchs Forrest [sic] NSW 2086, Dibbs Barker is to pay said invoices on behalf of the defendant from the Retained Sum in a total amount not exceeding $150,000. Such payment shall be not [sic] amount to an admission by the Plaintiff that any amount paid is an amount for which the Plaintiff is liable, and shall be made without prejudice to the Plaintiff’s ability to dispute in these proceedings that the amount paid was an amount for which it was liable.”

40 It was also ordered that the matter proceed by way of pleadings according to a timetable. Costs were reserved.

41 By statement of claim filed 30 June 2009, the plaintiff sought declarations that, in drawing down on the bank guarantee, Elderslie was in breach of cl 1 of the Level 3 lease, and of cl 15 of the Level 2 lease. The pleading raised issues as to the proper construction of the provisions of each lease relevant to any failure by the tenant to remove fixtures and fittings, and to the conditions for calling on the bank guarantee. It included the following allegations as to the Level 3 lease:

          “19. As and from the conclusion of the lease on 31 March 2009 the plaintiff and the defendant have been in dispute as to the quantum of amounts due following the conclusion of the lease, which dispute is continuing.

          20. Prior to calling upon the Bank Guarantee, there had been:
              (a) no determination or resolution of the dispute;
              (b) no incurring of costs or expenses referred to in sub-paragraph 18(c) above by the defendant;
              (c) an election by the defendant to remove fixtures and fittings itself;
              (d) no demand made of the plaintiff by the defendant; and
              (e) no actual loss of rental income as referred to in sub-paragraph 18(d).

          21. By reason of the foregoing, the defendant’s calling upon the Bank Guarantee in respect of amounts claimed to be owing under the terms of the Level 3 Lease was in breach of the provisions in the Level 3 Lease for the calling on the Bank Guarantee. “

      Allegations as to the Level 2 lease were pleaded in similar terms in pars 24, 25 and 26.

42 By its defence filed 24 July 2009 the defendant denied the plaintiff’s claims. It admitted the bank guarantee was called upon and, in short, alleged that it was entitled to do so by reason of the plaintiff’s breaches of its make good obligations prior to completion.

43 By its cross-claim filed 24 July 2009, the defendant/cross-claimant claimed declarations that the plaintiff/cross-defendant had breached the terms of both the Level 2 and Level 3 leases, and damages. It also claimed the following:

          “4. An order that the plaintiff/cross-defendant pay the defendant/cross-claimants costs of and incidental to these proceedings on an indemnity basis.
          5. In the alternative to the preceding order, an order that the plaintiff/cross-defendant pay the defendant/cross-claimants costs of these proceedings.”

44 In pars 19 and 20 allegations of breaches of the Level 3 and Level 2 leases respectively in failing to make good and remove fittings were pleaded. Damages as a consequence of the alleged breaches of the Level 3 lease were claimed, particulars of which were subscribed to par 21 as follows:

      “Particulars


      (a) Costs and expenses incurred by APGF in rectifying the Level 3 Breaches.
      (b) Loss of rental income while the Level 3 Make Good Obligations are completed (estimated at 10 weeks) further particulars of which will be made available on completion of the Level 3 Make Good Obligations by APGF.
      (c) Legal costs and related expenses incurred in remedying Altium’s breaches of the Level 3 Lease further particulars of which will be made available in due course.”

      Similar particulars were pleaded in support of the claim for damages as a consequence of the alleged breaches of the Level 2 lease.

45 It was also claimed (par 25) that the defendant was entitled to be indemnified by the plaintiff for loss and damage suffered and expenses incurred as a result of the plaintiff’s breaches of the leases. It was alleged that such entitlement was pursuant to cl 9.2 and cl 11.3 of the Level 3 lease, and cl 12.4 and cl 13.4 of the Level 2 lease. The particulars in support of the claim were as follows:

      “Particulars

      (a) Costs and expenses incurred by APGF in rectifying the Level 3 Breaches and the Level 2/Warehouse Breaches.
      (b) Loss of rental income while the Level 3 Make Good Obligations and Level 2/Warehouse Make Good Obligations are completed (estimated at 10 weeks) further particulars of which will be made available on completion of those tasks.
      (c) Legal costs and related expenses incurred in remedying Altium’s default of the Level 3 Lease and the Level 2/Warehouse Lease further particulars of which will be made available in due course.
      (d) Legal costs payable to Dibbs Barker that are ongoing by reason of this proceeding the particulars of which will be provided prior to payment.
      (e) Legal and administrative costs and expenses that are ongoing by reason of these proceedings the particulars of which will be provided in due course.”

