Civic Video Pty Ltd v Paterson - [2016] WASCA 69

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION: CIVIC VIDEO PTY LTD -v- PATERSON [2016] WASCA 69

CORAM: McLURE P
NEWNES JA
CORBOY J

HEARD: 15 DECEMBER 2015 & LAST SUBMISSIONS ON
8 FEBRUARY 2016

DELIVERED : 27 APRIL 2016

FILE NO/S: CACV 142 of 2014

BETWEEN: CIVIC VIDEO PTY LTD
Appellant
AND
ROBERT HENRY PATERSON
First Respondent
MALCOLM THOMPSON
Second Respondent
BARBARA THOMPSON
Third Respondent

ON APPEAL FROM:
Jurisdiction              :  SUPREME COURT OF WESTERN AUSTRALIA
Coram  :CHANEY J
Citation  :CIVIC VIDEO PTY LTD -v- PATERSON [No 3] [2014] WASC 321
File No  :CIV 2144 of 2008

Catchwords:

Tort - Inducing breach of contract - Relevant principles - First respondent purchased business of second and third respondents - Second and third respondents in breach of franchise agreement with appellant in selling business without consent - Whether trial judge erred in finding that first respondent did not intend to induce the breach

Contract - Breach of franchise agreements by second and third respondents - Claim by appellant for loss of bargain damages - Damages assessed as loss of chance that franchise fees would have been received by appellant - Whether error in assessing damages

Costs - Calderbank offer - Joint offer by respondents - Offer rejected - Whether appellant worse off - Appellant's position to be considered in respect of respondents separately - Whether relevant that Calderbank offer closer to outcome than appellant's claim

Legislation:

Nil

Result:

Appeal against dismissal of claim against first respondent dismissed
Appeal against assessment of damages payable by second and third respondents allowed
Assessment of damages payable by second and third respondents remitted to trial judge

Category: B

Representation:

Counsel:

Appellant:     Mr I R Pike SC
First Respondent          :     Mr A Metaxas
Second Respondent      :     Mr J Garas
Third Respondent        :     Mr J Garas

Solicitors:

Appellant:     Marque Lawyers
First Respondent          :     Metaxas & Hager
Second Respondent      :     Your Legal HQ
Third Respondent        :     Your Legal HQ

Case(s) referred to in judgment(s):

Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 58 FCR 26
Boase v Seven Network (Operations) Ltd [2005] WASC 269
Civic Video Pty Ltd v Paterson [No 3] [2014] WASC 321 (S)
Civic Video Pty Ltd v Paterson [No 3] [2014] WASC 321
Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156; (2012) 207 FCR 220
Devries v Australian National Railways Commission [1993] HCA 78; (1993) 177 CLR 472
Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473
Fox v Percy (2003) 214 CLR 118
LED Technologies Pty Ltd v Roadvision Pty Ltd [2012] FCAFC 3 (2012) 199 FCR 204
Leeder v The State of Western Australia [2008] WASCA 192
McKay v Commissioner of Main Roads [No 7] [2011] WASC 223 (S)
Minister for Immigration, Local Government and Ethnic Affairs v Hamsher (1992) 35 FCR 359
OBG Ltd v Allan [2007] 2 WLR 920
Short v City Bank of Sydney (1912) 15 CLR 148

McLURE P: I agree with Newnes JA.
NEWNES JA: This is an appeal from a decision of Chaney J, who found that the second and third respondents (the Thompsons) had repudiated two franchise agreements they had entered into with the appellant (Civic) by selling the assets of their businesses to the first respondent (Mr Paterson) and ceasing to operate the businesses. His Honour awarded damages to Civic in the sum of $36,300. His Honour dismissed Civic's claim against Mr Paterson that he had induced or procured the breach of the franchise agreements by the Thompsons.
Civic contends that the primary judge erred in dismissing its claim against Mr Paterson. It also contends that his Honour erred in assessing the damages Civic was entitled to recover from the Thompsons and in respect of the order as to costs that he made in respect of that claim.

Background

Civic carried on business as the franchisor of the 'Civic Video System' in video sales and rental stores, which operated throughout Australia under the name 'Civic Video'. The Civic Video System included Civic's proprietary rights in certain intellectual property; experience and knowledge in the design, layout, management and operation of stores; distinctive layouts and signage; and other business techniques and procedures.
On 20 December 1999, Civic and the Thompsons entered into a franchise agreement under which the Thompsons were to operate a store using the Civic Video System at 89 Durlacher Street, Geraldton (the Durlacher store) for a period of five years. A further franchise agreement for the Durlacher store was executed by those parties on 20 December 2004 (Durlacher franchise agreement). It was for a term of 10 years.
The Thompsons occupied the premises of the Durlacher store pursuant to a sublease from companies controlled by Mr Richard Bayliss. Those premises formed part of a larger commercial property at 89 Durlacher Street (the Durlacher Street complex) which the companies controlled by Mr Bayliss held under a long term lease. The Durlacher Street complex consisted of two shops of approximately 80 m² on short term sub‑leases, a 530 m² shop that was vacant, and the 360 m² shop that the Thompsons were occupying. The Durlacher store thus took up about one-third of the Durlacher Street complex.

