Heaney Enterprises Pty Ltd v Just Cuts Franchising Pty Ltd (No. 2)
[2017] VCC 654
•31 May 2017
| IN THE COUNTY COURT OF VICTORIA | Revised Not Restricted Suitable for Publication |
AT MELBOURNE
COMMERCIAL DIVISON
GENERAL LIST
Case No. CI-16-00008
| HEANEY ENTERPRISES PTY LTD | Plaintiff |
| v. | |
| JUST CUTS FRANCHISING PTY LTD | Defendant |
| JUST CUTS FRANCHISING PTY LTD | Plaintiff by Counterclaim |
| v. | |
| HEANEY ENTERPRISES PTY LTD and OTHERS | Defendants by Counterclaim |
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JUDGE: | His Honour Judge Anderson | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 26 May 2017 | |
DATE OF JUDGMENT: | 31 May 2017 | |
CASE MAY BE CITED AS: | Heaney Enterprises Pty Ltd v. Just Cuts Franchising Pty Ltd (No. 2) | |
MEDIUM NEUTRAL CITATION: | [2017] VCC 654 | |
REASONS FOR JUDGMENT
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Catchwords: Practice and procedure – Costs – Calderbank offer and offer of compromise – Whether the plaintiff unreasonably failed to accept offers – “Mixed success” by parties – No order made – Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No. 2) [2005] VSCA 298 and Chen v Chan [2009] VSCA 233 applied.
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APPEARANCES: | Counsel | Solicitors |
| For the plaintiff and defendants by counterclaim | Mr J. G. Levine of Counsel | TGA Legal Pty Ltd |
| For the defendant and plaintiff by counterclaim | Mr C. H. Truong of Counsel | LegalVision ILP Pty Ltd |
HIS HONOUR:
1On 19 May 2017, I delivered judgment in this matter following a trial in November/December 2016. At the request of the parties, I gave directions for the filing of written submissions on the question of costs and fixed the date, 26 May 2017, to hear oral submissions.
2On 19 May 2017, I made the following orders reflecting my determination of the issues in dispute:
“1. Judgment for the plaintiff against the defendant for a declaration that the defendant’s breach notice dated 5 January 2016 in respect of the Werribee franchise agreement was invalid and ineffective to terminate the agreement.
2.Judgment for the defendant against the plaintiff that the plaintiff’s claims otherwise be dismissed.
3.Judgment for the defendants to counterclaim against the plaintiff to counterclaim that the plaintiff to counterclaim’s counterclaim be dismissed”.
3I noted in my reasons for judgment that, “Unless any party wishes to make any submissions to the contrary, I would propose to order that there be no order as to costs of the proceeding, including the claim and counterclaim, and that each party bears their own costs”.
4Defendant’s counsel, Mr Truong, relied upon two offers, both dated 15 July 2016, which he submitted should lead the Court to make an order for costs, otherwise than as I had suggested in my reasons for judgment. Alternatively, Mr Truong submitted that, because the parties had enjoyed “mixed success”, the defendant should recover a proportion of its costs, because the plaintiff’s unsuccessful claims had taken up the bulk of the hearing time at the trial.
5Plaintiff’s counsel, Mr Levine, submitted that the plaintiff (and the other defendants to counterclaim) should be entitled to their costs of successfully defending the counterclaim, to be assessed on an indemnity basis, because the defendant had pursued “hopeless claims”.
6The questions for determination in relation to the costs issues are as follows:
a.whether, in relation to the offer of compromise made by the defendant/plaintiff by counterclaim pursuant to the Rules of Court on 15 July 2016:
i.Rule 26.08(3) and/or (4) applies;
ii.the plaintiff unreasonably failed to accept the offer of compromise or there were circumstances in which the plaintiff failed to recover judgment on its claim not more favourable than the terms of the offer;
b.whether the plaintiff unreasonably failed to accept the Calderbank offer made by letter dated 15 July 2016;
c.the consequences of any failure by the plaintiff to accept either offer;
d.whether, as a result of the “mixed success” of the parties, the defendant should be paid a significant proportion of its costs of successfully defending the plaintiff’s claims;
e.whether the defendant/plaintiff by counterclaim should pay the plaintiff/defendants by counterclaim’s costs of the counterclaim, and if so, on what basis;
f.what costs orders are appropriate to be made.