46 By its reply and defence to cross-claim, each filed 3 August 2009, the plaintiff contested the defendant’s claims, and also raised issues as to the proper construction of relevant provisions of the leases.

47 By notice of motion filed 3 August 2009 the plaintiff sought orders under UCPR 20.14 for the referral out of the whole proceedings to a referee. On 17 September 2009 the motion was dismissed, with costs, by his Honour Associate Justice Macready. The proceedings were stood over for directions before his Honour on 25 September 2009.

48 By letter of 30 September 2009 to the plaintiff’s solicitors, the defendant’s solicitors made a Calderbank offer in the following terms:


          “We wish to advise that we have been instructed to make an offer of settlement of $169,836.71 (principal offer) plus $75,000 (plus GST) in costs (costs offer) in full settlement of the above proceedings.

          The principal offer constitutes the cost of the make good works carried out in accordance with your client’s obligations under the leases of Levels 2 and 3 and the warehouse at 12A Rodborough Road, Frenchs Forest. Copies of the relevant tax invoices from Facilities Fix are enclosed with this letter.
          The offer is made pursuant to the authority Calderbank v Calderbank [1975] 3 All ER 333, and it is open for acceptance until 4pm on 9 October 2009.
          Please note that the costs offer is severable from the principal offer, such that your client is entitled to accept the principal offer without being bound to accept the costs offer.
          We reserve the right to tender this letter in respect of any issue of costs or interest arising from the further conduct of these proceedings …”

49 By letter of 2 October 2009 to the plaintiff’s solicitors, the defendant’s solicitors said:

          “For the avoidance of doubt we confirm that the offer contained in our previous correspondence would result in the payment to APGF Property Limited of:
          1. $169,836.71, being costs associated with making good the property (principal offer); and
          2. $75,000 plus GST, being legal costs and disbursements (costs offer).
          If accepted by your client the balance of these amounts would be paid from amounts currently held on trust. We note that $150,000 has already been drawn in respect of the principal offer.”

50 By email of 9 October 2009 the plaintiff’s solicitors replied to the offer as follows:

          “With regard to the without prejudice offer advanced by your client in the attached correspondence, please be advised that our client hereby accepts the principal offer but rejects the costs offer. Our client does so without making any admission that the amount constituting the principal offer was reasonably incurred by your client, but does so in order to avoid a prolonged and costly dispute.

          We therefore propose that your client pay our client the balance of the amount drawn down on the bank guarantee – being 480,000 less 169,836.71, being $310,163.29. Upon receipt of that amount by our client, both parties can then approach the Court to have the matter discontinued and to hear argument on the question of costs.”

51 By letter of 13 October 2009 to the plaintiff’s solicitors, the defendant’s solicitors replied as follows:

          “We refer to your email of 9 October 2009.

          We confirm your client’s acceptance of the principal offer put forward in our correspondence of 30 September 2009 and 2 October 2009 (principal offer).

