Arhanghelschi v Ussher (No 2)
[2013] VSC 354
•16 July 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2013 01261
| IN THE MATTER OF BASE IMAGING GROUP PTY LTD (ACN 138 302 235) BETWEEN: DAN IURII ARHANGHELSCHI and CLADWYN PTY LTD | Plaintiffs |
| v | |
| RICHARD MILNE USSHER & ORS | Defendants |
| MEAGHAN LIDDLE & ORS | Plaintiffs by Counterclaim |
| v | |
| CLADWYN PTY LTD | Defendant by Counterclaim |
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JUDGE: | FERGUSON J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 May 2013 |
WRITTEN SUBMISSIONS: | 24, 29 May, 11 July 2013 |
DATE OF JUDGMENT: | 16 July 2013 |
CASE MAY BE CITED AS: | Arhanghelschi v Ussher (No 2) |
MEDIUM NEUTRAL CITATION: | [2013] VSC 354 |
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PRACTICE AND PROCEDURE – Costs sought on indemnity basis – Offer made under the principles in Calderbank v Calderbank [1975] 3 All ER 333.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M Heaton QC with Mr T Moloney | Compact Commercial Law |
| For the Defendants | Dr T McEvoy | Herbert Smith Freehills |
HER HONOUR:
Introduction
On 16 May 2013, the defendants obtained judgment in their favour. These reasons should be read in conjunction with the reasons for that judgment.[1] The essence of the decision was that the defendants were entitled to act as they did in requiring the plaintiffs, Cladwyn Pty Ltd and Dr Arhanghelschi, to cease their involvement in the Base Imaging Group radiology business with a nominal payment to be made for their shares in Base Imaging Group Pty Ltd (“BIG”) and their units in the Base Imaging Group Unit Trust (‘Trust’). The defendants now seek part of their costs on an indemnity basis. They rely on a letter that was sent before trial offering to settle the matter under the principles stated in Calderbank v Calderbank.[2] In broad terms, the defendants offered to settle the dispute on the basis that the plaintiffs would relinquish their claims (with no order as to costs) and cease their involvement in the radiology business. In exchange, they would receive $180 000 with Dr Arhanghelschi to be released from the restraint of trade provisions that would otherwise apply.
[1]Arhanghelschi v Ussher [2013] VSC 253. Terms defined in the earlier reasons for judgment have been used in these reasons.
[2][1975] 3 All ER 333.
For the reasons which follow, I would order that the plaintiffs pay the costs of the defendants on a standard basis until the date the Calderbank offer was made and thereafter on an indemnity basis.[3]
[3]See Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 63.28.
Legal principles
In Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority(No 2),[4] the Court of Appeal observed that the policy objectives of the Calderbank principles are:
[4](2005) 13 VR 435.
(1)To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff’s real claim which can be placed before its opponent without risk that its ‘bottom line’ will be revealed to the court;
(2)To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and
(3)To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances that party should ordinarily bear the costs of litigation.[5]
[5]Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 cited with approval in respect of Calderbank offers in Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435, [21].
Bearing in mind those principles, where a Calderbank offer has been made, the Court takes into account a number of matters. In Hazeldene’s Chicken Farm, the Court of Appeal said:
The discretion with respect to costs must, like every other discretion, be exercised taking into account all relevant considerations and ignoring all irrelevant considerations. It is neither possible nor desirable to give an exhaustive list of relevant circumstances. At the same time, a core to considering a submission that the rejection of the Calderbank offer was unreasonable should ordinarily have regard at least to the following matters:
(a)the stage of the proceeding at which the offer was received;
(b)the time allowed to the offeree to consider the offer;
(c)the extent of the compromise offered;
(d)the offeree’s prospects of success, assessed as at the date of the offer;
(e)the clarity with which the terms of the offer were expressed; and
(f)whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting the offer.[6]
[6]Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435, [25].
The circumstances in which the offer was made
This proceeding commenced on 15 March 2013 and through an expedited timetable for interlocutory steps was tried and determined by 16 May 2013. Much happened in that two‑month period. On the day that the proceeding began, the plaintiffs sought interlocutory relief restraining the defendants until the determination of the proceeding from redeeming or cancelling any of the units of Cladwyn in the Trust. The defendants failed before the judge in the Practice Court in seeking interim relief. Later that day, the plaintiffs succeeded on appeal and orders were made restraining the defendants until determination of the proceeding. The Court of Appeal referred the proceeding to mediation.
