ICM Investments Pty Ltd v San Miguel Corporation [No. 3]
[2013] VSC 621
•19 NOVEMBER 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 01408 of 2011
| ICM Investments Pty Ltd (ACN 004 982 512) | Plaintiff |
| v | |
| San Miguel Corporation | First Defendant |
| and | |
| Berri Limited | Second Defendant |
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JUDGE: | VICKERY J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 31 OCTOBER 2013 | |
DATE OF JUDGMENT: | 19 NOVEMBER 2013 | |
CASE MAY BE CITED AS: | ICM INVESTMENTS PTY LTD v SAN MIGUEL CORPORATION & ORS [No. 3] | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 621 | |
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PRACTICE AND PROCEDURE – Costs –Nominal damages awarded to plaintiff on proof of breach of contract but failure to prove loss and damage – Entitlement of plaintiff to nominal damages - Relevance of nominal damages award to costs discretion – Successful defendants – Calderbank offer – Whether rejection by plaintiff unreasonable.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D Gration | Baker & Mackenzie |
| For the First Defendant | Ms P Thiagarajan | Herbert Smith Freehills |
| For the Second Defendant | Mr S Parmenter | King Wood & Mallesons |
HIS HONOUR:
The Principal Reasons
On 7 October 2013 I handed down my reasons for judgment in the principal proceeding (the “Principal Reasons”). [1]
[1]ICM Investments Pty Ltd v San Miguel Corporation & Ors. [No. 2] 2013 VSC 528.
These reasons relate to the orders for costs which I will make consequent upon the Principal Reasons.
In the Principal Reasons I made critical findings that, on its proper construction, clause 7.7(a) of the of the Put and Call Option Deed created a dividend “entitlement” for ICM. The dividend entitlement was for ICM to be paid its share of any second interim dividend declared in respect of profits for the period to the final settlement in late December 2005.[2] However, this did not impose an obligation to declare a dividend in disregard of the legal obligations on the directors of Berri to do so in accordance with the relevant legal principles applicable to the declaration of interim dividends.[3] Further, it was found that: [4]
The construction of clause 7.7(a) that I have found gives effect to the commercial purpose of the agreements. It ensures that ICM as far as possible within the confines of the Transaction Documents and the general law, receives a commercial return on the deferred purchase price, by way of an interim dividend. This would be subject to the Berri Board being in a position legitimately to declare and pay such a dividend. In the event that an interim dividend were so declared, its quantification was to be calculated in accordance with clause 10 of the Shareholders Agreement. There was an element of commercial risk for ICM that no such dividend would be declared, because the Berri Board was not in a position to take this course, but nevertheless, that is what the parties agreed should happen.
[2] ICM Investments Pty Ltd v San Miguel Corporation & Ors. [No. 2] 2013 VSC 528 [136].
[3] ICM Investments Pty Ltd v San Miguel Corporation & Ors. [No. 2] 2013 VSC 528 [146].
[4] ICM Investments Pty Ltd v San Miguel Corporation & Ors. [No. 2] 2013 VSC 528 [149].
Central to the determination as to whether it was proven that the directors of Berri were in a position to declare the interim dividend in accordance with the relevant legal principles, the Court found that the test described by Hutley JA in Marra Developments Ltd v BW Rofe Pty Ltd[5] (the “Marra Test”) was applicable. However, no meeting of the Berri Board was convened to consider the issue. This was found to be in breach of the contractual obligations of both Berri and San Miguel under the Transaction Documents. In this context, the question of causation of loss and damage became whether the Berri Board, had they met in late 2005, would have formed a genuine opinion as to whether the financial statements for the company, when they were later produced and adopted, would disclose sufficient distributable profits from which any further interim dividend for the year could be declared and paid.
[5](1977) 2 NSWLR 616 (Hutley JA) 622.
The Court found that not only was it not proven that the directors, had they met at the time on either 16 or 28 December 2005, would have resolved to declare a second interim dividend for the year in question, it was found positively that had they met, in all probability each director would have either: [6]
(a)refused to declare such a dividend, on the basis that each could not form a genuine opinion that the final accounts, when prepared, would disclose sufficient distributable profits from which such a dividend could be paid in late 2005;
(b)refused to declare such a dividend, on the basis that more time was needed to seek information on which to form the necessary opinion and make the necessary determination; or
(c)refused to declare any second interim dividend, and instead awaited the finalisation of Berri’s accounts.
[6] ICM Investments Pty Ltd v San Miguel Corporation & Ors. [No. 2] 2013 VSC 528 [631].
The result was that no damages could be awarded.
Accordingly, this was a case where the causal link between the breach of contract as found and the loss and damage alleged. was not only found not to have been proven by reason of some deficiency in the evidentiary chain of proof. Rather, there was a positive finding that no damages were payable on the evidence before the Court at trial.
