Brady v Official Trustee in Bankruptcy (No.2) - [2001] FMCA 87

FEDERAL MAGISTRATES COURT OF AUSTRALIA

BRADY v OFFICIAL TRUSTEE IN BANKRUPTCY (No.2) [2001] FMCA 87

COSTS – Offer of Compromise – Order 23 Federal Court Rules – Calderbank principles applied – Indemnity costs awarded – whether failure to accept offer imprudent.

INTEREST – Interest on Judgment up to date of offer of compromise.

Michael John Bates v Omareef Pty Limited (No. 4) [1997] 1201 FCA
(28 October 1997)
MGICA v Kenny & Good (1996) 140 ALR 707
Colgate Palmolive v Cussons (1993) 46 FCR 225

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397

Bankruptcy Act 1966 (Cth) s 176

Applicant:

PETER JOHN BRADY

Respondent:

OFFICIAL TRUSTEE IN BANKRUPTCY

File No:

WZ 7 of 2001

Delivered on:

21 September 2001

Delivered at:

Melbourne

Hearing Date:

22 August 2001

Judgment of:

McInnis FM

REPRESENTATION

The Applicant:

In Person

Solicitor for the Respondent:

Mr T Carey

Solicitors for the Respondent:

Australian Government Solicitor

ORDERS

That the Respondent pursuant to s 176 of the Bankruptcy Act 1966 (Cth) pay the Applicant damages of $17,550.
The Respondent pay the Applicant interest at the rate of 10.5% on and from 23 March 1995 up to and including 14 March 2000 in relation to the damages of $17,550 pursuant to Order 35 Rule 8 of the Federal Court Rules.
The Respondent pay the Applicant’s costs up to and including
13 March 2000 to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules on a party/party basis.
The Applicant pay the Respondent’s costs from and including
14 March 2000 up to and including 23 August 2000 (including all reserved costs and interlocutory costs not yet determined) to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules on a party/party basis.
The Applicant pay the Respondent’s costs from and including
24 August 2000 (including all reserved costs and interlocutory costs not yet determined) to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules on a solicitor/client basis.
The Respondent be permitted to set off the Applicant’s liability to pay its costs pursuant to orders made this day and made on prior occasions against its liability to the Applicant pursuant to the orders made this day on the claim including interest.
Execution on the judgment and orders on the claim and interest be stayed until the provision of an order or certificate of taxation of costs in favour of the Respondent as ordered this day.

Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH

WZ7 of 2001

PETER JOHN BRADY

Applicant

And

OFFICIAL TRUSTEE IN BANKRUPTCY

Respondent

REASONS FOR JUDGMENT

In this Application I delivered Judgment on 22 August 2001 and indicated that appropriate orders would be made that the Respondent pay the Applicant damages of $17,550.00. It is noted that there was a slip in the proposed order and the correct amount of damages should be $17,550. A copy of the original Judgment with that correction will be provided to the parties. In addition I proposed ordering interest at the rate of 10.5% on and from 23 March 1995 to the date of the order in relation to those damages pursuant to Order 35 Rule 8 of the Federal Court Rules.
I had included in the Judgment a proposed order that the Respondent pay the Applicant’s costs to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
When the Judgment was delivered and before orders were entered the Solicitor for the Respondent quite properly brought to my attention that there had been two offers made to compromise the matter pursuant to Order 23 of the Federal Court Rules.
At the time when the Judgment was delivered the Applicant was no longer legally represented. The Applicant had filed a Notice of Cancellation of Solicitor of Record on 10 August 2001.
Accordingly when the issue of costs was raised by the Respondent’s solicitor the Applicant expressed some concern about his ability to make submissions in reply. In the circumstances I thought it was appropriate to allow both parties an opportunity to file and serve written submissions.
I then directed that the Respondent file and serve its written submissions in relation to costs and interest by 4 pm. on 29 August 2001. The Applicant was then ordered to file and serve any Reply by 4 pm. on 6 September 2001. I had specifically requested that the Respondent attach to its submissions copies of any cases and/or rules upon which it sought to rely in order to assist the Applicant.
The Respondent filed written submissions dated 28 August 2001 in accordance with the direction. Likewise the Applicant filed a Reply which I note is dated 3 August 2001 but presumably should be