          With respect to your proposal that our client pay your client the balance of the bank guarantee, being $480,000 less $169,836.71, we are instructed as follows:

          1. our client will agree to pay to your client the balance of the bank guarantee but for the sum of $85,000 in respect of the disputed claim for costs;
          2. the sum of $85,000 will be held in accordance with the orders made by his Honour Justice Gzell in Equity on 19 June 2009, pending determination of the costs claim; and
          3. the issue of costs to be determined in these proceedings prior to discontinuance.“

52 By email of 15 October 2009 to the defendant’s solicitors, the plaintiff’s solicitors stated that the proposal to retain the sum of $85,000 was unacceptable, and continued:

          “The terms of the leases provide no basis upon which your client can seek to retain that sum. The whole of your client’s legal costs were not incurred as a direct result of any breach of the leases by our client. Rather, they were caused by your client drawing down almost the whole of the bank guarantee in an amount to which it had no right, the subsequent proceedings which were instituted by our client in respect of that conduct, and your client’s choices as to how it conducted and continued that litigation. In any event, as set out in the Level 2 lease, “costs” (including legal costs) incurred by your client are a liquidated debt which are “payable” to your client by our client “on demand”, as distinct from “loss or damage” in respect of which an entitlement to draw down on guarantee amounts is given.
          Please confirm immediately that your client will advance to our client the whole of the balance of the drawn down amount of $480,000 less the principal sum agreed.”

53 In their letter of 28 October 2009 to the plaintiff’s solicitors, the defendant’s solicitors asserted:

          “…
          3. the terms of the leases are clear and unambiguous in your client’s liability for costs (including legal costs) incurred as a consequence of or in connection with any breach or default of your client;
          4. legal costs consequential to and in connection with your client’s failure to make good the property satisfactorily (or at all) are “demanded” by way of the cross-claim filed in these proceedings …

          We confirm that it is the defendant’s position that, in the absence of agreement for settlement on the issue of costs, the sum of $85,000 be retained in the controlled money account pending determination of arguments on those aspects.”

54 By letter of 4 November 2009 to the defendant’s solicitors, the plaintiff’s solicitors, after referring to the prior correspondence, stated:

          “…
          2. The parties settled these proceedings on the terms of the principal offer that was accepted on 9 October 2009, which acceptance was confirmed by you on 15 October 2009. The principal offer was expressly stated to be severable from the costs offer.

          3. Your reference, in the last paragraph of the letter of 28 October 2009, to an application to the Court to amend the timetable for filing and serving of evidence is misconceived. The whole of the matters arising from the dispute between the parties and the proceedings (including your client’s cross-claim) have been settled save for the question of costs. We require your client’s immediate confirmation that it agrees with that proposition. If your client disagrees with that proposition, we will relist the matter and seek orders giving effect to the settlement as agreed on the terms of the principal offer.

          4. By seeking to withhold the sum of $85,000 your client is attempting to unilaterally vary the terms of the agreement entered into by the parties. We renew our client’s demand that your client immediately pay over to it the balance of the $480,000 less the principal sum, being the amount of $310,163.29 …”

55 The letter of 6 November 2009 from the defendant’s solicitors to the plaintiff’s solicitors included the following:

          “2. We confirm our instructions as follows:

          (a) We refer to paragraph 3 of your letter dated 4 November 2009. Our client confirms that it considers the dispute settled in accordance with previous correspondence, save as to costs.
          (b) The sum of $85,000.00 will be retained in a controlled monies account until further order of the Court.
          (c) The balance of any amounts owing to your client will be forwarded to your client upon receipt of your client’s nominated bank account details.”

The principles

56 Discontinuance is provided for by UCPR r 12.1(1):

          “12.1
          (1) The plaintiff in any proceedings may, by filing a notice of discontinuance, discontinue the proceedings, either as to all claims for relief or as to all claims for relief so far as they concern a particular defendant:
              (a) with the consent of each other active party in the proceedings, or
              (b) with the leave of the court.”

57 The applicable costs rule is UCPR r 42.19:

          “42.19
          (1) This rule applies to proceedings that are discontinued by the plaintiff, as referred to in rule 12.1.
          (2) Unless the court orders otherwise or the notice referred to in rule 12.1 (2) otherwise provides, the plaintiff must pay such of the defendant’s costs as, at the date on which the notice of discontinuance was filed, had been incurred by the defendant in relation to each claim in respect of which the proceedings have been discontinued ...”