Calderbank Offer
By a letter dated 14 September 2012, which was sent by the Second Defendant’s solicitors on that day on a "without prejudice save as to costs" basis, the first and second defendants delivered a joint offer, made in accordance with the decision in Calderbank v Calderbank,[7] to settle the proceeding (the “Calderbank Letter”).
[7][1975] 3 All ER 333; [1975] 3 WLR 586.
The Calderbank Letter contained terms to the following effect:
(a)a joint offer from the First and Second Defendants to settle the proceeding, whereby the First and Second Defendants would each pay the Plaintiff the sum of $250,000 (i.e. a total of $500,000);
(b)stated that the Defendants reserved their rights to produce the letter in respect of the issue of costs in accordance with the principles set out in Calderbank v Calderbank [1975] 3 All ER 333; and
(c)stated that the offer was open for a period of 14 days from 14 September 2012.
By letter dated 28 September 2012 from its solicitors to those of the Second Defendant, the Plaintiff ICM rejected the offer contained in the Calderbank Letter. The letter of 28 September contained a counter “Calderbank” offer to settle the proceeding in the following terms:
However, in the interests of resolving the proceeding without the need for the parties to incur further unnecessary costs and expenses, including the costs of preparation for trial, and the trial itself (which is scheduled to commence on 22 October 2012 on an estimated duration of 4 days) we are instructed to offer to settle the proceeding on the following terms:
1.The Plaintiff offers to accept $2.5 million (settlement Sum) in full and final settlement of the proceedings.
2.The Settlement Sum is to be paid in full by the Defendants (or either of them) by unendorsed bank cheque made payable to the Plaintiff and delivered to the offices of the Plaintiff’s solicitors by 4:00 pm on the 14th day after the date of the acceptance of this offer by the Defendants.
3.Subject to the receipt of the Settlement Sum in the manner and the time provided for in point 2 above, the Plaintiff and the defendants shall each consent to the proceeding being dismissed with no order as to costs.
4.Time shall be of the essence in relation to the payment of the Settlement Sum.
…
This offer is open for acceptance in writing until 5:00 pm on Friday, 5 October 2012 and must be accepted by each Defendant.
The Calderbank Letter also set out the positions of the First and Second Defendants as to why it was that they believed the plaintiff could not succeed in the litigation. The following explanations were provided in the letter:
Insofar as SMC [San Miguel] is concerned, the bases upon which it denies liability include that:
1. there was no Compromise Agreement as alleged;
2.on 21 April 2006 the Board of Berri resolved by unanimous approval not to pay a dividend;
3.Berri generated no profits in respect of the results of the six months ending 31 December 2005 for the purposes of the minimum dividend calculation under the Shareholders Agreement;
4.Berri did not have sufficient distributable profits to pay a dividend in respect of the six month period ending 31 December 2005;
5.Berri acted reasonably in determining that no dividend was payable from distributable profits;
6.ICM’s dividend entitlement pursuant to clause 10 of the Shareholders Agreement was nil;
7.in circumstances where ICM’s dividend entitlement was nil, SMC was not obliged under the Option Deed to procure Berri to pay to ICM a dividend.
Berri denies liability upon similar bases to a number of those relied upon by SMC and referred to above. The additional bases upon which Berri denies any liability to ICM include that:
1.the only basis of liability contended for in your letter dated 20 August 2012 is the Option deed; however Berri was not a party to the Option Deed, and there was no relevant obligation upon Berri pursuant to that agreement;
2.there was no Compromise Agreement as alleged, and if any agreement was entered into, Berri was not a party to it and/or did not vary the parties’ rights and obligations pursuant to the Shareholders Agreement;
3.on the proper construction of clause 10 of the Shareholders Agreement, that clause did not impose any obligation on Berri to declare and pay any dividend
a.to ICM after ICM ceased to be a shareholder of Berri on 28 December 2005; and
b.in respect of any lesser period than six months ending 31 December 2005;
4.by reason of the operation of clauses 17.1(b) and 17.2 of the Shareholders Agreement, ICM has and had no right to any dividend under clause 10 of the Shareholders Agreement.
SMC and Berri are of the view that your client has little prospect of success in the Proceeding.
The Contentions of ICM
In summary, the Plaintiff ICM submitted that appropriate orders as to costs would be to the following effect:
1.the First and Second Defendants pay the Plaintiff nominal damages of $10.00;
2.the Plaintiff pay the First and Second Defendants’ costs of the proceeding (including reserved costs) from 14 September 2012 which, in default of agreement, are to be taxed on a standard basis;
3.there should be no order as to costs incurred before 14 September 2012, the date of the Defendants’ settlement offer; and
4. there should be no order as to costs in favour of the plaintiff.
It was submitted that these orders would be consistent with the overarching purpose of the Rules and give appropriate recognition to the degree of success achieved by the parties at trial and to the Defendants’ settlement offer.