On 2 June 2001, the Thompsons entered into a franchise agreement with Civic to operate another Civic Video store, at premises located on North West Coastal Highway, Geraldton (the Highway store), for a term of five years. A further franchise agreement for the Highway store was executed on 2 June 2006 for a term of 10 years (Highway franchise agreement).
The franchise agreements for the Durlacher store and the Highway store were in substantially the same terms. Each included covenants by the Thompsons that they would exercise their best endeavours to conduct and promote the franchise business (cl 10); conduct the business at the specified premises during such hours as are observed by similar businesses or between such minimum hours as Civic may specify (cl 10); and, not sell, assign or transfer any interest in the business or any rights granted to them under the franchise agreement without Civic's prior written consent (cl 17). They were required to pay to Civic, among other things, a monthly franchise fee and an advertising fee, both of which were calculated by reference to the turnover of the store.
In early 2004, Mr Thompson had concerns about the viability of the two stores and the video industry generally. As a result of advice he received from his accountants, both stores were listed for sale with a local real estate agent. Mr Thompson also asked Mr Bayliss to make his business broker aware that the stores were for sale.
No offers were received for the stores between August 2004 and mid‑2006, during which period the Thompsons experienced financial difficulties and fell into arrears in the payment of franchise fees to Civic. The lease of the premises occupied by the Highway store expired on 14 April 2006. The Thompsons decided not to exercise the option to renew the lease of those premises and, after 14 April 2006, held over as monthly tenants. By May 2006, the Thompsons were in arrears in the monthly rent for the Highway store premises. Proceedings were commenced by the lessor seeking an order for possession. That claim was apparently settled by payment of the arrears for May and June 2006 pursuant to an agreement reached with the lessor. By that time, the Thompsons were also in arrears in rental payments for the Durlacher store premises.
In early 2006, Mr Bayliss telephoned Mr Stephen Smith, a business broker, to obtain his services in the sale of Mr Bayliss's leasehold interest in the Durlacher Street complex. He told Mr Smith that his companies had a long‑term lease of the Durlacher Street complex, but did not have many tenants and of the existing tenants the Thompsons were not paying their rent on time. Mr Bayliss told Mr Smith that he was looking for someone to buy the lease for approximately $500,000. He also suggested that Mr Smith telephone Mr Thompson.
In early May 2006, Mr Smith telephoned Mr Thompson. Mr Thompson told him that he owned two Civic Video stores and that both stores were losing money. Mr Thompson said that he had been trying to sell the stores without success, and that if both stores were not sold in the following six months they would have to be closed as the Thompsons would by then have run out of money. It was agreed that Mr Smith would attempt to find a buyer for the stores.
In early June 2006, Mr Smith delivered to the Thompsons an offer by Mr John Rock, who was an existing Civic Video franchisee, to purchase the two stores. Mr Rock, through his company, Rockstar Holdings Pty Ltd, offered to purchase both stores for the total sum of $405,000 plus stock at valuation. Mr Rock's proposal was that he would close one of the stores and transfer the stock to the other. The offers were accepted by the Thompsons on 9 June 2006, subject to certain conditions, including Civic's consent to the sale. Civic refused to give its consent, apparently because the offer involved the closure of one of the businesses, and, on or about 22 August 2006, the agreement between the Thompsons and Rockstar Holdings was terminated.
On 28 August 2006, Mr Bayliss's companies entered into a written agreement with Mr Paterson for the assignment of the head‑lease of the Durlacher Street complex to Mr Paterson for the sum of $500,000. The transfer of lease was executed some time later and was dated 28 November 2006. In his evidence, Mr Paterson said that he was interested in acquiring the head‑lease because it would give him the option of opening a DVD superstore of over 800 m² in the Durlacher Street complex when the Thompsons ceased trading there. Mr Paterson had extensive experience in the operation of video stores, having been involved in their operation since about 1983 and, in 2006, he had 15 stores, including a store in Geraldton, under franchise agreements with Video Ezy, a competitor of Civic Video.
In early September 2006, Mr Paterson made written offers to the Thompsons to purchase the assets of each of the Durlacher store and the Highway store. At trial, he gave evidence that it was his intention in acquiring both businesses to consolidate them into one Video Ezy business on the Highway store premises so that, with his existing Video Ezy store, he would then have two strong Video Ezy stores in Geraldton (ts 251, 254). He said he intended to consolidate them on the Highway store premises, rather than the Durlacher store premises, because the Highway store premises were further away from his existing Video Ezy store.
Mr Paterson's offer to purchase the assets of the Durlacher store contained terms that required the Thompsons to transfer the title to all plant and equipment, excluding trade supplied equipment, to Mr Paterson on settlement and to cease running the store as a franchisee of Civic by 21 September 2006. The offer to purchase the assets of the Highway store contained similar terms, save that the Thompsons were required to cease running the store as a franchisee of Civic by 4 October 2006.
Each of the offers also included the following term:
Subject to the Offeree indemnifying the Offeror to their absolute satisfaction, from any actions whatsoever from the current Franchisor of the Offeree.
The Thompsons accepted the offers on or about 14 September 2006. They did not obtain Civic's consent to the sales.
Settlement of the agreements occurred on or about 4 October 2006, the Thompsons having closed both stores the previous day. Mr Paterson then commenced operation of the Highway store from the same premises under the Video Ezy name.
On 9 October 2006, Mr Thompson sent an email to Civic saying that they had been forced to shut the businesses because they could not pay their bills. By a letter of 24 October 2006 to the Thompsons, Civic treated the Thompsons' email as a repudiation of the franchise agreements, which Civic accepted.

The legal proceedings

Civic subsequently commenced proceedings for damages against both the Thompsons and Mr Paterson.
Against the Thompsons, Civic alleged that, by the email of 9 October 2006, the Thompsons had wrongfully repudiated each of the franchise agreements and that the repudiation has been accepted by Civic by its letter of 24 October 2006. Civic claimed damages for, among other things, the loss of the franchise and advertising fees payable for the term of each franchise agreement.
The Thompsons did not admit that they had repudiated the franchise agreements but pleaded, in effect, that if they had, the sales of the businesses to Mr Paterson did not cause Civic any loss. They alleged that if they had not sold the businesses to Mr Paterson they would have closed them anyway and ceased trading. They said they would have been forced into bankruptcy and would therefore have been unable to pay Civic any further amounts by way of franchise fees or otherwise.
Against Mr Paterson, Civic alleged that he had wrongfully interfered with each of the franchise agreements by inducing the Thompsons, in breach of the agreement, to agree to transfer the assets of the business to him and close the business. It alleged that Mr Paterson knew the Thompsons had entered into franchise agreements with Civic and that he also knew, either because he was given copies of the franchise agreements or from his extensive experience in the video hire business, that the franchise agreements prohibited the sale of the businesses or their assets, or the abandonment of the businesses, without Civic's consent, which had not been obtained. Civic claimed the same damages as it claimed against the Thompsons.
In his defence, Mr Paterson, relevantly, denied that he had intended to cause, or that he knew he was inducing, the Thompsons to breach the franchise agreements. He denied that he had seen a copy of either of the franchise agreements at the time of the sale or that he was aware of their terms. He said he made the agreements with the Thompsons after he was told by Mr Smith that the Thompsons had 'squared things away' with Civic and that they had been advised to seek, and had sought, legal advice.
As mentioned above, the primary judge dismissed Civic's claim against Mr Paterson but found that the Thompsons were in breach of the franchise agreements and awarded Civic damages of $36,300: Civic Video Pty Ltd v Paterson [No 3] [2014] WASC 321.