58 In Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 Hodgson JA (Tobias, Basten JJA agreeing) said:

          “53 It has been said that UCPR 42.19 does not give rise to a presumption that costs will be ordered against the discontinuing party: Fordyce v Fordham [2006] NSWCA 274; (2006) 67 NSWLR 497; Foukkare v Angreb Pty Limited [2006] NSWCA 335 at [65].
          54 However, like UCPR 42.20, UCPR 42.19 states what the order for costs is to be unless there is a discretionary decision to order otherwise: Australiawide Airlines Limited v Aspirion Pty Limited [2006] NSWCA 365 at [53]. This means there is an onus on the discontinuing party to make an application in respect of costs if it does not propose to pay the costs of the other parties: Foukkare at [65]. In my opinion, it also means that there must be “some sound positive ground or good reason for departing from the ordinary course”: Australiawide Airlines at [54].”

59 In Prodromos Anastasi Foukkare v Angreb Pty Limited [2006] NSWCA 335 Beazley JA reviewed the authorities as to how the court should approach the exercise of the discretion in the following passage:

          “66 In Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194 Hill J summarised the principles that have emerged from the case law as to how the Court should approach the exercise of discretion in respect of costs when there has been no hearing on the merits. He said (at 201):

              ‘(1) Where neither party desires to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order …

              (2) It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a Court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial … This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue.

              (3) In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them …

              (4) In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation …

              (5) Where the proceedings terminate after interlocutory relief has been granted, the Court may take into account the fact that interlocutory relief has been granted …’
          67 The same question was considered in Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; ex parte Lai Qin (1997) 186 CLR 622. McHugh J said at 624 –625:
              ‘In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd [1971] QWN 13, the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent Council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans.’ (Footnotes omitted)
          68 The principles discussed in these cases apply where a court is asked to make an order under UCPR 42.19. This was recognised in Fordyce v Fordham , where McColl JA (Beazley and Santow JJA agreeing) said, after pointing out the default orders provided for under the rules governing discontinuance (see UCPR 42.19):
              ‘84 [ UCPR 42.19 is] a relevant, but not determinative, consideration. Other relevant considerations were, as the primary judge concluded, usefully gathered in Lai Qin and Australian Security Commission v Aust-Home Investments Ltd & Ors (1993) 44 FCR 194, notwithstanding, as the discussion below reveals, that they were decided in a different statutory context.
              …
              87 Once it is recognised, however, that the costs discretion conferred by UCPR 42.19 … is unconfined, the matters referred to in the Lai Qin line of authority are plainly pertinent, although, again, not necessarily determinative.’”

60 The authorities suggest to me that the discretion conferred by r 42.19 will be enlivened where the plaintiff demonstrates some sound positive ground or good reason for departing from the ordinary course, and requires the court to make such order as it thinks just in the particular circumstances of the case.

61 The plaintiff submitted that the defendant should be ordered to pay its costs of the proceedings, including the costs of the interlocutory application, alternatively there should be no order as to costs. It submitted that it was entitled to a favourable costs order on grounds that the unreasonable conduct of the defendant precipitated the litigation and, in the circumstances, it had acted reasonably in commencing the proceedings.

62 It was put that the circumstances which necessitated the interlocutory application were evidenced by the correspondence between the parties, details of which are set out above. Emphasis was placed on the following.

63 In its letter of 23 March 2009 the plaintiff disputed the defendant’s requirement to carry out the make good work in accordance with the Australis report, and the suggested liability to pay rent in an amount of over $200,000 as indicated in the report. It said it intended to carry out the work in accordance with the Altium report at a cost substantially less than that proposed by the defendant. In response, the defendant insisted that the work it proposed be carried out by 31 March 2009, the termination date, failing which it would call on the securities to reimburse it for loss and damage suffered.