On 21 March 2013, the relevant defendants offered to settle the dispute on the basis that Cladwyn and Dr Arhanghelschi would cease to be involved in the Base Imaging Group radiology business other than as a consultant radiologist with remuneration of $600 000 per annum and 10 weeks’ annual leave. The offer was open for acceptance until noon the following day. The letter stated that the time for acceptance was set having regard to the mediation ordered by the Court of Appeal. The offer was rejected.
A mediation took place on 4 April 2013. Each party prepared a position paper and the defendants provided to the plaintiffs a draft defence and counterclaim that was substantially the same as the pleading that they relied upon at trial. No settlement was reached at the mediation.
On Friday, 26 April 2013, the defendants made their Calderbank offer upon which they rely. As I have said above, in essence, the defendants’ offer required Cladwyn and Dr Arhanghelschi to give up their claims (with no order to be made as to costs) and to cease to be involved in the radiology business. In part this would have entailed Dr Arhanghelschi providing a signed share transfer in relation to the shares he held in BIG and Base Imaging Services Pty Ltd (“BIS”) and resigning from his position as a director of both companies. At the time, BIS was a shell company – it had no assets and did not operate in any way.[7]
[7]BIS was incorporated in June 2012. A couple of months before the Calderbank offer was made, the doctors (as directors of BIS) decided that BIS should take a lease of a property in contemplation of opening an outpatient centre. Dr Arhanghelschi and one of the other directors held the view that the property should remain undeveloped for some time. BIS has now entered into the lease but so far, the property has not been developed and no outpatient centre operates from it.
In exchange for giving up their claims and interest in BIG, the Trust and BIS, Cladwyn and Dr Arhanghelschi were to be paid a total of $180 000 in four instalments over four months, with the last instalment to be paid on 15 September 2013. In addition to that payment, Dr Arhanghelschi was to be paid for services that he had provided in April 2013 and up until the date of his resignation. Finally, the defendants offered to waive the restraint of trade clause contained in the Unitholders Deed.
The offer remained open for acceptance until 4.00 pm on Wednesday, 1 May 2013. The letter made it clear that if the offer was not accepted, the letter would be relied upon in support of an application for the type of order that is now sought by the defendants. The letter also set out why the defendants’ solicitors were of the view that it would be unreasonable for the plaintiffs to reject the offer.
On the day the Calderbank offer was to expire, the parties attended a further mediation before an Associate Judge. The mediation was terminated at about 2.30 pm. The Calderbank offer remained open for acceptance until 4.00 pm that day. It was not accepted.
As scheduled, the trial began the following Monday, 6 May 2013.
Was it unreasonable for the plaintiffs not to accept the offer?
The plaintiffs submitted that, in the circumstances, it was not unreasonable for them to refuse the offer that was made. They pointed to the following circumstances:
(1)the offer was made on the Friday between the Thursday Anzac Day public holiday and the weekend;
(2)there was little time to accept the offer before 4.00 pm on the following Wednesday, 1 May 2013;
(3)the offer was made at a time when mediation before the Associate Judge was pending and scheduled for 1 May 2013;
(4)taking into account public holidays, school holidays and the compressed timetable, there were only 30 business days to attend to all interlocutory processes and preparation for trial;
(5)the final valuation of the radiology business was not available for consideration until 1 May 2013 — the business was valued at $6.35 million and on a pro rata basis the value to be attributed to the plaintiffs’ interest in the business would have been approximately $1.27 million. The offer of $180 000 in circumstances where Dr Arhanghelschi would not have been able to work for Ballarat Health Services meant that it was not unreasonable for him to regard the offer as paltry and hardly genuine;
(6)they had no way of assessing the value of the ‘BIS business’ and as it was part of the settlement they were unable to make a commercial decision in respect of this aspect of the offer;
(6)discovery issues were still outstanding as at 1 May 2013;
(7)there were compounding personal circumstances of the plaintiffs in the period from commencement of the proceeding until the date for acceptance of the offer expired. Those circumstances included Ms Kelly Wilson, who is a director of Cladwyn and wife of Dr Arhanghelschi, having to attend her own medical appointments and tests for a potentially serious medical condition as well as having to support her aunt who was diagnosed with a significant medical condition, and dealing with the death of an uncle on 1 May 2013. In addition, Dr Arhanghelschi and Ms Wilson were both involved with the intense case preparation necessitated by the short interlocutory timeframe for the proceeding and with matters concerning their immediate family. Finally, Dr Arhanghelschi and Ms Wilson had taken on a mortgage for a holiday house, which was to settle in the last week of March 2013, and the possibility of being without income in the context of the pending settlement of the purchase exacerbated the stress under which they had to prepare for the hearing in this matter;
