Bakovski v Lenehan (No 2)

[2014] NSWSC 739

Supreme Court

New South Wales

Medium Neutral Citation:

Bakovski v Lenehan (No 2) [2014] NSWSC 739

Hearing dates:

On written submissions

Decision date:

02 June 2014

Jurisdiction:

Common Law

Before:

Hall J

Decision:

(1) Judgment entered in favour of the plaintiffs against the first and second defendants in the sum of $444,772.92.

(2) The first and second defendants are to pay the plaintiffs' costs of the proceedings as against the first and second defendants, such costs to be assessed:

(a) On the ordinary basis in respect of the period up to and including 21 February 2013; and

(b) On the indemnity basis in respect of the period from 22 February 2013 to the date of judgment.

Catchwords:

COSTS - Calderbank offer - defendants unreasonably refused plaintiffs' offer - costs awarded on an indemnity basis from the date of offer

Cases Cited:

Bakovski v Lenehan [2014] NSWSC 671
Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298
Jones v Trad (No 3) [2013] NSWCA 463
Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344
SMEC Testing Services Pty Limited v Campbelltown City Council [2000] NSWCA 323

Category:

Costs

Parties:

George Bakovski (First Plaintiff)
Vera Bakovski (Second Plaintiff)
Norman Rutherford Lenehan t/as Lenehan & Co (First Defendant)
James Socrates Arkoudis (Second Defendant)

Representation:

Counsel:
E Finnane (Plaintiffs)
G Curtin SC (Defendants)
Solicitors:
Uther Webster & Evans (Plaintiffs)
Gilchrist Connell (Defendants)

File Number(s):

2010/269931

Judgment (ex tempore)

1. In this matter I delivered judgment on 27 May 2014: Bakovski v Lenehan [2014] NSWSC 671.

1. I made provision in the judgment for further submissions to be made in relation to matters concerning interest calculations and costs.

1. I have had the benefit of written submissions on behalf of Mr Finnane of Counsel who appeared for the plaintiffs and Mr Curtin SC who appeared for the defendant.

1. The plaintiff's solicitor, Mr Maksisi, has sworn an affidavit in these proceedings on 30 May 2014. The affidavit was read on the application on the issues this morning, in particular, going to the question of costs. That affidavit was read without objection and Mr Maksisi was not required for cross-examination on his affidavit.

1. I can say at the outset that the affidavit, I think, has been acknowledged, certainly it is my assessment, as being a model affidavit in terms of endeavouring to provide the Court with detail and analysis of costs with full annexures which I have had the opportunity of considering. The affidavit material has assisted in crystallising the matters that need to be determined so far as costs are concerned.

1. There is no issue as to the calculation in respect of the judgment sum that is to be entered with interest calculations made up until today, that is, judgment in the amount of $444,772.92 as set out in paragraph [1] of the draft short minutes entitled "Judgment".

1. Accordingly, I propose to enter judgment in that amount in favour of the plaintiff against the first and second defendants, and I do so.

1. That leaves the question of costs and the proposed orders set out in paragraph [2] of the draft short minutes to which I have referred which seeks costs on an ordinary basis up to 21 February 2013 and thereafter, that is from 22 February 2013, on an indemnity basis.

1. There is no issue that the plaintiffs are entitled to a costs order in respect of the proceedings against the first and second defendants. The substantive issue that has been dealt with this morning relates to the second costs order sought, that is, the costs on an indemnity basis from 22 February 2013.

1. It is necessary to set some background to the question of the Calderbank offer to which I will come in a moment.

1. Annexed to Mr Maksisi's affidavit are materials from which he has provided an analysis of the legal costs divided into three periods. The first is 21 April 2010 to 22 August 2012 which has been estimated at $247,083.27. That is a figure to which an amount of fifty per cent has been applied as an apportionment, made on the assumption stated in the affidavit as representing the amount referable to the claim by the plaintiffs against the first and second defendants separate from the work done in respect of the claim against the fifth defendant in that period.

1. The second period relates to 23 August 2012 to 18 October 2012, for which costs have been estimated at $22,819.37. The affidavit states that the bulk of those costs were attributable to the claim concerning Mr Sharpe which are itemised in annexure H. Costs for the third period, 19 October 2012 to 21 February 2013, are estimated at $7,139.70 including disbursements.