The reasons of the primary judge

The claim against Mr Paterson

It was Civic's case at trial that Mr Paterson's purpose in acquiring the head-lease from Mr Bayliss and the Thompsons' businesses was to secure control over the two Civic stores and to exclude Civic from having any presence in the Geraldton area. It was contended that Mr Paterson believed he would be able to secure a lease of the Highway store premises as the Thompsons were holding over and in arrears of rent, and by acquiring the head‑lease of the Durlacher store premises he would, upon the expiration or earlier termination of the Thompsons' lease of those premises, be able to prevent Civic from having an outlet there. Civic contended that the acquisitions of the head‑lease from Mr Bayliss and the Thompsons' businesses were thus interlinked and were occurring simultaneously, or that the proposal for Mr Paterson to purchase the Thompsons' businesses preceded the agreement for Mr Paterson to purchase the head‑lease from Mr Bayliss.
His Honour rejected the contention that the transactions were interlinked. He accepted the evidence of both Mr Paterson and Mr Smith that Mr Smith had initially approached Mr Paterson only about acquiring the head‑lease of the Durlacher Street complex from Mr Bayliss. That had led to a meeting in about mid‑August 2006 in Mr Smith's office attended by Mr Bayliss and Mr Paterson to discuss Mr Paterson's purchase of the head‑lease. His Honour found that, at or about that time, Mr Paterson agreed in principle to purchase the head‑lease for $500,000, although the written agreement was not signed until 28 August 2006. His Honour found that the agreement in principle was made while the Thompsons' contract with Mr Rock was still on foot and that it was only after the contract with Mr Rock came to an end, on or about 22 August 2006, that Mr Smith first spoke to Mr Paterson about purchasing the Thompsons' businesses [31]. The primary judge accepted Mr Paterson's evidence that the purchase of the head-lease and the purchase of the Thompsons' businesses were not interlinked but were separate transactions [30].
His Honour then turned to the specific allegations on which Civic relied for its claim.
It was common ground that the elements of the tort of intentional interference with contractual relations were as follows:
(1)there must be a contract between the plaintiff (or applicant) and a third party;
(2)the defendant (or respondent) must know that such a contract exists;
(3)the defendant must know that if the third party does, or fails to do, a particular act, that conduct of the third party would be a breach of the contract;
(4)the defendant must intend to induce or procure the third party to breach the contract by doing or failing to do that particular act; and
(5)the breach must cause loss or damage to the plaintiff.
See Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156; (2012) 207 FCR 220 [88]; Boase v Seven Network (Operations) Ltd [2005] WASC 269 [32] ‑ [33].
The primary judge took each element in turn. The first element was not in issue.
As to the second, his Honour found that Mr Paterson was aware the Thompsons had agreements with Civic regarding the operation of the two stores but that he was not shown either of the franchise agreements and he was not aware of the term of those agreements or whether they had expired. His Honour found, however, that Mr Paterson knew from his experience in the industry that franchise agreements generally contained a term that required a franchisee to obtain the franchisor's consent to early termination [104].
On the third element, the primary judge rejected Civic's contention that Mr Paterson knew that by entering into the contracts with him the Thompsons would be in breach of their franchise agreements. Civic submitted that such knowledge should be inferred from Mr Paterson's general knowledge of franchise agreements within the industry; the inclusion in his offers to purchase the businesses of an indemnity in respect of any claims by Civic; and an inquiry he had made of Mr Smith as to Civic's attitude to the sale. His Honour did not accept that submission.
In relation to the indemnity clause, the primary judge accepted the evidence of Mr Smith (whom he considered to be a credible and honest witness [13]) that he had prepared the offer documentation and that the indemnity had not been included at Mr Paterson's request but on Mr Smith's own initiative: that it was a pro forma provision Mr Smith used in offer documents. His Honour considered it was not inherently improbable that a vendor's agent might utilise pro forma provisions to insert a provision protective of a purchaser in an offer document [108].
As to the inquiry Mr Paterson made as to Civic's attitude to the sale, the primary judge noted that there was some inconsistency between the evidence of Mr Paterson and Mr Smith. In his witness statement, Mr Paterson had said that when Mr Smith raised with him the prospect of purchasing the Thompsons' stores, he had asked Mr Smith what Civic's attitude to the sale was and was told that the Thompsons had 'squared things away with Civic Video'. In cross‑examination, Mr Paterson said Mr Smith had also told him that the Thompsons had been advised to seek legal advice regarding the implications of selling the businesses before formalising any dealings, and that they had done so. Mr Smith's evidence was that when asked by Mr Paterson as to Civic's attitude, he had said that the Thompsons had been advised by him (Mr Smith) to seek legal advice, which they had done. Mr Smith did not mention in his evidence that he had told Mr Paterson that the Thompsons had 'squared things away with Civic Video'.

His Honour accepted Mr Smith's evidence that he told Mr Paterson the Thompsons had been advised by him to seek, and had sought, legal advice. His Honour found there was no evidence that Mr Smith disclosed to Mr Paterson what the legal advice was, or whether Mr Smith knew at the time of the conversation with Mr Paterson what the advice was. The primary judge did not accept Mr Paterson's evidence that Mr Smith had also told him the Thompsons had 'squared things away' with Civic [111].
His Honour concluded that Mr Paterson did not know, one way or the other, whether the sale of the businesses to him would be a breach by the Thompsons of the franchise agreements. All Mr Paterson knew was that the Thompsons had taken legal advice in relation to their position with Civic and that they wished to proceed with the sale, and he did not consider it necessary to inquire further [112]. While his Honour considered that Mr Paterson had grounds to suspect that by selling the businesses the Thompsons might be in breach of the franchise agreements, his Honour concluded that that suspicion did not amount to reckless indifference or wilful blindness [113].
As to the fourth element, the primary judge did not accept Civic's submission that by offering to purchase the businesses Mr Paterson must have intended to induce or procure the Thompsons' breach of contract. He noted that it was Mr Smith, acting on behalf of the Thompsons, who had approached Mr Paterson regarding the purchase of the businesses and Mr Paterson's offers to purchase them were a response to that approach. His Honour reiterated that when Mr Paterson had inquired as to Civic's attitude, he was told that the Thompsons had taken legal advice and that they wished to proceed. He considered that while Mr Paterson saw an opportunity for commercial advantage in the event that the Civic stores closed, there was nothing untoward in him taking advantage of that opportunity when it was offered to him. His Honour observed that that was quite different to Mr Paterson initiating the transaction with a view to inducing or procuring the Thompsons to breach their contract [114].
The claim against Mr Paterson was dismissed. His Honour went on, however, to say that had the claim against Mr Paterson been established he considered the damages to which Civic would have been entitled would have been the same as the damages awarded in relation to the claim against the Thompsons [116].

The claim against the Thompsons

The primary judge found that the Thompsons had repudiated the franchise agreements by their email of 9 October 2006 and that the sale of the assets of the businesses and their closure was in breach of the franchise agreements.

