Cape Byron Power 1 Pty Ltd v Downer Energy Systems Pty Limited
[2023] QSC 109
•18 May 2023
SUPREME COURT OF QUEENSLAND
CITATION:
Cape Byron Power 1 Pty Ltd & Ors v Downer Energy Systems Pty Limited & Ors [2023] QSC 109
PARTIES:
CAPE BYRON POWER I PTY LTD ACN 074 408 923 (formerly known as Delta Electricity Australia Pty Ltd) and CAPE BYRON POWER II PTY LTD ACN 095 991 638 (formerly known as Sunshine Renewable Energy Pty Ltd) as joint venturers in the Sunshine Electricity Joint Venture
(first plaintiffs)
CAPE BYRON POWER II PTY LTD ACN 095 991 638 (formerly known as Sunshine Renewable Energy Pty Ltd)
(second plaintiff)
NEW SOUTH WALES SUGAR MILLING
CO-OPERATIVE LIMITED ACN 051 052 209(third plaintiff)
v
DOWNER ENERGY SYSTEMS PTY LIMITED ACN 067 158 954(first defendant)
DMH PLANT SERVICES PTY LTD ACN 010 975 256 (formerly known as MHPS Plant Services Pty Ltd and Clyde Babcock-Hitachi Pty Ltd)
(second defendant)
DOWNER EDI LIMITED ACN 003 872 848
(third defendant)
FILE NO:
BS 11011 of 2014
DIVISION:
Trial Division
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
18 May 2023
DELIVERED AT:
Brisbane
HEARING DATE:
Written Submissions 20, 25 and 28 April 2023
JUDGE:
Applegarth J
ORDER:
1. The first and second defendants pay 85 per cent of the first plaintiffs’ costs of and incidental to the proceeding on the standard basis.
2. The third defendant pay 85 per cent of the first plaintiffs’ costs of and incidental to the proceeding on the indemnity basis.
3. The plaintiffs’ costs referred to in orders 1 and 2 herein, not include the costs associated with the affidavits of Laura Horvat filed 18 June 2020, 20 August 2020, 24 September 2021, 3 December 2021 and 3 May 2022, and the affidavit of David Rodighiero filed 21 August 2020.
4. The third plaintiff pay the first and second defendants’ costs of defending the third plaintiff’s claims in the proceeding on the standard basis.
CATCHWORDS:
PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COSTS – DEPRIVING SUCCESSFUL PARTY OF COSTS – OTHER CASES – SUBSTANTIAL SUCCESS - where the first plaintiffs were successful on the most substantial issues in the proceeding - where the parties agree that the first plaintiffs should receive an award of costs that is reduced to reflect the first plaintiff’s failure on some claims - where the plaintiffs propose a 10 per cent reduction while the defendants propose a 30 per cent reduction in the costs award - where the defendants further submit that the first plaintiffs should be precluded from recovering some specific costs – what is the appropriate percentage reduction to the plaintiffs’ costs
PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COSTS – OFFERS OF COMPROMISE, PAYMENTS INTO COURT AND SETTLEMENTS – where the first plaintiffs seek costs on the indemnity basis from the date on which they made a Calderbank offer for settlement – where the offer was expressed to be inclusive of costs – where the defendants contend that the making of an “all-up” offer impedes the plaintiffs from recovering costs on the indemnity basis - where the defendants contend that the plaintiffs should not be awarded indemnity costs because the judgment was not more favourable than the offer and it was not unreasonable for the defendants to reject the offer - whether the first and second defendants should pay the first plaintiffs’ costs on the indemnity basis from the date of the offer
PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COSTS – INDEMNITY COSTS – where the first plaintiffs and third defendant entered into a Deed of Guarantee – where the plaintiffs contend that the Court should award indemnity costs due to a contractual right contained in the Deed – where the defendants contend that the Court should not exercise its discretion because the Deed does not plainly and unambiguously provide for indemnity costs and the plaintiffs never foreshadowed such a claim – whether the Court should exercise its direction to give effect to the contractual right under the Deed and order that the third defendant pay the first plaintiffs’ costs on the indemnity basis
Built Qld Pty Ltd v Pro-Invest Australian Hospitality Opportunity (ST) Pty Ltd(No 3) [2022] QSC 62
Calderbank v Calderbank [1975] 3 All ER 333
Cape Byron Power 1 Pty Ltd & Ors v Downer Energy Systems Pty Ltd & Ors [2022] QSC 294
Cape Byron Power 1 Pty Ltd & Ors v Downer Energy Systems Pty Ltd & Ors [2023] QSC 76
Clarence Property Corporation Ltd v Sentinel Robina Office Pty Ltd [2019] QSC 13
Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322
Megerditchian v Khatchadourian (No 2) [2020] NSWSC 112
Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37
Platinum United II Pty Ltd & Anor v Secured Mortgage Management Ltd (in liq)[2011] QCA 229
SHA Premier Constructions Pty Ltd v Niclin Constructions Pty Ltd (No 2) [2020] QSC 323
Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97
Speets Investment Pty Ltd v Bencol Pty Ltd (No. 2) [2021] QCA 39
Turba Trium Pty Ltd v First Mortgage Capital Pty Ltd [2021] QCA 100
W Jeffreys Holdings Pty Ltd v Appleyard and Associates (1990) 10 BCL 298COUNSEL:
G D Beacham KC and B O’Brien for the plaintiffs
M T Hickey for the defendants
SOLICITORS:
Carter Newell for the plaintiffs
Clayton Utz for the defendants
On 2 February 2023, I gave judgment for the reasons published on 22 December 2022.[1] On 14 April 2023, I awarded interest on damages[2] and directed the parties to make written submissions on costs.