The Contentions of San Miguel
San Miguel, on the other hand, submitted that costs orders should be made as follows:
1. The proceeding is dismissed.
2.The Plaintiff pay the First and Second Defendants' costs of the proceeding which, in default of agreement, are to be taxed:
(a)on a party-party basis up to and including 28 September 2012; and
(b) on an indemnity basis from 29 September 2012.
The Contentions of Berri
Berri submits that the form of judgment proposed by San Miguel is appropriate to give effect to the Court's Principal Reasons for Judgment.
It was submitted by Berri that dismissal of the proceeding reflects the Court's Principal Reasons, and that the proposed order for costs is appropriate having regard to ICM's rejection of the Calderbank offer which was made to it on l4 September 2012.
Whether Nominal Damages Should be Awarded
A matter which needs to be resolved at the outset is whether ICM’s claim to an entitlement to nominal damages can be sustained.
Nominal damages were described by Lord Halsbury in “The Mediana”[8] in the following oft-cited passage:
'Nominal damages' is a technical phrase which means that you have negatived anything like real damage, but that you are affirming by your nominal damages that there is an infraction of a legal right which, though it gives you no right to any real damages at all, yet it gives you a right to the verdict or judgment because your legal right has been infringed. But the term 'nominal damages' does not mean small damages.
[8]The Owners of the Steamship “Mediana” v The Owners, Master and Crew of the Lightship “Comet” (“The Mediana”)[1900] AC 113, 116; cited with approval in Baume v Commonwealth [1906] HCA 92; (1906) 4 CLR 97 at 116-117 (Griffiths CJ).
The Plaintiff ICM contended that such damages were appropriate in circumstances where the Court has found that the defendants breached their contractual obligations to the plaintiff, but that the plaintiff had failed to prove it suffered compensable loss and damage caused by the defendants’ breach. In these circumstances, the plaintiff is entitled to an award of nominal damages.[9]
[9]See: NC Seddon & MP Ellinghaus, Cheshire and Fifoot’s Law of Contract (9th Australian Edition) (LexisNexis 2008) at [23.1] and the cases there cited.
In the Motium Pty Ltd v Arrow Electronics Australia Pty Ltd[10] a question as to nominal damages arose for consideration by the Western Australian Court of Appeal in the following way. At the trial in the District Court below, the appellant had claimed damages against the respondent for, among other things, breach of contract in a contract of supply. The appellant quantified its damages at $77,689.30. The primary judge found that whilst the appellant had established that the respondent had breached the contract, the appellant had failed to prove that it had suffered any loss as a result of the breach. The primary judge did not, however, consider whether in light of his finding that the respondent had breached the contract, the appellant was entitled to nominal damages and no such order was made. It seems the subject was not touched upon below. Further, the appellant did not expressly seek an order for nominal damages in the alternative to its claim for substantial damages at trial.
[10][2011] WASCA 65 (“Motium”).
The respondent in Motium submitted that no order should be made by the Court of Appeal for nominal damages following the appeal, which failed for the appellant on all grounds. The respondent said that the issue of nominal damages was not part of the appellant's case at trial or on appeal on the basis that the appellant's case was that it was entitled to substantial damages. It failed to make good that case.
The appellant in Motium, on the other hand, submitted that as the primary judge found that the respondent had breached the contract, his Honour should have made an order for the nominal damages to which the appellant was plainly entitled, and that the Court of Appeal should make such an order before finally disposing of the appeal.
The Court of Appeal noted that the relevant debate was, unsurprisingly, not in truth over the amount the appellant would recover by way of nominal damages. It was rather the peg on which the appellant sought to hang its application for the costs of the trial and the appeal. In this respect, Motium was similar to the objective of the plaintiff in the present case in seeking an award of nominal damages to support its application for some relief from the full impact of a potential costs order.
In the view of the Court of Appeal in Motium, nominal damages should be awarded upon a finding that the respondent was in breach of the relevant contract. This gave rise to an entitlement to such an order in that case because the appellant failed to establish that it had suffered substantial damages. The Court of Appeal further held that it was unnecessary for the appellant to expressly seek an order for nominal damages in the alternative to its claim for substantial damages at trial, and that even in the absence of such an express claim the order should have been made by the primary judge.[11]
[11]Motium Pty Ltd v Arrow Electronics Australia Pty Ltd[2011] WASCA 65 [14].
It is to be noted that the Court of Appeal in Motium made an order for the payment of nominal damages, without the necessity to make a declaration in support of the order.
In Nicholson v Hilldove Pty Ltd (No 4),[12] Sifris J, no doubt applying these principles, awarded nominal damages for breach of contract where loss and damage was not proved. Again this order was made without a supporting declaration as to the entitlement.
[12][2013] VSC 578 (25 October 2013, Sifris J).
In my opinion, there should be an order that the defendants pay to the Plaintiff ICM nominal damages in the sum of $10.00.
