Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd (No 2)
[2014] SASC 141
•23 September 2014
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
ESSENTIAL BEAUTY FRANCHISING (WA) PTY LTD AND ORS v PILTON HOLDINGS PTY LTD AND ORS (NO 2)
[2014] SASC 141
Judgment of The Honourable Justice Blue
23 September 2014
PROCEDURE - COSTS - GENERAL RULE - COSTS FOLLOW THE EVENT
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - ORDER FOR COSTS ON INDEMNITY BASIS
The first plaintiff sued the defendants for monies due under a master franchise agreement and for declaration that it validly terminated the master franchise agreement. The defendants counterclaimed for a declaration that the master franchise agreement was not validly terminated and for damages for wrongful termination.
Judgment was granted in favour of the plaintiffs and the counterclaim was dismissed. The plaintiffs seek an order that the defendants pay their costs of the action and counterclaim on a solicitor and client basis on three alternative bases:
1. as a contractual debt under clause 12.23 or clause 17 of the master franchise agreement;
2. alternatively, in the general discretion of the Court by reason of the defendants’ non-acceptance of the plaintiffs' informal offers;
3. alternatively, under rule 188(6) of the Supreme Court Civil Rules 2006 (SA) by reason of the defendants’ non-acceptance of a formal filed offer made on 8 January 2014.
The plaintiffs also seek an order that the defendants pay to the Court 95 per cent of the daily trial fee on the basis that the defendants were plaintiffs on the counterclaim which was the substantive matter heard at trial.
Held:
1. On its proper construction, clause 12.23 of the master franchise agreement does not apply to costs incurred by the master franchisor in defending a claim brought against it by the master franchisee (at [19]).
2. On its proper construction, clause 12.23 does not require the master franchisee to pay costs on a solicitor and client basis (at [29]).
3. On its proper construction, clause 17 of the master franchise agreement does not apply to costs incurred by the master franchisor in suing the master franchisee or defending an action brought against it by the master franchisee (at [13]-[16]).
4. Rule 188(6) does not entitle a plaintiff in its capacity as a defendant to a counterclaim to costs on a solicitor and client basis from the inception of the action (at [38]).
5. In all of the circumstances, by reason of their non-acceptance of the informal offer on 8 April 2013 in conjunction with an objective assessment of their prospects of success, the defendants should pay the plaintiffs’ costs of the action and counterclaim on a solicitor and client basis after 15 April 2013 (at [59]-[60]).
6. On its proper construction, regulation 5 and Schedule 1 item 14 to the Supreme Court Regulations 2005 (SA) impose a liability upon the plaintiff to pay the daily trial fee unless the Court has ordered otherwise before the liability is incurred (at [75]).
Supreme Court Civil Rules 2006 (SA) r 4, r 28(2), r 188(6); Supreme Court Regulations 2005 (SA), referred to.
BHP Billiton Ltd v Parker [2012] SASCFC 73; (2012) 113 SASR 206; Clarke v Australian Broadcasting Corporation [2001] VSC 274; District Bank LD v Adelphi Hotel (Brighton) LD [1953] 1 WLR 955; Jones v Bradley (No 2) [2003] NSWCA 258; Messiter v Hutchinson (1987) NSWLR 525; Micarone v Perpetual Trustees Australia Ltd (No 2) [1999] SASC 533; Morris v McEwen [2005] SASC 284; (2004) 92 SASR 281; MT Associates Pty Ltd v Aqua-Max Pty Ltd [2000] VSC 163; Pirrotta v Citibank Ltd (1998) 72 SASR 259, discussed.
Baresic v Slingshot Holdings Pty Ltd (No 2) [2005] NSWCA 160; Calderbank v Calderbank [1975] 3 All ER 333; Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd [2014] SASC 84; Micarone v Perpetual Trustees Australia Ltd (No 2) [1999] SASC 533, considered.
ESSENTIAL BEAUTY FRANCHISING (WA) PTY LTD AND ORS v PILTON HOLDINGS PTY LTD AND ORS (NO 2)
[2014] SASC 141Civil:
BLUE J:
On 30 June 2014, I made a declaration that the first plaintiff Essential Beauty Franchising (WA) Pty Ltd (Essential Beauty WA) validly terminated a Master Franchise Agreement between it and the defendants Pilton Holdings Pty Ltd and Angus Forrest. I also made subsidiary declarations and orders, entered judgment for Essential Beauty WA against Pilton and Mr Forrest for $279,808.41 and dismissed the defendants’ counterclaim.[1]
[1] Essential Beauty Franchising (WA) Pty Ltd & Ors v Pilton Holdings Pty Ltd & Ors [2014] SASC 84.
The plaintiffs seek an order that the defendants pay their costs of the action and counterclaim on a solicitor and client basis. The defendants do not resist an order that they pay these plaintiffs’ costs of action on a party and party basis but resist the costs being payable on the higher solicitor and client basis.
The plaintiffs seek a solicitor and client costs order against the defendants on three alternative bases:
1.as a contractual debt under clause 12.23 (or clause 17) of the Master Franchise Agreement;
2.alternatively, in the general discretion of the Court by reason of the defendants’ non-acceptance of one or more of three informal offers and one formal offer made between 8 April 2013 and 8 January 2014;[2]
3.alternatively, under rule 188(6) of the Supreme Court Civil Rules 2006 (SA) (the Rules) by reason of the defendants’ non-acceptance of a formal filed offer made on 8 January 2014.
[2] Calderbank v Calderbank[1975] 3 All ER 333.
After the conclusion of the trial, the plaintiffs sought an order under Schedule 1 item 14 to the Supreme Court Regulations 2005 (SA) that the defendants pay 95 per cent of the daily trial fee.