3 September 2001. The Respondent filed a minor Corrigendum to the Submissions on 4 September 2001.
The details of the offers made are not in dispute. The offers were as follows:
a)
Offer of Compromise by a notice undated but served on

13 March 2000 in the sum of $42,000 inclusive of costs and interest, interest being expressed to have been calculated at the rate of 7% per annum on the principal sum of $27,500 for six years (the first offer); and
b)Offer of Compromise by notice dated and served 12 September 2000 in the sum of $42,962.50 inclusive of costs and interest, interest being expressed to have been calculated at the rate of 7% per annum on the principal sum of $267,500 for six and a half years (the second offer).
In its submissions the Respondent has indicated that it relies solely upon the first offer as the foundation for its application for costs on a solicitor client basis since the date of the offer and has submitted that the subsequent offer was irrelevant. I was referred to the Decision of Emmett J in the matter of Michael John Bates v Omareef Pty Limited (No.4) [1997] 1201 FCA (28 October 1997) (Bates v Omareef).
It was submitted by the Respondent that the first offer complied with the requirements of Order 23 Federal Court Rules and in particular Rule 3. The rule provides as follows:
“3 (1) An offer of compromise is made to a party by serving a notice of the offer on the party.
(2)A notice of offer must:
(a)be prepared in accordance with Order 41; and
(b)bear a statement to the effect that the offer is made under this Order; and
(c)be signed by the party making the offer or by the solicitor appearing for that party.
(3)Until an offer has been accepted, notice of the offer must not be filed.”
The first offer produced to the Court contains the following:
“The Respondent offers to pay the Applicant the sum of Forty two thousand dollars ($42,000) in satisfaction of the Applicant’s claim herein. The said sum of $42,000 is inclusive of costs and interest. Interest is calculated at the rate of 7% per annum on the principal sum of $27,500 for six years.
The offer of compromise is made under Order 23 Federal Court Rules”.
Although the first offer was undated it is common ground that it was served on 13 March 2000.
In its submissions the Respondent had noted that there was an error in terms of the interest to be given on the principal sum for six years and suggests this should have been a reference to five years. However in its Corrigendum it notes that in fact no slip occurred as the interest on a principal sum of $27,500 for 6 years at an annual simple interest rate of 7% is $11,550.00. In any event it is submitted by the Respondent that Order 23 Rule 11(7) makes provision for the purpose of determining the consequences as to costs and the Court is to disregard so much of an award of interest as relates to the period after the day the first offer was made. In the circumstances the Respondent submits that 13 March 2000 is the critical date.
A calculation of interest at 10.5% on the principal of $17,550 being the judgment sum results in the Applicant’s entitlement to interest for the period commencing with the sale date and ending with the offer date of $11,818.84. In examining the figures it is submitted and I accept that the first offer clearly exceeds the judgment and interest to the date of the claim as awarded by the Court. Indeed as pointed out by the submissions for and on behalf of the Respondent the offer of compromise is almost $10,000 or 25% greater than the judgment and interests awarded by the Court to the date of the claim.
In general terms the Respondent has submitted that in determining the consequences which flow from the failure of the Applicant to accept the first offer that I should have regard to the principles expressed in those authorities dealing with ‘Calderbank’ offers. It was submitted that a party refusing a reasonable offer and subsequently receiving an award no more favourable than the offer received should be liable for costs subsequent to the offer. It is further submitted that those costs should be calculated on a full indemnity (solicitor/client) basis.
It is appropriate to set out Order 23 subrules 11(5) and (6) as follows:
“(5) If
(a)an offer is made by a respondent and not accepted by the applicant; and
(b)the applicant obtains judgment on the claim to which the offer relates not more favourable than the terms of the offer;
then, unless the Court otherwise orders:
(c)the applicant is entitled to an order against the respondent; and
(d)the respondent is entitled to an order against the applicant;
for costs in respect of the claim taxed as provided in subrule (6).
(6) For the purpose of subrule (5), if an order was made:
(a)on the day before the trial or hearing of the proceeding commenced; or
(b)on any later day;
then, unless the Court otherwise orders:
(c)the applicant is entitled to costs, in respect of the claim, incurred up to 11 a.m. on the day following the day on which the offer was made; and
(d)the respondent is entitled to costs, in respect of the claim, incurred after that time;
taxed on a party and party basis.”
In the present case it is clear that the first offer was made approximately 13½ months prior to the trial.
I was referred to the decision of Lingren J in MGICA v Kenny & Good (1996) 140 ALR 707 where at page 711 it is noted that the offer in that case was made a few days before commencement of trial and was only open for four days compared with the fourteen day duration of an Order 23 offer. Lingren J stated in the MGICA case that “Order 23 establishes a regime, which, if utilised, gives rise to a presumptive entitlement to indemnity costs”. The Respondent submits that “His Honour’s reasoning in relation to late ‘Calderbank’ offers is reflected in Order 23 sub rule 11(6) recording that that sub rule relates only to offers made on the day before trial or any later day”.
The Respondent further referred to the Decision of Emmett J in Bates v Omareef and notes the reliance in that decision upon the further case of Colgate Palmolive v Cussons (1993) 46 FCR 225. The Respondent correctly submits in my view that as the offer in the present case was made many months prior to the commencement of the trial that the rules which I have set out above namely subrules 11(5) and (6) do not apply in their terms to the offer in this case. Hence reliance is placed in this instance by the Respondent on the ‘Calderbank’ line of cases which support the proposition that the Applicant should pay the Respondent’s costs from the offer date and as indicated that the costs should be calculated on a full indemnity basis. The matters raised by Emmett J in Bates v Omareef Decision are said by the Respondent to apply to the present case or at least are closely analogous to the present case namely:
·When the offer was made it was not rejected or met with a counter offer, it was simply ignored.
·The offer was accompanied by a letter which in many respects accurately predicted the outcome of the trial.
·In the current case the Respondent’s solicitors wrote to the Applicant’s solicitors on 23 August 2000 and although the letter did not accompany the offer it was written at a time when the Respondent’s legal representatives were about to embark on large scale preparations for trial and was directed specifically to the reasonableness of the offer and risks to the Applicant if it was not accepted.
·The letter with the exception of Mr Mitchell’s evidence in large part reflected the ultimate result of the Court’s Decision.
·The offer of compromise was an eminently reasonable one in the circumstances as then known to the Applicant.
The letter to which the Respondent refers dated 23 August 2000 clearly makes reference to the offer of compromise in the sum of $42,000 and further asks the Applicant to consider the amount of the offer by raising a number of questions concerning the possible outcome of the Applicant’s claim. It clearly suggests that the exemplary damages claim would not succeed and that if successful on the conversion claim damages would be fixed as at the date of sale namely 23 March 1995 not April 1993.
The Respondent also notes that an allegation of a fabrication of a report of a meeting of 2 February 1993 had ultimately been withdrawn by the Applicant and the fact that he had resiled from an allegation of serious fraudulent conduct should also be taken into account in the exercise of the Court’s discretion.
It follows according to the Respondent that orders should be made reflecting its submissions.
On the issue of interest the Respondent submits that interest should not be allowed from the date of the offer and that in the circumstances the award of interest which has been made pursuant to the Federal Court Rules should not as a matter of principle apply in a situation where as a consequence of the Applicant’s imprudence the litigation continued beyond the date of the offer of compromise.
The Respondent referred to s 51A of the Federal Court of Australia Act. In the Judgment delivered by the Court on 22 August 2001,