[1]Cape Byron Power 1 Pty Ltd & Ors v Downer Energy Systems Pty Ltd & Ors [2022] QSC 294.
[2]Cape Byron Power 1 Pty Ltd & Ors v Downer Energy Systems Pty Ltd & Ors [2023] QSC 76.
Percentage reduction of the first plaintiffs’ costs
The parties agree that the first plaintiffs should receive an award of costs against the first and second defendants that adopts the “netting off”[3] approach to reflect the first plaintiffs’ failure on some claims. However, the parties disagree on the appropriate percentage reduction. The plaintiffs propose a 10 per cent reduction while the defendants propose a 30 per cent reduction.
[3]Speets Investment Pty Ltd v Bencol Pty Ltd(No. 2) [2021] QCA 39 at [16]-[17].
What is an appropriate reduction to reflect the first plaintiffs’ failure on the misleading or deceptive conduct claim and the business interruption claim?
Defendants’ submissions in relation to percentage reduction
The defendants submit that a 10 per cent reduction in the first plaintiffs' costs is inadequate and that a reduction of 30 per cent more accurately reflects the relative contribution of those issues to the proceedings. The defendants’ submissions broadly outline the contribution of those claims to the volume of submissions. They note that the claims concerned the more complex legal issues between the parties. They also refer to the volume of evidence and documentation associated with the business interruption claim, in particular the substantial reports of Mr O’Shea and Mr Miller. The defendants submit that the evidence in relation to the business interruption loss claim was extensive and among the more costly aspects of the case.
Plaintiffs’ submissions in relation to percentage reduction
The plaintiffs submit that a 10 per cent reduction in costs would appropriately reflect the relative contribution of these claims to the volume of evidence and time spent at trial. In response to the defendants’ submissions, the plaintiffs argue that the defendants have incorrectly incorporated the costs of the third plaintiff’s business interruption claim to reach the proposed reduction of 30 per cent.
The plaintiffs’ submissions in reply analyse the extent to which the misleading or deceptive conduct claim and the first plaintiffs’ business interruption claim occupied the submissions and evidence. It submits that excluding submissions associated with the third plaintiff’s claim would bring the relevant claims closer to 10 per cent of the overall submissions.
It also submits that the volume of evidence should be considered in the context of the total volume of evidence produced by both parties. The plaintiffs calculate the number of witness statements and expert reports produced by the plaintiffs and defendants. They submit that the amount of evidence relating to the business interruption claim was not relatively extensive when considered in this context. They submit that an order for payment of 90 per cent of the costs would be appropriate to account for the lack of contribution of these legal issues and to reflect the most significant issues in dispute, being causation and the plaintiffs’ awareness of or ability to have detected the problems.
What is an appropriate reduction?
The first plaintiffs were successful on the most substantial and time-consuming issues in the proceeding. They were unsuccessful on the misleading or deceptive conduct claim and the business interruption claim. The first plaintiffs, as the successful parties, are entitled to an award of costs against the first and second defendants that may be reduced to account for their failure on certain issues.
Those issues made a relatively minor contribution to the totality of submissions. They accounted for just over 10 per cent of the total submissions. The length of submissions on an issue does not necessarily reflect the importance of the issue or the resources required to litigate it. The volume of evidence and documentation associated with the two issues upon which the first plaintiffs failed, particularly the business interruption claim, was substantial but so was the volume devoted to other issues. The defendants’ proposal of a 30 per cent reduction overstates the proportion of relevant evidence relative to the volume of evidence in the whole proceedings. Further, the costs associated with the third plaintiff’s business interruption claim should be excluded from this consideration, since it is covered by a costs order against the third plaintiff in favour of the first and second defendants.
The misleading or deceptive conduct claim built upon the plaintiffs’ main claim about the cause of the damage, the plaintiffs’ ignorance of that cause and the first and second defendants’ attribution of other causes. The misleading or deceptive conduct claim had some legal complexity but added little factually to the case. The business interruption claim required substantial proof but was not legally complex. The plaintiffs conceded that the Indirect Loss clause meant that they could not recover those amounts for certain claims.
I assess the contribution of the “failed claims” at no more than 15 per cent. An appropriate order as to costs is to order the first and second defendants pay 85 per cent of the first plaintiffs’ costs of the proceeding.
Exclusion of specific costs
The defendants further submit that, in any event, the first plaintiffs should be precluded from recovering costs in respect of:
(a)the affidavit of Mr Miller filed on 25 September 2020, the material exhibited thereto, or any correspondence in relation to it; or
(b)any of the numerous affidavits filed by the plaintiffs’ solicitors to explain delays and defaults in relation to the orders of the Court.
Mr Miller’s affidavit
The defendants submit that they should not bear the cost of Mr Miller’s affidavit because before the trial the plaintiffs elected not to rely upon his evidence.
