Eshuys v St Barbara Ltd (No 2)
[2011] VSC 150
•18 April 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. SCI 2009 10251
| EDUARD ESHUYS | Plaintiff |
| v | |
| ST BARBARA LIMITED | Defendant |
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JUDGE: | KAYE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 April 2011 | |
DATE OF JUDGMENT: | 18 April 2011 | |
CASE MAY BE CITED AS: | Eshuys v St Barbara Limited (No 2) | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 150 | |
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COSTS – Offers of compromise by defendant – Plaintiff failed at trial on liability – Whether defendant entitled to costs on indemnity basis.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R Strong | Gadens Lawyers |
| For the Defendant | Mr P Solomon SC and Mr E Gisonda | Freehills |
HIS HONOUR:
On 6 April 2011, I handed down my reasons for judgment in the proceeding.[1] In those reasons, I held that the defendant had not breached the variation agreement dated 18 August 2008, in assessing the amount of the performance based completion payment to be made by the defendant to the plaintiff under clause 4 of that agreement. Accordingly, I concluded that the plaintiff’s claim for damages, for breach of that agreement, should fail.
[1]Eshuys v St Barbara Ltd [2011] VSC 125.
There is no dispute that, as a result of my decision, the plaintiff should pay the defendant’s costs of the proceeding. However, the defendant has contended that I should order that the plaintiff pay the defendant’s costs on an indemnity basis from 21 May 2010. That contention is based on three offers, which the defendant made to the plaintiff, to resolve the proceeding between March 2010 and May 2010.
The first offer by the defendant constituted a “Calderbank” offer of compromise[2], and was contained in a letter by the defendant’s solicitors to the plaintiff’s solicitors dated 18 March 2010, entitled “Without Prejudice Save as to Costs”. By that letter, the defendant offered that the plaintiff discontinue his proceeding against the defendant and that each party should bear its own costs. That offer was stated to be open for acceptance by the plaintiff until 1 April 2010. The letter referred to, and summarised, the defence which had been delivered on behalf of the defendant dated 5 February 2010. It noted that, following the delivery of that defence, the defendant had provided to the plaintiff copies of the documents, which were referred to in the defence.
[2]Calderbank v Calderbank [1976] Fam 93.
Subsequently, on 16 April 2010, the defendant served on the plaintiff an offer of compromise under Order 26.02 of the Rules of the Supreme Court, offering to compromise the proceeding for the amount of $70,000 together with party/party costs. The offer of compromise was stated to be open to be accepted by the plaintiff for 14 days after service of the offer. That offer, in turn, was followed by a second offer of compromise, under Order 26.02, dated 7 May 2010, by which the defendant offered to compromise the proceeding for the amount of $115,000 together with party/party costs. That offer was also stated to be open to be accepted by the plaintiff for 14 days after service of it.
Principles
Ordinarily, costs are awarded in favour of the successful party on a party/party basis. Order 26 of the Rules of the Supreme Court contains a number of provisions, specifying the particular costs consequences, where a party to litigation does not accept an offer of compromise, and, subsequently, obtains a judgment which is no more favourable to that party than that contained in the terms of the offer. Order 26.08 provides for the consequences where the plaintiff obtains judgment on the claim, which is no more favourable to the plaintiff than the terms of an offer of compromise made by the defendant, which has not been accepted by the plaintiff. That rule does not apply to this case, because it does not specify the consequences to a plaintiff, where the defendant has obtained judgment on the claim, in a proceeding in which the defendant has served an offer of compromise. However, it is common ground that, in those circumstances, such an offer of compromise by the defendant is to be given the same effect as Calderbank offers of compromise.[3]
[3]Stipanov v Mier (No 2) [2006] VSC 424, [8]-[11] (Hollingworth J); Foster v Galea & Anor (No 2) [2008] VSC 331, [7] (Byrne J); Tenth Vandy Pty Ltd v Natwest Markets Australia Pty Ltd (No 2) [2010] VSC 70, [13] (Croft J).
In Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2)[4], the Court of Appeal gave consideration to the principles, which should be applied in determining whether solicitor/client costs should be awarded against a party who, by judgment, has failed to obtain a more favourable result than that contained in a Calderbank offer of compromise. In particular, the court held that the critical question, in such a case, is whether the rejection of the offer was unreasonable, taking into account (inter alia) the following factors: the stage of the proceeding at which the offer was received; the time allowed to the offeree to consider the offer; the extent of the compromise contained in the offer; the offeree’s prospects of success, assessed as at the date of the offer; the clarity with which the terms of the offer were expressed; and whether the offer foreshadowed an application for an indemnity costs order in the event of the offeree rejecting it.[5]
[4](2005) 13 VR 435; [2005] VSCA 298.