I proposed making an order for interest pursuant to Order 35 Rule 8 of the Federal Court Rules. It should be noted that s 76 of the Federal Magistrates Act 1999 appears to be in similar terms to s 51A of the Federal Court legislation. At the time when the hearing occurred however the Federal Magistrates Court had not yet introduced its rules and hence I thought it appropriate in those circumstances to apply the Federal Court Rules. I did that simply as a means of applying what I thought may be an appropriate rate of interest though I recognise that various rates may be regarded as being appropriate. In any event it is clear that the Court has the power to order interest and may do so at such rate as the Court thinks fit on the whole or any part of the money for the whole or any part of the period from the date when the action arose to the date on which judgment is entered.
In his reply the Applicant appears to submit that strict compliance with Order 23 should be required if it is to apply to the present case. He provides various calculations which support the proposition that the subject offer was not clear and as far as I can understand it has suggested that the offer made to him on 13 March 2000 was not certain but instead as he states “riddled with uncertainty”.
The Applicant asserts that he did wish to negotiate in this matter and relies upon a letter which he forwarded to the Respondent’s solicitors dated 31 January 2000 which had attached to it a counter offer which sought the total sum of $315,000 which included $120,000 for exemplary damages.
In his reply the Applicant states he has not resiled from an allegation of `seriously fraudulent conduct’. He otherwise seeks to distinguish his case from the cases to which the Respondent has referred and asserts that it in fact would have been “totally imprudent for me to accept their offer of compromise”. This he regarded for good reason that it would have been “an acknowledgment by me that I was in fact only an unsecured creditor and this would have then hidden the reality now established that the official trustee has acted contrary to the Bankruptcy Act.”
The Applicant suggests that there be no alteration to order for costs and interest.
In my view the Court clearly has a discretion in matters of this kind to consider making orders which it believes are appropriate having regard to its interpretation of the nature of the offer of compromise.
I am satisfied in the present case that an offer of compromise was made on 13 March 2000 and complied substantially with the form required by Order 23 of the Federal Court Rules. I accept that in circumstances where the offer was made approximately 13½ months prior to the trial that it is appropriate to apply the Calderbank principles and in particular it is further appropriate to take into account and apply those principles referred to by the Respondent which were set out in the Judgment of Emmett J in Bates v Omareef.
I am further satisfied that the first offer made it clear that it was inclusive of costs and interest and provided a basis upon which the recipient of the offer of compromise could calculate the amount of interest allowed for in that notice.
Having regard to the significant disparity between the total amount of the offer of compromise and the judgment, allowing for interest to the date of offer. It is clear in my view that the offer represented a reasonable and serious endeavour to resolve an application which had the potential to increase costs significantly.
It is noteworthy that in its letter to the Applicant dated 23 August 2000 the Respondent in clarifying its offer and the consequences of rejection states, “If the matter goes to hearing we would be surprised if the costs subsequent to 13 March 2000 were less than $30,000”.
It is appropriate in the circumstances to note from the Court file that the application commenced on 24 March 1999. On that occasion the Applicant had acting for and on his behalf a solicitor Catherine P Crawford. That solicitor by Notice of Ceasing to Act pursuant to Order 45 Rule 6(b) filed 11 August 1999 ceased to act for the Applicant. The Applicant was then unrepresented until 8 February 2001 when Notice of Appointment by Applicant of Solicitors Messrs H Kremer & Co was filed with the Court. That notice is dated 2 February 2001 and it is noted that on 13 February 2001 another notice was filed and on that occasion it was dated 13 February 2001. In any event it is clear that there were two notices filed and at least it can be concluded that for part of the preparation time the Applicant was represented. It is also important to note that at the hearing the Applicant was represented by Senior Counsel so that in my view at all material times when considering the offer of compromise the Applicant was either represented and/or had access to legal advice in relation to the prudence of accepting the offer of compromise.
The Applicant’s solicitors at the trial filed a Notice of Cancellation of Solicitor on record on 8 August 2001 which explains why the Applicant did not have the advantage of legal assistance in the preparation of his reply on the issue of costs and interest. I have made due allowance for that fact and have endeavoured to determine the basis upon which the Applicant asserts that the orders sought by the Respondent should not be granted in relation to the important issue of costs and interest.
In the present case I find as a matter of fact that when the offer was made it was not rejected or met with a counter offer within a reasonable time. The offer can be limited as to the time that is open to be accepted though the Rules provide that it must be not less than 14 days beginning on the day after the offer is made. In the present case the Applicant relies upon a letter dated 31 January 2000 with an accompanying counter offer which pre dates the first offer and also relies upon a letter dated 13 March 2000 which only queries the basis upon which the $27,500 amount is calculated in the offer of compromise. There does not appear to be any real endeavour within a reasonable time to make a counter offer or indeed properly consider the first offer even after a more detailed letter is forwarded to the Applicant on 23 August 2000 by the solicitors for the Respondent.