The plaintiffs submit that the cost of Mr Miller’s affidavit should not be excluded. Mr Miller’s affidavit related to the business interruption claim and therefore, the cost of the affidavit would already be borne by the first plaintiffs in the percentage reduction to costs awarded. The plaintiffs contend that removing those costs specifically would involve a “double dip” for the defendants.
I am not inclined to further reduce the costs awarded to the first plaintiffs on account of the costs associated with the defendants considering Mr Miller’s affidavit up until the plaintiffs confirmed on 18 February 2022 that they no longer sought to rely on it. Account has been taken of those costs in arriving at a 15 per cent reduction. An additional order to exclude this specific cost would be inappropriate.
Affidavits of the plaintiffs’ solicitors
The defendants submit that the first plaintiffs should be precluded from recovering costs in respect of several affidavits filed by the plaintiffs’ solicitors to explain delays and defaults in relation to the orders of the Court. The defendants contend that they should not bear such costs given the nature of their content and the circumstances of repeated default and delay in which they came to be prepared. The defendants rely on Mr Brackin’s affidavit which outlines the specific affidavits and reasons for exclusion. The proposed orders sought also include the affidavit of Madeline Condon filed 13 November 2020 and the affidavit of Laura Horvat filed 25 March 2022.
The plaintiffs concede that they cannot recover the costs of the affidavits filed 20 August 2020, 21 August 2020, 24 September 2021, 3 December 2021, 18 June 2020 and 3 May 2022. The plaintiffs submit that the affidavits dated 18 June 2021 and 18 February 2022 should not be excluded as they dealt with matters other than delay. They further submit that the affidavits dated 13 November 2020 and 25 March 2022 were not dealt with in Mr Brackin’s affidavit and should not be excluded.
In my view, the costs of the affidavits filed 20 August 2020, 21 August 2020, 24 September 2021, 3 December 2021, 18 June 2020 and 3 May 2022, should be excluded. The affidavits dated 18 June 2021 and 18 February 2022 dealt with matters other than delay so they should not be excluded on that basis. The affidavits filed on 13 November 2020 and 25 March 2022 should not be excluded in the absence of a good reason to do so.
Should the first plaintiffs’ costs from 14 January 2021 to date be assessed on the indemnity basis?
The first plaintiffs submit that their costs should be assessed on the standard basis up to and including 13 January 2021, and on the indemnity basis from 14 January 2021 to date.
Should costs be awarded on an indemnity basis from 14 January 2021, the date on which the plaintiffs made an offer to settle which was not accepted by the defendants?
The parties raise three issues:
(a)Whether the making of an “all-up” Calderbank offer precludes the Court from awarding costs on the indemnity basis;
(b)Whether the plaintiffs obtained a more favourable outcome in the judgment than the offer; and
(c)Whether it was unreasonable for the defendants not to accept the offer.
The plaintiffs’ offer
On 14 January 2021, the plaintiffs sent a letter to the defendants offering to settle. The offer was for the sum of $3,827,689.10 inclusive of damages, interest and costs. Such an offer is sometimes referred to as an “all-up” or “all-in” offer.
The letter expressly stated that, if not accepted, the plaintiffs would rely on it in submissions to seek costs on the indemnity basis, pursuant to the principles set out in Calderbank v Calderbank [1975] 3 All ER 333. The offer was open for acceptance for a period of four weeks.
Should the making of an “all-up” offer preclude the Court from awarding costs on the indemnity basis?
The plaintiffs submit that the making of an “all-up” Calderbank offer is no impediment to its consideration by a court in the exercise of its discretion. The fact that the offer is “all-up” is relevant but should not prevent the Court from making a special costs order.
The defendants accept that the making of an “all-up” offer does not automatically preclude a special costs order. However, the defendants contest the plaintiffs’ characterisation of the issue as “no impediment”. They rely on Elite Protective Personnel Pty Ltd v Salmon[4] to contend that an “all‑up” offer is a very significant impediment to a special costs order.
[4][2007] NSWCA 322 (“Elite”).
In that case Beazley JA noted the authorities discussed by McColl and Basten JJA, and stated that an offer of compromise which is inclusive of costs may form the basis upon which the court awards indemnity costs.[5] Beazley JA continued:[6]
“… the proper approach to any such offer of compromise is to consider it according to its terms and determine whether, in all the circumstances, the court should exercise its discretion to award indemnity costs. Having said that, there may be difficulties in the path of a party who seeks indemnity costs when the application is based upon an offer inclusive of costs, as is examined and explained by Basten JA.”
[5]At [6].
[6]At [7].
Basten JA considered authorities that suggested the need in a Calderbank letter to isolate costs in a way that is clear and capable of proper assessment independently of the principal claim.[7] As the learned author Professor Dal Pont has observed, the underlying premise of this line of authority rests on the proposition that an offeree is unable to determine the appropriate amount to attribute to the substantive claim and the costs incurred in advancing it, making it unfair to expect a considered response to the offer.[8] According to these authorities, the offeree cannot be said to have acted unreasonably in not accepting an offer in that form.
[7]At [100].
[8]G E Dal Pont, Law of Costs (LexisNexis, 5th Ed, 2021) at [13.81]; see also Elite at [111] per McColl JA.