64 On 26 March 2009 the defendant refused the plaintiff’s request that it be given 14 days notice of any action to be taken in respect of the security. By letter of 22 April 2009 the plaintiff repeated its denial of liability for rent, asserted that the amount sought by the defendant was excessive, and that liability be limited to the reasonable costs of the make good work. Subsequently, it invited discussion as to the extent of work required. On 29 April 2009 the plaintiff asked for confirmation that it be given seven days notice of intention to draw on the bank guarantee, failing which an application for injunctive relief would be made. It sought agreement to a proposal that the bank guarantee be returned in exchange for one to cover the possible claim relating to Level 3 on the basis that the only outstanding work was for Level 3, and there had been no loss of rental income. The proposal was rejected.

65 Having been notified by HSBC that the draw down was by a cheque payable to Elderslie, on 27 May 2009 the plaintiff repeated its assertion to the defendant that the amount it claimed was excessive, and sought details of the basis upon which the amount of $480,000 was drawn down. It requested an undertaking that Elderslie would not deal with the proceeds or make any distribution to third parties, including creditors, pending resolution of the question as to any entitlement to draw down under the leases.

66 Without giving the undertaking, on 28 May 2009 the defendant’s solicitors advised that they were instructed to hold the cheque and retain it in escrow, and that it was not intended to deposit it until it became necessary to meet the costs of make good work then in progress, and yet to be invoiced. On the same day they also advised that the bank guarantee was drawn to cover, inter alia, make good expenses estimated at $156,000, and compensation for loss of rent during the make good period. It advised that the defendant would draw on the proceeds of the cheque for the payment of make good costs, compensation for rent, and legal costs, and then return the balance of remaining funds to the plaintiff.

67 On 2 June 2009 the plaintiff repeated its assertions that the amounts claimed were excessive, and the rent claim was baseless. It disputed entitlement under the leases to draw down almost the whole of the amount guaranteed prior to sustaining actual loss. It sought an undertaking not to deposit the cheque, or deal with its proceeds, without giving five days notice, failing which urgent injunctive relief would be sought.

68 On 12 June 2009 the plaintiff was informed that the undertaking was declined. On 16 June 2009 it commenced these proceedings.

69 In short, the plaintiff submitted that in circumstances where, from the outset, there was a clear dispute as to the reasonableness of the extent and costs of the make good work, and as to the claim for consequential loss of rent, and as to any entitlement under the leases to draw upon the bank guarantee where no actual loss or expense had been incurred, it would have been reasonable for the defendant to provide the undertakings requested (for example in the letter of 27 May 2009) and thereby avoid commencement of proceedings. In particular, it was put that it was unreasonable and provocative to have drawn down the amount of $480,000, rather than an amount equivalent to a reasonable amount for expenses incurred for make good work.

70 Further, it was submitted that the defendant’s failure to undertake not to deal with the cheque pending resolution of the disputed issues supported the plaintiff’s fear that there was a real risk that Elderslie would be permitted to deal with the cheque with third parties, including creditors, and thereby put the proceeds beyond recovery under any subsequent claim by the plaintiff for damages. It submitted that, taken overall, the plaintiff’s conduct in commencing the proceedings and in maintaining them, to the extent they were maintained was reasonable.

71 Accordingly, the plaintiff submitted that it had established the basis for the exercise of discretion under r 42.19 which warranted the making of a favourable costs order.

72 In opposing the plaintiff’s costs claims, the defendant sought an order that the plaintiff pay its costs of the proceedings, including the cross-claim on an indemnity basis, alternatively on the ordinary basis.

73 The claim for indemnity costs was based on cl 9.2 and cl 11.3 of the Level 3 lease, and cl 12.4 and cl 13.4 of the Level 2 lease which, in effect, obliged the plaintiff to pay the defendant’s costs and expenses for which the defendant became liable as a consequence of the plaintiff’s default or breach under the leases, for example, costs and expenses incurred in rectifying breaches. Relevantly, it was claimed that the legal costs of these proceedings were costs incurred by reason of the plaintiff’s default under the leases, thus entitling the defendant to indemnification for such costs.