I am satisfied that the first offer was reasonable and that it was imprudent of the Applicant to reject that offer. Consistent with the authorities to which I have been referred it is my view that the circumstances of the present case demonstrate that the Applicant for reasons better known to himself has taken the view that he would succeed in obtaining a significant award of damages including exemplary damages. Throughout the correspondence both to the Respondent and solicitors acting for and on behalf of the Respondent the Applicant has adopted a somewhat aggressive approach and even in his reply to the submissions before this Court maintains a suggestion of fraudulent conduct. It is noteworthy that even when he attempts to make a counter offer for the significant sum of $315,000 the Applicant in his letter dated 31 January 2000 seeks to suggest that the persons acting for and on behalf of the Respondent are `incompetent’. It is not surprising in those circumstances that negotiations and/or a sensible resolution of this claim having regard to an objective assessment of the competing risks of both parties has not been possible.
I find that at least for part of the time the Applicant has had access to competent legal advice in making an assessment of the prospects of success and the prudence of accepting any offer of compromise which may have been available.
In my view on a proper analysis of the facts in the present case the matters raised by Emmett J in Bates v Omareef are sufficiently analogous to the present case to be applied. The first offer and subsequent correspondence clearly identified the issues, the nature of the offer and indeed largely predicted the outcome of the trial particularly in relation to the issue of exemplary damages which had been vigorously pursued by the Applicant. In MGICA v Kenny the Court refers to the variety of ways in which Judges will find it necessary or sufficient to support an order for indemnity costs. Reference is made to the Decision of Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 where at p 401 Woodward J said,
“I believe that it is appropriate to consider awarding `solicitor and client’ or ‘indemnity’ costs, whenever it appears that an action has been commenced or continued in circumstances where the Applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law.”
Accordingly in my view it is appropriate in the present case to make an award for costs which in part will be calculated on a full indemnity basis. Having regard to the chronology of legal representation to which I have referred and the fact that the first offer was made on