Basten JA questioned the correctness of the premise, particularly in the case of an “all‑in” offer by a defendant.[9] His Honour continued:[10]
“Different considerations will arise if the plaintiff makes an inclusive offer, the matter proceeds to trial and the plaintiff obtains a judgment which is below the offer but arguably above the damages component. Again, applying the approach adopted in Smallacombe, the plaintiff will be unable to obtain a special order as to costs because he or she will be unable to establish (without an assessment of costs) that the offer has been bettered. On the other hand, if the plaintiff obtains a sum in excess of the offer, it is clear that the offer has been bettered and a special order for costs may be appropriate.”
[9]Elite at [143]-[144].
[10]At [145].
McColl JA, while accepting that there was no “… ‘definitive rule’ that an ‘all-in’ Calderbank offer can never be considered on the question of indemnity costs”,[11] considered that “great weight” should be afforded to the views of experienced trial judges in a line of authority commencing with Smallacombe v Lockyer Investment Co Pty Ltd,[12] which were to the effect that “a Calderbank letter expressed to be inclusive of costs will not warrant departure from the usual basis upon which a successful party’s costs are calculated.”[13]
[11]At [115].
[12](1993) 42 FCR 97.
[13]Elite at [100], [111].
The authorities were recently analysed by Williams J who concluded that a discretion existed to award costs on the basis of a Calderbank offer which is inclusive of costs. Her Honour observed:[14]
“… there is no rule that a Calderbank offer which is inclusive of costs cannot be the basis upon which the court exercises its discretion to award indemnity costs. The proper exercise of the discretion is to be in all of the circumstances.”
[14]Built Qld Pty Ltd v Pro-Invest Australian Hospitality Opportunity (ST) Pty Ltd(No 3) [2022] QSC 62 at [235].
Williams J stated,[15] and I agree, that the decision of Parker J in Megerditchian v Khatchadourian (No 2)[16] succinctly stated the approach as follows:
“Making an offer inclusive of costs may sometimes have the result that it is difficult to demonstrate unreasonableness in rejecting it. This is particularly so where the offeror is the plaintiff. In such a case the defendant will have no direct knowledge of the costs which the plaintiff has actually incurred and will only be able to make the broadest estimate.”
[15]At [234].
[16][2020] NSWSC 112.
Parker J continued:[17]
“But that is not so where the offer is made on an inclusive basis from the defendant to the plaintiff. The plaintiff knows, or can readily find out, what his or her costs are. Where it is sufficiently clear afterwards that, taking into account the costs the plaintiff had incurred at the date of the offer, the offer was more favourable than the ultimate result, there is no objection in principle to concluding that refusal of the offer was unreasonable: see Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322 at [136]-[145], per Basten JA.”
[17]At [39].
I conclude that the making of an “all-up” Calderbank offer does not preclude the exercise of the discretion to award costs on the indemnity basis. Depending on the circumstances, and particularly when the “all-up” offer is made by a plaintiff, it may be an impediment to such an award because in some circumstances it is difficult to tell if the offer is more favourable than the judgment and in a case of uncertainty about the quantum of the costs incorporated in the offer, it will be hard to conclude that an offeree acted unreasonably in not accepting the offer.
For these and other reasons courts have discouraged the making of “all-up” or “all‑in” offers. Offers that are not “all-up”, but which are made for a certain amount for the sum claimed and interest, with an additional offer to pay the other party’s costs, facilitate the just and expeditious resolution of proceedings.
The present application is a case in point in which the Court has to consider collateral issues, such as the offeree’s ability to assess what the quantum of the plaintiffs’ costs were at the time of the Calderbank offer as part of an inquiry into whether it was unreasonable to not accept that offer.
Another matter was highlighted by Cole J in 1990:[18]
“Great difficulty is encountered if offers are framed in Calderbank letters on an inclusive of costs basis. It leads to ex post facto and unsubstantiated estimates of what costs may have been at a given date.”
[18]W Jeffreys Holdings Pty Ltd v Appleyard and Associates (1990) 10 BCL 298 at 303.
Was the judgment more favourable than the offer?
The plaintiffs submit that they obtained a more favourable outcome in the judgment than the offer. The first plaintiffs were awarded the judgment sum of $3,558,487.25 (comprising damages of $2,230,447 and interest up to 9 July 2018 of $1,328,040.25), exclusive of costs. The offer was for $3,827,689.10, including costs. The difference between the offer and the judgment sum is $269,201.85. The plaintiffs contend that as at 14 January 2021, it had incurred recoverable legal costs well in excess of this difference.
The defendants submit that the first plaintiffs did not establish that they obtained a more favourable outcome than the offer. The defendants raise three issues:
(a)The plaintiffs rely upon the interest ultimately awarded by the Court;
(b)The plaintiffs rely upon their estimate of costs as at the date of the offer; and
(c)The offer was made by all three plaintiffs, but the third plaintiff ultimately failed in its claims.
Interest
The defendants contend that, in determining whether a more favourable outcome was obtained, the plaintiffs cannot rely upon the interest ultimately awarded by the Court. The offer must be assessed at the time it was made. At that time the defendants did not know that the plaintiffs would not be entitled to the full sum of interest.
