Harcourts South Australia Pty Ltd v Ouwens Casserly Real Estate Pty Ltd (No 2) - [2017] SADC 45

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
HARCOURTS SOUTH AUSTRALIA PTY LTD v OUWENS CASSERLY REAL ESTATE PTY LTD & ORS (No 2)
[2017] SADC 45
Judgment of His Honour Judge Barrett
28 April 2017
DAMAGES - MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR BREACH OF CONTRACT
In the principal action, judgment was entered substantially in favour of the plaintiff and a provisional assessment of damages was made. After further submissions on behalf of the parties a final assessment of damages is made.
Held: The defendants are to pay damages to the plaintiff in the sum of $222,917.17.

PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE
The plaintiff was substantially successful in the principal proceedings. It seeks costs on an indemnity basis pursuant to r 264(5)(b). The defendants submit that the plaintiff should receive only a percentage of its party/party costs. Calderbank letter sent by plaintiff on eve of trial.
Held: Plaintiff is entitled to its costs on a solicitor/client basis pursuant to r 264(5)(a).
District Court Act 1991 s 39; District Court Civil Supplementary Rules 2014 (SA) r 208, r 264(5)(a) and (b); District Court Civil Rules 2006 r 263, referred to.
Ccolgate-Parmolive Pty Ltd v Cussons Pty Ltd (1993) 46 FCR 225; Clone Pty Ltd v Players Pty Ltd [2016] SASC 134; Nominal Defendant v Dighton (No 2) [2012] SASCFC 97; Perpetual Trustees Australia Limited and Ors v Barker (2004) 232 LSJS 400, [2004] SASC 58; Citibank v Pirrotta and Ors FCSCSA 1 April 1989 unreported; Catto v Hampton Australia Ltd (in liq) (2008) 257 LSJS 245, [2008] SASC 231; Bayford v St George Bank Ltd (No 2) (2003) 229 LSJS 59; Chen and Anor v Kevin McNamara & Son Pty Ltd and Anor (No 2) [2012] VSCA 229; Re Adelphi Hotel (Brighton) Ltd [1953] 2 All ER 498, considered.

HARCOURTS SOUTH AUSTRALIA PTY LTD v OUWENS CASSERLY REAL ESTATE PTY LTD & ORS (No 2)
[2017] SADC 45

On 3 February 2017 I delivered a judgment in this matter that the defendants were liable to pay damages to the plaintiff for breach of the Franchise Agreement entered into by the parties.[1] I provisionally assessed the damages at $239,787. The assessment was provisional because I needed further assistance from the parties on aspects of the evidence of the plaintiff’s valuer Mr White. I am grateful to counsel for the parties providing written submissions and supplementary oral submissions on 27 March 2017. I am now in a position to finally assess the damages.
[1] [2017] SADC 30.
There are really three points of contention between the parties which bear on the final assessment of damages. They are as follows:
The inclusion by Mr White of the defendants’ income from both the Adelaide and the Henley Beach real estate offices.
The reliance by Mr White on the commission income of the defendants in the months after termination (the ‘current’ income of approximately $31,000 per month) rather than the average income from 31 July 2013 to termination (the ‘historical’ income of about $27,000 per month).
The calculation of interest from the point of loss (the plaintiff’s position) as opposed to the date of issue of the proceedings (the defendants’ position).
Estimate of loss from two offices
The defendants submit that the plaintiff’s valuer Mr White has incorrectly assessed the damages suffered by the plaintiff insofar as he has included the defendants’ commission income from both the Adelaide and Henley Beach offices post termination. There was a further suggestion by the defendants that Mr White had erroneously also included income from the Collinswood office, Ouwens Casserly Projects and Club KI.2 The answer to the second criticism is that Mr White only had regard to sales commission income and there was no evidence that sales commission income was generated at the Collinswood office or the other two entities mentioned above.