Contractual claim
It is common ground that, even when a contract provides for payment of costs of litigation, costs nevertheless remain in the discretion of the court and the court is not bound to make a costs order in accordance with the contract.[3] It is also common ground that, if on its proper construction the Master Franchise Agreement provides for solicitor and client costs, there is no reason not to make a costs order in accordance with the contract.
[3] Micarone v Perpetual Trustees Australia Ltd (No 2) [1999] SASC 533 at [32] per Olsson, Debelle and Wicks JJ.
If there is a contractual entitlement to costs on a solicitor and client basis, that entitlement is confined to the first plaintiff, Essential Beauty WA, and does not apply to any costs entitlement of the second plaintiff, Essential Beauty Franchising, which is not a party to the Master Franchise Agreement. However, in practice, the costs incurred in this action relate mainly to the counterclaim against Essential Beauty WA rather than to the claim by Essential Beauty WA.
Clause 12.23 of the Master Franchise Agreement provides:
The Master Franchisee agrees with the Company as follows:
…
12.23to pay the reasonable costs and expenses which the Company may in any way incur arising from any default by the Master Franchisee in the performance of its obligations under this Agreement.
Clause 17 of the Master Franchise Agreement provides:
The Master Franchisee covenants and agrees that it will assume the sole and entire responsibility for and indemnify and save harmless the Company from any and all claims, liabilities, losses, expenses, responsibility and damages by reason of any claim, proceedings, action, liability or injury arising out of the Master Franchisee’s conduct of the Business or as a result of the Master Franchisee’s dealings with its Franchisees and other third parties or because of any breach of this Agreement by the Master Franchisee.
Three questions of construction arise in relation to clause 12.23 and clause 17:
1.does clause 12.23 or clause 17 impose an obligation on Pilton to pay legal costs on a solicitor and client basis?
2.does clause 12.23 or clause 17 apply to the costs incurred by Essential Beauty WA in defending the counterclaim brought by Pilton?
3.does clause 17 apply to costs incurred by Essential Beauty WA in litigation between Essential Beauty WA and the defendants not involving any third party?
It is convenient to address these three questions in reverse order.
Application of clause 17 to litigation between the parties
The plaintiffs rely upon clause 12.23 and refer to clause 17 to support their construction of clause 12.23. However, in the course of their submissions, the plaintiffs contend that, on its proper construction, clause 17 applies to costs incurred in litigation between the plaintiffs and the defendants over disputes arising under the Master Franchise Agreement, thereby relying independently upon clause 17 for a contractual entitlement to costs on a solicitor and client basis. The defendants contend that clause 17 applies only to liabilities incurred by Essential Beauty WA vis a vis third parties.
For the purposes of analysis, clause 17 can be recast as follows:
The Master Franchisee covenants and agrees that it will assume the sole and entire responsibility for and indemnify and save harmless the Company from:
all claims, liabilities, losses, expenses, responsibility and damages
by reason of any claim, proceedings, action, liability or injury:
(a) arising out of the Master Franchisee’s conduct of the business or
(b) as a result of the Master Franchisee’s dealings with its Franchisees and other third parties or
(c) because of any breach of this Agreement by the Master Franchisee.
The plaintiffs concede that the clauses designated (a) and (b) above relate to claims by third parties against Essential Beauty WA or liabilities of Essential Beauty WA to third parties, and do not relate to claims simply between master franchisor and master franchisee. They contend, however, that the clause designated (c) above does extend to the latter. I reject that contention.
Clause 17 is an indemnity clause directed to circumstances in which the master franchisor has a liability or potential liability to a third party, either alone or jointly with the master franchisee. If the liability is joint, under the clause the master franchisee is to assume sole and entire responsibility for the liability. If the liability is alone, the master franchisee is to indemnify the master franchisor against that liability. The liability the subject of the assumption or indemnity extends to claims as well as judgments and to legal costs as well as liabilities, losses, expenses and damages generally. The clause has no application to a simple contractual dispute between the master franchisor and master franchisee themselves.
The clause designated (c) above is to be read in the context of the clauses designated (a) and (b) above and in the context of the clause as an indemnity provision as a whole. If the clause had been intended to provide for the master franchisee to pay costs in litigation between master franchisor and master franchisee, it may be expected that it would have been differently constructed.
Clause 17 does not find any contractual entitlement in Essential Beauty WA to payment of costs of this action.
Application to a counterclaim
The plaintiffs contend that clause 12.23 applies to costs incurred by Essential Beauty WA in defending the counterclaim in this action as well as the costs incurred by Essential Beauty WA in prosecuting the claim against the defendants. The defendants contend that the clause is apt to apply to the costs of Essential Beauty WA in suing for the contractual debt that resulted in judgment for the sum of $279,808.41, but does not apply to the costs incurred by Essential Beauty WA in defending the counterclaim for wrongful termination of the Master Franchise Agreement.
Clause 12.23 applies to costs incurred by Essential Beauty WA:
arising from any default by the Master Franchisee in the performance of its obligations under this Agreement.
The costs incurred by Essential Beauty WA in defending the counterclaim brought against it by Pilton for wrongful termination of the Master Franchise Agreement did not arise from any default by Pilton in the performance of its obligations under the Master Franchise Agreement. Rather, they arose from the institution and prosecution of the counterclaim. If the counterclaim had been successful, it could not be said that Essential Beauty WA’s costs in unsuccessfully defending it arose from any default by Pilton in the performance of its obligations. Merely because the counterclaim was unsuccessful does not entail that the defence costs arose from a default by Pilton in the performance of its obligations.
In theory, Essential Beauty WA could claim its legal costs incurred in prosecuting its own claim for the contractual debt that has now become the judgment debt. However, in circumstances in which that debt was admitted at trial,[4] the costs so incurred form a very small proportion of the total costs incurred by Essential Beauty WA in the proceedings and the plaintiffs do not seek a differential costs order in this manner.