[5]Pages 441-2; [23]-[25] (Warren CJ, Maxwell P and Harper AJA).
The resolution of the question of the unreasonableness of a party, in not accepting an offer of compromise, is assisted by taking into account the policy objectives which the courts have identified as being relevant to this issue. In particular, the courts have been concerned to encourage litigants to save costs by negotiating reasonable settlements. In addition, it is considered that a party, who has made an offer of compromise, should be indemnified in respect of costs, which have been incurred, as a consequence of the other party acting unreasonably by not accepting that offer.[6]
[6]Grbavac v Hart [1997] 1 VR 154, 164-165 (Hayne JA); Mutual Community Ltd v Lorden Pty Ltd (Unreported, Supreme Court of Victoria, Byrne J, 28 April 1993, pages 12-13).
In determining this question, it is important to ensure that the reasonableness of the offeree, in not accepting the particular offer, is assessed as at the time at which the offer was made. It is therefore necessary to be conscious of the dangers involved in judging that conduct in hindsight, in particular after a contested trial, in which the facts have been the subject of detailed evidence.[7]
[7]Stipanov v Mier (No 2), above, [12] (Hollingworth J).
Further, the defendant is seeking an order for costs which is not the usual order. Accordingly, it was common ground that the defendant bears the onus of persuading me that the failure by the plaintiff to accept the offers of compromise was unreasonable at the time at which the offers were made to him.[8]
[8]Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2), above, 440-441 [19]-[20]; Foster v Galea & Anor (No 2), above, [11]; Leichhardt Municipal Council v Green [2004] NSWCA 341, [46] (Santow JA).
The issues relating to costs
The three offers of compromise were each made by the defendant at a relatively early stage of the proceeding. The plaintiff does not contend that insufficient time was allowed to him to consider the offers. The offers were expressed in clear terms. The first offer of compromise (the Calderbank offer) foreshadowed that an application for an indemnity costs order would be made, in the event of the plaintiff rejecting it. Although no such statement was contained in the two offers made under Order 26, Mr Strong, for the plaintiff, did not contend that his client was not thereby placed on notice that, should he fail in the action, the offers would be treated as “Calderbank” offers of compromise.
The critical issue, concerning the present application, relates to the question of the plaintiff’s prospects of success, assessed as at the date at which the offers were made. In considering that question, it is important to bear in mind that the plaintiff did not participate in, nor was he privy to, the considerations by the directors of the defendant, as to the amount of the performance based completion payment to be made to him. Thus, the question, whether it was unreasonable for the plaintiff to have rejected the offers of compromise made to him by the defendant, depends significantly on the knowledge, which the plaintiff then had of the material facts relating to the issues in the case, and on whether, in light of the plaintiff’s knowledge of those facts at that time, the plaintiff ought reasonably to have made an assessment that he should have accepted the offers made to him by the defendant.
The claim by the plaintiff, that the defendant breached the variation agreement of 18 August 2008, was made on three principal bases, namely: that the defendant failed to make a measured assessment of the extent to which there had been compliance with the two criteria stated in clause 4 of the agreement; that the defendant acted on an incorrect view as to what constituted the “milestones” referred to in the second criterion specified in clause 4 of the variation agreement; and that the defendant, in exercising its discretion, made a determination which was capricious, irrational, arbitrary or perverse. Mr Strong submitted that, based on the information available to the plaintiff at the time at which the defendant made the three offers of compromise to him, it was not unreasonable for the plaintiff to consider that he had reasonable prospects of success on the first basis of liability, to which I have just referred. Mr Solomon SC, who appeared with Mr Gisonda for the defendant, did not contend to the contrary.
In my view, Mr Strong was on sound ground in submitting that the plaintiff, on the information then available to him as at May 2010, was not acting unreasonably in considering, at that time, that he had reasonable prospects of succeeding on the basis that the defendant’s board had failed to make a “measured” assessment of the extent of compliance with the two criteria stated in clause 4 of the variation agreement. It was common ground, at trial, that, under clause 4, the defendant’s board was required to make a measured determination of the extent of compliance with those criteria, and that, if it had not done so, the defendant would thereby have breached its obligations under clause 4 of the agreement.
It will be recalled that the directors of the defendant made their decision, concerning the performance based completion payment to be made to the plaintiff, on 12 March 2009. On that date, Mr Wise, the chairman of the defendant, wrote a letter to the plaintiff, informing him of the decision of the board. Although the letter is not entirely clear on the point, nevertheless it was capable of giving rise to an understanding that the board had not made a measured assessment of the degree of compliance with the two criteria contained in the variation agreement. Subsequently, the defendant’s solicitors wrote a letter to the plaintiff’s solicitors dated 5 May 2009. That letter referred to the two criteria contained in clause 4 of the agreement and then stated:
“This obligation to pay only arises if both conditions are satisfied. Both conditions were not satisfied. Accordingly, the obligation does not arise. Therefore, the board was not required to pay the performance bonus at all.”