2 Para 2 Defendants' written submissions.
The answer to the first criticism is more complex. It is true that Mr White did in one calculation have regard to the income from both the Adelaide and Henley Beach offices post termination, ie from February 2014 to February 2015. One reason why it would be reasonable to do so is that the agents operating from the Henley Beach office were agents recruited from the Adelaide office. On the other hand, the Henley Beach office necessarily covered a larger area than the Adelaide office. The pool of clients was that much larger. The Henley Beach office was never part of the defendants’ franchise with the plaintiff. I think the resolution of this question is to be found in Mr White’s revised calculations to be discussed under the next heading.
Historical or current income
It was put to Mr White in cross examination that he had incorrectly included the income from the two offices post termination, rather than projecting the ‘historical’ income from the one office in Adelaide for the 12 months after termination in February 2014. Mr White allowed for the possibility that an adjustment should be made.[2]
[2] T193 line 25.
In re-examination Mr White accepted that if he was required to ignore the income from the second office he would extrapolate the post termination income from the historical, pre-termination income. On that assumption he provided a revised figure of monthly income. Whereas the current income average was approximately $31,000 the historical income was approximately $27,000 per month.
In my view, the historical figure is to be preferred. That is so despite the agents operating from the Adelaide office being those also operating from the Henley Beach office. Those agents had a larger pool of clients than was the case in the Adelaide office. Accordingly, the damages for the plaintiff’s loss should be the monthly figure averaged from the period from August 2013 to January 2014 inclusive, ie $27,186 per month. That monthly figure leads to a loss of $187,735.42.
Interest
The defendants submit that interest should be calculated from the date of initiation of these proceedings. The plaintiff submits that interest should be calculated from the point at which the plaintiff began suffering loss.
I find that there is no reason to depart from the terms of s 39 (2) of the District Court Act 1991. I reproduce s 39:
39—Pre-judgment interest
(1)Unless good reason is shown to the contrary, the Court will, on the application of a party in whose favour a monetary judgment has been, or is to be, given include in the judgment an award of interest in accordance with this section.
(2) The interest—
(a) will be calculated at a rate fixed by the Court; and
(b)will be calculated in respect of a period fixed by the Court (which must, however, in the case of a judgment given on a liquidated claim, be the period running from when the liability to pay the amount of the claim fell due to the date of judgment unless the Court otherwise determines); and
(c)is, in accordance with the Court's determination, payable in respect of the whole or part of the amount for which judgment is given.
(3)The Court may, without proceeding to calculate interest under subsection (2), award a lump sum instead of interest.
(4) This section does not—
(a)authorise the award of interest on interest;
(b)authorise the award of interest on exemplary or punitive damages;
(c)affect damages for dishonour of a negotiable instrument;
(d)authorise the award of interest (except by consent) on a sum for which judgment is given by consent;
(e)limit or affect the operation of any other enactment or rule of law providing for the award of interest.
I apply the rates of interest set out in r 208 of the District Court Civil Supplementary Rules 2014 (SA). Interest should run from 4 February 2014, the date of termination.
Calculating the interest in accordance with the foregoing passages I fix the judgment amount at $222,917.17 as at 23 February 2017. Interest thereafter will accrue at the rate of $28.29 per day.
Costs
The plaintiff seeks an order that the defendants pay its costs on either a solicitor/client basis r 264(5)(a) or an indemnity basis r 264(5)(b). It does so on two bases.
First, the plaintiff made a pre-trial offer to the defendants to settle the matter on terms which, in light of the outcome, it was unreasonable for the defendants to reject (the settlement offer).
Second, the terms of the Franchise Agreement provide for the plaintiff to recover its costs of any proceedings taken on a breach of the agreement on an elevated basis (the contractual entitlement).
The defendants oppose the plaintiff’s applications for costs. The defendants submit that the plaintiff should recover only 75 per cent of its party/party costs.
