In the matter of Pacific Springs Pty Ltd

[2021] NSWSC 66

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Pacific Springs Pty Ltd [2021] NSWSC 66

Hearing dates:

On the papers

Date of orders:

10 February 2021

Decision date:

10 February 2021

Jurisdiction:

Equity - Corporations List

Before:

Rees J

Decision:

Order indemnity costs from non-acceptance of third without prejudice offer.

Catchwords:

COSTS – Calderbank offers – plaintiffs sought correction of share register – shares of nominal value – defendant makes ‘walk away’ offer on Friday expiring on Monday – plaintiffs live overseas, not fluent in English and unfamiliar with Australian legal processes – rejection of offer not unreasonable – defendants’ evidence served – mediation – defendant offers $200,000 – rejection of third offer unreasonable – no question of principle.

Legislation Cited:

Corporations Act 2001 (Cth) s 237

Uniform Civil Procedure Rules 2005 (NSW) rr 20.26, 42.19(2)

Cases Cited:

Atton v National Mutual Life Association of Australasia (No 2) [2007] NSWSC 348

Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited (No 2) [2009] NSWCA 12

Calderbank v Calderbank [1975] 3 All ER 333

Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354

Fan v Han (No 2) [2016] NSWSC 1651

Fan v Han (No 2) [2016] NSWSC 1651

Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1

Grimaldi v Chameleon Mining NL and Another (No 2) (2012) 200 FCR 296

In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356

In the matter of Pacific Springs Pty Limited (No 2) [2019] NSWSC 1183

In the matter of Pacific Springs Pty Limited [2020] NSWSC 1240

Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2008] NSWCA 85

Leda v Weerden (No 3) [2006] NSWSC 220

Maule v Liporoni (No 2) [2002] NSWLEC 140; (2002) 122 LGERA 216

Ngurli Ltd v McCann (1953) 90 CLR 425

Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268

Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268

Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569

Texts Cited:

Stapledon, G P, “Locus Standi of Shareholders to Enforce the Duty of Company Directors to Exercise the Share Issue Power for Proper Purposes” (1990) 8 Company and Securities Law Journal 213

Category:

Costs

Parties:

Gani Mualim (First Plaintiff)
Jorida Mualim (Second Plaintiff)

Ricards Dzelme (First Defendant)
Pacific Springs Pty Limited (Second Defendant)

Representation:

Counsel:
Mr Grieve QC (First and Second Plaintiffs)
Mr Pritchard SC / Mr A Macauley (First and Second Defendants)

Solicitors:
RBHM Commercial Lawyers (First and Second Plaintiffs)
Swaab Attorneys (First and Second Defendants)

File Number(s):

2019/55505

Judgment

1. HER HONOUR: On 11 September 2020, I gave judgment in these proceedings in favour of the defendants: In the matter of Pacific Springs Pty Limited [2020] NSWSC 1240. I ordered the plaintiffs to pay the defendants’ costs of the claim and cross-claim, and granted liberty to any party wishing to be heard in respect of any variation of that order. The defendants have exercised this liberty and now seek their costs on an indemnity basis from 25 May 2019 on or, alternatively, from 17 April 2020 on. Such an order is opposed by the plaintiffs.

2. In support of their application, the defendants read an affidavit by their solicitor, Sean Greenwood. The plaintiffs read an affidavit by their solicitor, Michael Horton. There was no cross-examination. The parties agreed that I should determine the application on the papers.

3. This judgment assumes familiarity with my principal judgment (Pacific Springs) together with two judgments I gave in respect of the defendants’ application, in 2019, for security for costs: In the matter of Pacific Springs Pty Limited (ex tempore judgment, 22 July 2019) and In the matter of Pacific Springs Pty Limited (No 2) [2019] NSWSC 1183 (9 September 2019).

FACTS

4. On 19 February 2019, these proceedings commenced. The plaintiffs, Gani and Jorida Mualim, live in Indonesia. The defendant then named was Ricards Dzelme, the de facto husband of Mr and Mrs Mualim’s son, Dean Mualim, who had recently passed away. Mr and Mrs Mualim sought to bring a derivative suit under section 237 of the Corporations Act 2001 (Cth) to rectify the members’ register of Pacific Springs Pty Limited. Specifically, Mr and Mrs Mualim sought a declaration that an allotment of 1,800 shares in Pacific Springs by and to their son was made for an improper purpose and was void and of no effect and, further, an order that the register of the company be rectified. Pacific Springs was not, however, named as a defendant.