[4] Subject only to the counterclaim.
Scale of costs
In light of my conclusions at [16] and [19] above, the question whether costs under clause 12.23 are on a solicitor and client, or party and party basis does not strictly arise for decision.
Clause 12.23 requires Pilton to pay:
the reasonable costs and expenses which the Company may in any way incur arising from any default...
By comparison, rule 264(2) defines “party and party costs” to be:
on the basis that the party entitled to the costs will be reimbursed for costs reasonably incurred by the party in the conduct of the litigation to an extent determined by reference to the scale of costs in force, under these Rules or the previous rules, when the costs were incurred.
and rule 264(5)(a) defines “solicitor and client costs” to be:
on the basis that the party will be fully reimbursed for costs reasonably incurred by the party in the conduct of the litigation.
Each definition refers to “costs reasonably incurred”: the difference being that the former are to be determined on the basis of reimbursement by reference to the scale of costs under the Rules, whereas the latter are to be determined on the basis of full reimbursement.
The wording of clause 12.23 is consistent with either party and party costs or solicitor and client costs as defined by the Rules. It is arguable that clause 12.23 refers to party and party costs because party and party costs are defined to involve reimbursement of costs reasonably incurred. It is arguable that clause 12.23 refers to solicitor and client costs because solicitor and client costs are defined to involve full reimbursement of costs reasonably incurred.
In re Adelphi Hotel (Brighton) LD; District Bank LD v Adelphi Hotel (Brighton) LD,[5] a clause in a mortgage provided that the mortgagee was to pay “all costs, charges and expenses incurred or paid by the bank in relation to the negotiation for and preparation, completion realization and enforcement of this security”.[6] Vaisey J held that, on its proper construction, the clause provided only for payment of party and party costs. Vaisey J said:
I put my judgment on this part of the case, involving as it does a point of construction, on the ground that, as every taxation in which more than one party (in addition to the solicitor) is interested is prima facie a taxation as between party and party, any other basis of taxation is only justified when the party asking for it can show that he is entitled to it either upon some well-recognised principle, or under some contract plainly and unambiguously expressed.
I can find no such principle, nor any such contract here.[7]
[5] [1953] 1 WLR 955.
[6] Ibid at 956.
[7] Ibid at 961.
In Micarone v Perpetual Trustees Australia Ltd (No 2),[8] Olsson, Debelle and Wicks JJ said:
The general rule is that, in the absence of an agreement to the contrary, a mortgagee is entitled to costs on a party and party basis. The expression of a contrary intention must be “plainly and unambiguously expressed” to use the words of Vaisey J in Re Adelphi Hotel Co Ltd at 961.[9] (Citations omitted)
[8] [1999] SASC 533.
[9] Ibid at [32].
The plaintiffs acknowledge that the principle of construction articulated by Vaisey J adopted by the Full Court would apply to clause 12.23 if it were found in a mortgage, but contend that this principle does not apply to other types of documents such as leases. I reject that contention. There is no reason to distinguish between a mortgage and a lease or a lease and a licence in this respect. Nor is there reason to distinguish between an agreement creating or granting proprietary rights and an agreement creating rights in personam.
Clause 12.23 is ambiguous. It should be construed on the basis that it provides only for party and party costs as there is no sufficient basis to prefer a construction entailing solicitor and client costs.
Rule 188 claim
The plaintiffs rely upon rule 188 in the alternative to their reliance upon the general discretion of the Court and the principle articulated in Calderbank v Calderbank.[10] . However, it is convenient to address the plaintiffs’ claim based on rule 188 before turning to the general discretion.
[10] [1975] 3 All ER 333.
On 8 January 2014, the plaintiffs filed under rule 187 a formal offer of settlement (the Formal Offer) in the following terms:
The Plaintiffs (and First and Second Defendant by Counterclaim) and the Third Defendant by Counterclaim OFFER pursuant to Rule 187 to settle the action as follows:
1. accept payment of the total sum of $100,000 (the “Offer”) in full and final settlement of all claims made in the Fourth Statement of Claim dated 17 September 2012;
2. of the total amount of the Offer, the sum of $75,000 relates to the principal relief claimed in the Fourth Statement of Claim dated 17 September 2012 (including for the avoidance of any doubt, the claim for interest) and the sum of $25,000 relates to costs;
3. the offer as to the principal relief may not be accepted without accepting the offer as to costs and vice versa;
4. each of the Defendants and Plaintiffs by Counterclaim consent to an order that the Second Counterclaim dated 19 December 2012 be dismissed with no order as to costs.
The defendants do not suggest that the offer was not a valid offer under rule 187, but contend that the plaintiffs are only entitled to solicitor and client costs under rule 188(6) in respect of the claim and not in respect of the defence to the counterclaim.
Rule 188(6) provides:
If a formal offer of settlement so far as it relates to principal relief is not accepted by the party to whom the offer is made and the Court determines the relevant action or claim on terms (as to principal relief) that are no more favourable to the party than the terms of the offer, then, subject to the Court's order to the contrary—
(a) the party to whom the offer was made is not to be entitled to costs referable to the period falling after the relevant date; and
(b) the party that made the offer—
(i) if a defendant—is entitled to costs referable to the period falling after the relevant date; and
(ii) if a plaintiff—is entitled to the whole of the party's costs of action on a solicitor/client basis and the defendant is not entitled to any costs not otherwise ordered.
the “relevant date” is defined by rule 188(7) to mean:
the date falling 14 days after the date of service of the offer.
The Rules explicitly provide that a counterclaim is a secondary action,[11] that “plaintiff” encompasses a party seeking relief in a secondary action and that “defendant” encompasses a party against whose interest a secondary action lies.[12] In a composite action, a person may be defendant in one individual action and plaintiff in another action.[13]
[11] Supreme Court Civil Rules 2006 (SA) rule 28(2).