The damages awarded against the Thompsons

In its statement of claim, Civic claimed damages for the loss of the franchise fees and other amounts payable to it under each of the franchise agreements for the balance of their respective terms (the Durlacher franchise agreement expired on 20 December 2014 and the Highway franchise agreement on 2 June 2016); the loss of an opportunity to procure a purchaser for each store or to acquire the store itself; and the loss of reputation and good will in the Geraldton area.
His Honour found there was no evidence to support the latter two claims, so that the only basis for the assessment of damages was the loss of franchise fees and other amounts that would have been received by Civic had the franchise agreements been performed [51].
In support of its claim for damages, Civic relied upon the evidence of a forensic accountant, Mr Temple‑Cole. Mr Temple‑Cole assumed that the future turnover of the Durlacher store would have followed the historical trend of a decline of 4% per annum and that of the Highway store would have followed the historical trend of a growth of 2% per annum. He calculated the amount of franchise and advertising fees that would have been payable to Civic over the remaining period of the franchise agreements based on those turnover figures; determined the amounts net of the estimated tax on those amounts; and applied a discount rate of 12% to reflect the risks associated with their receipt. He then grossed up that amount by the amount of tax which would have been payable on an award of damages. That resulted in a figure of $92,366 in relation to the Durlacher store, and $146,050 in relation to the Highway store.
His Honour did not, however, accept that to be an appropriate way of assessing damages [62]. Having canvassed in some detail the evidence as to the Thompsons' financial position between 2003 and 2006, the primary judge concluded that the Thompsons were not earning a living wage from the businesses for the years 2002/2003 to 2004/2005 and that, whether or not they were technically insolvent, by October 2006 they were unable to continue trading [80].
In relation to the Durlacher franchise agreement, his Honour considered that damages could therefore be assessed only by reference to the value of the chance of Civic procuring another purchaser or, alternatively, itself taking over the lease of the Durlacher store for the remaining three years of the term. His Honour considered that Civic could not have found a purchaser in circumstances where Mr Paterson controlled the premises and the lease was only of short duration, and that it would not have taken on the expense of operating the store itself as a corporate store. His Honour therefore concluded that Civic would not have received franchise fees beyond 16 October 2006 [84]. He found that, accordingly, Civic had failed to establish that it had suffered any damage as a result of the Thompsons' breach of the Durlacher franchise agreement [85].
In relation to the Highway franchise agreement, the primary judge considered that damages were to be assessed as the loss of a chance by Civic to take a lease of the Highway store premises, a chance which his Honour accepted Civic would have sought to take up but of which it had been deprived by the Thompsons' breach [86], [88].
From the figure arrived at by Mr Temple‑Cole, his Honour deducted advertising fees, on the basis that those fees were in effect held by Civic on trust to be spent on advertising, and the cost that Civic would have incurred in a representative travelling to Geraldton if the business had continued [90], [91]. His Honour then applied a discount rate to take into account the competition from Mr Paterson's operation of a Video Ezy store at the Durlacher store premises and the decline in the industry generally. He did not accept the discount rate of 12% proposed by Mr Temple‑Cole. His Honour noted that Mr Malacco, a forensic accountant who also gave evidence, was of the view that 12% did not properly reflect the risks associated with the video hire industry and revenue streams in small businesses generally, and that Mr Malacco suggested a figure of 20% to 25% [92]. His Honour considered that a rate of 25% was appropriate [94]. After taking taxation factors into account, his Honour arrived at a figure of $72,611 [96].
In assessing the value of the lost chance, the primary judge then took into account the possibility that the lessor of the Highway premises may not have granted a 10 year lease and that Mr Paterson may have been preferred as a tenant, and the likelihood that Civic would have incurred additional costs in operating the store itself while it found a new franchisee [97]. His Honour concluded that the chance of Civic receiving franchise fees for the full term of the Highway franchise agreement was no greater than 50%. He therefore assessed Civic's damages at $36,300 [98].
The costs of the action were the subject of a separate decision by the primary judge: Civic Video Pty Ltd v Paterson [No 3] [2014] WASC 321 (S). On costs, his Honour ordered, relevantly, that in respect of Civic's claim against the Thompsons, the Thompsons should pay Civic's costs up to 12 July 2010 when a Calderbank offer made by the Thompsons and Mr Paterson expired, and Civic should pay the Thompsons' costs after that date. Civic was ordered to pay Mr Paterson's costs.

The grounds of appeal

The grounds of appeal were as follows:
As against [Mr Paterson] –
1.His Honour erred in mixed law and fact in finding that Mr Paterson did not induce the [Thompsons] to breach their franchise agreements with [Civic];
2.His Honour erred in law in concluding, had his Honour found that Mr Paterson was liable to [Civic] for inducing the [Thompsons] to breach their Franchise Agreements, that the loss and damage suffered by [Civic] should be assessed at $36,300. His Honour should have assessed [Civic's] loss and damage as:
a.The figures set out in Mr Temple‑Cole's estimates of [Civic's] loss in respect of the Durlacher Store and the Highway Store;
b.But deducting from those figures the travel expenses of $2,000 per year;
c.And applying an increased discount rate of 20‑25% to the damages; and
d.Plus interest.
As against the [Thompsons] –
3.His Honour erred in law in assessing the damages suffered by [Civic] by reason of the breaches of the franchise agreements by the [Thompsons] as $36,300. His Honour should have ordered damages against the [Thompsons] in favour of [Civic] in the sum of:
a.The figures set out in Mr Temple‑Cole's estimates of [Civic's] loss in respect of the Durlacher Store and the Highway Store;
b.But deducting from those figures the travel expenses of $2,000 per year; and
c.Plus interest.
4.His Honour erred in mixed law and fact in ordering that [Civic] pay the [Thompsons'] costs of and incidental to the action as from and including 13 July 2010, to be taxed if not agreed. His Honour should have ordered the [Thompsons] to pay [Civic's] costs of the proceedings, to be taxed if not agreed.