(8)Dr Arhanghelschi worked on Friday 26 April, Monday 29 April and Tuesday 30 April 2013, before the mediation scheduled for Wednesday 1 May 2013. That work is extremely demanding such that it would be unreasonable to expect him to have the emotional and intellectual resources and to make significant and difficult decisions in the timeframe imposed by the defendants for acceptance of the offer in addition to the necessary preparation of the case, bearing in mind the personal circumstances set out above;
(9)at the time that the offer expired, there was no reason that had been advanced by the defendants for the actions which they had taken;
(10) an objective bystander at the time would regard the proposed exclusion of Dr Arhanghelschi and Cladwyn without reasons advanced from a business worth $6.35 million and from being able to practise in the area as unreasonable and capricious, and it was not unreasonable to regard the prospects of success as good or at the least, very reasonable.
In all the circumstances, the plaintiffs submitted that with so many variables unidentified at the time of the offer, the course to proceed to trial was not unreasonable and the rejection of the offer was appropriate in circumstances where the defendants had clearly not ‘put all of their cards on the table’ as would be the case in a more regular interlocutory process. They submitted that this was not a case where the defendants’ position was manifestly bolstered by practice and authority, as was the case in Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2).[8] They submitted that the arguments on the construction of the Unitholders Deed were not ‘cut and dried’, and there were clear and substantial arguments in support of each side.
[8](2005) 13 VR 435.
Finally, the plaintiffs contended that they had undertaken much of the preparation work for the case themselves and worked closely with their lawyers to contain costs. In contrast, they submitted that the defendants had retained a top‑tier firm and were able to distributively share the costs. The plaintiffs submitted that the ordering of indemnity costs would effectively prevent any possibility of them exercising any rights of appeal. All of this would be in circumstances where they were excluded from the radiology business without notice.
Dealing first with the timing of the offer and the period for acceptance, it seems to me that in the context of this matter, the time given to the plaintiffs to consider the offer was reasonable. I accept that Dr Arhanghelschi and Ms Wilson were closely involved in the preparation of their case and that they devoted significant time and attention to that. I also accept that the pressure of case preparation on them was likely high given the truncated timetable for completing interlocutory steps. However, that does not make it reasonable for them to refuse offers that ought be accepted. Further, even if one discounts how much time was available to consider the offer taking into account these matters and that the offer was made the day after a public holiday and the day before the weekend, there was nevertheless more than a couple of days when the offer was open for acceptance. In particular, the offer was made before the second mediation and the time for acceptance expired after it concluded. One would expect that throughout the mediation the plaintiffs’ attention would have been focused on whether a settlement could be reached taking into account not only any offers made during the mediation but also taking into account that there was the Calderbank offer on the table.
In my view, as at 1 May 2013, the prospects of the plaintiffs’ success in their claim were low. The correspondence from the solicitors for the defendants clearly set out the reasons why the claim must fail. Bearing the weakness of the plaintiffs’ case in mind, the fact that a valuation of the business was not available and that, when received, it valued the business at $6.35 million is irrelevant to the reasonableness of the plaintiffs’ conduct. If the case is weak and only has low prospects, then the likelihood of receiving any amount (no matter the value of the business) must also be low. If, as resulted here, there is a finding that there was no entitlement at all, the valuation becomes irrelevant. As to the inclusion of BIS as part of the offer, Dr Arhanghelschi is a director of that company. He must have known that it had no business nor assets and cannot have been worth much (if anything). Whilst Ms Wilson and Cladwyn may not have been able to assess the value of BIS, they have no financial interest in that company.