[12] Supreme Court Civil Rules 2006 (SA) rule 4.
[13] Supreme Court Civil Rules 2006 (SA) rule 4.
Rule 188(6) sharply differentiates between the consequences of non-acceptance by a defendant of an offer by a plaintiff to settle its claim when the plaintiff obtains judgment on better terms and the consequences of non-acceptance by a plaintiff of an offer by a defendant when the plaintiff fails to obtain judgment on better terms. In the former case, the plaintiff is prima facie entitled, not only to costs on a solicitor and client basis, but to such costs from the inception of the action.[14] By contrast, in the latter case, by force of rule 188(6)(b)(i)[15] the defendant is only entitled prima facie to costs on a party and party basis and only in respect of costs incurred 14 days after service of the offer.
[14] In this respect, rule 188(6)(b)(ii) has a deliberately penal operation and provides an incentive to defendants to settle actions: Whitehead v Maas (No 2) (1991) 56 SASR 362 at 367 per King CJ (Mohr and Olsson JJ agreeing).
[15] If the plaintiff is successful overall in the action, by force of other provisions of the Supreme Court Civil Rules 2006 (SA) and the usual exercise of discretion, absent special factors the defendant might be expected to be ordered to pay the plaintiff's costs up to the relevant date after the plaintiff's offer. If the plaintiff is unsuccessful overall in the action, by force of other provisions of the Rules and the usual exercise of discretion, absent special factors the plaintiff might be expected to be ordered to pay the defendant’s costs of action and rule 188(6) might be otiose.
In the present case, Essential Beauty WA and Essential Beauty Franchising were plaintiffs in the action and the offer contained in paragraphs 1 to 3 of the Formal Offer was addressed to the plaintiffs’ action and not to the defendant’s counterclaim. Essential Beauty WA and Mr Maiello[16] were defendants to the counterclaim and the offer contained in paragraph 4 of the Formal Offer was addressed to the counterclaim.
[16] Technically Essential Beauty Franchising was also shown as a defendant to counterclaim, but it was made plain at trial that the counterclaim was brought only against Essential Beauty WA and Mr Maiello.
Under rule 188(6)(b)(ii), Essential Beauty WA and Essential Beauty Franchising are prima facie entitled to their costs of instituting and prosecuting the primary action on a solicitor and client basis. However, under rule 188(6)(b)(i), Essential Beauty WA and Essential Beauty Franchising are prima facie entitled only to their costs of defending the counterclaim – the secondary action - on a party and party basis.
Rule 188(6) has a differential operation in respect of costs incurred on a claim and counterclaim by a party who is plaintiff on the claim and defendant on the counterclaim. It is conceivable that, if the vast majority of costs were incurred by a party on its claim and a small proportion of costs incurred in defending a counterclaim, particularly when the claim and counterclaim were integrated, it might be an appropriate exercise of discretion to order that the party receive all of its costs of the proceedings on a solicitor and client basis from the inception of the proceedings. However, that is not so in this case. In this case, the position is complex. Very little costs were incurred on Essential Beauty WA’s claim insofar as it sued for a contractual debt because that debt was admitted by the defendants, subject only to the counterclaim. Each of the plaintiffs and defendants sought declaratory relief as to the validity of Essential Beauty WA’s purported termination of the Master Franchise Agreement such that the costs incurred on issues going to the validity of that termination might be said to arise both on the action and the counterclaim. The defendants brought a large counterclaim for damages for wrongful termination and substantial costs were incurred on that issue. In reality, it would be very difficult to separate costs incurred in the action as opposed to costs incurred in the counterclaim. However, the mere fact that Essential Beauty WA is a plaintiff in the primary action is no reason why it should receive solicitor and client costs from the inception of the proceedings in its capacity as a defendant in the secondary action, contrary to the purpose and effect of rule 188(6)(b)(ii).
In their submissions, the plaintiffs do not contend that rule 188(6) operates other than as described in the previous two paragraphs. However, they draw attention to the words “subject to the Court's order to the contrary” in rule 188(6) and contend that, in circumstances in which there is both a claim and a counterclaim, there is good reason to order to the contrary, namely to award the successful plaintiff/defendant by counterclaim costs on a solicitor and client basis from the inception of the proceedings. The purpose of the words in rule 188(6) relied upon by the plaintiffs is to preserve the residual discretion of the Court as to costs. I turn therefore to consider the general discretion as to costs.
General discretion: Calderbank v Calderbank
The plaintiffs contend that the defendants unreasonably rejected four offers (comprising three informal and one formal offer) successively made by the plaintiffs to settle the proceedings and this is a ground for ordering that the defendants pay the plaintiffs’ costs of the proceedings on a solicitor and client basis after the offers were not accepted.
On 8 April 2013, the plaintiffs’ solicitors wrote a letter to the defendants’ solicitors on a without prejudice basis save as to costs. The letter referred to a without prejudice conference that had taken place between the parties on 4 April and put an offer to settle the proceedings. The terms in the letter included payment by the plaintiffs to the defendants of $375,000 within seven days of acceptance with each party to bear its own legal costs. There were various ancillary terms associated with disconnecting any future operations by the defendants from the ongoing Essential Beauty franchise business. Those terms included the following:
Your clients…promptly and forever cease and desist from in any way holding themselves out as in any way associated with Essential Beauty, including without limitation, as a master franchisee or former master franchisee of Essential Beauty…
The 8 April 2013 offer was said to be not negotiable. The offer was expressed to be open for acceptance until 15 April 2013 on account of the imminent expenses to be incurred by the plaintiffs in relation to expert reports and trial preparation.
On 17 October 2013, the plaintiffs’ solicitors wrote a letter to the defendants’ solicitors on a without prejudice basis save as to costs. The letter put an offer to settle the proceedings on the basis that each of the claim and counterclaim be dismissed with no orders as to costs. The offer was expressed to be open for acceptance for 21 days.