1. The first period to which I referred is the subject of paragraph [24] of Mr Maksisi's affidavit. It is important to observe two things: Firstly, that the amount of solicitor's costs of $205,003.70 forming part of the total of $247,083.27 referred to in that paragraph is not an actual figure but is an estimate of WIP (work in progress) in that period. It includes counsel's fees. Secondly, the apportionment referred to in paragraph [25] is not an actual apportionment based on final cost figures referable to the work in progress. It is, as Mr Maksisi has stated, an assumption which is assuming an equal apportionment and he adopts for the purposes of his affidavit a figure of fifty per cent. It might be said that the claim against Mr Sharpe related to a fairly confined period from approximately August through till November or thereabouts and whether that is strictly correct, it was not long period.

1. As I can best judge the matter from my own knowledge of the substantive proceedings and based on Mr Maksisi's affidavit, the fifty per cent apportionment is extremely generous and whether that is borne out on an actual costs assessment remains to be seen. It could be, as Mr Maksisi says, eighty per cent and it could be a figure less than fifty per cent. The important point is, it is a working assumption for the purpose of the affidavit.

1. Mr Maksisi set out in paragraph [33] calculations applying the fifty per cent apportionment figure in respect of the first of the three periods and no apportionment in respect of the second and third periods, which derives a figure on that of $130,681.33.

1. Mr Finnane of counsel, who has appeared on behalf of the plaintiffs, has submitted that I can reach the conclusion that the apportionment figure to which I have referred of fifty per cent is a consistent approach consistent with what he expressly says was the conservative approach taken to the matters the subject of paragraph [36] of Mr Maksisi's affidavit.

1. I accept that in a general sense, the estimates provided by Mr Maksisi in his affidavit do tend to indicate a conservative rather than an overstatement in relation to the matters concerning the estimate of the costs of attributable work done in the two periods with which I am concerned.

1. In order to derive a solicitor/client figure, a suggested range of seventy to seventy five per cent is stated to be understood to be the typical ratio of costs and asserted on the ordinary basis as opposed to actual, or solicitor and client, costs: Mr Maksisi's affidavit at [35]. Applying a seventy per cent figure, Mr Maksisi derives the adjusted costs of $91,476.93 as stated in paragraph [36] of his affidavit.

1. The plaintiffs, as I have stated, seek an order for costs on the indemnity basis. Support for such an order was said to rest on the letter sent by the solicitors for the plaintiffs on 21 February 2013 to the solicitors for the defendants, a copy of which is annexed to Mr Maksisi's affidavit and marked as annexure F. It is an offer to settle the proceedings.

1. In the letter of 21 February 2013 Mr Maksisi stated in the third paragraph:

"We also understand that your clients are not presently willing to consider any form of settlement that would involve any payment to our clients."

1. The letter goes on to refer to certain of the factual matters in the proceedings. It refers to the concern as to costs and then provides an explanation of the various figures set out which I do not here reproduce but they are to be found in subparas (i) to (v) on pages 2 and 3 of the letter. The letter puts the offer in these terms.

"In the interests of avoiding further unnecessary costs, and in order to resolve the matter commercially and efficiently, we are instructed to make the following offer to avoid incurring any additional costs associated with further prolonging the proceedings:

1. Your client is to pay our client the amount of $350,000 inclusive of interest, plus $150,000 inclusive of costs in full and final settlement of the Proceedings;

2. Your clients bear their own costs of the proceedings;

3. Your clients and our clients enter into a deed of release on terms to be agreed, including mutual releases in relation to the current claim and any future claims arising out of or in any way connected with the facts or circumstances giving rise to the current claim;

4. Consent terms be filed dismissing the claim against your client.

5. This offer is open for acceptance for 28 days from the date of this letter, after which time it will lapse."

1. Mr Finnane has submitted that the offer made does reflect compromise. It was a claim in which there was a claim for compound interest and that is to be borne in mind as to the substance of the claim being brought. It was submitted that this is a case in which there is no element of capitulation but that it was a real offer and that the costs of $150,000 had been put noting that the estimate Mr Maksisi had made on a party/party basis was of the order of $91,000.

1. Mr Curtin in his submissions said that the application for a special costs order was based on the principles referred to in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298, cited in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [12]. In Hazeldene's it was observed that the plaintiff bears the onus of proving that the rejection of any offer was unreasonable in the circumstances and that the mere fact that was a less favourable result does not result in a presumption in favour of a special costs order.

1. It is submitted that the rejection of the offer involving an element of compromise when it was acknowledged as being strictly correct but it was suggested that the amount of the compromise was exceptionally modest at $15,281. In fairness to Mr Curtin's submissions, he acknowledged that depending on how one goes about assessing the value of the offer and the result one could derive a differential of a significantly greater amount than $15,281.