Cost Consequences of Award of Nominal Damages
Orders as to costs in proceedings where there has been an offer of compromise extended by a party, which offer has not been accepted at the time of judgment, are contemplated by Order 26 of the Supreme Court (General Civil Procedure Rules) 2006 (Vic).[13] The Rules do not differentiate between nominal damages and an award of substantive compensatory damages. Rule 26.08 relevantly provides :
[13] Supreme Court (General Civil Procedure Rules) 2006 (Vic), r 26.08(1).
(2)Where an offer of compromise is made by a plaintiff and not accepted by the defendant, and the plaintiff obtains a judgment on the claim to which the offer relates no less favourable to the plaintiff than the terms of the offer, then, unless the Court otherwise orders, the plaintiff shall be entitled—
(a)if the claim of the plaintiff is for damages for or arising out of death or bodily injury, to an order against the defendant for the plaintiff's costs in respect of the claim [claims], taxed on an indemnity basis;
(b)in the case of any other claim of the plaintiff, to an order against the defendant for the plaintiff's costs in respect of the claim before 11.00 am on the second business day after the offer was served, taxed on a party and party basis and for the plaintiff's costs thereafter taxed on an indemnity basis.
(3)Where an offer of compromise is made by a defendant and not accepted by the plaintiff, and the plaintiff obtains a judgment on the claim to which the offer relates not more favourable to the plaintiff than the terms of the offer, then, unless the Court otherwise orders—
(a)the plaintiff shall be entitled to an order against the defendant for the plaintiff's costs in respect of the claim before 11.00 am on the second business day after the offer was served, taxed on a party and party basis; and
(b)the defendant shall be entitled to an order against the plaintiff for the defendant's costs in respect of the claim thereafter taxed on the ordinarily applicable basis.
…
(7)Paragraphs (2) and (3) shall not apply unless the Court is satisfied by the party serving the offer of compromise that party was at all material times willing and able to carry out the [that] party's part of what was proposed in the offer.
(8)Where the plaintiff obtains judgment for the recovery of a debt or damages, and the amount of the debt or the damages was not in dispute, but only the question of liability, paragraph (2) shall not apply unless the Court is satisfied that the plaintiff's offer was of a genuine compromise.
As ICM acknowledges, in many cases an award of nominal damages does not bring with it an entitlement to costs and a defendant may, in some cases, be awarded its costs despite nominal damages being awarded against it.[14]
[14]See: Connolly v Sunday Times’ Publishing Co Ltd (1908) CLR 263; Nexus Minerals NL v Brutus Constructions Pty Ltd FCAFC (Unreported 10 September 1997, Spender, Nicholson and Finn JJ); Oshlack v Richmond City Council (1998) 193 CLR 72 [70] (McHugh J); Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 [685]; MLW Technology Pty Ltd v May (No 4) [2003] VSC 293 (Byrne J); ACN 074 971 109 Pty Ltd and Pegela Pty Ltd v National Mutual Life Association of Australasia Ltd (No 2) [2012] VSC 177 [24] (Croft J).
Nevertheless, ICM referred to a number of recent examples in this Court of a plaintiff who has been awarded nominal damages consequently being entitled to some or all of its costs, and not being required to pay the defendant’s costs, at least up to a particular stage in the proceeding.
In Simply Irresistible Pty Ltd v Couper,[15] the plaintiff was awarded nominal damages of $1 for breach of contract. The defendant had made an offer of compromise under Order 26. Kyrou J in that case held that the fact that the plaintiff was awarded nominal damages only did not render Rule 26.08(3) inapplicable, that Rule governing the costs consequences of failure to accept an offer of compromise. His Honour awarded the plaintiff its costs up to the date of the offer of compromise, and awarded the defendant its costs after the date of the offer of compromise, in each case taxed on a party and party basis.
[15][2011] VSC 33.
In Nicholson v Hilldove Pty Ltd (No 4),[16] Sifris J awarded the plaintiff nominal damages of $100.00. In the circumstances of that case, his Honour held that the defendants should pay one-half of the plaintiff’s costs up to the date of the Court’s judgment with respect to liability and that the plaintiff should pay the defendants’ costs after that date, in each case taxed on a party and party basis or standard basis depending upon when the costs were incurred.
[16][2013] VSC 578 (“Nicholson”).
However, in Nicholson, Sifris J in his summary correctly emphasised that: “[e]ach case must be considered on its own facts and in appropriate cases such unsuccessful party will not only be denied the costs of a pyrrhic victory but will be ordered to pay the costs of the truly successful party either in whole or in part. By the same token in appropriate cases the unsuccessful party may recover part of the costs.”[17]
[17] Nicholson v Hilldove Pty Ltd (No 4) [2013] VSC 578 [62].
An important consideration in the Nicholson case before Sifris J, which his Honour took into account, was that as is common in the Commercial Court, liability was determined in a split trial before quantum of the loss. In these circumstances his Honour found that: “Unfortunately, not much attention was given to the proper formulation or quantification of damages and, perhaps more relevantly, Nicholson maintained his claim for specific performance. Establishing the Agreement was fundamental to his case whatever the remedy.” His Honour proceeded: “Having established the central pillar of his case, at a stage where the remedy received little focus, it would be manifestly unjust to require him to pay the costs because subsequent findings and events turned his success into a pyrrhic victory. Further and more relevantly I would not order Nicholson to pay the costs of this stage of the trial in circumstances where the evidence of the defendants’ key witness was thoroughly discredited.”