Clearly, on receipt of that letter, the plaintiff was entitled to understand that the defendant’s board had not undertaken a measured assessment of the degree of compliance with the true criteria stated in clause 4 of the agreement, but, rather, had determined that no amount was payable to the plaintiff, because (inter alia) the company had not met the milestones contained in the budget.
Subsequently, the plaintiff’s solicitors sent to the defendant’s solicitors a copy of the proposed statement of claim. In response, the defendant’s solicitors wrote a letter to the plaintiff’s solicitors dated 11 November 2009 stating:
“… The board exercised its discretion correctly. The objective financial data upon which the board relied when making its determination demonstrated that your client failed to meet basic performance milestones.”
In light of the foregoing correspondence, in my view, when proceedings were issued in November 2009, the plaintiff was entitled, on the information then available to him, to understand that the defendant had not made a measured determination of the extent of compliance with the two criteria stated in clause 4 of the variation agreement. The defence, delivered by the defendant on 5 February 2010, did not contain any pleading, which would have disabused the plaintiff of that understanding. The “Calderbank” letter of offer by the defendant dated 18 March 2010 did not refer to the issue. In those circumstances, it is clear that on the information then available to him, the plaintiff was entitled to assume that the defendant had not made a measured assessment of the degree of compliance with the two criteria in clause 4 of the agreement.
At that stage, discovery of documents had not taken place between the parties. The defendant had not provided to the plaintiff the communications between the directors, which preceded the meeting of 12 March 2009, and which, in part, related to this particular issue. Nor, of course, did he have any information as to the discussions by the directors at their dinner meeting on 23 February, or at their meeting on 12 March. Thus, the plaintiff was not then seised with the evidence, which was adduced at trial, and based upon which I concluded that the board of directors of the defendant had, in fact, undertaken a measured assessment of the extent of compliance with the two criteria contained in clause 4 of the variation agreement. Based on the information, available to the plaintiff at the time at which the defendant made the three offers of compromise to him between March and May 2010, the plaintiff was entitled to have an understanding to the contrary, namely, that in fact the defendant, in breach of clause 4 of the variation agreement, failed to undertake a measured assessment of the extent of compliance with the two criteria.
As I stated, Mr Solomon did not seek to persuade me to a contrary conclusion to that which I have just expressed. Rather, his principal submission was that, notwithstanding that it was not unreasonable for the plaintiff to have considered, in May 2010, that he had good prospects of success on the question of the breach by the defendant of clause 4 of the variation agreement, it was unreasonable for the plaintiff not to have accepted the offer of $115,000, as a reasonable assessment of the damages to which he would have been entitled arising out of that breach.
It was common ground, at the trial, that, if the plaintiff established a breach of the variation agreement by the defendant in the determination, by the board of directors, of the amount of the performance based completion payment payable by the defendant to the plaintiff, the damages payable to the plaintiff would be based on an assessment by the court as to what a reasonable board, in the position of the defendant’s board on 12 March 2009, would have determined to be the extent of compliance with the two criteria contained in clause 4 of the variation agreement. The defendant had paid to the plaintiff the sum of $150,000 in respect of the performance based completion payment. Thus, the question, which I must determine, is whether it was unreasonable for the plaintiff to have expected, as at May 2010, that the damages payable to him would have been based on an assessment by the court that the board, correctly applying clause 4 of the variation agreement, would have decided the amount of the performance based completion payment in excess of $265,000.
Mr Solomon submitted that it would have been unreasonable for the plaintiff to have held such an expectation. He submitted that, in May 2010, the plaintiff had all the financial information, on which the board had made its decision in respect of the performance based completion payment. In particular, the plaintiff was aware of the extent to which, between September 2009 and February 2010, the defendant company had failed to achieve the production, operating cost, cash flow, cash balance and net profit targets contained in the budget. Mr Solomon submitted that, based on that information, the plaintiff had acted unreasonably in expecting that the court would have assessed damages payable to him on the basis that, if the defendant’s board had made a determination in accordance with clause 4 of the variation agreement, the board would have decided that the plaintiff was entitled to a performance based completion payment in excess of $265,000.