The plaintiffs submit that they are entitled to rely on the interest ultimately awarded by the Court. The interest calculation was made to 2018 and therefore represents the notional outcome, even as at the date of the offer in 2021. The plaintiffs submit that the defendants’ contention blurs the issue of whether or not the offer has been beaten with whether its rejection was unreasonable at the time it was made.
Estimate of Costs
The defendants submit that even after allowing for the award of interest ultimately awarded, the offer can only exceed the judgment on the basis of an estimate of the plaintiffs’ costs as at the date of the offer.
The plaintiffs submit that the sum of recoverable costs needed to overtop the offer is relatively small, and the uncontested evidence is that the recoverable costs as at 14 January 2021 would be well in excess of this amount, even taking into account the costs order against the third plaintiff.
Third Plaintiff
The offer was made by all three plaintiffs, but the third plaintiff ultimately failed on its claims. The defendants submit that before the Court can determine whether the outcome was more favourable than the offer, the first and second defendants’ entitlement to costs from the third plaintiff must be brought into account.
The plaintiffs respond that this is of no great significance because of:
(a)the relatively modest value of the third plaintiff’s claims;
(b)the extent of overlap with the claims of the first plaintiffs; and
(c)the proportion of the proceeding and costs dedicated solely to the third plaintiff’s claim of $200,214 was minimal because at the time Mr O’Shea’s report had not been prepared, nor had the witness statement of Mr Welch that addressed the third plaintiff’s expense claims.
Conclusion – a more favourable outcome?
It is far from clear that the offer was more favourable to the defendants at the time it was made than the judgment that was obtained. The issue includes the issue of interest and a need to adjust for an uncertain amount on account of costs in favour of the first plaintiffs and against the third plaintiff.
As for interest, although I awarded eight out of the 11 years and, for convenience, ordered interest over the first eight years, as at the date of the offer there was a basis to limit interest, and not award interest for years of delay that preceded 2018.
Even assuming that interest as at 14 January 2021 was likely to be in the order of the amount awarded by me, the costs issue is complex. I am prepared to accept the evidence of Mr Rodighiero and conclude that the first plaintiffs had incurred reasonable legal costs well in excess of $250,000 as at the date of the offer. I note that:
(a)the proceeding had been on foot for at least six years, and many significant events had occurred in it;
(b)the plaintiffs had engaged a law firm and junior and senior counsel to represent them in the matter; and
(c)the plaintiffs had engaged the expert Mr Lowry who had produced four expert reports and participated in a joint expert conference and prepared a joint expert report.
Even now, the defendants are not to know what the first plaintiffs’ recoverable costs probably were as at the date of the offer, but that matter relates more to the issue of reasonableness than the “more favourable” issue. The defendants do not advance reasons or a sound evidentiary basis to reject Mr Rodighiero’s estimate.
I also accept that a costs order against the third plaintiff would have been relatively small as at the date of the offer for the reasons given by the plaintiffs.
I conclude that the net position of the plaintiffs’ costs as at the date of the offer probably exceeded $270,000.
Therefore, the judgment for the first plaintiffs is more favourable to them than the offer the plaintiffs made, having regard to the costs that were recoverable by them at the date of the offer.
Was it unreasonable for the defendants not to accept the offer?
In SHA Premier Constructions Pty Ltd v Niclin Constructions Pty Ltd (No 2)[19] Bond J (as his Honour then was) summarised the principles relating to Calderbank offers:
[19][2020] QSC 323 (emphasis in original; footnotes omitted).
“[10] First, the usual rule is that where the Court orders the costs of one party to litigation to be paid by another party, the order is for assessment of those costs on the standard basis.
[11] Second, the Court will depart from the usual rule where the circumstances of the case warrant that course.
[12] Third, one feature which may justify a departure from the usual rule is the rejection of a Calderbank offer to compromise. However, it is wrong to think that an offeree’s rejection of a Calderbank offer gives rise to a presumption that the offeree should pay the offeror’s costs on an indemnity basis if the offeree obtains a less favourable result than contained in the offer. Rather, the correct approach is to consider whether the rejection of the Calderbank offer, in all the circumstances, justifies a departure from the usual rule.
[13] Fourth, the balance between the competing policy considerations of, on the one hand, appropriately encouraging settlement and, on the other, not discouraging potential litigants from bringing their disputes to the courts, is found by applying a test of “reasonableness”. The policy rationale for requiring the offeree to indemnify the offeror for costs incurred after the offeree’s unreasonable rejection of an offer is that, from the time of the unreasonable rejection, notionally the real cause and occasion of the litigation is the unreasonable attitude adopted by the offeree.
[14] Fifth, deciding the critical question of whether the offeree’s rejection of the offer is unreasonable in all the circumstances will always involve matters of judgment and impression. However, the discretion as to costs must be exercised judicially and is subject to review in accordance with the principles set out in House v The King (1936) 55 CLR 499 at 505. Without being exhaustive concerning the considerations which should be taken into account, a court should ordinarily have regard to at least 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 it.”