It is convenient to deal first with the defendants’ submission. In my view that submission is untenable. As a general rule, costs follow the event (r 263 District Court Civil Rules 2006). The judgment is substantially in the plaintiff’s favour. The plaintiff established that the defendants had, contrary to their denials, breached the terms of the Franchise Agreement and had in fact abandoned the franchise. The plaintiff is entitled to an award in damages. While those damages were not awarded for the whole period of the agreement to October 2016, they were ordered for the period until February 2015. This fall-back position was plainly contemplated by the plaintiff which forwarded to the defendants just before the trial began an offer to settle the case on what is effectively their valuer’s assessment of the damages up to February 2015. While the quantum of damages in the final judgment was based on a later, and lesser, calculation by the valuer, the plaintiff was substantially successful in its claim. There is in my view no reason to deny the plaintiff its full party/party costs. The real question is whether costs should be ordered on an elevated basis.
I turn to consider the two bases upon which the plaintiff seeks elevated costs.
Settlement Offer
The hearing in this matter began on Monday 21 March 2016. Before initiating the proceedings the plaintiff sent to the defendants a notice of its claim. In a letter of 10 February 2014 the plaintiff sought damages of $909,146.20 and explained the basis for the claim. The plaintiff filed its Statement of Claim on 11 November 2014. In the filed claim it sought damages of $1,002,407 for losses to 31 October 2016, and in the alternative, damages of $351,910 for losses to 1 February 2015. Those figures were based on Mr White’s first estimation of loss.
A week before the trial began Mr White revised his estimates down to $677,783 and $239,787 respectively. The latter figure formed the basis of the plaintiff’s offer to settle sent in a letter to the defendants on the eve of trial on Friday 18 March 2016. Materially the plaintiff offered to settle its claim upon the defendants paying $239,787. That figure is Mr White’s estimate of loss to February 2015 ($218,297) together with interest to that date ($21,490).[3] Leaving aside the interest component of the damages, the plaintiff has as a result of today’s judgment recovered $30,561.58 less than the sum for which it sought to settle ($218,297 minus $187,735.42). The pre-trial offer was to remain open until 9 am on Monday 21 March 2016, the date on which the trial began. The offer also proposed that the defendants pay the plaintiff’s costs on a party/party basis.
[3] Exhibit PA para 75.
In my view the offer to settle was a reasonable and realistic one. It effectively acknowledged the likelihood that the period for which its losses would be assessed would be to February 2015 rather than October 2016. The offer relied on the recently revised down estimate of loss by Mr White. Mr White had that week made a deduction in light of the defendants’ valuer pointing out that no allowance had been made for the franchise fee rebate scheme.[4] While the offer was made only on the eve of trial, the contested issues in the trial were clearly understood by the defendants and they were well able to consider the offer before the trial began. The defendants did not respond to the offer. Their conduct of the trial indicates that they were never willing to admit liability. The quantum of damages was a somewhat secondary issue in the trial. Certainly the method of assessing damages up to 15 February ((historical versus current income) was a secondary issue. One criterion for awarding costs on an elevated basis is that it was imprudent a party to refuse, or fail to accept, the offer made.[5]
[4] See [170] of the principal judgment.
[5] Colgate-Parmolive Pty Ltd v Cussons Pty Ltd (1993) 46 FCR 225 at 233 per Shephard J cited in Clone Pty Ltd v Players Pty Ltd [2016] SASC 134 [404] per Blue J.
In the result the defendants were unsuccessful for two principal reasons:
1.The interpretation of the restraint provision of the Franchise Agreement was, while arguable, mistaken in my view, and
2.Their version of the facts on the abandonment of the franchise point was unsustainable.[6]
[6] See [150] of principal judgment.
It was arguably imprudent for the defendants not to appreciate their vulnerability on the latter point at least.
In its costs argument the plaintiff refers to the case of Nominal Defendant v Dighton (No 2) [2012] SASCFC 97 [8] per Sulan, Anderson and David JJ. The court there set out the following criteria to be used when evaluating costs following the making of offers to settle:
First, what stage the proceedings were at when the offer was received. Secondly, the time allowed to consider the offer. Thirdly, the extent of the compromise offer. Fourthly, the prospects of success from the date of the offer. Fifthly, the clarity in which the terms were expressed and finally, whether the offer foreshadowed indemnity costs in the event the offeree rejected it.