5. From the outset, Mr Dzelme’s solicitors contended that seeking to bring a derivative suit was misconceived as Mr and Mrs Mualim challenged the exercise by Dean Mualim of a fiduciary power rather than sued for breach of fiduciary duty: Grimaldi v Chameleon Mining NL and Another (No 2) (2012) 200 FCR 296 at [174]; Ngurli Ltd v McCann (1953) 90 CLR 425 at 447-448 per the court; Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 at 31-32 per Williams J; Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569 at 574-577 per King CJ (Matheson and Bollen JJ agreeing); Stapledon, G P, “Locus Standi of Shareholders to Enforce the Duty of Company Directors to Exercise the Share Issue Power for Proper Purposes” (1990) 8 Company and Securities Law Journal 213. Mr and Mrs Mualim maintained that Dean Mualim had acted in breach of fiduciary duty and that their claim for equitable relief on behalf of the company was appropriately prosecuted by a derivative suit. Either way, this topic occupied initial correspondence and was likely productive of unnecessary legal costs in the form of directions made to progress the application for leave to bring a derivative suit, which was ultimately abandoned.

6. At the first return of the Originating Process on 28 February 2019, the matter was adjourned to 4 March 2019. On 1 March 2019, the defendants’ solicitors sent an email requesting information in respect of the plaintiffs’ Australian assets and anticipating that an application for security for costs may be brought. Further, the defendants’ solicitors advised that the proceedings would be contested and, in the event that Mr Dzelme was successful in the proceedings, a costs order would be sought against the plaintiffs. On 4 March 2019, Black J made directions for an amended originating process to be filed, together with any motion for summary dismissal and stood the application for leave to bring a derivative suit over to 18 March 2019 for further directions.

First offer

7. On 11 March 2019, the defendants’ solicitors sent a detailed letter to the plaintiffs’ solicitor suggesting that the proceedings were flawed as Pacific Springs was not a defendant and Mr Dzelme was wrongly named as a defendant. It was suggested that, given these defects, the proceedings ought be summarily dismissed with costs. Accompanying the open letter was a without prejudice letter offering that, if the plaintiffs agreed for the proceedings to be dismissed, then Mr Dzelme would bear his own costs. Mr Greenwood says that there was no reply to this letter. At the time, Mr Dzelme had incurred about $12,000 in legal costs. The defendants do not seek an indemnity costs order in relation to non-acceptance of the first offer.

8. Later on 11 March 2019, the plaintiffs’ solicitors served a notice to produce and an amended originating process, joining the New South Wales Trustee and Guardian to the proceedings. On 12 March 2019, the amended originating process was filed, albeit without the necessary leave. On 13 March 2019, the plaintiffs issued a subpoena to Pacific Springs. On 18 March 2019, Black J joined Pacific Springs as a defendant and made directions for the plaintiffs to file an application to join NSW Trustee and Guardian. Mr Dzelme was directed to file and serve any application for security for costs. The application for leave to bring a derivative suit was listed for hearing on 6 May 2019. On 19 March 2019, the plaintiffs filed an interlocutory process seeking to join NSW Trustee and Guardian and, on 20 March 2019, filed a further amended originating process, albeit again without leave. On 25 March 2019, Black J struck the further amended originating process from the record for non-compliance, and stood over the motion to join NSW Trustee and Guardian to 6 May 2019. On 1 April 2019, a grant of probate was made in respect of the Will of Dean Mualim, rendering the proposed joinder of NSW Trustee and Guardian otiose.

9. On 3 April 2019, the defendants filed an interlocutory process seeking security for costs in the sum of $88,850. The evidence in support of the interlocutory process detailed the legal costs incurred by the defendants thus far ($33,185.29) and estimated the costs going forward ($131,000).

10. Also in April 2019, the defendants served two affidavits in response to the plaintiffs’ application for leave to bring a derivative suit, being an affidavit of Mr Dzelme and an affidavit by Pacific Springs’ accountant, Saba Salameh.