The plaintiffs submit:
(a)the offer was made at a stage when the proceeding had been on foot for over six years, and at least one year before trial. At that stage, the defendants had the benefit of having participated in a mediation with the plaintiffs and had also received disclosure from the plaintiffs, expert evidence (including a joint expert report) and the plaintiffs’ witness statements;
(b)the time allowed for the defendants to consider the offer was a period of four weeks which was ample;
(c)it therefore could be expected that the defendants were well able to assess the offer, without the offer itself containing any explanation as to why it was a reasonable one;
(d)the extent of the compromise offered was significant. In particular:
(i)the offer was a substantial discount on the pleaded claims. At the time of the offer, the plaintiffs were claiming damages and interest of $5,949,913.64, and in addition to this sum the defendants would reasonably have expected the plaintiffs to have incurred significant costs given the proceeding had been on foot for over six years;
(ii)in terms of the actual outcome, it represents a complete abandonment of the unsuccessful claims, and a discount on the recoverable costs (the amount being dependant on the exact quantum assessed as recoverable);
(e)in respect of the defendants’ prospects of success, as at the date of the offer the first plaintiffs succeeded in their breach of contract and negligence claims for the repair costs at trial in 2022 and those successful claims were substantially the same as at 14 January 2021 and reliant on the same expert evidence of Mr Lowry available as at 14 January 2021. To put it another way, there was no substantial shift in the case after the time of the offer that would have substantially altered the way in which the defendants might have assessed their prospects;
(f)the terms of the offer were expressed in clear terms; and
(g)the offer foreshadowed the plaintiffs’ intention to seek indemnity costs in the event the offer was not accepted.
The defendants submit that the plaintiffs have not established that the defendants’ rejection of the offer was unreasonable. They note that, at the time of the offer, the defendants had received Dr Dixon’s expert report which expressed the strong view that the reverse operation of the air-to-oil damper, which was the subject of the plaintiffs’ claim, was not the cause of the damage. They also note that the plaintiffs had refused the defendants’ requests to facilitate reversal effect tests at Broadwater. The defendants concede that the parties will never know what the testing would have established. However, they submit that there was a prospect that it could have changed the defendants’ perception of the strength of their case, and this possibility was prevented by the plaintiffs.
The defendants further submit that the case was one of considerable factual and technical complexity, in relation to which there was much room for disagreement.
Conclusion – did the defendants act unreasonably in refusing the plaintiffs’ offer?
The “all-up” offer made it difficult for the defendants to know the amount of the plaintiffs’ recoverable costs at that stage and therefore how much was being offered on account of the plaintiffs’ claims, together with interest.
Leaving aside what was agreed and what was disputed between the experts, Mr Lowry and Dr Dixon, the plaintiffs’ case on causation should always have been perceived by the defendants to have reasonable prospects. As the plaintiffs’ costs submissions note, the facts known to the defendants included:
(a)The Condong boiler had functioned without the faults experienced by the Broadwater boiler;
(b)When the fault with the ATO Damper was fixed, the faults became far fewer;
(c)After the reverse operation was corrected, Mr Rojo did a test of the effects of the correction, and grate temperatures reduced by 30°C in 30 minutes;
(d)The air balance tests conducted during commissioning of the boiler showed the ATO Damper was operating in reverse.
Despite this, the defendants still had reason to think, based on Dr Dixon’s reports and their own assessment of causative factors, that any contribution of the reverse operation of the ATO Damper was minimal and not a substantial cause. It also had good grounds to resist the misleading or deceptive conduct claim and to rely on the Indirect Costs clause to cap the first plaintiffs’ contract claim.
One should avoid hindsight bias in assessing reasonableness. The defendants might reasonably have considered that the first plaintiffs had reasonable, but not good, prospects of recovering their repair costs based on a preference for Mr Lowry’s opinions and the four matters noted at [57], but that they had some prospects of defeating that claim based on the evidence of Dr Dixon and Mr Ironside. One should recall the concessions those experts made were only made at the trial.
When the anticipated quantum of the contractual and concurrent claims in tort for repair costs upon which the plaintiffs succeeded is discounted for the risk of that claim failing, I do not consider the offer was a significant offer of compromise upon the first plaintiffs’ realistic quantum for repair costs for breach of contract. This is so even if the extent of the compromise was significant based on the total quantum of their claim which included economic loss and what they may have recovered for their misleading or deceptive conduct claim.
I am not persuaded that the defendants acted unreasonably in not accepting the offer.
Therefore, I decline to award costs on the indemnity basis in favour of the first plaintiffs.
Costs payable by the third defendant
The plaintiffs submit that the third defendant should pay the same percentage as I have decided above of the first plaintiffs’ costs and that they be assessed on the indemnity basis. In the alternative, they submit that the Court should make orders enforcing the costs indemnity in the Deed of Guarantee.
Should the third defendant pay 85 per cent of the first plaintiffs’ costs on the indemnity basis?
The parties agree that the first plaintiffs should receive an award of costs against the third defendant. The issue is whether the Court should exercise its discretion to award costs on the indemnity basis due to a contractual right to indemnity costs contained in the Deed of Guarantee.
The first plaintiffs and third defendant entered into a Deed of Guarantee in relation to the EPC Contract. Clause 2 of the Deed provided that the third defendant would indemnify the first plaintiffs against all costs “including legal costs on a full indemnity basis” incurred by reason of any default in performing and observing the Contract. The Court has already found that the third defendant is liable under clause 2 to indemnify the first plaintiffs for loss and damage resulting from breaches of the Contract.