These criteria are largely favourable to the plaintiff. I deal with them in the order they are set out. While the offer was made on the eve of trial, the issues were very clear by then. There was adequate time to consider the offer. The extent of the compromise was realistic and reasonable. The prospects of the plaintiff’s success were quite good at least so far as the defendants should have been aware of their liability to being unable to sustain the facts suggesting they had not abandoned the franchise. The terms of settlement were offered with clarity. Finally, it is true that the plaintiff did not expressly foreshadow an application for indemnity costs in the event of the matter proceeding to trial but it referred to the offer being confidential except as to costs.
Notwithstanding the favourable position of the plaintiff in light of these criteria, the fact remains that the judgment sum is some $30,000 less than the offer for settlement. While the matter might be fairly finely balanced I would decline to exercise the costs discretion in favour of the plaintiff receiving costs on an elevated basis by reason of the settlement offer.
I turn to consider the terms of the Franchise Agreement.
Costs Clause in the Franchise Agreement
The plaintiff submits that it is entitled to costs on an elevated basis pursuant to two clauses in the Franchise Agreement. In Perpetual Trustees Australia Limited and Ors v Barker (2004) 232 LSJS 400, [2004] SASC 58, Duggan J (with whom Doyle CJ and Anderson J agreed, Anderson J disagreeing on a different point) cited authorities for the proposition that the costs discretion should ordinarily be exercised so as to reflect contractual rights to costs.[7] His Honour noted[8] a qualification to that proposition arising from the case of CitiBank v Pirrotta and Ors FCSCSA 1 April 1989, unreported, in that a mortgagee should be limited to party/party costs unless the mortgage contract plainly and unambiguously provided for costs on some other basis.[9]
[7] [20].
[8] [21].
[9] See also Re Adelphi Hotel (Brighton) Ltd [1953] 2 All ER 498 at 502.
The plaintiff relies on the two following clauses in the Franchise Agreement:
11.27
Legal Costs
The Franchisee shall bear all costs and expenses, including legal costs and nay other professional fees and disbursements incurred by the Franchisor in connection with:
(a) any enforcement of the Franchisor’s rights and remedies, power and privileges under this Agreement;
(b) …
(c) …
(d) defending any claim or proceeding rising out of the Franchisee’s failure to perform any obligation of the Franchisee under this Agreement; and
(e) any termination of this Agreement other than as a result of a material breach by the Franchisor.
13.1
Indemnity
The Franchisee indemnifies and will keep indemnified the Franchisor, its Related Bodies Corporate, and its directors, officers, servants, employees, agents, contractors, successors and assigns against all causes of action, claims, demands, damages, interest, losses, costs, liabilities and expenses arising from:
(a) any breach of this Agreement by the Franchisee, its Staff, Key People, directors or servants or which arise from or are connected with the Franchisee’s conduct of the Franchised Business;
(b) without limiting the generality of clause 13.1(a), arising out of injury to any person and the loss of or damage to any property arising out of or as a consequence of:
(i) any breach by the Franchisee, its Staff, Key People of directors of the terms of this Agreement; or
(ii) an occurrence in respect of or arising out of our in connection with the operation of the Franchised Business.
(emphases added)
It can be seen that neither clause uses in relation to costs, the terms used in the rules or cases dealing with costs. Nowhere does there appear the expressions party/party, solicitor/client or indemnity costs.
On the other hand there are words suggesting that the clauses intend costs to be paid on an elevated scale. In clause 11.27 the franchisee is to bear
all costs … incurred by the franchisor in connection with … any enforcement of the Franchisor’s rights … under this Agreement.
In clause 13.1 the word ‘indemnifies’ appears.