As I have emphasised, that question must be determined in light of the information which was then available to the plaintiff. At that time, the plaintiff had little information as to how the defendant had, in fact, determined the amount of the performance based completion payment made to him. As I stated, on the information then in his possession, it was reasonable for the plaintiff to understand at that time (albeit, in hindsight, incorrectly) that the board had not made a measured determination of the extent of compliance with the two criteria in clause 4. That is, on the information then available to the plaintiff, he was entitled to understand that the defendant had decided that, strictly, he was not entitled to any amount by way of a performance based completion payment, because the two criteria, specified in clause 4 had not been complied with. Based on the correspondence sent to the plaintiff at that time, the plaintiff was entitled to assume that the payment of $150,000 was made to him, notwithstanding the conclusion by the defendant’s board that he was not entitled to any payment at all.
It is important to bear in mind that, in May 2010, the plaintiff did not have in his possession the various memoranda and documents, which passed between the directors of the board of the defendant in the period leading up to the decision of 12 March 2009. In particular, he did not have in his possession the memorandum by Ms Gibson to the directors dated 20 February 2009, the memorandum by Mr Wise to the directors dated 21 February 2009 (containing the “Road map”), the memorandum by Mr Wise to Ms Gibson dated 6 March 2009, the memorandum by Ms Gibson to Mr Wise dated 7 March 2009, or the memorandum by Mr Wise to the directors dated 8 March 2009. Furthermore, until the service of witness statements in this case, the plaintiff did not have any information as to the content of the discussions which occurred between the directors at their dinner meeting on 23 February 2009, or at their meeting on 12 March 2009, when they reached their decision as to the amount of the performance based completion payment to be made to the plaintiff.
Clause 4 of the agreement provided that the amount of the performance based completion payment, payable to the plaintiff under clause 4, was to be determined by the board as a discretionary assessment of the extent of compliance with the two criteria in clause 4. In the absence of the information, to which I have just referred, the plaintiff would not have had any information as to how the directors of the defendant would have applied their discretionary consideration to that issue. It will be recalled that, as the third basis upon which the plaintiff claimed that the defendant breached the variation agreement, the plaintiff maintained that the board acted irrationally, capriciously, arbitrarily or perversely in taking certain factors into account, or not taking other factors into account, in reaching its determination as to the amount of the payment to be made to him. The plaintiff had no information as to how the defendant viewed any of those factors, and what weight (if any) the defendant’s board had given to them. Thus, as at May 2010, the plaintiff was not in possession of any information, on which he might have made a considered assessment, as to the amount which the court would consider that a reasonable board, in the position of the defendant’s board on 12 March 2009, would have determined to be payable to the plaintiff, based on a measured assessment of the extent of compliance with the two criteria contained in clause 4.
Under clause 4 of the variation agreement, the plaintiff was entitled to a payment of up to $1,000,000. Taking into account the sum of $150,000 already paid by the defendant to the plaintiff, the third offer of compromise made to the defendant, in effect, amounted to 26.5 percent of that amount. Bearing in mind that the onus of persuasion on this issue lies on the defendant, I am not persuaded, in the above circumstances, that, in light of the paucity of the information available to the plaintiff at May 2010, it was unreasonable for him to have expected that, if he succeeded in establishing a breach of contract by the defendant, he would have been awarded damages in excess of $115,000. Accordingly, I am not persuaded that it was unreasonable for the plaintiff not to have accepted the offers of compromise made to him in this case.
In reaching that conclusion, I have been mindful of the underlying policy objectives, considered by the authorities in relation to Calderbank offers of compromise. Further, I am mindful that, in most litigation, the recipient of an offer of compromise is not, generally, seised with all of the information which might emerge at trial, and which might affect that litigant’s prospects of success. However, in this case, as I have already stated, the plaintiff was not a party to the decision made by the defendant in respect of the performance based completion payment payable to him. At the time at which the offers of compromise were made to him, he had little information as to the basis upon which that payment was determined by the defendant’s board. In my view, and in light of the information then available to him, it was not unreasonable for the plaintiff not to accept the offers of compromise made to him by the defendant.
Accordingly, I reject the application by the defendant that the plaintiff pay to it either indemnity costs, or solicitor/client costs, from 22 May 2010.
For the purposes of completeness, I should also state that, if I had been persuaded that it had been unreasonable for the plaintiff not to have accepted the offers of compromise made to him by the defendant, I would have awarded costs against the plaintiff from 22 May 2010 on a solicitor/client basis, and not on an indemnity basis. At the conclusion of my reasons for judgment,[9] I remarked upon the shortcomings in the witness statements served on behalf of the defendant. It was evident from those witness statements, and from the contents of the Court Book, that the defendant, in preparing its defence, unreasonably incurred a substantial amount of costs which were wasted in the proceeding. If (contrary to my above conclusion) I had concluded that the plaintiff acted unreasonably in not accepting the offers of compromise, it would have been unjust to require him to indemnify the defendant in respect of costs, such as those, which were unnecessarily incurred by it.
[9]Paras [180]-[185].
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