74 The defendant submitted that the plaintiff was in breach of its obligation to make good prior to the termination date, the consequence of which was that the defendant drew down under the bank guarantee. As these proceedings concern the defendant’s entitlement to do so, it was put that these proceedings arose as a consequence of, or in connection with, the plaintiff’s breach, hence rendering the plaintiff liable under the relevant provisions of the leases to indemnify the defendant for its legal costs incurred in these proceedings. The claim was said to be in accordance with claims 4 and 5 under the cross-claim for orders for costs on an indemnity basis, alternatively on the ordinary basis, based upon the pleaded breaches of the plaintiff’s make good obligations under the leases.

75 It was argued that these claims under the cross-claim had not been resolved by the settlement which resulted from the acceptance by the plaintiff on 9 October 2009 of the defendant’s offer, which had been confirmed by the defendant on 13 October 2009. It was put that, as a matter of construction, the settlement agreement left open the claim for indemnity for legal costs of these proceedings as pleaded in the cross-claim. (The relevant allegations and particulars in support as pleaded in the cross-claim are referred to in pars 43, 44, 45 above.)

76 Alternatively, and in reply to the plaintiff’s claim, the defendant submitted that in the circumstances, the commencement and continuation of the proceedings by the plaintiff was unreasonable. Reliance was placed on the correspondence as evidence of this conduct. The defendant’s submissions are summarised as follows.

77 It was put that although warned by the defendant on 4 March 2009 to make good by the termination date, the plaintiff, in breach of the leases, did not do so. (Reference was also made to the email of 12 February 2009 by which the defendant’s agent advised the plaintiff that all make good requirements should be completed by the termination date, to which no response was made.) It was pointed out that the letter of the defendant’s solicitors of 28 May 2009 informed the plaintiff of the defendant’s intention not to deposit the cheque until it became necessary to pay for make good works then in progress in about four to six weeks time. It was put that, acting reasonably, the plaintiff would have accepted that there was no threat to deal with the cheque within that period, and the cheque would be secure without the undertaking sought. It was argued that the defendant had acted hastily, and unreasonably, in approaching the court on 16 June 2009, having regard to the matters canvassed in the preceding correspondence including the plaintiff’s threats on 25 March 2009 and 29 April 2009 to apply for injunctive relief which were not acted upon.

78 The defendant submitted that, in truth, the dispute concerned the make good costs and not rent as shown, for example, in the letter to the plaintiff’s solicitors of 20 April 2009 which referred only to make good costs. It put that the defendant had merely reserved its position on rent, and no issue as to rent arose until the cross-claim was filed. It was put that the defendant was entitled to call on the bank guarantee in the prevailing circumstances where, in effect, the plaintiff had admitted that work was required, and expenditure would be incurred. On the defendant’s construction of the lease, it said that it was entitled to draw down for any amount of expense or loss it had incurred or might incur, particularly in circumstances where no offer of payment had been made by the plaintiff and the defendant was likely to be out of pocket.

79 Furthermore, given that the plaintiff had been advised on 7 May 2009 that the defendant was the manager of the trust, the plaintiff’s fear that the cheque would be improperly dealt with was baseless.

80 The defendant further submitted that the outcome of the proceedings established that it had emerged as the victor. It was pointed out that the defendant’s estimate on 9 April 2009 for make good costs was $170,655 against the plaintiff’s estimate of $42,800. As the matter was ultimately settled to allow the sum of $169,836.71 to be released to the defendant to pay such costs, the overall success in the proceedings was with the defendant.

81 Accordingly, having regard to what was said to be the unreasonableness of the plaintiff in commencing and continuing the proceedings, and to their outcome, it was submitted that the exercise of discretion required that the plaintiff be ordered to pay the defendant’s costs of the proceedings, including the costs of the cross-claim.

82 In reply to the claim for indemnity under the leases, the plaintiff submitted that this, as with all other claims under the leases, had been resolved upon acceptance of the principal offer. All that remained open for determination, at the court’s discretion, was the question of costs of these proceedings.

83 It was put that had it been otherwise it may be expected that the parties would have expressly reserved for later determination the issues under the cross-claim which asserted a contractual right to indemnity, and the existence of any breach of the relevant provisions of the leases.