The Franchisee indemnifies … the Franchisor … against all … costs, liabilities and expenses arising from … any breach of this agreement by the Franchisee …
The plaintiff cites authorities which have construed terms of contracts expressed in similar language. In Catto v Hampton Australia Ltd (in liq) (2008) 257 LSJS 245, [2008] SASC 231, White J (with whom Vanstone and Anderson JJ agreed) rejected a submission that ‘costs incurred’ should be limited to costs which a solicitor could legally enforce against a litigant client. His Honour held that the expression was capable of being construed as relating to ‘amounts actually expended by a party for costs’.[10] His Honour held that:
such a construction was consistent with the notion that costs are awarded to a party by way of indemnity. They are intended to reimburse a litigant o costs actually incurred.
[10] [32].
In Bayford v St George Bank Ltd (No 2) (2003) 229 LSJS 59, Besanko J construed two terms of a mortgage contract to mean that the unsuccessful mortgagor was obliged to pay the bank’s costs on a solicitor/client basis. The first term required the mortgagor to pay the bank’s ‘reasonable costs’ in any action to enforce its contractual rights.
The second term required the mortgagor to ‘indemnify’ the bank for, inter alia, any costs incurred in the event of a default.[11] His Honour held that although those two clauses were not the operative ones regarding costs, another clause was. That was clause 21 which he found was drafted with the relevant sections of the Consumer Credit Code in mind.
[11] [6].
His Honour held that despite there being a residual discretion to award costs on a basis different from that contemplated by the terms of the agreement, he would order costs on a solicitor/client basis.[12] That order most closely reflected clause 21 to which I have already referred. The clause and the code referred to:
reasonable expenses [we] reasonably incurred …
[12] [15]-[16].

His Honour made the order on a solicitor/client basis rather than an indemnity basis because the latter would have placed the onus on the mortgagor to demonstrate the unreasonableness of costs. Although his Honour did not expressly say so, I interpret him to mean that the words ‘reasonable expenses’ and ‘reasonably incurred’ implied a duty on the mortgagee to demonstrate that they were reasonable.
The defendants cite Chen and Anor v Kevin McNamara & Son Pty Ltd and Anor (No 2)[13] in support of their contention that the words used in the Franchise Agreement are not sufficiently plain and unequivocal to warrant an elevated order of costs. In that case Redlich JA (with whom Maxwell P and Robson AJA agreed) found that in a building contract the words ‘any costs and fees incurred …’ were insufficient to entitle the successful respondents/builder to other than party/party costs.
[13] [2012] VSCA 229.
His Honour said:[14]
I would refuse the application. No conduct, well recognised principle or plain and unequivocal contractual term has been identified which would justify the displacement of the general rule that costs should be awarded on a party and party basis. I would order that the builder’s costs of the appeal be assessed on a party/party basis. (authorities omitted).
[14] [21].
His Honour found in a review of cases interpreting words like, but not identical to, the words in the contract, there were inconsistencies. His Honour said:
Both parties referred to contractual terms that had been considered in other cases as bearing upon the construction that should be given to clause 4 and the costs order that should be made. Although the parties sought to find a case where the terms were most like the present, none were in identical terms to clause 4. But the search for like cases illuminated the fact that even very similar terms have sometimes been construed quite differently and these different constructions cannot be reconciled on the basis that the decisions were discretionary. That said, contractual terms which have been considered in other cases are of some assistance, as there are recurring features of those contractual terms which have been construed as reflecting an intention by the contracting parties that the costs extended to solicitor/client or indemnity costs and those which have been construed as manifesting no such intention.
He went on to refer to cases dealing with specific types of contracts such as mortgage contracts, guarantees and landlord and tenant contracts.[15]
[15] [10]-[16].