These considerations are absent from the present case. The trial was not split, as it was in Nicholson. In the present case the plaintiff party proceeded with its case at trial, not only on liability, but also assuming the burden of establishing causation and loss and damage. Accordingly, its focus from the outset of the trial was on both issues. Further, it was not the case that the evidence of the defendants’ key witness was “thoroughly discredited”, as was apparently the case in Nicholson.
In Motium the Western Australian Court of Appeal observed that while the Court has a broad discretion as to costs, and generally the successful party is entitled to its costs, it does not follow that a party which is awarded nominal damages is entitled to an order for the costs of the proceedings. As was observed: “The question is whether a party that is awarded nominal damages is to be regarded as the successful party.”[18]
[18] Motium Pty Ltd v Arrow Electronics Australia Pty Ltd[2011] WASCA 65 [8].
This observation of the Court of Appeal echoed the approach reflected in Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd,[19] where Devlin J said:
No doubt, the ordinary rule is that, where a plaintiff has been successful, he ought not to be deprived of his costs, or, at any rate, made to pay the costs of the other side, unless he has been guilty of some sort of misconduct. In applying that rule, however, it is necessary to decide whether the plaintiff really has been successful, and I do not think that a plaintiff who recovers nominal damages ought necessarily to be regarded in the ordinary sense of the word as a 'successful' plaintiff. In certain cases he may be, eg, where part of the object of the action is to establish a legal right, wholly irrespective of whether any substantial remedy is obtained. To that extent a plaintiff who recovers nominal damages may properly be regarded as a successful plaintiff, but it is necessary to examine the facts of each particular case.
[19][1951] 1 All ER 873, 874.
To similar effect are the observations of McHugh J in Oshlack v Richmond River Council.[20] Although McHugh J was in dissent in that case, his statement of general principles concerning costs was not in issue.
[20][1998] HCA 11; (1998) 193 CLR 72.
His Honour commenced his analysis with the observation that:[21]
Although the statutory discretion is broadly stated, it is not unqualified. It clearly cannot be exercised capriciously. Importantly, the discretion must be exercised judicially in accordance with established principle and factors directly connected with the litigation[22]. In this manner, the law has gradually developed principles to guide the proper exercise of the discretion and, in some cases, to highlight extraneous considerations which, if taken into account, will cause the exercise of the discretion to miscarry.
[21] Oshlack v Richmond River Council(1998) 193 CLR 72 [65].
[22]In re Elgindata Ltd (No 2) [1993] 1 All ER 232;[1992] 1 WLR 1207.
McHugh J then made the unexceptional statement that: “By far the most important factor which courts have viewed as guiding the exercise of the costs discretion is the result of the litigation. A successful litigant is generally entitled to an award of costs”, which his Honour described as what is commonly referred to as the “usual order as to costs”, [23] about which the following was said as to the fundamental fairness and policy underpinning such an order in the usual case:[24]
The expression the "usual order as to costs" embodies the important principle that, subject to certain limited exceptions, a successful party in litigation is entitled to an award of costs in its favour. The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party[25]. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation.
As a matter of policy, one beneficial by-product of this compensatory purpose may well be to instil in a party contemplating commencing, or defending, litigation a sober realisation of the potential financial expense involved. Large scale disregard of the principle of the usual order as to costs would inevitably lead to an increase in litigation with an increased, and often unnecessary, burden on the scarce resources of the publicly funded system of justice.
[23]Oshlack v Richmond River Council(1998) 193 CLR 72 [66].
[24]Oshlack v Richmond River Council(1998) 193 CLR 72 [67]-[68].
[25] Latoudis v Casey (1990) 170 CLR 534, 543 (Mason CJ), 562-563 (Toohey J), 566-567 (McHugh J); Cachia v Hanes (1994) 179 CLR 403, 410 (Mason CJ, Brennan, Deane, Dawson and McHugh JJ).
After noting the traditional exceptions as to the usual order as to costs, which focus on the conduct of the case on the part of the successful party,[26] McHugh J made some further observations as to the award of costs where a plaintiff has obtained only nominal damages, noting that in such a case the Court may award costs in favour of the defendant, noting that this practice can be justified on the basis that based on established authority,[27] in reality, the successful party lost the litigation and the unsuccessful party won.[28]
[26]Oshlack v Richmond River Council(1998) 193 CLR 72 [69].
[27]Alltrans ExpressLtd v CVA Holdings Ltd [1984] 1 WLR 394, 401, 403-404; [1984] 1 All ER 685, 691, 693; Anglo-Cyprian Trade Agencies v Paphos Wine Industries [1951] 1 All ER 873, 874.