Offer of compromise dated 15 July 2016
7By offer of compromise dated 15 July 2016, the “defendant/plaintiff by counterclaim” made the following “offer of compromise”:
“1. The defendant/plaintiff by counterclaim pays the plaintiff/defendants by counterclaim the sum of $125,000 (inclusive of costs).
2. The proceedings (being the claim and the counterclaim) are dismissed.
3.Each party bears their own costs of the proceedings (being the claim and the counterclaim)”.
8The offer is “inclusive of costs”, which is contemplated by Rule 26.02(4)(a). The offer refers to the parties both by their descriptions in relation to the claim and in relation to the counterclaim, and contemplates the dismissal of both the claim and counterclaim. In my view the offer, sufficiently for the purposes of Rule 26.02(2), is expressed “on terms that take into account” both the claim and the counterclaim in the proceeding.
9I do not consider that Rule 26.08(3) applies to the offer because:
a.the plaintiff has not obtained a judgment on the claim for a money sum;
b.the rule contemplates that the Court will need to determine that the plaintiff received a judgment on its claim which was “not more favourable to the plaintiff than the terms of the offer”. In this case, it was ordered that the plaintiff have judgment for declaratory relief, but not for a monetary amount. It is therefore difficult to compare the judgment ordered by the Court against the monetary relief offered by the defendant.
10The offer contemplated that the counterclaim would be “dismissed”. The counterclaim sought, as part of the relief claimed by the defendant/plaintiff by counterclaim, “Declaratory orders that the breach notice was valid”. The offer did not, however, contemplate the declaratory relief sought by the plaintiff, that the breach notice was “invalid and ineffective to terminate the agreement”.
11In my view, Rule 26.08(4) is the operative rule, and it is necessary for the defendant to show that the plaintiff had unreasonably failed to accept the offer. In that respect, the principles enunciated by the Court of Appeal in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No. 2) [2005] VSCA 298 (“Hazeldene”), in that case in relation to a “Calderbank offer”, are equally applicable to the words “unreasonably fails to accept the offer” in Rule 26.08(4).
12The Court of Appeal reaffirmed at paragraphs 21 and 22 of Hazeldene “the policy rationale underlying the availability of special orders for costs where offers of compromise are rejected”, although it referred to “other competing objectives of equal importance”, including that “potential litigants should not be discouraged from bringing their disputes to the Courts” and that it was “such considerations which underlie the general rule that an order for special costs should only be made in special circumstances”.
13At paragraph 24, the Court of Appeal said that “deciding whether conduct is ‘reasonable’ or ‘unreasonable’ will always involve matters of judgment and impression”. The Court of Appeal, without intending to “give an exhaustive list”, stated at paragraph 25 that, “a court considering a submission that the rejection of a Calderbank offer was unreasonable should ordinarily have regard at least to the following matters:
a. the stage of the proceeding at which the offer was received;
b. the time allowed to the offeree to consider the offer;
c. the extent of the compromise offered;
d. the offeree’s prospects of success, assessed as at the date of the offer;
e. the clarity with which the terms of the offer were expressed;
f.whether the offer foreshadowed an application for an [order for] indemnity costs in the event of the offeree’s rejecting it”.
14The Court of Appeal made it clear at paragraphs 26 to 29 that the offeror did not have to:
a.set out “the basis for the offeror’s contention that the offeree should accept the compromise”;
b.“establish misconduct by the offeree [or] lack of merit in the way a party has conducted its case”;
c.“show that the offeree acted with ‘wilful disregard of known facts or clearly established law’, or that it acted with ‘high-handed presumption’”.
15Of the six suggested matters to which a court should have regard, an offer of compromise made under the Rules:
a.provides a default period of 14 days for acceptance of an offer, if no other period is specified (Rule 26.03(4)(a));
b.specifically provides for the costs consequences (including a claim for indemnity costs under Rule 26.08(4)) for failing to accept an offer where a claim is dismissed.