1. It is clear, in my assessment, that there was a greater compromise in that figure. The question Mr Curtin emphasised was whether or not the defendants had unreasonably rejected the offer and one has to look at what the offer was. It was one indefeasible offer. True, he acknowledged it could have been put as an offer of $500,000, but it was not. As to costs, the defendants were only liable for party/party costs. On that point I was taken to the Solicitors' Rules and in particular r 4.1.2 which is a mandatory provision in the rules for honest and courteous conduct in all dealings in the course of legal practice.

1. Rule 22.1 states:

"A solicitor must not knowingly make a false statement to an opponent in relation to the case (including its compromise).

1. Rules 34.1 and 34.1.1 are in the following terms:

"34.1 A solicitor must not in any action or communication associated with representing a client:

34.1.1 make any statement which grossly exceeds the legitimate assertion of the rights or entitlements of the solicitor's client, and which misleads or intimidates the other person."

1. It was submitted, on the affidavit material, that costs, in fact, were not $150,000 as at the date of offer and that there was an overstatement, reference being made in that respect to Mr Maksisi's figure of $130,681.33, to which I have earlier referred, in paragraph [34] of his affidavit.

1. Mr Finnane in response submitted that the Solicitors' Rules clearly deal with matters other than inadvertence and that there was no basis in this case, and Mr Maksisi was not sought to be cross examined to establish, that he in any way misrepresented the costs position in the offer that was put on 21 February 2013. As to the $130,000, that was one derived by taking what was referred to as a "broad axe" approach and was not involved with any detailed assessment of costs. Therefore, it is not possible to state whether the offer of $150,000 did, in fact, exceed or did not exceed the value of the solicitor's work and disbursements at $150,000. I will return to that issue.

1. The principles concerning the making of a Calderbank offer have been enunciated now in a number of cases and I will not refer to them all. In Jones v Trad (No 3) [2013] NSWCA 463 Ward JA at [45] drew together the relevant principles and sourced them to the well-known cases in which indemnity costs has been the subject of decision by that Court. Her Honour observed in Jones v Trad that the making of a Calderbank offer does not automatically result in a favourable costs order simply because the judgment is more favourable to the party making the offer than the terms of the offer. The question is whether failure to accept an offer in all the circumstances warrants departure from the ordinary rule as to costs. The focus is on the party making the Calderbank offer to satisfy the Court that it should exercise the costs discretion in its favour and that not only must the offer invoke a genuine offer of compromise, but it must be one which was unreasonable for the offeree not to accept.

1. In SMEC Testing Services Pty Limited v Campbelltown City Council [2000] NSWCA 323 Giles JA at [37] addressed the issue of the making of a Calderbank offer and stated that where the offeree does not accept the offer but ends up worse off than if the offer had been accepted, that is a matter to which the Court may have regard, but it does not automatically bring about a different order as to costs. His Honour emphasised that all the circumstances must be considered.

1. While with the policy regarding a Calderbank an offeree can reasonably fail to accept an offer without suffering in costs, the ultimate question is whether the offeree's failure to accept the offer in all the circumstances warrants a departure from the rules as to costs.

1. Those principles have been more recently reviewed and stated in the decision of the Supreme Court of Victoria Court of Appeal, a decision to which Mr Curtin has drawn attention, in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2), supra, at [25] (echoing the above observations of Giles JA):

"The discretion with respect to costs must, like every other discretion, be exercised taking into account all relevant considerations and ignoring all irrelevant considerations."

1. Although not giving an exhaustive list of relevant considerations the Court stated they include:

"(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;

(f) whether the offer foreshadowed an application for an indemnity costs in the event of the offeree's rejecting it."

1. The unreasonable refusal of an offer of compromise is a proper ground for the awarding of indemnity costs. It is clear that in this case there was a genuine offer of compromise. The offer was made at an early stage and it was open for twenty eight days from the date of the letter. There was set out in the letter an explanation of the basis of the claim. It is clear from the other annexures to Mr Maksisi's affidavit that the parties were well-seized of the factual issues and in particular they were subjacent to the proceedings so that the offer was made at a time when the parties well understood the issues and the affidavit evidence had made clear, as it were, where the battle lines were drawn.

1. The only substantive issue that has been raised, really, is the question as to the form of the offer which was to be in two parts: that the defendants were to pay the plaintiffs the amount of $350,000 inclusive of interest plus $150,000 inclusive of costs in full and final settlement of proceedings.