[28] Oshlack v Richmond River Council(1998) 193 CLR 72 [70].
In my opinion, it was not a primary purpose of the present proceeding simply to establish or vindicate some legal right claimed by ICM. Its primary purpose, indeed its only purpose, was to recover substantial damages.
Given that ICM has obtained merely nominal damages of $10.00, it has recovered something of no real use to it. Had it known at the outset of the litigation that this would be the outcome, it would not have brought the proceeding.
In the words of the Western Australian Court of Appeal in Motium: “It would be contrary to modern notions of the efficient and cost-effective use of judicial resources to enable a party to recover its costs for a pyrrhic victory, having substantively failed in the action.”[29]
[29]Motium Pty Ltd v Arrow Electronics Australia Pty Ltd[2011] WASCA 65 [10].
Accordingly, in exercising the costs discretion, I disregard the award of nominal damages in favour of ICM.
The defendants are entitled to the usual order as to costs in their favour.
Whether Costs Should be Awarded to the Defendants on a Special Basis
In the present case, the offer made by the Defendants was a Calderbank offer rather than a formal offer of compromise under Order 26.[30] This offer was made in accordance with the decision in Calderbank v Calderbank,[31] and was not capable of acceptance by the Plaintiff in relation to only one of the Defendants. It remains to be considered whether the defendants’ costs should be awarded on any special basis by virtue of ICM’s rejection of the offer contained in the defendants’ Calderbank Letter.
[30]Order 26 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic).
[31][1975] 3 All ER 333; [1975] 3 WLR 586.
Calderbank Principles
The standard starting point for such an examination of a Calderbank offer is the joint judgment of Warren CJ, Maxwell P and Harper AJA in Hazeldene’s Chicken Farm Pty Ld v Victorian Workcover Authority (No 2).[32] A very useful collection of the principles in Hazeldene as applied in subsequent authorities is provided by Habersberger J in BHP Billiton Olympic Dam Corporation Pty Ltd v Steuler Industriewerke GmbH (No 3),[33] where his Honour observed [citations omitted]:[34]
[32](2005) 13 VR 435 (“Hazeldene”).
[33][2012] VSC 414.
[34] BHP Billiton Olympic Dam Corporation Pty Ltd v Steuler Industriewerke GmbH (No 3) [2012] VSC 414 [59]-[67].
59First, the fact that a less favourable result is achieved does not give rise to a presumption of a special costs order. The making of an offer and its rejection are “but two albeit important circumstances” to which the Court will have regard in the exercise of its costs discretion.
60Secondly, the competing policy objectives relevant to the exercise of the costs discretion are principally the desirability of promoting settlement and reducing litigation costs as against the undesirability of discouraging potential litigants from bringing their dispute to the courts.
61Thirdly, the critical question is whether the rejection of the offer was unreasonable in the circumstances. As the Court of Appeal said in Hazeldene:
In our view, these competing considerations can be sufficiently accommodated by applying a test of (un)reasonableness. The critical question is whether the rejection of the offer was unreasonable in the circumstances. We see no justification for a more stringent test such as “manifestly” or “plainly” unreasonable.
62Fourthly, a court considering submissions 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 for 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; and
(f)whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.
63Fifthly, as the determination of whether it was unreasonable for the offeree to have rejected the offer is made “as at the time, or within a reasonably short time after, the offer” was made, the Court should not too readily embrace submissions that it was inevitable that the proceedings would fail. As Hamilton J put it in Grynberg v Muller:
These submissions focus the bright light of hindsight. Hindsight sings a siren song of which Judges must be cautious ...
64Sixthly, the onus lies on the offeror to demonstrate the unreasonableness of the offeree’s rejection of the offer. This means that it is necessary to analyse what was proposed.
65Seventhly, there is no general rule that the Calderbank offer must set out with specificity the basis for the offeror’s contention that the offeree should accept the compromise. Whether there is a need to do so depends upon a consideration of all of the circumstances existing at the time of the offer.
66Eighthly, it is not necessary for the applicant for an indemnity costs order to establish matters which might be relevant to other, well-recognised, grounds for indemnity costs. Such conduct is not a pre-requisite for a finding that the rejection of the Calderbank offer was unreasonable.
67 Ninthly, an “all in” offer is permitted in a Calderbank offer.
I will apply these principles in the exercise of the costs discretion conferred on the Court in the present case.
ICM’s Case on Reasonableness of the Offer Rejection
ICM advanced a number of factors which pointed to its rejection of the Calderbank offer as being reasonable, in all the circumstances that prevailed at the relevant date. It relied upon the following ‘Hazeldene’ factors which were put in these terms:
(a)The stage of the proceeding at which the offer was received: The key issues in the proceeding were: (1) the proper construction of the Transaction Documents; (2) whether the Defendants complied with their obligations under the Transaction Documents; and (3) whether, in December 2005, the Berri board should properly have determined to declare and pay the required dividend.