16In my view, the critical factor in respect of the defendant’s offer of compromise is whether the offer failed to sufficiently make clear that the breach notice would be treated as ineffective, and that the Werribee franchise agreement would remain in force.
17I consider that the offer did not sufficiently clarify this matter. The plaintiff’s claim included a claim for declaratory relief in relation to the breach notice and the counterclaim was based on the breach notice being valid. The dismissal of both claim and counterclaim would leave the validity of the breach notice uncertain.
18A similar concern had been noted by the plaintiff’s solicitor in a letter dated 2 June 2016 in response to an earlier offer made by letter dated 1 June 2016. The plaintiff’s solicitor had rejected an offer of a payment of $150,000 for the Point Cook business and that the plaintiff “continue to operate the Werribee Just Cuts franchised hair salon for the existing term of the associated lease, being approximately another 2 years”.
19The plaintiff’s solicitor wrote that he had been “instructed to reject the offer that is contained in the abovementioned letter, because my clients would be waiving their entitlement to two further 6 year terms of the Werribee franchise agreement (in which the Werribee Shopping Plaza is their exclusive territory), which exceeds in value the cash payment that your client has offered to pay to my clients in the sum of $150,000”.
20In the circumstances, I am not satisfied that the “extent of the compromise offered” or the “clarity with which the terms of the offer were expressed” were such that the plaintiff could be regarded as having unreasonably failed to accept the offer.
Calderbank offer dated 15 July 2016
21The Calderbank offer relied upon by the defendant is in an extensive letter dated 15 July 2016. The letter contains two alternative offers; one expressed to be a restatement of “the offer made at the judicial conference”, and an “alternative offer” which is now relied upon. The “alternative offer” was that:
“a. our client pay to your clients the sum of $125,000 (inclusive of costs)_ within 90 days;
b.your client retain its right to operate the Werribee franchise pursuant to the terms of the current Franchise Agreement and Licence Agreement;
c.the parties release each other from all claims relating to the proceedings and will enter into a deed of release to give effect to this; and
d. the proceedings be discontinued with no order as to costs”.
22The offer clarifies the uncertainty contained in the offer of compromise about the continued effectiveness of the Werribee franchise agreement.
23The offer also fits other criteria specifically referred to by the Court of Appeal in Hazeldene, as follows:
a.the offer was served on 15 July 2016. The other relevant events at about that time which indicated that the plaintiff was in a very good position to assess the offer included:
i.the proceeding was listed for trial on 11 July 2016. The parties were ready for trial and the only reason it did not proceed was because the estimate of 3 sitting days was considered by the trial judge as inadequate because counsel could not give an assurance that the trial would be completed in that time. The trial was relisted with an estimate of 5-6 days;
ii.a judicial resolution conference was conducted by a Judicial Registrar on 11 July 2016 and the proceeding did not settle;
b.the offer provided that it would “remain open for acceptance until 5pm on 31 July 2016”;
c.the extent of the compromise offered included the clarification of the continued validity of the Werribee franchise agreement, and payment of a substantial monetary sum. I shall return to examine these matters;
d.the plaintiff’s prospects of success were the same as when the matter came to trial in November 2016. The plaintiff made two claims for damages; the first for loss of opportunity damages arising from the defendant’s breach of the Franchising Code of Conduct, and the second relating to the circumstances in late 2015 when, for the Point Cook franchise, the lease was not extended and no new franchise agreement was entered into. Both claims failed;
e.the offer foreshadowed that indemnity costs would be sought, if the offer were not accepted;
f.the letter containing the offer set out the defendant’s solicitors’ views as to why the plaintiff would fail on its claims and the defendant would succeed on its counterclaims.