Disposition of the appeal

Ground 1

For present purposes, the relevant principles can be shortly stated. To give rise to liability for the tort of inducing a breach of contract, the defendant must have induced or procured the doing of what he or she knew would be a breach of contract: Short v City Bank of Sydney (1912) 15 CLR 148, 160; Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 58 FCR 26. In OBG Ltd v Allan [2007] 2 WLR 920, Lord Hoffman put the position as follows:
To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realise that it will have this effect. Nor does it matter that you ought reasonably to have done so [39].
The plaintiff must therefore prove that the defendant had sufficient knowledge of the contract to ground an intention to interfere with contractual rights. Ignorance of the existence of the contract or of its terms born of inadvertence or negligence is not enough. On the other hand, reckless indifference or wilful blindness to the truth, whilst not synonymous with intention or knowledge, may lead to a finding of the necessary intention or knowledge: Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473, 511 ‑ 512.
In LED Technologies Pty Ltd v Roadvision Pty Ltd [2012] FCAFC 3; (2012) 199 FCR 204, Besanko J (with whom Mansfield and Flick JJ agreed) said (at [54]) that wilful blindness will occur where a party makes a conscious decision not to inquire into the existence of a fact in case they discover a 'disagreeable truth'. His Honour considered the concept of reckless indifference to be quite close, being established only if the facts show affirmatively that the alleged tortfeasor, faced with knowledge of at least a substantial prospect of breach, proceeded not caring whether or not a breach would occur.
While this ground of appeal is cast in the most general terms, on the hearing of the appeal the appellant attacked two findings of fact of the primary judge; namely, that Mr Paterson did not know that the sale of the businesses by the Thompsons would breach their franchise agreements, and that Mr Paterson did not intend to induce or procure the Thompsons to breach the franchise agreements. Both findings, it was submitted, were contrary to the evidence and commercial common‑sense.
In relation to Mr Paterson's state of knowledge, four propositions were advanced in support of that submission. First, while Mr Paterson did not receive a copy of the franchise agreements, he was experienced in the operation of video stores pursuant to franchise agreements and, as the primary judge found (at [104]), was aware that franchise agreements generally had a provision requiring the franchisor's consent for early termination. Second, it was evident from Mr Paterson's inquiry of Mr Smith as to Civic's attitude to the sales that Mr Paterson was alive to the fact that the Thompsons might be breaching the franchise agreements. Mr Paterson's evidence that he was told the Thompsons had 'squared things away' with Civic was not accepted by the primary judge ([111] ‑ [112]). The fact, as found, that Mr Smith had told him the Thompsons had been advised to seek legal advice did not provide any basis to conclude that Mr Paterson was not aware the Thompsons would be in breach; indeed, had the advice been that there would be no breach it is inherently likely Mr Smith would have told Mr Paterson that. Third, the inclusion of the indemnity in the sale agreements was an acknowledgement that the sale of the businesses by the Thompsons would be in breach of contract. It defied commercial common‑sense that Mr Smith, who was the Thompsons' agent, would have voluntarily included an indemnity which protected only Mr Paterson, as did the explanation that it was a pro forma clause. The evidence of Mr Paterson and Mr Smith was inherently improbable and should not have been accepted. In any event, the mere fact that the indemnity clause was included was consistent with a concern by all involved that the acquisition may give Civic a claim against Mr Paterson. Fourth, the fact that Mr Paterson was prepared to pay $500,000 for the two stores, one of which he was going to close, in circumstances where he was aware the Thompsons were impecunious and could not continue in business, demonstrated that the acquisition was for competitive reasons, to ensure the Civic Video stores ceased to operate in the Geraldton area.
In relation to the issue of Mr Paterson's intention, it was submitted that the same matters pointed inexorably to an intention to induce or procure a breach of each franchise agreement. His explanation in evidence that he paid $500,000 for the two businesses out of altruism was farcical and weighed against acceptance of his evidence generally. His obvious intention was to remove Civic Video as a competitor in the Geraldton area.
Before turning to the specific issues raised by this ground, it is appropriate to refer to the well‑known principles that apply to an appeal of this nature. In Fox v Percy (2003) 214 CLR 118, 125 ‑ 126, Gleeson CJ, Gummow and Kirby JJ pointed out that where (as in this case) an appeal is by way of a rehearing solely on the evidence before the trial court, that shapes the requirements and limitations of the appeal. They went on to say:
On the one hand, the appellate court is obliged to 'give the judgment which in its opinion ought to have been given in the first instance'. On the other, it must, of necessity, observe the 'natural limitations' that exist in the case of any appellate court proceeding wholly or substantially on the record. These limitations include the disadvantage that the appellate court has when compared with the trial judge in respect of the evaluation of witnesses' credibility and of the 'feeling' of a case which an appellate court, reading the transcript, cannot always fully share. (footnotes omitted)
Where (as here) the appellant seeks to overturn findings of fact, the onus on the appellant goes beyond merely showing that an alternative finding was available on the facts. The appellant must show that a factual error was made by the primary judge: Minister for Immigration, Local Government and Ethnic Affairs v Hamsher (1992) 35 FCR 359, 369; Leeder v The State of Western Australia [2008] WASCA 192 [84]. In addition, as Brennan, Gaudron and McHugh JJ pointed out in Devries v Australian National Railways Commission [1993] HCA 78; (1993) 177 CLR 472, a finding of fact by a trial judge, based on the credibility of a witness, is not to be set aside because an appellate court thinks that the probabilities of the case are against - even strongly against - that finding of fact. Their Honours said:
If the trial judge's finding depends to any substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge 'has failed to use or has palpably misused his advantage' or has acted on evidence which was 'inconsistent with facts incontrovertibly established by the evidence' or which was 'glaringly improbable' (479). (footnotes omitted)
An appellant who seeks to overturn findings of fact which depend to any substantial degree upon credibility assumes a formidable burden.
In this case, I am not persuaded that there is a basis upon which this court might properly interfere with the findings of fact that the appellant seeks to controvert. In my view, each of those findings was open to his Honour on the evidence.
It is apparent, as senior counsel for the appellant acknowledged on the hearing of the appeal, that the appellant's case against Mr Paterson was built in no small part on the proposition that the acquisition of the head‑lease from Mr Bayliss and the acquisition of the assets of the Thompsons' two businesses were 'intertwined' transactions, occurring either simultaneously or with the latter preceding the former, as integral parts of an overall commercial strategy by Mr Paterson to exclude Civic Video from having any outlets in the Geraldton area.
That proposition was rejected by the primary judge. In my respectful view, he was entitled to reject it. Before turning to his Honour's findings, I should also note that both at trial, and initially on the appeal, the proposition that the acquisitions of the head-lease and the assets of the Thompsons' two businesses were 'intertwined' appears to have been advanced by the appellant on the mistaken assumption that the head‑lease applied only to the premises of the Durlacher store, rather than, as was the case, the Durlacher Street complex, of which the premises of the Durlacher store formed only about one‑third. As senior counsel for the appellant conceded on the hearing of the appeal, the fact that the head‑lease applied to the whole complex, rather than simply the Durlacher store premises, significantly detracted from the appellant's case that the transactions were intertwined (appeal ts 6).
As mentioned earlier, the primary judge found that Mr Paterson agreed to acquire the head‑lease of the Durlacher Street complex at a time when Mr Rock's agreement to acquire the Thompsons' businesses was still on foot and that Mr Paterson was only approached about acquiring the Thompsons' businesses after Mr Rock's agreement was terminated and when he had agreed in principle to acquire the head-lease of the Durlacher Street complex.
Civic contested that finding both at trial and on the appeal on the basis that initial offers to purchase the Thompsons' businesses had been made by Mr Paterson by facsimile on 25 August 2006, three days before the agreement to acquire the head‑lease from Mr Bayliss was signed. At trial, his Honour observed that little light had been shed on those offers in the evidence, but he noted that they were made three days after Mr Rock's contract to purchase the businesses had been terminated and after the time at which he had found Mr Paterson had agreed in principle to acquire the head‑lease, albeit before the execution of the written agreement on 28 August 2006. His Honour concluded that the facsimile offers were not inconsistent with the sequence of events given by Mr Smith and Mr Paterson.