On 8 January 2014, the plaintiffs’ solicitors wrote a letter to the defendants’ solicitors on a without prejudice basis save as to costs. The letter put an offer to settle the proceedings upon terms set out in the letter. The terms included payment by the plaintiffs to the defendants of $200,000 (inclusive of interest and costs) within seven days of acceptance with the counterclaim to be dismissed. There were ancillary terms for mutual releases and confidentiality. The offer was expressed to be open for acceptance until 5 pm on 29 January 2014.
On 8 January 2014, the plaintiffs also concurrently filed the Formal Offer offering to settle the proceedings on the basis of payment by the defendants to the plaintiffs of $100,000 (inclusive of costs of the action) with the counterclaim being dismissed and each party bearing its own costs of the counterclaim.
The first offer
At trial, the plaintiffs were successful on the fundamental issue of the validity of the termination of the Master Franchise Agreement, were awarded judgment for $279,808.41 payable from the defendants and are entitled to an order for costs of the action and counterclaim, at least on a party and party basis. This result favourably compares to the first offer made by the plaintiffs on 8 April 2013 to settle the proceedings on the basis of their payment to the defendants of $375,000.
The defendants contend that they did not unreasonably reject or not accept that offer because it was expressed to be open only for seven days and this gave them inadequate time to consider acceptance. The defendants further contend that the offer was not accepted, reasonably, because it was a non-negotiable term of the offer that the defendants not hold themselves out as a former master franchisee of Essential Beauty in circumstances in which Pilton was in truth a former master franchisee.
Rule 188(6)(b)(ii) imposes costs consequences in respect of filed offers which take effect in the case of offers by a defendant 14 days after service of the offer. Rules 187 and 188 permit filing a formal offer until 21 days before trial and acceptance of such an offer until seven days before trial, implying a minimum period of 14 days during which the offer is open. There are several cases in which courts have considered whether informal offers have not been unreasonably rejected because they were open for less than 14 days.
In Messiter v Hutchinson,[17] an informal offer[18] was made by a defendant before an arbitration hearing was listed to commence on 13 April 1987. The offer was made on Friday, 3 April 1987, and was expressed to be open until 4pm, Wednesday 8 April 1987. The plaintiffs contended that the offer should not be taken into account because it was only open for five days and was made at the last minute. The plaintiff did not suggest that she did not have sufficient time to consider the offer, nor did she attempt to seek an extension of time for acceptance of the offer. The amount achieved by the plaintiff in arbitration was less than the amount previously offered by the defendant. Rogers J held that the defendant was to pay the plaintiff’s costs up to 8 April, and thereafter deprived the plaintiff of her costs because of her unreasonable rejection of the offer.
[17] (1987) 10 NSWLR 525.
[18] Also known as a Calderbank offer which takes its name from comments by Cairns LJ in Calderbank v Calderbank [1975] 3 All ER 333.
In Pirrotta v Citibank Ltd & Ors,[19] the plaintiffs sued the defendants Citibank and Olsson & Co. Citibank brought a third party claim against Olsson & Co. The plaintiffs failed against Citibank but they and Citibank both succeeded against Olsson & Co. About two months before trial, the plaintiffs had made an informal offer of settlement to Olsson & Co by letter dated 8 April 1997. The plaintiffs offered to contribute $30,000 to Citibank on the basis that Olsson & Co indemnify them against their liability to Citibank. The offer was expressed to be open for 14 days. At trial, the plaintiffs achieved better than this position.[20] The trial judge declined to award solicitor and client costs in favour of the plaintiffs against Olsson & Co. The Full Court dismissed the plaintiffs’ appeal essentially for reasons unrelated to the period for which the offer was open. However, Debelle J (Millhouse and Olsson JJ agreeing) said:
The intention of Rule 41 is to allow a reasonable time in which to consider an offer. This litigation had been proceeding for more than two years when the offer was made. The appellants’ solicitor did not in all the circumstances allow sufficient time in which to consider the offer. In other words, the letter was not sufficiently consistent with the regime in Rule 41. No reason has been given for the peremptory tone of that part of the letter limiting the time for acceptance. Offers of compromise are more likely to be accepted if a reasonable time is permitted for consideration of the offer. A period longer than 14 days would not have been unreasonable. Although I do not place a great deal of weight on this factor, it is nevertheless relevant.[21]
[19] (1998) 72 SASR 259.
[20] The plaintiffs were ordered to contribute $15,000 to Citibank and the respondents were to indemnify the appellants against their liability to Citibank.
[21] Ibid at 270.
In M.T Associates Pty Ltd v Aqua-Max Pty Ltd & Anor (No 3)[22] the plaintiff made an informal offer to settle the proceedings by accepting $2.6 million inclusive of costs. The offer was expressed to be open for six days. Gillard J declined to award indemnity costs in favour of the plaintiff for reasons unrelated to the period for which the offer remained open. Gillard J ordered that the defendants pay the plaintiffs costs incurred after 22 November 1999 on a solicitor and client basis, and rejected the defendant’s contention that the short period for which the offer was open was a reason not to award solicitor and client costs, saying:
[T]his litigation had been on foot by 15 November 1999 for some 21 months since the hearing commenced and some five years since it was instituted. I have no doubt that experienced counsel and the experienced solicitor acting for the defendants would have no difficulty in assessing what the offer represented and I have no doubt they could have made up their mind about whether they wished to accept within a period of less than six days.[23]
[22] [2000] VSC 163.
[23] Ibid at [122].