24Mr Levine submitted that the offer suffered from the following defects which made it unclear, or unrealistic having regard to an assessment of the plaintiff’s prospects at that time, and therefore it was not unreasonable for the plaintiff to have not accepted the offer:
a.the sum offered of $125,000 would have been insufficient to cover the plaintiff’s costs to that time;
b.the offer provided for payment of the sum within 90 days, whereas the terms of the offer provided that the plaintiff, upon acceptance of the offer, would give an immediate release in relation to its claims, with the proceeding to be discontinued.
25Neither party produced evidence of the plaintiff’s costs or likely costs at the time the offer was made. The plaintiff had served a notice to produce on the defendant requiring the production of documents relating to the defendant’s costs, which Mr Levine suggested might be used to infer what the plaintiff’s reasonable costs might have been.
26The lack of evidence might have been filled by either party. In the circumstances, I must determine the issue without that evidence. The plaintiff’s costs, on a standard basis, would have been calculated at 80% of the Supreme Court scale of costs. The plaintiff’s actual costs would have been significantly higher. The plaintiff had, by the stage the offer was made, incurred all the costs of the interlocutory steps, preparation for trial and, effectively, engaging counsel for at least a 3 day trial.
27It is likely, in my view, that upon whatever basis the plaintiff’s costs were calculated, that the sum offered would not have covered those costs and the plaintiff would not have recovered any part of its alleged loss and damage. The onus was upon the defendant, as the party seeking a special costs order, to establish the basis for the order. I am not satisfied that the defendant has established that the offer of $125,000 would have left the plaintiff with more than a substantial contribution to its costs of the proceeding.
28The offer to pay the sum within 90 days was said to add a further element of uncertainty. Under Rule 26.03.1, a party may specify the time for payment of a sum of money, the subject of an offer of compromise, although if no period is stated, the offer is taken to provide for payment within 28 days. Under Rule 26.07.1, if after acceptance of an offer, there were a default in complying with the terms of the offer (including payment of an offered sum), the plaintiff might seek, in the alternative, judgment for the offered sum or the striking out the defendant’s defence and proceeding with its claims.
29In the present case, the Calderbank offer and the offer of compromise were both served on the plaintiff on the same day. The differences between the two offers were:
a.the Calderbank offer provided for payment of the sum of $125,000 within 90 days; the offer of compromise was taken to be an offer to pay that sum within 28 days;
b.the Calderbank offer expressly preserved the plaintiff’s rights pursuant to the Werribee franchise agreement and licence agreement;
c.the Calderbank offer required the parties to enter into a deed of release “to give effect to” mutual releases “from all claims relating to the proceedings”.
30In my view, I should have regard to these matters of context when considering the terms of the Calderbank offer, as well as the probable insufficiency of the offered sum to cover the plaintiff’s costs. In these circumstances:
a.the critical terms as to the extent and proposed effect of the deed of release and the consequences of non-payment of the offered sum add a degree of uncertainty and lack of clarity;
b.the extent of the compromise offered, because the money sum was inclusive of costs, would not be likely to meet the plaintiff’s costs;
c.the plaintiff’s prospects on its claims were not so hopeless that, having reached the door of the court, the plaintiff should have been expected to have abandoned those claims and only accept a contribution to its costs.
31In regard to the plaintiff’s prospects of success, it is relevant to consider that the most contentious factual issues (in relation to the Point Cook franchise), both in the interlocutory argument before me concerning the plaintiff’s pleadings, and at the trial concerned:
a.whether the defendant had complied with its obligations under the Franchising Code of Conduct by providing certain documents to the plaintiff;
b.whether the plaintiff (or Mrs Heaney on its behalf) had executed a written franchise agreement;
c.whether the opening of the Williams Landing franchise had affected sales at the Point Cook franchise;
d.the circumstances in late 2015 leading to the salon continuing to trade as Jakob’s Hair Salon.
32The first two and the last points were determined against the defendant. The third matter was not necessary for me to decide. I considered there were other significant factors which the plaintiff’s expert, Mr Miller, had failed to take into account. However, it was likely, in my view, that the downturn in sales at Point Cook, corresponding as it did with the Williams Landing franchise commencing to trade, had some relationship, although the extent was not possible to determine on the evidence.