The plaintiffs submit that the Court should exercise its costs discretion to give effect to the contractual right to indemnity costs. They submit that clause 2 of the Deed provides a contractual right to costs incurred “by reason of … any default on the part of the Contractor in performing and observing” the Contract, and that the costs of the first plaintiffs’ successful claim plainly fall within that description. The plaintiffs accept that the costs of its failed claims do not come within that description.
The defendants submit that costs should not be awarded on the indemnity basis for two reasons:
(a)the Deed of Guarantee does not plainly and unambiguously provide for indemnity costs; and
(b)the plaintiffs never pursued or foreshadowed such a claim.
Does the Deed of Guarantee provide for indemnity costs?
A court will usually exercise the discretion as to costs to reflect a contractual right, and will give effect to a contractual provision that plainly and unambiguously provides for costs to be assessed on the indemnity basis.[20]
[20]Platinum United II Pty Ltd & Anor v Secured Mortgage Management Ltd (in liq)[2011] QCA 229 at [6], [8]; Turba Trium Pty Ltd v First Mortgage Capital Pty Ltd [2021] QCA 100 at [40].
Clause 2 of the Deed plainly makes the third defendant liable to pay the first plaintiffs’ costs “on a full indemnity basis”.
The defendants’ argument is that, while clause 2 expressly contemplates the recovery of indemnity costs, the first plaintiffs are not entitled to be indemnified against costs under clause 2 by virtue of clause 10 of the Deed. It provides that the guarantor’s liability is subject to the same exclusions and limitations of liability as are expressly prescribed in the Contract in respect of the first and second defendants’ liability. Clause 48.4 of the Contract provides that the first and second defendants are not liable for “any indirect, special or consequential damages” arising out of the Contract.
Clause 48.4 states they are not liable for Indirect Loss, which relevantly includes:
“… any indirect, special or consequential damages arising out of or in connection with this Contract regardless of whether liability is based on any breach of contract, tort (including negligence), indemnity, warranty, statute, or any other basis of liability.” (emphasis added).
In response, the plaintiffs point out that the indemnity in clause 2 of the Deed provides an indemnity in respect of “… damages…” and, separately, an indemnity in respect of “… costs (including legal costs on a full indemnity basis …” Clause 48.4 of the Contract, on the other hand, creates a limitation only upon the recovery of certain types of “damages”.
Clause 2 of the Deed is set out at [798] of my Reasons for Judgment on liability. However, it is convenient to reproduce it here:
“As a separate undertaking, the Guarantor unconditionally and irrevocably agrees that, on receipt of written demand from the Principal, it will indemnify the Principal against all losses, damages, costs (including legal costs on a full indemnity basis and the costs of enforcing this Guarantee and Indemnity), expenses or otherwise which may be incurred by it by reason of: (a) any default on the part of the Contractor in performing and observing the agreements and provisions on its part contained in the Contract; or (b) an obligation the Contractor would otherwise have under the Contract being found to be unenforceable. The Principal need not incur expense or make payment before enforcing his right of indemnity.”
The plaintiffs are correct to highlight that the third defendant’s obligation to indemnify the first plaintiffs is against “all losses, damages, costs (including legal costs on a full indemnity basis and the costs of enforcing this Guarantee and Indemnity), expenses …” It does not refer to “damages, including legal costs”. Legal costs are a distinct matter in respect of which the third defendant has an obligation to indemnify the first plaintiffs.
The defendants submit that liability for indemnity costs should be categorised as either “indirect”, “special”, or “consequential” within the meaning of the Deed because the first plaintiffs’ liability to pay legal costs arises not from the default, but from the court proceedings. However, the issue is not whether the legal costs that the first plaintiffs have incurred in successfully pursuing those proceedings are indirect, special or consequential. The issue is whether they are indirect, special or consequential damages. In my view, the plaintiffs are correct in submitting that clause 48.4 of the Contract relevantly limits only the recovery of certain types of “damages” and that their liability to their own lawyers for legal costs are not “damages”.
Expressed differently, clause 2 of the Deed, insofar as it provides an indemnity in respect of damages, may be subject, by virtue of clause 10 of the Deed, to a limitation on recovering certain categories of damages. This is why in the principal judgment the third defendant’s obligation to indemnify was in relation to damages for repair costs, and did not extend to other loss or damage that was in fact caused to the first plaintiffs by the first and second defendants’ breach of contract.
The Deed should be construed according to its terms. It treats damages and “costs” (including legal costs) separately. The relevant limitation in the Contract applies to certain categories of “damages”. Clause 48.4 should not be interpreted as if it read any indirect, special or consequential “damages or costs”. The parties agreed that the third defendant’s liability to indemnify the first plaintiffs against damages was subject to the limitation in clause 48.4 of the Contract.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry requires consideration of the language used by the parties in the contract.[21] A reasonable businessperson, considering the language used by the parties, would not conclude that the limitation in clause 48.4 of the Contract applied beyond what is stated in the clause, namely damages, but extended to a different subject matter, namely costs.
[21]Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at [47]; [2015] HCA 37 at [47].