1. There are two matters which are at least clear:

1. The plaintiffs were indicating that a total payment of $500,000 would settle the proceedings.

2. That the offer of costs of $150,000 was not expressed to be put on the basis of a party/party assessment, but was a figure nominated as a figure that would be acceptable to the plaintiffs as payment for costs up to the date of the offer.

1. There have been submissions made and discussion with counsel as to whether or not, on the evidence before me, it can be said that the offer put in terms of $150,000 was an overstatement or an incorrect statement of what the actual costs position was. I initially was persuaded to the view that Mr Curtin was putting, that it could be said that the figure of $150,000 did represent an overstatement. However, on closer analysis of the way in which the figures are derived, it clearly was not an overstatement. It was simply an estimate based on work in progress assessments and not purporting to be a definitive statement as to the actual costs that had been incurred up to that date.

1. The contention that there was an overstatement was largely based on the figure of $130,681.33 appearing in paragraph [34] of Mr Maksisi's affidavit, to which I have already referred. However, for reasons I have earlier stated, that figure has been derived not on a strict assessment basis, but on an assumption talking of an apportionment of fifty per cent to reduce the costs, for the first period I have mentioned, down to $123,541.63.

1. Although I was invited to conclude as a matter of fact that the letter of offer of $150,000 was some form of misrepresentation or overstatement, when understood as being based upon an assessment only of work in progress and supplying an apportionment of fifty per cent, one can see that there is, firstly, no attempt at overstatement and, secondly, there was in fact no overstatement.

1. For a conclusion to be reached on each issue that there was an overstatement made in the letter of offer of $150,000 for costs, I accept the submission made by Mr Finnane that it would have been imperative that Mr Maksisi be cross-examined. It would have been simply a matter of procedural fairness, in my view, for him to put forward any explanation that he may wish to proffer as to how that figure of $150,000 was derived and on what basis.

1. Mr Maksisi was not cross examined and, based on the affidavit material, it is simply not open, in my assessment, to make a finding that there was an overstatement made by a member of the profession when the evidence simply could not justify such a finding.

1. The material, so far as I can determine it from the affidavit material which is extensive, is that there was no overstatement of the costs as at February 2013. On that basis, the offer contained in the letter dated 21 February 2013 was, in my assessment, a proper offer made. Whether or not it can be seen as an offer which in effect was offering to settle for $500,000 in total or whether it is an offer that can be seen with one or two components, it was well open to the defendants to consider it as a proper offer and to respond to it.

1. This was a case in which much depended upon findings of fact and, in particular, as to conversations that took place between Mr Arkoudis and the plaintiff. Mr Arkoudis, as discussed in the principal judgment, had made no record either of his conversation with the plaintiffs and even human fallibility alone would indicate that when it comes to a factual issue of that kind, at least uncertainty arises as to what the true position was and one would have to factor that in, in assessing whether or not an offer of compromise would be accepted or not.

1. This is the sort of case where a compromise offer had to be closely considered and the offer made sufficient compromise to be an attractive one. Having regard to all of the risks inherent in this particular piece of litigation, I have concluded that it was an unreasonable refusal of the offer made by the plaintiffs to the defendants.

1. I have heard submissions in passing on the question as to whether or not the earlier correspondence before the date of the offer made it plain that the defendants were just simply not interested in settling for any amount and, in fact, their response was to in effect not say anything to the plaintiffs but simply to have them in effect terminate the litigation on the basis that each party pay its own costs.

1. Mr Curtin has correctly, with respect, said that the question of indemnity costs does not involve any form of punishment based on prior conduct. Mr Finnane accepted that and I do, too. Whether or not the conduct up to February could give rise to an inference that the real reason for not accepting the offer was because of the earlier continuing attitude, that they did not think the plaintiffs had any merit, is not an issue that I have to finally determine.

1. It is sufficient to say that the offer was a reasonable offer and it was unreasonable to refuse the offer. Accordingly, I propose to make an order in terms of paragraph [2] of the short minutes.

1. I will have the form of judgment sealed and copies made available to the parties sufficient to confirm that I order judgment for the plaintiffs against the first and second defendants in the sum of $444,772.92.

1. In accordance with paragraph [1] of the short minutes, I make orders that the first and second defendants are to pay the plaintiffs' costs of the proceedings as against the first and second defendants. Such costs as to be assessed on the ordinary basis in respect of the period up to and including 21 February 2013, and on the indemnity basis in respect of the period from 22 February 2013 to the date of judgment.

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Decision last updated: 05 June 2014