In Clarke & Anor v Australian Broadcasting Corporation & Ors,[24] the plaintiff made an informal offer to the ABC to settle the action on Monday 4 June 2001. The offer was expressed to be open until noon, Friday 8 June 2001. The trial was listed to commence on 12 June 2001. Ashley J ordered that the ABC pay the plaintiff’s costs after 12 June on a solicitor and client basis. Ashley J observed that given that the ABC had made a counter offer on 7 June 2001, the ABC was not disabled by the short period of time of 4 days for which the offer was left open from giving it proper consideration.
[24] [2001] VSC 274.
In Jones v Bradley (No 2),[25] the defendant made an informal offer of settlement by fax at 2.13pm on Friday, 26 October 2001. The offer was expressed to be open until 10.15 am on Monday, 29 October 2001 (in effect the offer was open for less than half of a working day) and was made during the course of the trial. After a successful appeal on quantum, judgment against the defendant was reduced to a figure substantially below the defendant’s offer. The Court of Appeal ordered that the plaintiff pay the defendant’s costs of action from 26 October 2001 to 3 December 2001. Meagher, Beazley and Santow JJA held that in the circumstances of the case and given the prior negotiations between the parties, the plaintiff had a reasonable time in which to consider the offer.
[25] [2003] NSWCA 258.
In Morris v McEwen & Anor,[26] the defendant made an informal offer to settle the proceedings by letter dated Thursday 1 May 2003, by payment of $20,000 plus costs to the plaintiff. The offer was expressed to be open for seven days. As the letter was not received by the plaintiff until Tuesday 6 May 2003, effectively it was only open for two days. The plaintiff made a counter offer on 7 May 2003. Ultimately the plaintiff obtained net judgment for approximately $15,000. The trial judge awarded the plaintiff costs of action up to 15 May 2003, but ordered that the plaintiff pay the defendant’s costs thereafter. A majority of the Full Court, Besanko J dissenting, allowed the plaintiff’s appeal. White J (Debelle J agreeing) took into account the short period of two days for which the offer was open in reaching an overall conclusion that the trial judge’s discretion miscarried and the plaintiff should have his costs of action at large. White J said:
the offer was open for a period much shorter than the 14 day period established by Rule 40 as a reasonable period in which a plaintiff might consider and deal with an offer. In effect, as the offer was received by the plaintiff’s solicitors on 6 May 2003, it was open for acceptance for only two days. The defendants submitted that was not a matter of significance in the present circumstances because, the plaintiff had, as of fact, responded to the defendant’s offer by a letter dated 7 May 2003, that is, within the seven day period. It was submitted, therefore, that the stipulated seven day period had been sufficient in this case. I do not regard that consideration as being persuasive. It is to be expected that in every case where solicitors for a party receive an offer, expressed to be open for only a limited time, those solicitors will, in the proper exercise of their professional duty, make all reasonable efforts to obtain their client’s instructions with respect to the offer within the time stipulated. If they do not, and the offer lapses, the solicitors may expose themselves to an action in professional negligence from their own client…
…the offer departed in a significant way from the régime established by the courts to encourage parties to settle their differences without the need of litigation. That departure made it inappropriate to attach such significance to the defendants’ offer.[27]
[26] [2005] SASC 284; (2004) 92 SASR 281.
[27] Ibid at [77], [79].
In BHP Billiton Ltd v Parker,[28] the plaintiff made an informal offer by letter dated 14 March 2008 to accept $25,000 plus costs from each defendant. The offer was expressed to remain open for seven days. The trial judge awarded the plaintiff indemnity costs from 14 March 2008. A majority of the Full Court, Gray J dissenting, dismissed BHP’s appeal against the costs order but varied it so that costs was payable on a solicitor and client basis instead. Doyle CJ and White J said:
It is a factor in favour of BHP that each offer made by Mr Parker was open for a short time only. As the court observed in Pirrotta and in Morris, a settlement offer by letter that does not conform to the scheme in the Rules for a formal offer of settlement will not necessarily be given the weight, in the exercise of the discretion as to costs, that a formal offer according with that scheme would be given. A party receiving an offer that is open for a short time only might not have sufficient time properly to consider the offer. An offer that has a short deadline for acceptance has done its work once that time has expired, and that suggests that the court, when considering such an offer in relation to costs, should focus its attention fairly carefully on the period of time during which the offer was open. In the present case the parties were represented by solicitors who, the Judge commented, were experienced in litigation relating to the exposure of workers to asbestos. The Judge considered that the litigation has proceeded far enough for the parties to be in a position to assess their risks. Medical reports had been exchanged. It is unlikely that BHP did not have time adequately to consider its position. The significant matter, as we have already remarked, is that from early December 2007 until March 2008 each offer proposed a consent judgment for $50,000. The parties appear to have been at issue only on the question of costs.[29]
[28] [2012] SASCFC 73; (2012) 113 SASR 206.
[29] Ibid at [268].
In assessing whether to make a costs order other than the usual order by reason of the rejection or non-acceptance of an informal offer, the following principles are established by the authorities cited above and other authorities.
1.The mere fact that it was open to the offeror to file a formal offer under the Rules is not in itself a reason to discount reliance upon rejection or non-acceptance of an informal offer as a reason to make an order departing from the general rule that costs on a party and party basis follow the event (a special costs order).
2.While non-acceptance or rejection of an informal offer can be a relevant factor to take into account, it is not the only relevant factor and all relevant factors should be considered in deciding whether to make a special costs order.
3.In assessing whether the offeree had a reasonable time to assess whether to accept the offer, it is necessary to take into account all the circumstances, including the stage the action has reached, the information available to the offeree, previous negotiations between the parties, legal representation of the offeree, the nature of the issues in the action and whether there was a response by the offeree to the offer.
4.In deciding whether to make a special costs order, it is relevant to compare the form and substance of the informal offer with the form and substance required of a formal offer under the Rules.
5.The mere fact that an offer is expressed to remain open for less than 14 days, or for less than the period required of a formal offer under the Rules, is not in itself fatal to an application for a special costs order founded on non-acceptance of the informal offer.