Those findings, including his finding that agreement in principle for Mr Paterson to purchase the head‑lease was made in about mid‑August 2006, prior to Mr Paterson's facsimile offers to purchase the Thompsons' businesses, are not 'inconsistent with facts incontrovertibly established by the evidence' or 'glaringly improbable', and were clearly open to his Honour.
Once it is accepted that Mr Paterson had agreed to acquire the head‑lease of the Durlacher Street complex before the possibility of purchasing the Thompsons' businesses was raised with him, Civic's contention that the transactions were 'intertwined' in the manner it alleged cannot be sustained.
Turning to the specific matters raised on the appeal, it was not in issue that Mr Paterson did not see a copy of the franchise agreements before completion of the sales. While he assumed from his previous experience that the franchise agreements would contain a provision requiring Civic's consent to the sale or closure of the businesses, there was no evidence that he was aware of the term of either franchise agreement and therefore whether the Thompsons remained bound by the restrictions on the sale or closure of the businesses. He inquired, however, as to Civic's attitude to the sale and the response he received, whilst not itself conclusive, was consistent with the absence of any legal impediment. It is implicit that, having seen and heard Mr Paterson give evidence, the primary judge was satisfied that Mr Paterson did not make a conscious decision to inquire no further for fear that something 'disagreeable' might be revealed. In the circumstances, it was open to his Honour to decline to draw the inference sought by Civic that the absence of any further inquiry by Mr Paterson demonstrated knowledge of such an impediment, or reckless indifference or wilful blindness as to its existence.
I do not accept that it is inherently likely that if the legal advice was that the Thompsons would not be in breach Mr Paterson would have been told that. The information as to the legal advice came from Mr Smith, not the Thompsons with whom Mr Paterson had no contact. It was not inherently unlikely that Mr Smith did not know what the legal advice was and had not concerned himself with the nature of the legal advice, but only with whether or not it meant the sales would be proceeding.
The circumstances in which the indemnity clause came to be inserted into the sales agreements turned on an issue of credibility. The evidence of both Mr Paterson and Mr Smith was that Mr Paterson had not requested it. Mr Smith said that he prepared the sales contracts and that he had inserted the clause in many of the video stores sales contracts in which he had been involved (ts 271). As mentioned earlier, his Honour found Mr Smith to be a credible and honest witness [13]. While Mr Smith's purpose in including such a provision was never clearly explained, I am not persuaded that the evidence that he inserted it on his own initiative was so glaringly improbable that the primary judge should not have accepted it. The fact that it operated in Mr Paterson's interests, rather than the interests of the Thompsons, did not preclude the possibility that Mr Smith thought it was an appropriate provision to include in the agreements.
Finally, it was submitted that the fact that Mr Paterson was prepared to pay $500,000 for the assets of the businesses when he knew the Thompsons were unable financially to continue in the businesses, was explicable only on the basis that the sum was intended to be an inducement to them to breach the franchise agreements. Senior counsel for Civic referred to Mr Paterson's evidence that he believed he would have been able to purchase the stock in both stores for no more than $40,000 to $50,000 if the Thompsons had to close the businesses and sell the stock at a 'fire sale'. It was argued that Mr Paterson's description in cross‑examination of the offer of $500,000 for the assets of the businesses as altruistic was so farcical as to cast doubt on his evidence generally.
It is evident that the primary judge did not accept that in making such an offer Mr Paterson's motives were altruistic. His Honour considered that when Mr Smith suggested he might purchase the two businesses, Mr Paterson saw a commercial opportunity to bring about the closure of the Civic stores in Geraldton and establish a successful business on one of the two Civic sites. Whether or not Mr Paterson considered he might have been able to buy the stock in both stores for $40,000 to $50,000 if and when the businesses ultimately failed, his Honour clearly inferred that Mr Paterson was not prepared to wait to see if that eventuality came about.
Civic's submission that Mr Paterson's offer was far in excess of the real value of the Thompsons' businesses also ignores the offer made some three weeks previously by Mr Rock. Mr Rock's offer of $405,000 plus stock at valuation was made, like Mr Paterson's, on the basis that one store would be closed and the stock in it transferred to the other, apparently because Mr Rock, like Mr Paterson, considered that operating the two stores was not commercially viable. Senior counsel for Civic argued that Mr Rock's offer was not an appropriate comparison because Mr Rock did not have Mr Paterson's knowledge of the Thompsons' parlous financial circumstances. There was, however, no evidence of that and in circumstances where Mr Rock apparently considered the two stores to be unviable and had reached the stage of making an application for finance for their purchase, it certainly could not be inferred that he was unaware the Thompsons were in financial difficulties.
In my opinion, on the evidence it was open to his Honour to find that Civic had failed to establish its claim that Mr Paterson had induced or procured the Thompsons to breach their contract. This ground of appeal should be dismissed.

Ground 2

In light of my finding on ground 1, this ground does not arise.