33Mr Oberoi lived in Point Cook and he aggressively marketed the Williams Landing franchise. Further, the basis for the defendant’s counterclaim based on the plaintiff’s continued trading at Point Cook as Jakob’s Hair Salon, relied upon the reasonableness of the protection offered to the defendant by the restraint of trade provision in the Werribee franchise agreement. Competition from a similar business in a nearby shopping centre was regarded as a matter which would be likely to affect the defendant’s reasonable business interests.
34Essentially, the plaintiff’s claim failed because it could not establish a causal link between the defendant’s non-compliance with the Code and the absence of a territorial limit which the plaintiff might have negotiated to prevent the possibility of a competing Just Cuts’ franchise being established nearby, including at Williams Landing.
35For these reasons, I do not consider that the defendant has established that the plaintiff unreasonably failed to accept the Calderbank offer made by the defendant as the “alternative” offer in the letter dated 15 July 2016.
“Mixed success” for the parties in the litigation
36The Court of Appeal in Chen v. Chan [2009] VSCA 233 (“Chen”) at [10] set out the relevant general principles that courts should apply when determining questions of costs particularly “where there is a multiplicity of issues and mixed success has been enjoyed by the parties”.
37In those circumstances, the Court of Appeal said that:
“(2) The Rules of Court permit significant flexibility in determining questions of costs. In particular, the Court is entitled to examine the realities of the case and will attempt to do ‘substantial justice’ as between the parties on matters of costs.
(3)Where there is a multiplicity of issues and mixed success has been enjoyed by the parties, a Court may take a pragmatic approach in framing the order for costs, taking into consideration the success (or lack of success) of the parties on an issues basis. Generally, if such an order is made, it is reflected in the successful party being awarded a proportion of its costs but not the full amount.
(4)A Court may, when fixing costs in a claim where there has been mixed success, take into account complications which it considers will arise in the taxation of costs, as part of its consideration of the overall interests of justice.
(5)Where a Court determines to make an order apportioning costs, then it does so primarily as ‘a matter of impression and evaluation’, rather than with arithmetical precision, having considered the importance of the matters upon which the parties have been successful or unsuccessful, the time occupied and the ambit of the submissions made, as well as any other relevant matter”.
38Mr Truong submitted that, “These proceedings involved a mixed outcome for the parties in which all of Heaney Enterprises’ claims were dismissed and the counterclaims were dismissed. Ordinarily, the Court’s proposed orders as to costs would be appropriate. However, as a matter of impression and evaluation, Heaney Enterprises’ claims were the primary driver for this litigation and comprised the key issues to be determined. They also occupied much of the trial time”.
39Mr Truong relied upon an affidavit of a solicitor who had worked on the matter who had reviewed the transcript and estimated that, of the total trial time:
a.82.65% was spent addressing the plaintiff’s claims;
b.10.44% was spent addressing the defendant’s counterclaims.
40In these circumstances, Mr Truong submitted that “costs orders should be made in favour of Just Cuts on a proportionate basis, which Just Cuts submits should be fixed at 40 percent from the commencement of the proceedings”. This result was suggested as appropriate because of the amount of time “directed at the loss of damages [opportunity?] claims” brought by the plaintiff and the fact that “each of Heaney Enterprises’ claims were dismissed”.
41For the reasons I have already discussed, both in this document and in my reasons for judgment, I do not accept that the percentages calculated by the solicitor accurately reflect the “realities” of the way in which the trial was conducted. The principal evidentiary disputes concerned:
a.whether the defendant had sent the “usual bundle” of documents required by the Franchising Code of Conduct to the plaintiff;
b.whether Mrs Heaney had executed a copy of the Point Cook franchise agreement on behalf of the plaintiff;
c.the reasons for the downturn of takings at the Point Cook franchise after January 2015;
d.the circumstances leading to the opening of Jakob’s Hair Salon at the end of 2015.
42In relation to the first two issues, these matters were determined, on the evidence, against the defendant. The defendant’s former in-house solicitor was responsible for ensuring that both these steps were carried out. She did not give evidence, and it was understandable that she did not. However, the remaining evidence on these issues was generally not helpful to the defendant. In certain respects, the evidence suggested systemic failures in a number of respects.