It became apparent at the original hearing before Davies J in October 2012 that the Defendants had not understood, and the Plaintiff had not sufficiently pleaded, the way in which the Plaintiff put its case in respect of the third point.
The Plaintiff subsequently amended its pleadings to make clear that its case was that the Berri Board could not and would not have taken into account certain adjustments to the forecast profit of Berri in determining whether or not to pay the required dividend in December 2005. Both parties served significant supplementary expert reports after the pleading amendments.
The Defendants’ settlement offer was made in September 2012, about a month before the original hearing before Davies J, and well before the substantial amendments to the pleadings which were made after that hearing. The offer letter does not address the key question on which the Plaintiff ultimately failed; whether or not in December 2005 Berri had sufficient actual or anticipated profits to pay the required dividend.
At the time of the Defendants offer, the Plaintiff had received Mr Morris’ first report which opined that Berri’s profit reserves were available to fund the required dividend. The Court reached the same conclusion.
The offer was not made at a stage of the proceeding when the Plaintiff was in a position to appreciate properly the basis on which its case ultimately failed.
(b)The time allowed to the offeree to consider the offer: 14 days was a reasonable time for the Plaintiff to consider the offer.
(c)The extent of the compromise offered: The offer was not, in reality, a compromise of the claim. It was an invitation to capitulate. The Defendants’ offer of $500,000 was inclusive of costs. Having regard to the likely legal costs incurred by the Plaintiff to that stage of the proceeding, the offer put little, if any, value on the Plaintiff’s claim for almost $5 million, together with interest calculated from December 2005.
(d)The offeree’s prospects of success, assessed as at the date of the offer: While ultimately unsuccessful, the Plaintiff had a clearly arguable case and in fact succeeded in making good many aspects of its case. That the Court held that the Plaintiff ultimately failed to prove its loss and damage, does not make the failure to accept the offer in September 2012 unreasonable. At the date of the offer, the parties had not amended their pleadings or served expert evidence on the issue on which the Plaintiff’s case ultimately failed.
To adopt the words of Almond J in Strategic Property Reservoir Pty Ltd v Condec Pty Ltd (No 2),[35] the facts of the case were difficult and complex, there was a very significant amount at stake, the Plaintiff would have incurred substantial legal costs, and it could not be said at the time of the offer that the Plaintiff had no real prospect of success.
(e)The clarity with which the terms of the offer were expressed: The terms of the offer were expressed clearly.
(f)Whether the offer foreshadowed an application for indemnity costs: The offer foreshadowed an application for indemnity costs.
[35][2013] VSC 29 [12]–[13].
Berri’s Case on Unreasonableness of the Calderbank Offer Rejection
Berri also analysed the facts of the present case against the six factors referred to in Hazeldene, submitted that the Court should arrive at a different conclusion, namely that the plaintiff’s rejection of the Calderbank offer was unreasonable, and for these reasons, Berri submitted that it is appropriate that its costs be awarded on an indemnity basis from 29 September 2012.
Berri submitted in this respect:
First, as was noted in the Calderbank Offer, at the time the offer was made, the events which were the subject of the proceeding had occurred more than six years previously. The proceeding had been on foot for over l7 months. Pleadings and discovery were complete, expert evidence and summaries of lay witness evidence had been filed, and the issues had been ventilated at a mediation conducted on 23 March 2012. In light of this history, ICM should have been well aware of the various bases upon which SMC and Berri denied liability and of ICM's prospects of success in the proceeding.
Second, the offer was open for acceptance for l4 days. This was more than sufficient time for ICM to give proper consideration to the offer.
Third, and significantly, the extent of the compromise offered was significant. The offer constituted an offer by each of SMC and Berri to pay ICM the sum of $250,000, i.e. a total of $500,000. It was no token offer. Importantly, it was also an offer to forego any order that might otherwise ultimately be made in favour of Berri (and SMC) for the costs which had been incurred in the conduct of the proceeding to that stage. The costs which Berri had incurred to that point in time were clearly significant. For example, costs had been reserved pursuant to orders made by the Court on 6 May 20ll,l July 2011,26 July 20ll , 4 August 2011, 25 August 2011 , 14 October 2011, 17 February 2012, 30 March 2012 and l0 August 2012.33 Further, Berri had plainly incurred other significant costs which were not encompassed by the orders for reserved costs which had been made to that point in time, such as its costs of preparing pleadings, making discovery, preparing summaries of lay witness evidence, attending the mediation and the like. If Berri ultimately succeeded, all of those costs (including reserved costs) would be included in a costs order in its favour. Having regard to all of those matters, the offer was a real and genuine offer of compromise by Berri (and SMC). It was by no means a demand to capitulate.