On the other hand, although their prospects of success were low, acceptance of the offer would have seen the plaintiffs receive $180,000. Dr Arhanghelschi would also have been released from the restraint of trade restrictions to which he was subject. This may have benefited him to some degree. However, I accept for the purposes of the application for costs, that the benefit may have been more apparent than real if he was not able to work for Ballarat Health Services.
As to outstanding discovery issues, it was unlikely that additional documents would affect the outcome of the trial because the focus of the case was on the construction of the terms of the Unitholders Deed (extraneous documents not being relevant to determination of that issue) and whether there was anything oppressive in relation to the exercise of rights under it. That latter issue centred on the exclusion of the plaintiffs from the radiology business for a nominal payment, and it is difficult to conceive of documents that would materially affect the merits of that part of the case or assist the plaintiffs in assessing the strength of their case. Further, in this case, although discovery was not complete when the offer was made, the critical documents were available to Dr Arhanghelschi at that time. There was only one document relied upon by him at trial that was not in his possession at the date that the offer was made and the case did not turn on that document.
There is no doubt that Dr Arhanghelschi and Ms Wilson had difficult personal circumstances to cope with throughout the period from the commencement of the litigation and the date when the Calderbank offer expired. However, it is a fact of litigation that it is stressful for litigants and that the pressure it places on parties is more frequently than not compounded by other personal circumstances. Despite the difficult circumstances of the plaintiffs in this case, (including the demanding nature of Dr Arhanghelschi’s work) I am not persuaded that it was not unreasonable for them to refuse the offer. This is particularly so when, as I have outlined above, the offer remained open for acceptance throughout the course of and following the failed second mediation. Further, I also take into account that the plaintiffs were well represented by senior and junior counsel and solicitors throughout the proceeding and at the mediations. The plaintiffs were not left to consider the offer without the benefit of legal representation.
It is irrelevant that at the time of the offer the defendants had not advanced any reason for why they had taken the action that they did. As I have already found,[9] they were under no obligation to provide reasons and the failure to do so does not have any effect on the reasonableness of the plaintiffs’ conduct.
[9]Arhanghelschi v Ussher [2013] VSC 253.
Finally, it seems to me that the comparison between the position in which the plaintiffs find themselves in respect of costs and that of the defendants (including the firm they retained and the defendants’ ability to share the costs between them) is irrelevant. If the costs cannot be agreed, they will be taxed with the benefit of the protections that the system of taxation affords. The effect of a costs order on the ability of the plaintiffs to appeal, is not a matter for consideration on this application. I do note, however, that an order for costs will not prevent the plaintiffs from bringing any application they may be advised to make to the Court of Appeal in respect of the effect of the order on their ability to prosecute an appeal.
Conclusion
In conclusion, in my view, the failure of the plaintiffs to accept the offer made to them was unreasonable. The offer was clear. It was a genuine offer to settle with a real compromise of payment of a not insubstantial sum of money. The removal of the restraint of trade barrier may also have benefited Dr Arhanghelschi (although I do not place much weight on this)[10]. The offer made it clear that if it was not accepted, the plaintiffs would face an application for costs on an indemnity basis. The plaintiffs’ prospects of success were low, and the defendants (through their lawyers) had told the plaintiffs why the claim would not succeed. The offer was made at a time when an earlier offer had been rejected, there had been one failed mediation and a further mediation was to take place. The offer was still open for acceptance after that second mediation had concluded. Whilst the time for acceptance was not lengthy, it was not unduly short, particularly when regard is had to the truncated timetable for interlocutory steps and the impending trial. Throughout, the plaintiffs were represented by counsel and solicitors. In the circumstances, it is appropriate that the defendants have their costs on a higher basis after the date of the Calderbank offer.
[10]See [17] above.
The orders will be:
1.The Plaintiffs and Defendant by Counterclaim pay the costs of the proceeding of the Defendants and Plaintiffs by Counterclaim, such costs to be assessed:
(a)on a standard basis in respect of the costs incurred in the proceeding up to and including 26 April 2013, including the costs of the application before Justice Beach on 15 March 2013 and of the application to the Court of Appeal on 15 March 2013; and
(b)on an indemnity basis in respect of the costs incurred in the proceeding after 26 April 2013.
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