In the present case, in assessing whether the defendants acted unreasonably in not accepting the April 2013 offer, it is relevant to take into account an objective assessment of the defendants’ prospects of success at that point. It is apparent that there was, and had been since 2010, a dispute between the parties as to the proper construction of clause 9.1.2 of the Master Franchise Agreement and in particular whether it was the role of the master franchisor or master franchisee to accredit third party suppliers and whether franchisees were to purchase product from any one of the master franchisor, master franchisee or accredited third party suppliers or only from such as were designated by the master franchisee, Pilton.[30] However, it was uncontestable, and not contested by the defendants at trial, that it was the exclusive role of the master franchisor to approve product.[31] Leaving aside the identity of approved suppliers, Pilton manifestly failed to comply with Essential Beauty WA’s directions concerning approved product and this failure gave Essential Beauty WA an explicit entitlement under clause 22 to terminate the Master Franchise Agreement.[32] For this reason, objectively assessed, the defendants had very poor prospects of success on the termination issue.
[30] This dispute is identified in my principal reasons for judgment: [2014] SASC 84 at [184]–[186].
[31] As explained in my principal reasons for judgment: ibid at [212].
[32] For the reasons given in my principal reasons for judgment: ibid at [275] and [370] – [374].
Aside from the time for which the offer remained open, the defendants contend that the offer was not unreasonably rejected because it included a term that the defendants agree not to hold themselves out as a former master franchisee of Essential Beauty. If the defendants had promoted the ongoing business on the basis that they were a former master franchisee of Essential Beauty, there would have been a potential for consumers to be misled. The plaintiffs had a legitimate interest in avoiding any inappropriate holding out. The letter of 8 April 2013 contemplated that a deed of settlement would be entered into by the parties. This would have given to the defendants the opportunity to fine tune the wording of the holding out clause. The inclusion in the letter of the term concerning holding out does not preclude a finding that the defendants’ rejection of the offer was unreasonable.
In all of the circumstances, it was unreasonable for the defendants to reject the April 2013 offer. The mere fact that offer was open for acceptance for only seven days is not in all of the circumstances a reason to ignore the offer in determining whether to make a special costs order. As at April 2013, the proceedings had been on foot for two years and the defendants were in a position to have made a realistic assessment of the prospects of success. The defendants would have been acting imprudently if they had not made such an assessment given the costs and potential liabilities they were incurring after two years of litigation. The defendants had attended a settlement conference four days before the informal offer was made, which indicates that they were in a position to make an informed decision about resolving the matter. The defendants were represented by solicitors. The defendants did not respond to the letter. There is no affirmative reason to think that the defendants did not have sufficient time to respond to the offer. Despite expressions in the letter that the terms were not negotiable and the offer would remain open only for seven days, if the defendants had been seriously contemplating a resolution in monetary terms in the vicinity of the offer made, there was nothing to prevent their requesting an extension of time to consider the offer. There was nothing to prevent the defendants making a counter offer themselves on the same terms after the offer had expired. In all the circumstances, I am satisfied that the defendants had adequate time in which to consider the offer and that they decided to reject it on the merits and not due to any limitations of time.
The offer entailed a substantial payment of $375,000 by the plaintiffs to the defendants. In the circumstances identified at [57] above, this represented a very generous offer. From the defendants’ point of view, that offer far exceeded their position following trial. It is appropriate to order that the plaintiffs have costs of the claim and counterclaim on a solicitor and client basis from 16 April 2013.
The second offer
The October 2013 offer was expressed to be open for 21 days. The defendants do not contend that it was open for too short a time, so as to disentitle the plaintiffs to rely upon it as a ground for seeking a special costs order.
The terms of the October 2013 offer were that the claim and counterclaim would both be dismissed with no order as to costs. The defendants contend that, because the plaintiffs did not offer to pay any money or provide non-monetary consideration to the defendants, the offer is not one which should give rise to a special costs order upon its rejection or non-acceptance.
If a plaintiff were to make an informal offer to a defendant to agree to judgment for the full amount of the plaintiff’s claim together with interest and party and party costs, the rejection of such an offer would be incapable of comprising a ground for making a special costs order because acceptance of the offer would involve a complete capitulation by the defendant. If it were so regarded, such informal offers would become universal, as would special costs orders. The same applies to an informal offer by a defendant to a plaintiff to judgment being entered dismissing the plaintiff’s claim with an order that the plaintiff pay the defendant’s party and party costs. For this reason, there is a considerable body of authority that, to form a ground for making a special costs order, an informal offer must involve genuine compromise by the party compared to its position on success at trial.[33]
[33] See, for example, Baresic v Slingshot Holdings Pty Ltd & Anor (No 2) [2005] NSWCA 160 at [13] per Beazley JA (Mason P and Bryson JA agreeing).
The defendants contend that the October 2013 offer did not involve genuine compromise because it did not involve any payment by the plaintiffs to the defendants on account of their counterclaim. I reject that contention. By the offer, the plaintiffs offered to forego the contractual debt of over $200,000, which was either uncontested or uncontestable if the defendant’s counterclaim failed. They also offered to forego party and party costs which at that point must have been in excess of $100,000. It is unnecessary to decide whether an offer to forego the costs in itself involved a genuine compromise because the offer to forego the contractual debt as well resulted in the offer involving a genuine compromise.
If I had not concluded that the plaintiffs are entitled to solicitor and client costs from 16 April 2013, I would have ordered the defendants pay costs on solicitor and client basis from 8 November 2013 due to the unreasonable refusal of the October 2013 offer.