43The plaintiff’s expert evidence was unsatisfactory. The presentation of the court books was a shambles. This was the responsibility of both parties, as the directions of the Court required. There should have been few problems as the case had been earlier fixed for trial. There were five principal court books. The ordering of documents followed no system. This added time to the trial and to my consideration of the matter.
44In these circumstances, it was very difficult to follow through the court books the communications relevant to the first two issues, I referred to above, and to the fourth issue (the events in the second half of 2015). It was necessary to examine these matters in detail to determine both the plaintiff’s claim, that it was denied a further lease and franchise agreement for Point Cook, and the defendant’s counterclaim that the opening of Jakob’s Hair Salon caused loss and damage to it.
45As “a matter of impression and evaluation”, I consider that to do “substantial justice” as between the parties would generally require that I make no order as to the costs of the proceeding.
46The Court of Appeal in Chen reiterated that, “The general rule is that costs should follow the event”. It would not be appropriate, in my view for the reasons I discuss below, that costs be ordered to be paid by the unsuccessful claimant and the unsuccessful counter-claimant to the opposite party or parties in each case. To do so would involve the parties in additional and unnecessary expense to effectively assess both parties’ costs of the entire proceeding, before they could be set off against each other.
Should the plaintiff receive indemnity costs for the Werribee breach notice issue
47Mr Levine submitted that the plaintiff should obtain orders for costs for the determination of the issues relating to the Werribee breach notice, as follows:
a.the plaintiff had obtained judgment for a declaratory order that the breach notice was “invalid and ineffective”, and was “thereby entitled to its costs”;
b.“the plaintiff should be entitled to indemnity costs in respect of the counterclaim because the defendant’s claims in the counterclaim were without merit, but were still pursued”;
c.the service of the breach notice had “sparked” the litigation.
48I consider that these submissions should be rejected. A declaratory order was appropriate in relation to the Werribee breach notice as:
a.both parties sought declaratory relief as to the validity of the notice;
b.the issue was very significant for the ongoing relationship between the parties and required an order, and not simply a finding or the statement of a conclusion in the reasons for judgment.
49However, these matters do not necessarily elevate the issue above the judgments given for the defendant on the plaintiff’s other claims and for the plaintiff on the defendant’s counterclaims. The “reality” is that the parties were essentially unsuccessful and should meet their own costs of the litigation.
50Mr Levine attempted to characterise the defendant’s case, particularly as regards the Werribee breach notice, as “hopeless”. I do not agree. The issue of the time allowed by the breach notice to remedy the alleged breaches was a difficult issue.
51In one sense, all the majority of the House of Lords were doing in Mannai was overruling an earlier line of authority which the judges in the minority felt constrained to follow, although the majority considered the reasoning in those decisions as inconsistent with more modern principles for the construction of commercial documents.
52In Central Pacific, Ormiston JA at page 3 noted that Mannai “was the subject of a detailed note published the day after argument was concluded in this court, entitled “Near enough is good enough” or “We know what you mean” written by Peter Butt [now Emeritus Professor, The University of Sydney] in the November issue of the Australian Law Journal (1997) 71 ALJ 816”, and at page 5 that Lord Steyn had commented in Mannai that he had “not said anything original”.
53Mannai is now a significant authority, no doubt because of Lord Steyn’s very useful statement of relevant “propositions”. However, it is a judgment which must be read in full and with regard to the specific task of construction being undertaken. Mr Truong’s thorough and careful written submissions did not reflect the pursuit of a “hopeless case” justifying an order for indemnity costs in the plaintiff’s favour.
Order
54Accordingly, I will order that there shall be no order as to the costs of the proceeding, including the plaintiff’s claims and the defendant’s counterclaims, and that the parties must bear their own costs.
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Certificate
I certify that these 12 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 31 May 2017.
Dated: 31 May 2017.
Carla Cianfaglione
Associate to His Honour Judge Anderson
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