1. Mr Dzelme’s affidavit was detailed and substantive. He deposed inter alia that, at about the time that the shares were issued, Dean Mualim told him that he had sent some paperwork relating to Pacific Springs to his parents by facsimile. Dean said this was to give effect to what he had agreed with his mother during a telephone call earlier that day. Dean said:

“My mother said she doesn’t care about Pacific Springs and Nice Cream anymore. She said I can have my wings”.

2. The accountant set out the financial position of Pacific Springs, which could only be described as humble.

11. On 6 May 2019, the matter was listed for further directions. The plaintiffs sought to adjourn the application for leave to bring a derivative suit and the defendants’ application for security for costs. The plaintiffs submitted that Pacific Springs’ business appeared to have failed and was now insolvent, with its affairs said to be being conducted in an irregular manner. The efficacy of the proceedings was said to be in doubt. The plaintiffs submitted that it was unclear why Pacific Springs continued to trade and had not been placed into voluntary administration or liquidation. An adjournment was sought to allow the plaintiffs’ solicitors the opportunity to obtain instructions for the discontinuance of the proceedings. Senior counsel briefed in the matter for the plaintiffs was then unavailable to be consulted on the subject. Black J stood over the application for leave to bring a derivative suit to 13 May 2019. Also on 6 May 2019, the plaintiffs served a second notice to produce.

12. On 7 May 2019, the plaintiffs served a Third Amended Originating Process, seeking an order that Pacific Springs be wound up. On 8 May 2019, the defendants produced documents in answer to the second notice to produce. On 10 May 2019, the plaintiffs served a third notice to produce. Also on 10 May 2019, Black J made orders in chambers standing over the application for leave to bring a derivative suit on 27 May 2019 by reason of settlement discussions then said to be under way.

13. On 21 May 2019, the defendants’ solicitor sent an email headed “without prejudice save as to costs”, noting that the defendants had previously agreed to the plaintiffs’ request for the proceedings to be adjourned for the purpose of affording the parties an opportunity to meet to discuss their positions and attempt to agree on a sensible outcome to the matter. However, the defendants had not heard from the plaintiffs in respect of a meeting since Black J adjourned the proceedings on 10 May 2019. The defendants’ solicitors advised that their clients would prefer to resolve the dispute without the parties having to continue to be involved in costly litigation and looked forward to hearing from them as soon as possible as to whether the plaintiffs were still willing to meet and, if so, when, noting that Black J had stood over the application for leave to bring a derivative suit to 27 May 2019. The defendants’ solicitors offered to host the meeting at their offices.

14. On 22 May 2019, Mr Horton enquired whether the defendants’ solicitors could obtain instructions to further adjourn the matter. Mr Horton had been asked by his clients to prepare an affidavit which more fully detailed their concerns. Mr Horton advised:

When I have that document, I will forward it to you. I expect that the details in that affidavit will assist your client to more fully understand my client’s “position”.

As my clients are not familiar with the Australian Legal System there are obvious issues around me trying to explain the benefits of reaching a negotiated settlement rather than pursuing litigation.

I don’t consider that the exercise is in vain however I anticipate that time will get away from us and wish to ascertain whether it may be possible for us to agree to extending the time for this to occur. … I note your client is going away on 9 June but do not know for how long.

It seems to me that time is not really of the essence in this matter and that we should attempt to resolve the matter if possible.

Would it be possible for you to obtain some instructions to further adjourn this matter until a reasonable time after your client returns?

15. On 23 May 2019, Gani Mualim swore a substantive affidavit, ultimately relied upon at the final hearing. At 8.02 am on Friday, 24 May 2019, Mr Horton served the affidavit by email, enquiring whether the defendants’ solicitors had been able to obtain instructions in relation in the proposal for a further adjournment.

Second offer

16. At 2.42 pm on Friday, 24 May 2019, the defendants’ solicitors conveyed a second offer of settlement. The “without prejudice save as to costs” letter accompanied an open letter dealing with various outstanding procedural matters, and noting that Mr Dzelme did not agree to a further adjournment. Proposed short minutes of order were proffered to progress the proceedings. In the without prejudice letter, the defendants’ solicitors expressed the view that the plaintiffs’ claim for relief in the proceedings was not strong and was likely to be dismissed, with the plaintiffs being required to pay the defendants’ costs of the proceedings. In any event, it was said that the proceedings would likely be of no utility as Pacific Springs had limited assets: increasing the plaintiffs’ shareholding in a company of nominal value did not appear to be a worthwhile pursuit. The defendants, nonetheless, were willing to consent to dismissal of the proceedings with no order as to costs. If the plaintiffs did not accept the offer and the proceedings were dismissed, the defendants advised that they would rely on the letter in support of an application for indemnity costs.