84 Alternatively, it was put that under the applicable provisions of the leases, the indemnity extended only to costs incurred in consequence of a breach, of which there was no evidence. Further, it was put that had there been a breach it had been embraced in the settlement, alternatively no breach had been established in evidence and, accordingly, the claim was without foundation.

Determination

85 I turn first to the defendant’s claim for indemnity costs, the outcome of which turns on the proper construction of the settlement agreement.

86 The offer of 30 September 2009 was expressed to be a Calderbank offer, without prejudice save as to costs. Its terms are set out in par 48 above. The basis of the principal offer was specified, and the supporting invoices were provided. The costs offer was for the amount of $75,000, proposed without elaboration.

87 A Calderbank offer is a well understood means of making an offer of settlement. Had this offer not been accepted, and the case proceeded to trial with an outcome more favourable to the defendant than one resulting from acceptance of the offer, it would have afforded the defendant the basis for seeking a costs advantage. The relevant principles were referred to in Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 by Ipp JA (Mason P, McColl JA agreeing):

          “7 … Calderbank offers do not give rise to a prima facie presumption in favour of indemnity costs if the offer is not bettered: Leichhardt Municipal Council vGreen [2004] NSWCA 341. The matter remains one for the court’s discretion ( Jones v Bradley (No 2) [2003] NSWCA 258), the exercise of which depends on all the circumstances of the case: SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 (at [37] per Giles JA). It is well established that a Calderbank offer will not justify an indemnity costs order unless its rejection was unreasonable : Jones v Bradley (No 2) ; SMEC Testing Services Pty Ltd vCampbelltown City Council ; Leichhardt Municipal Council v Green ; Brymount Pty Ltd v Cummins (No 2) [2005] NSWCA 69 (at [14] per Beazley JA); Russell vEdwards (No 2) [2006] NSWCA 52 (at [6] to [7]).”

88 It is to be assumed that the defendant’s solicitors, when making the offer, and the plaintiff’s solicitors, when accepting the principal offer and rejecting the costs offer, acted with these principles in mind. The defendant’s letter contained nothing to indicate that the costs offer was for a sum for indemnity costs of the proceedings under the relevant provisions of the leases as claimed in the cross-claim, or to indicate that the amount was other than for costs on the ordinary basis. With regard to the principles referred to, both parties may be taken to have intended that non-acceptance of either offer would not automatically lead to an indemnity costs order for the defendant. In other words there was nothing to indicate that the parties intended that the principles relevant to the costs consequences of non-acceptance of a Calderbank offer did not apply.

89 The offers were expressed in unambiguous terms to be in full settlement of the proceedings which, self evidently, included the issues under the cross-claim. Had it been intended to except from settlement the claim for indemnity costs raised in the cross-claim, in my opinion express provision for such exception was required. In my opinion a commonsense construction of the letters of offer and acceptance establish that the rejection of the costs offer left outstanding only the question of costs of the proceedings to be determined in the exercise of the court’s discretion in the usual way. Acceptance of the principal offer put an end to all other claims in the proceedings.

90 Accordingly, the defendant’s claim for indemnity costs must be rejected.

91 I turn now to consideration of the costs order to be made under r 42.19. Essentially, the determination of the competing claims for costs requires, on the one hand, an assessment of the reasonableness of the defendant in refusing to give the undertakings sought by the plaintiff prior to the commencement of proceedings and, on the other, the reasonableness of the plaintiff in commencing them.

92 As the correspondence has been set out earlier, it is unnecessary to recite the details. It demonstrates that from 23 March 2009 until the interlocutory orders were made on 19 June 2009 there was a real dispute as to the extent and cost of the make good work, and as to the validity of the defendant’s claim for rent, and as to the entitlement of the defendant to draw down under the bank guarantee for the amount of $480,000, or at all.

93 On 29 April 2009 the plaintiff, inter alia, sought agreement to a proposal that the bank guarantee be returned in exchange for one to cover the possible claim relating to Level 3 on the basis that the only outstanding work was for Level 3, and there had been no loss of rental income. The proposal was rejected.