Fourth, as to ICM's prospects of success, assessed as at l4 September 2012, they could not have been assessed as strong. It ought to have been apparent to ICM that its prospects of success were poor, or uncertain at best. The Calderbank Offer set out a number of the bases upon which liability was denied, including:
(a)that Berri was never a party to any Compromise Agreement as alleged (as was clear from the email correspondence and as the Court ultimately found); and
(b)significantly, that Berri did not have sufficient distributable profits to pay a dividend in respect of the six month period ending 3l December 2005 and that Berri acting reasonably in determining that no dividend was payable from distributable profits (and arguments to similar effect were ultimately upheld by the Court, after ICM amended its claim following the aborted trial in October 2012 to run a different case contending for the payment of an interim dividend in accordance with the principles in Marra Developments v Rofe Pty Ltd.
Further, the fact that ICM considered it critical to amend its case in October 2012 when the (first) trial commenced strongly suggests that ICM was aware or ought to have been aware that the case as pleaded in September 2012, as at the date of the Calderbank Offer, was one upon which it was unlikely to succeed at trial. Given that in October 2012 it insisted on the need to amend its case notwithstanding the consequential vacation of the trial and costs order made against ICM, the Court is entitled to infer that ICM considered that its prospects of succeeding on the case pleaded prior to the amendments were sufficiently poor such that it was essential that it amend its claim.
Fifth, the terms of the offer were expressed clearly.
Sixth, the offer was expressed to be 'without prejudice save as to costs', and the offer foreshadowed, in the last paragraph, an application for indemnity costs (from the date of the letter) in the event that the offer was not accepted.
San Miguel’s Case on Unreasonableness of the Calderbank Offer Rejection
San Miguel submitted that it was unreasonable for ICM not to accept the Calderbank offer for the following reasons:
(a) the offer made was clear and readily comprehensible;
(b)the offer was a genuine offer of compromise of a substantial sum of money (i.e. a total of $500,000 and a substantial amount represented by reserved costs);
(c)ICM was given sufficient time to evaluate the offer and decide whether to accept it. The offer was made at a time when the proceeding was well advanced. The parties had completed discovery, exchanged expert reports and ICM was in a position to make an informed decision and was cognisant of the weaknesses of its claim;
(d)even if ICM did not know that its prospects of success were low, the Calderbank Letter explained clearly why ICM's claim would not succeed;
(e)the offer made it clear that if it was not accepted ICM would face an application for costs on an indemnity basis;
(f)throughout the proceedings ICM was represented by counsel and solicitors.
Conclusion on the Calderbank Letter
It is to be noted that the Calderbank letter dated 14 September 2012 was sent prior to the commencement of the first aborted trial, which was set down for October 2012 before Davies J. The adjournment of the trial was brought about by the events described above, which resulted in the plaintiff subsequently amending its pleadings. This in turn prompted both parties to serve significant supplementary expert reports after the pleading amendments. At the date of the offer, the parties had not amended their pleadings or served expert evidence on the issue on which the Plaintiff’s case ultimately failed.
I accept, too, that at the time of the Defendants’ Calderbank offer, the Plaintiff ICM had received Mr Morris’ first expert report which opined that Berri’s profit reserves were available to fund the required dividend. The Court reached the same conclusion.
I accept further that the offer was not made at a stage of the proceeding when the Plaintiff ICM was in a position to appreciate properly the basis on which its case ultimately failed.
I also take into account the fact that the Defendants’ Calderbank offer of $500,000 was inclusive of costs. In these circumstances, having regard to the likely legal costs incurred by ICM to that point, the offer, if it had been accepted would have gone only a little way, at most, to satisfying the Plaintiff’s claim for almost $5 million, together with interest calculated from December 2005.
It also needs to be borne in mind that the facts of this case were complex. Much time was devoted at trial to considering difficult accounting issues, which on some issues had not been the subject of previous judicial consideration. It could not be said at the time of the offer that the plaintiff had no real prospect of success, such that it would have been reasonable to effectively ‘capitulate’ by accepting the terms of the Calderbank offer.
Although the Calderbank Letter provided a number of explanations as to why it was that the defendants took the position that the plaintiff could not succeed in the litigation, ICM substantially succeeded on these points, and established a breach of the contract comprised in the Transaction Documents. However, it failed on an issue which was not addressed in the Calderbank Letter, namely proof of the causal link between the breach as found and the loss and damage claimed, following application of the “Marra Test” as earlier described.
I have taken into account each of the matters raised by the defendants in support of their contentions that rejection of their Calderbank offer by ICM was unreasonable. However, in considering the factors in their context, and overall, in my opinion, the offerors of the Calderbank offer, namely the defendants, have failed to establish the unreasonableness of the ICM’s rejection of the offer.
Accordingly, costs ought to be awarded on the usual ‘party party’ basis.
Orders
I will make the following orders:
1. The First and Second Defendants pay the Plaintiff nominal damages of $10.00;
2.The Plaintiff pay the First and Second Defendants’ costs of the proceeding (including reserved costs) which, in default of agreement, are to be taxed on a standard (party-party) basis;
3. The proceeding be otherwise dismissed.
3
10
0