Ground 3

Civic did not challenge the finding of the primary judge that the only basis for the assessment of damages was the loss of franchise fees and other payments that would have been received by Civic had the Thompsons performed the franchise agreements for the term of those agreements. Civic contended, however, that in assessing those damages his Honour wrongly did so on the basis of a loss of opportunity rather than a loss of bargain.
This ground should be upheld. Civic's claim was pleaded and advanced at trial on the basis of a conventional loss of bargain claim. As mentioned earlier, in support of its claim Civic relied upon the evidence of Mr Temple‑Cole that Civic would have received by way of franchising and advertising fees the sum of $92,366 in relation to the Durlacher store and $146,050 in relation to the Highway store over the balance of the term of the respective franchise agreements.
The primary judge rejected that approach. He said:
The difficulty with Civic's assessment of damages is its reliance upon the factual assumption that, had the Thompsons not sold their business to Mr Paterson, they, or some alternative franchisee who may have purchased the stores, would have continued to trade without interruption for the remaining terms of the franchise agreements. That assumption is not borne out by the evidence.
As I have already found, the Thompsons would not have continued to trade after 16 October 2006 [62] ‑ [63].
In relation to the Durlacher franchise agreement, his Honour considered that damages could only be assessed by reference to the value of the chance that Civic could have procured another franchisee or itself taken over the operation of the business. He did not consider either would have occurred. His Honour continued:
To award Civic damages based on franchise fees it would have received on the assumption that the Thompsons, or some assignee of the Thompsons, would have continued to trade for the balance of the period of the franchise agreement would be to place Civic in a far better position than it would have been had the Thompsons not breached the agreement but endeavoured to perform their obligations to the extent that they were able.
...
In my view, had the Thompsons not sold the business to Mr Paterson, Civic would not have received any entitlement to franchise fees beyond October 2006. Indeed, it is very unlikely that they would have received the arrears of franchise fees which Mr and Mrs Thompson ultimately paid after the sale of their business, and Civic would, therefore, have been worse off than it ultimately was.
In the circumstances, I do not consider that Civic has established that it has suffered any damages as a result of the Thompsons' breach of the Durlacher Street franchise agreement [83] ‑ [85].
In my opinion, that, with respect, was an erroneous approach. The franchise agreements having been terminated by Civic for the Thompsons' breach, Civic was entitled to 'loss of bargain' damages; that is, damages to put it in the position it would have been in if the Thompsons had performed the franchise agreements - what, it has been suggested, might be better described as 'hypothetical performance' damages: Cheshire & Fifoot Law of Contract (10^th Australian ed, 2013), [23.6].
As Civic's case was advanced at trial, the assessment of those damages did not involve any question of loss of chance and nor was it relevant that, due to their poor trading results, the Thompsons may, or would, have been unable to perform the franchise agreements for the balance of the term. That the Thompsons were financially unable to continue to perform the franchise agreements might be an explanation for their breach but it did not relieve them of the consequences of the breach and it was not relevant to the assessment of damages. The damages remained, in my opinion, to be assessed on the basis of the amount that Civic would have received had the Thompsons performed the franchise agreements for the balance of their respective terms.
In support of a notice of contention, it was submitted by counsel for the Thompsons, as I understood the argument, that by virtue of cl 10.2 of the franchise agreements, the Thompsons were not required to conduct the businesses throughout the term but only to use their best endeavours to do so. If the Thompsons had not repudiated the franchise agreements they would have been unable, even using their best endeavours, to continue to trade beyond 16 October 2006 and would have closed the businesses at that point. It was argued that that would have constituted a voluntary abandonment of the businesses, for which Civic's only remedy would have been to terminate the franchise agreements under cl 18.1. Such a termination would not have given Civic a right to damages for breach. Accordingly, Civic had suffered no, or at most minimal, damages by reason of the repudiation.
There is nothing in that argument. It is based upon a fundamental misunderstanding of the franchise agreements.
The franchise agreements each provided, relevantly:
10.Operation of the Business
At all times during the Term, the Franchisee must:
…
10.2exercise its best endeavours to conduct and promote the Business and the Civic Video System;
…
10.10conduct the Business at the site during such hours as are observed by similar businesses or between such minimum hours as the Franchisor may specify from time to time.
…
18.Termination
18.1The Franchisor may terminate this Agreement by immediate, or at its sole discretion, greater written notice to the Franchisee, unless this Agreement states or law requires otherwise, if:
(a)a receiver, receiver and manager, liquidator, administrator, trustee or assignee in insolvency of the Franchisee is appointed:
(i)over the Franchisee; or
(ii)over all or substantially all of the Franchisee's assets;
(b)a mortgagee takes possession of all or substantially all of its assets;
(c)the Franchisee voluntarily abandons, the Business;
…
Those provisions do not have the effect contended for by the Thompsons. Clause 10.10 required the Thompsons to conduct the business at the site for the specified hours 'at all times during the Term'. Clause 10.2 required them 'at all times during the Term' to use their best endeavours to (relevantly) conduct and promote the business. That is, cl 10.2 simply specified the manner in which the Thompsons were to conduct and promote the business during the Term. It did not affect the obligation of the Thompsons under cl 10.10 to conduct the business throughout the Term. On no fair reading of those provisions, in the context of the franchise agreement as a whole, could cl 10.2 be understood to mean that the Thompsons were required to conduct the business only for so long as they were able to do so using their best endeavours.
Nor does cl 18 assist the Thompsons. It is unnecessary to consider the effect of cl 18 beyond saying that it could not properly be read as giving a franchisee carte blanche to walk out of the business at any time during the Term without any liability to Civic for doing so. Civic's entitlement under cl 18.1(c) to terminate the franchise agreement in the event of the franchisee voluntarily abandoning the business is not inconsistent with the right of Civic to treat an abandonment as a breach of cl 10.10 and to sue for damages for breach. It was plainly not intended to preclude such a right.
This ground of appeal should be upheld.
The assessment of damages should be remitted to the primary judge to be undertaken according to law. The assessment of damages turns substantially on findings of fact from the concurrent expert evidence given by the expert witnesses for each side at trial and the expert reports that were admitted into evidence. Because of the view he took as to the manner in which damages were to be assessed, that was not an enquiry upon which the primary judge embarked. In my view, it is not a task that this court can properly undertake and it must therefore be remitted to the primary judge.
There is, however, one matter on which it is appropriate to comment. The primary judge took the view that Civic was not entitled to damages in respect of the advertising fees which it would have received from the Thompsons had they performed the franchise agreements. That is because of the view his Honour took as to the effect of the provisions of the franchise agreements relating to the advertising fees. The relevant provisions can be shortly described.
Clause 5.2(b) of the franchise agreements provided that the franchisee was to pay to Civic a monthly advertising fee calculated in accordance with that provision. Clause 15.1 provided that Civic must credit all such fees paid by franchisees to the 'Advertising Fund' and separately account for them in its books and records of account. Under cl 15.2, Civic was required to develop and implement an advertising, development and marketing programme for the 'Civic Video System' and to use the Advertising Fund to defray all expenses it thereby incurred. It further provided that if at any time the Advertising Fund did not have sufficient credit to meet Civic's expenses, Civic was not obliged to provide any advertising, development and marketing programme. The Civic Video System is described above at [4]. It is significant that the advertising, development and marketing programme on which the fees were to be expended were for the 'Civic Video System' generally and not specifically in relation to the Thompsons' stores.
His Honour considered that the effect of cl 15 was that the advertising fees were impressed with a trust for use for advertising for the benefit of franchisees, to the extent of the available funds, and not money to which Civic was entitled in its own right. If Civic was awarded damages in respect of the advertising fees it would be entitled to use those funds as its own and thereby be in a better position than it would have been in if the Thompsons had performed the franchise agreements. His Honour concluded that Civic's claim in respect of the unpaid advertising fees must therefore fail.
In my respectful view, the primary judge was in error in so finding. Civic was entitled to enforce the Thompsons' contractual obligation to pay to it the advertising fees for the purposes of the Advertising Fund and, following the termination of the franchise agreement, to seek damages for the diminution of the funds available to Civic to develop and implement an advertising, development and marketing programme for the 'Civic Video System' by reason of the Thompsons' failure to perform the franchise agreements. The Thompsons were not relieved of that liability because under the franchise agreements the fees were payable to Civic to be used by it for a specific purpose.