94 On 25 May 2009 the defendant drew down under the bank guarantee having given no notice as to when, or for what amount it would do so, or of particulars in support of the amount drawn down. This action prompted the plaintiff’s response on 27 May 2009 in which it repeated the matters of which it said there was a genuine dispute. The plaintiff sought an undertaking that there be no further dealing with the proceeds of the cheque pending resolution of the disputed question as to the legal basis upon which the bank guarantee was drawn down. The letter advised that if the undertaking was not provided by 4pm next day, application for interlocutory relief would be made.

95 The effect of subsequent letters from the defendant, including the letter of 12 June 2009, was to inform the plaintiff of the intention to apply $156,000 progressively towards items which included make good costs and compensation for rent, and to decline to provide the undertakings.

96 On 19 June 2009, when the matter was first before the court, the defendant provided an undertaking in terms substantially similar to those earlier sought, and consented to orders the effect of which was to preserve the proceeds of the cheque pending determination of the proceedings subject to the release of monies not exceeding $150,000 to meet make good costs.

97 In my assessment, the regime provided by these orders was tantamount to the arrangement proposed by the plaintiff in its letters of 22 April, 27 May, and 2 June 2009. The proposals had allowed for payment for make good work in the amount claimed by the defendant or, at least, to meet costs actually incurred. The draw down by Elderslie confronted the plaintiff with a fait accompli which put Elderslie in a position to use the proceeds of the cheque as it, or the liquidator, saw fit, including for the payment of disputed amounts of make good costs yet to be invoiced. I am satisfied that, in the circumstances, the proposals were reasonable.

98 It is difficult to see what, if any, inconvenience would have been suffered by the defendant had it accepted any of the proposals. I am satisfied that the defendant’s conduct in rejecting them, coupled with an inflexible insistence that it was entitled to do what it did, was unreasonable in the circumstances, and precipitated the commencement of proceedings which could have been avoided by acceptance. Furthermore, in my opinion, reasonableness required the defendant to make some evaluation of the plaintiff’s case as presented in the correspondence. Had it done so, it should have recognised that the plaintiff’s claims were at least arguable, and, accordingly, there was a real likelihood that the plaintiff would be successful in obtaining an order to preserve the status quo which restrained Elderslie from dealing further with the proceeds of the cheque pending determination of the dispute. In my opinion its failure to recognise the plaintiff’s likely prospects of success and to take appropriate steps to avoid the litigation is further indication of unreasonable conduct on its part. It was reasonable for the plaintiff to commence the proceedings in order to preserve the proceeds of the cheque pending determination of the dispute.

99 As for the defendant’s submission that, ultimately, it was the victor, my opinion is that it must be rejected having regard to the undertakings and consent orders of 19 June 2009. As I have said, the arrangement so reached was to substantially the same effect as the plaintiff had earlier proposed.

100 Accordingly, the plaintiff has demonstrated good reason for departure from the ordinary course under r 42.19. I generally accept the plaintiff’s submissions. The costs order should relate to the whole of the proceedings, including the interlocutory application and the cross claim. It would be artificial and unjust to treat them separately. The referral proceedings which were dismissed with costs on 17 September 2009 are not included.

101 In my opinion, the proper exercise of discretion requires an order that the defendant pay the plaintiff’s costs of the proceedings.

Orders

102 It is ordered that:


      (1) Leave be granted to the plaintiff to discontinue the proceedings by filing a notice of discontinuance.

      (2) Leave be granted to the defendant to discontinue the cross-claim by filing a notice of discontinuance.

      (3) The defendant pay the plaintiff’s costs of the proceedings, including the cross-claim .

      (4) The defendant pay the plaintiff’s costs of the costs application.

      **********
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Most Recent Citation
Chang v Tjiong [2011] NSWSC 1614
Cases Citing This Decision

1

Chang v Tjiong [2011] NSWSC 1614
Cases Cited

11

Statutory Material Cited

1

Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32
Foukkare v Angreb Pty Ltd [2006] NSWCA 335
Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194