13 March 2000 and was then the subject of further correspondence clearly setting out the position by 23 August 2000, it is appropriate to award indemnity costs on and from 23 August 2000 and party/party costs on and from the date of the offer of compromise until 23 August 2000. The continuation of the claim beyond 23 August 2000 on the material before me occurred as a consequence of the Applicant forming an unreasonable view that damages would be assessed at an unrealistically high level and/or that he would succeed in pursuing his claim for exemplary damages based, in part, on ill conceived notions of what he would describe as at least `quasi fraudulent’ behaviour on the part of the Respondent.
It is also appropriate in my view that having found that the offer of compromise was reasonable and that it was imprudent of the Applicant not to accept and indeed or properly consider the offer that the calculation of interest should not be allowed for the period from the date of the offer. To do otherwise would be to effectively allow interest accrue for the benefit of the Applicant in circumstances where I have already found that he was imprudent in not accepting the Respondent’s offer of compromise.
The orders I propose making will therefore be as follows:
(1)That the Respondent pursuant to s 176 of the Bankruptcy Act 1966 (Cth) pay the Applicant damages of $17,550.
(2)The Respondent pay the Applicant interest at the rate of 10.5% on and from 23 March 1995 up to and including 14 March 2000 in relation to the damages of $17,550 pursuant to Order 35 Rule 8 of the Federal Court Rules.
(3)The Respondent pay the Applicant’s costs up to and including 13 March 2000 to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules on a party/party basis.
(4)The Applicant pay the Respondent’s costs from and including
14 March 2000 up to and including 23 August 2000 (including all reserved costs and interlocutory costs not yet determined) to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules on a party/party basis.
(5)The Applicant pay the Respondent’s costs from and including
24 August 2000 (including all reserved costs and interlocutory costs not yet determined) to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules on a solicitor/client basis.
(6)The Respondent be permitted to set off the Applicant’s liability to pay its costs pursuant to orders made this day and made on prior occasions against its liability to the Applicant pursuant to the orders made this day on the claim including interest.
(7)Execution on the judgment and orders on the claim and interest be stayed until the provision of an order or certificate of taxation of costs in favour of the Respondent as ordered this day.

I certify that the preceding forty-two (42) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 21 September 2001