It makes commercial sense, when regard is had to clause 2 of the Deed and clause 48.4 of the Contract, that the third defendant was prepared to indemnify in relation to damages the amount of the damages that were limited by the Contract, and which have been awarded by the Court, and also to indemnify the first plaintiffs for the costs they incurred in proving that damages claim. This reflects the plain language of the Deed.
Finally, the interpretation contended for by the defendants is one that would not advance the commercial purpose of agreeing to indemnify the first plaintiffs against costs, including legal costs on a full indemnity basis. The obligation to indemnify against costs would be rendered practically useless because, on the defendant’s argument, they would necessarily fall within the exclusion in clause 48.4. The interpretation advanced by the plaintiffs, which I favour, does not deprive the relevant obligation in clause 2 of the Deed of practical operation in relation to legal costs. It is more consistent with the apparent purpose of the Deed.
The liability to indemnify in respect of costs contained in clause 2 of the Deed should not be interpreted as subject to the limitation in clause 48.4 of the Contract.
It is therefore unnecessary to address whether the costs should be categorised as “indirect, special or consequential”.
I conclude that the Deed provides an indemnity against the costs that the first plaintiffs have incurred in these proceedings. The costs that the first plaintiffs incurred in litigating these proceedings were incurred by reason of the default by the first and second defendants in performing the Contract. In theory, the indemnity would be for all of their legal costs, including the costs of pursuing the claim for misleading or deceptive conduct and the business interruption loss, not just the 85 per cent that I have decided the first and second defendants should pay. This is because the whole proceeding was precipitated by the first and second defendants’ default. However, the plaintiffs accept that the costs associated with those failed claims do not fall within the indemnity. If they had not taken that position I would have exercised my discretion in ordering costs against the third defendant so that the costs were the first plaintiffs’ costs associated with their successful claim.
For the reasons that I gave in deciding to order the first and second defendants pay 85 per cent of the first plaintiffs’ costs of the proceeding, I propose to order that the third defendant pay 85 per cent of the first plaintiffs’ costs of the proceeding on the indemnity basis. As the plaintiffs note, this is somewhat generous to the third defendant since, in the netting off exercise, the defendant’s costs of the failed claims for misleading or deceptive conduct and for business interruption loss would not be assessed on the indemnity basis.
The foreshadowing of the claim
The defendants contend that no claim for costs on the indemnity basis was ever included in the pleadings, nor otherwise pursued, nor even foreshadowed at any time prior to the closing oral submissions.
The plaintiffs respond that:
(a)The claim for indemnity under the Deed had been raised since 7 May 2013;
(b)The claim for indemnity costs has been foreshadowed since the making of the offer; and
(c)The defendants were alive to the potential application of the Deed to a claim for legal costs at least by the time of closing submissions.
I agree that the defendants were given timely notice of the first plaintiffs’ intended reliance on the indemnity.[22] In retrospect, the plaintiffs might have specifically pleaded that they sought an exercise of the Court’s discretion to award costs on the indemnity basis by reason of the indemnity. However, the third defendant was on notice that the first plaintiffs relied upon the Deed. No issue is pressed as to any requirement to demand a precise figure to engage the exercise of the Court’s discretion to order costs in accordance with the contractual right to indemnity.
[22]cf Clarence Property Corporation Ltd v Sentinel Robina Office Pty Ltd [2019] QSC 13 at [16].
Therefore, I propose to order that the third defendant pay 85 per cent of the first plaintiffs’ costs of the proceeding on the indemnity basis.
Second plaintiff’s claims
The second plaintiff made separate claims against the first and second defendants for misleading or deceptive conduct and negligence. The defendants suggest that, for the sake of finality, those claims should be disposed of by an order that they be dismissed, since the second plaintiff (which is one of the first plaintiffs) did not obtain an order separate from those of the first plaintiffs. The defendants accept, however, that as the second plaintiff did not actively pursue its separate claims, no order as to costs should be made in respect of such claims.
The plaintiffs submit that an order dismissing the second plaintiff’s claims is not warranted and is likely to introduce confusion about the nature of the judgment in favour of the first plaintiffs, with the second plaintiff’s claims being both upheld and dismissed.
In circumstances in which the defendants do not seek any costs order against the second plaintiff and it is clear that the second plaintiff is not entitled to any additional judgment in its favour, an order dismissing those claims is not necessary. Although the risk of confusion arising from such an order might be small, that risk need not be run. The judgment that I have already given in favour of the first plaintiffs and dismissing the third plaintiff’s proceeding is effective to dispose of the claims that were litigated, and need not be reopened.
Costs orders
I propose to make the following orders as to costs:
1.The first and second defendants pay 85 per cent of the first plaintiffs’ costs of and incidental to the proceeding on the standard basis.
2.The third defendant pay 85 per cent of the first plaintiffs’ costs of and incidental to the proceeding on the indemnity basis.
3.The plaintiffs’ costs referred to in orders 1 and 2 herein, not include the costs associated with the affidavits of Laura Horvat filed 18 June 2020, 20 August 2020, 24 September 2021, 3 December 2021 and 3 May 2022, and the affidavit of David Rodighiero filed 21 August 2020.
4.The third plaintiff pay the first and second defendants’ costs of defending the third plaintiff’s claims in the proceeding on the standard basis.
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