The third and fourth offers
The 8 January 2014 informal offer involved payment of $200,000 by the plaintiffs to the defendants. It was expressed to be open for 21 days. The defendants do not contend that it was open for too short a time, so as to disentitle the plaintiffs to rely upon it as a ground for seeking a special costs order. There is no basis for a contention by the defendants that it did not involve a genuine compromise. If I had not concluded that the plaintiffs are entitled to solicitor and client costs from 16 April 2013, I would have ordered that the defendants pay costs on this basis from 30 January 2014 due to the unreasonable refusal of the January 2014 offer.
A formal offer was filed on the same day. In circumstances in which both the plaintiffs and defendants were seeking declarations as to the validity of the purported termination of the Master Franchise Agreement, which was the major issue at trial and which arose on both the action and counterclaim, I consider that I have a discretion under rule 188(6) to make an order that the defendants pay the plaintiffs’ costs on a solicitor and client basis from the inception of the action. However, there is no good reason to exercise that discretion. The formal offer was filed less than a month before trial and rule 188(6) does not have an automatic operation for the reasons explained above. I have already determined that the defendants should pay costs on a solicitor and client basis from 16 April 2013 onwards. In all the circumstances, it is not appropriate to order that they pay costs on that basis before that date.
Conclusion on costs
The plaintiffs are entitled to the costs of action in respect of both the claim and counterclaim on a party and party basis up to 15 April 2013 and thereafter on a solicitor and client basis.
Liability for daily trial fee
The Supreme Court Regulations 2005 (SA) (the Regulations) impose liabilities to pay court fees upon parties to civil actions in the Court. By regulation 5 and Schedule 1 item 14, a liability is imposed to pay a daily trial fee of $3,278.[34]
[34] This is the rate applicable for a prescribed corporation. The rate for a natural person is $2,323.
The trial in this matter proceeded over 17 days between 3 February and 5 March 2014, resulting in a total trial fee of $54,264. On 6 March 2014 the Court Administration Authority issued an invoice to the plaintiffs’ solicitors for trial fees incurred in February, and on 4 April 2014 it issued an invoice to the plaintiffs’ solicitors for trial fees incurred in March.
On 8 May 2014, the plaintiffs issued an interlocutory application seeking an order that the defendants pay 95 per cent of the daily trial fee. The application was made on the ground that over 95 per cent of the time during trial was spent on issues raised by the defendants’ counterclaim compared to the plaintiffs’ claim.
Item 14 of Schedule 1 to the Regulations provides:
14
Trial fee—for each day or part of a day on which the trial is heard by the court—
(a) for a prescribed corporation
$3 278.00
(b) for any other person
$2 323.00
Note—
The fee for a trial is the fee fixed under clause 14 as in force on the day on which the trial commenced and is payable by the plaintiff or appellant in the proceedings. However, if the court or Registrar so orders, the fee is payable by another party to the proceedings or by the parties to the proceedings in the proportions ordered.
The plaintiffs contend that the Court has power under the second sentence of the Note to item 14 to order that the daily trial fee be paid by a party other than a plaintiff or in proportions as between a plaintiff and defendant.
On its proper construction, when both a claim and counterclaim proceed to trial, the reference to “the plaintiff” in the Note is a reference to the plaintiff in the primary action and not to the plaintiff in the secondary action (the counterclaim). While the term “the plaintiff” is defined by rule 5 of the Supreme Court Civil Rules 2006 (SA) to include a plaintiff in a counterclaim, that definition does not apply to the Regulations and in any event is inconsistent with the context in which the word “plaintiff” is used in the Note to item 14. Otherwise, there would be no way in which it could be determined with certainty whether it is the plaintiff in the primary action or the plaintiff in the secondary action who is liable to pay the daily trial fee. In some cases, the primary action might be the principal matter at trial and in other cases it might be the secondary action. The Regulations proceed on the basis that there is certainty as to the liability imposed to pay fees.
On its proper construction, the power conferred by the Note to item 14 is to be exercised in advance of incurring the liability to pay the daily trial fee and is not to be exercised after the conclusion of the trial. The purpose of the Regulations is to secure payment of the fees imposed by them. The Regulations proceed on the basis that the fees imposed will be paid more or less contemporaneously with their being incurred. For example, item 2 imposes a fee on filing a document by which a proceeding is commenced and proceeds on the assumption that the fee will be paid at the time of filing.
Item 14 proceeds on the basis that the liability to pay the daily trial fee will be incurred on each day on which the trial is heard, albeit that the fee might not actually be paid until after that day. If the Court has not previously made an order under the second sentence of the Note to item 14, the liability will be incurred by the plaintiff in the action.
The amount of the fee will depend on whether the plaintiff is a prescribed corporation (any corporation other than a small business - employing less than the equivalent of 20 full-time employees – or a not-for-profit organisation) or not. The fee for a prescribed corporation is $3,278; whereas the fee for any other person is $2,323. In the present case, the plaintiffs are prescribed corporations and the defendants are not. The amount of the fee must necessarily be fixed when it is incurred rather than depending upon a subsequent determination whether it is to be the plaintiff or the defendant who is to pay the daily trial fee.
Regulation 5(2) provides that the Registrar may require a party to proceedings to pay a deposit on account of any amount to which the party may become liable under the Regulations. That decision can only effectively be made in advance on the basis that it is the plaintiff in the primary action who is liable to pay the daily trial fee unless the Court has otherwise ordered.
Therefore, the plaintiffs remain liable to the Court to pay the daily trial fee. However, upon adjudication of their costs, the plaintiffs will be entitled to reimbursement of the amount paid for the daily trial fee from the defendants.
Conclusion
I make the following orders:
1.The defendants pay the plaintiffs’ cost of the action and the counterclaim on a party and party basis up to 15 April 2013 and on a solicitor and client basis thereafter.
2.The daily trial fee is payable to the Courts Administration Authority by the plaintiffs without prejudice to their entitlement to recover it from the defendants under order 1.
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