Ground 4

This ground turns on the effect of a Calderbank offer jointly made by all of the respondents before trial. In light of my finding that ground 3 should be allowed and the assessment of damages remitted to the primary judge, this ground falls away. However, had it been necessary to do so I would have upheld it.
On 28 June 2010, the Thompsons and Mr Paterson jointly made an offer, expressed to be a Calderbank offer, to settle the action by the payment to Civic of the sum of $50,000, inclusive of costs. The offer, which was sent to Civic's solicitors, stated that 'for the purposes of assessing the reasonableness of this offer we estimate that your client's taxed costs to date in the action should it be successful may not exceed $15,000.' The offer was rejected.
The primary judge found that Civic had achieved at trial an outcome less favourable than if it had accepted the offer. In reaching that conclusion his Honour took into account the substantial costs which Civic had incurred since the offer was made, a significant portion of which he assumed would not be recoverable from the Thompsons on taxation, and Civic's liability for Mr Paterson's costs of the action as a result of the dismissal of the claim against him.
Nevertheless, his Honour concluded that it was not unreasonable for Civic to reject the offer. His reasons for that conclusion were, in substance, threefold; namely, the difficulty in calculating the amount of the damages, the absence of expert evidence at that stage, and the fact that the offer was inclusive of costs. His Honour held that as the rejection of the offer was not unreasonable, the Thompsons were not entitled to indemnity costs [25], [26].
However, the primary judge concluded that, notwithstanding its rejection was reasonable, the offer remained relevant to the general discretion as to costs [28]. He referred to McKay v Commissioner of Main Roads [No 7] [2011] WASC 223 (S) at [127]. His Honour considered that in the exercise of that discretion it was a relevant factor favouring an order for party and party costs against Civic that the Thompsons were substantially successful on the central issue at trial (that is, that the franchise fees would not have continued to be paid after 16 October 2006), with the result that the award of damages of $36,300 was far closer to the respondents' offer than Civic's assessment of its claim at $238,416 [31]. His Honour referred to McKay at [96], [124], [127].
His Honour considered that as Civic had put the other parties to substantial expense and achieved an outcome less favourable than if the offer had been accepted, Civic should pay the Thompsons' costs from 12 July 2010 on a party and party basis and the Thompsons should pay Civic's costs up to that date [33].
It was submitted on behalf of Civic that the primary judge had erred in concluding that by not accepting the offer Civic was worse off than if it had accepted the offer. His Honour had reached that conclusion by comparing Civic's position with regard to both the Thompsons (against whom it had received an award of $36,300 plus interest) and Mr Paterson (against whom it had failed), and with the costs it had incurred after the offer was made. That was the wrong approach. The question of the costs of the action against Mr Paterson had been dealt with separately, Civic having been ordered to pay his costs. The question was whether with respect to the Thompsons, Civic was worse off by not accepting the offer. It clearly wasn't. Nor was it appropriate to have regard to the costs incurred after the offer was made; the adequacy of the offer was to be assessed by comparing the amount of the offer to the judgment obtained. Further, his Honour erred in taking into account whether Civic's claim or the Calderbank offer was closer in amount to the damages awarded at trial. McKay was not authority for the proposition that that is a relevant consideration.

Those submissions should be accepted. In my opinion, the question whether Civic was worse off as a result of rejecting the offer had to be determined in respect of the Thompsons separately. His Honour, with respect, erred in determining that question by reference to Civic's overall position in relation to both Mr Paterson and the Thompsons. His Honour also erred in taking into account the costs incurred by Civic after the offer was made up to and including trial. In this case, the proper approach was to compare the principal sum offered in the Calderbank offer with the amount of the judgment sum obtained at trial.
In respect of the Thompsons, Civic was not worse off. Despite its somewhat equivocal language, the offer is properly to be understood as an offer of $35,000 in respect of damages and $15,000 in respect of costs. Civic obtained an award of damages, in effect, in the sum of $36,300 plus interest from 3 October 2006 at the rate of 6% per annum. As at the date of the offer, the amount of interest payable at that rate was in the order of $8,000. The amount of the judgment obtained by Civic against the Thompsons thus exceeded the amount of the offer by some $9,000. The primary judge was therefore in error in finding that Civic was worse off for having rejected the offer.
I should also say that I do not consider McKay is authority for the proposition that in the exercise of the discretion as to costs it is a relevant consideration whether the amount of the Calderbank offer or the amount of the offeree's claim is closest to the outcome at trial. If McKay was authority for such a principle I would consider that it was wrongly decided. I do not, however, think that it is such authority. The example given by Beech J in that case, and on which the primary judge relied, was of a case where the defendant had denied liability but offered an amount by way of settlement, and at trial the plaintiff, although successful in establishing liability, received an award of damages no greater than the amount offered by the defendant. Beech J considered that in such circumstances an order that the plaintiff pay the defendant's costs on a party and party basis may well be appropriate. That example is not this case. In McKay, the Calderbank offer was some $6 million greater than the amount the plaintiff achieved at trial and the plaintiff was ordered to pay the defendant's costs on a party and party basis from the date the offer expired.
In my respectful opinion, in ordering Civic to pay the Thompsons' costs from 12 July 2010 the primary judge erred in the exercise of his discretion as to costs. The re‑exercise of the discretion as to costs is a matter for the primary judge once the assessment of damages is complete.

Conclusion

I would:
1.dismiss grounds 1 and 2 of the grounds of appeal;
2.allow grounds 3 and 4 of the grounds of appeal;
3.set aside the orders of the primary judge that there be judgment for Civic against the Thompsons in the sum of $36,300 and remit the assessment of the damages to which Civic is entitled against the Thompsons to the primary judge for determination;
4.set aside the orders of the primary judge as to the costs of the action as between Civic and the Thompsons and remit that issue to the primary judge to be determined upon the assessment of damages as between those parties;
5.dismiss the Thompsons' notice of contention.
CORBOY J: I agree with Newnes JA.