His Honour turned finally to the words ‘any costs and fees incurred by the contractor’ in the subject building agreement. He concluded that those words should not be construed as entitling the respondent to other than party/party costs:[16]
[20] It remains to be considered whether the language of clause 4 demonstrates a clear intention that special costs should be awarded. The clause requires the Owners to pay to the Contractor ‘any costs and fees incurred by the Contractor in enforcing or further securing its rights’. The Builder submitted that there was no material difference between the phrase ‘all costs and expenses’ in Abigroup and the phrase ‘any costs and fees’ in clause 4 of the agreement in this case that, properly construed, the language of clause 4 entitled the Builder to costs on an indemnity basis. That submission cannot be sustained. The clause does not specify that the Owner shall ‘indemnify’ the Builder. It does not refer to ‘indemnity costs’, ‘solicitor/client costs’ or ‘special costs’. It contains no language which might signify that the costs contemplated were solicitor/client or indemnity costs.
[21] I would refuse the application. No conduct, well recognised principle or plan and unequivocal contractual terms has been identified which would justify the displacement of the general rule that costs should be awarded on a party and party Basis. I would order that the Builder’s costs of the appeal be assessed on a party/party basis.
[16] [20]-[21].
In my view that case can be distinguished principally on the ground that in the present case, unlike Chen, the franchisee undertakes to indemnify the franchisor as to costs in clause 13.1 of the agreement. While it is true that the word ‘indemnify’ does not appear in clause 11.27 dealing with legal costs, it does appear in clause 13.1 under the heading ‘Indemnity’.
In Chen Redlich J noted at [13] that the authorities tended to find that:
ordinarily an indemnifier would be liable for the full costs as between solicitor and client.
I find that the combined effect of clauses 11.27 and 13.1 is that the defendants have agreed to pay costs at an elevated level.
That leaves two further questions.
1.Notwithstanding that the defendants are contractually obliged to pay costs at an elevated level, should the court’s discretion be exercised so as not to require them to do so. In my view there is no discretionary reason not to order the elevated costs. The plaintiff was substantially successful in its claims. The respects in which it was unsuccessful were secondary issues in the trial.
2.If costs are to be paid at an elevated level should they be paid on the solicitor/client basis (r 264(5)(a)) or on the indemnity basis (r 264(5)(b)). The rule reads thus:
Rule 264(5) In exercising its general discretion as to costs, the Court may -
(a)award costs as between solicitor and client (that is, on the basis that the party will be fully reimbursed for costs incurred by the party in the conduct of the litigation to the extent that the party entitled to the costs shows them to have bene reasonably incurred); or
(b)award costs on the basis on an indemnity (that is, on the basis that the party will be fully reimbursed for costs incurred by the party in the conduct of the litigation except to the extent that the party liable for the costs shows them to have been unreasonably incurred; …
The only difference between the two costs orders is the onus of proof of the reasonableness of the costs. The onus lies on the plaintiff on the former and the defendants in the latter.
In my view the word “indemnify” in clause 13.1 of the Franchise Agreement should not be taken as meaning that indemnity costs should be awarded. There is no reason to think that the words in the clause were directed to the concept of indemnity costs in the Rules. That is to be distinguished for example from the situation in Bayford v St George Bank supra where at [15] and [16] Besanko J concluded that the words in the mortgage were drafted with the terms of the consumer credit code in mind. I note that his Honour declined to make an order pursuant to then r 101.07(6)(d) which was the predecessor of the present r 264(5)(b). Without giving reasons he concluded it would not be appropriate to place the onus on the person paying the costs.
I will adopt the same approach. In the present contract there is nothing suggesting that there should be any onus on the defendants to demonstrate the unreasonableness of the costs. There is in my view nothing reprehensible in the defendants’ conduct of the trial so as to place upon them the onus of demonstrating unreasonableness in the plaintiff’s costs.
Orders
1. The defendants will pay to the plaintiff by way of damages the sum of $222,917.117 including interest as at 23 February 2017. Interest will accrue thereafter at a rate of $28.29 per day.
2. I make an order pursuant to r 264(5)(a) that the defendants pay the plaintiff’s costs as between solicitor and client, that is, on the basis that the plaintiff will be fully reimbursed for costs incurred by it in the conduct of the litigation to the extent that the plaintiff shows them to have been incurred reasonably.