17. The second offer was said to be open for acceptance until 9 am on Monday, 27 May 2019, at which time it would lapse and be withdrawn. Presumably, the timeframe was selected to endeavour to resolve the proceedings before the next directions hearing before Black J. Mr Horton says that, as his clients resided in Indonesia, he did not have sufficient opportunity to confer with them about the terms of the offer before it expired at 9.00 am on 27 May 2019. The defendants object to Mr Horton’s evidence as conclusory: Mr Horton does not say that he was unable to confer with the plaintiffs in relation to the offer, or that he had no opportunity to confer with them, but asserts a lack of “sufficient opportunity” without elucidating what steps or actions Mr Horton was unable to undertake in the period during which the offer was open. The objection is well taken but I will nonetheless admit the paragraph in question; the lack of specificity of Mr Horton’s evidence affects the weight that I will give it. That said, the opportunity was self-evidently short, particularly in circumstances where his clients lived overseas, did not speak English well and were not familiar with Australian legal processes, to which I will return at [44].

18. The defendants note that there was no complaint at the time that there was insufficient opportunity to consider the second offer, nor any request to extend the time in which the offer was open for acceptance so as to permit proper consideration of the offer. Certainly, the evidence is there was no response at all. Mr Greenwood says that, at this stage in the proceedings, the defendants had incurred $88,000 in legal costs.

19. On 27 May 2019, the matter came before Black J for directions. His Honour made directions for the filing of a Third Amended Originating Process (in which the application for leave to bring a derivative suit was abandoned), for a statement of claim to be filed and for the progress of the security for costs application.

Security for costs

20. On 22 July 2019, I heard the defendants’ application for security for costs. The plaintiffs opposed such an order on the basis that their claim was “unanswerable”. As to the defendants’ witnesses to be called at trial, I was told that lay witnesses for the defendants would be Mr Dzleme, the solicitors who assisted in incorporating Pacific Springs in 2000, the accountants who assisted in the allotment of additional shares in 2004, the officer manager and a contractor who worked for the ice cream company. I observed in my ex tempore judgment:

Having reviewed the affidavit evidence to which I was taken by both senior counsel, it does not seem to me that the plaintiffs’ claim is unanswerable. The plaintiffs’ claim is no doubt genuinely brought. However, it does appear to me that there is evidence which might reasonably relied upon as telling against the relief sought by the plaintiffs. Therefore, I do not regard the merits of the parents’ claim to be such as to counter the factors relied on by the defendants.

21. I decided that security should be provided. As to quantum, I observed in my ex tempore judgment:

… The defendants have put forward detailed evidence to support the amount sought. The plaintiffs say the defendants’ figures are grossly excessive. This is, in large part, because the plaintiffs say that their claim is unanswerable. Thus, it is said that it will take the defendants one hour to read the plaintiffs’ originating process and supporting affidavits and four hours to take instructions from Mr Dzelme and advise him that their claim is unanswerable.

22. As the plaintiffs’ senior counsel had informed me during the hearing that he intended to amend the plaintiffs’ claim further such that some of the prayers for relief would not be pressed at trial, I considered that the quantum of security then sought might be more than would be necessary to meet fewer claims. I made directions for the plaintiffs to amend their pleading and for the defendants, having regard to the amended statement of claim, to revise the amount of security sought. On 29 July 2019, an amended statement of claim was filed adding some prayers for relief — concerning whether Mr Dzelme had been validly appointed as a director of Pacific Springs — and deleting prayers for relief directed to appointing a liquidator to the company. Having regard to the amended statement of claim, the defendants sought security for costs in a reduced amount of $147,633.93.

23. The plaintiffs, by written submissions, objected to the reduced amount of security sought as excessive. As noted in Pacific Springs (No 2) at [3]-[4]:

[3]   The costs estimate of the defendants’ solicitor was said to demonstrate an unacceptable level of inefficiency and the imposition of excessive charges said to add salt to a sore wound and invite [in]credulity. Mr Grieve QC considered that the hearing would not take two days as he did not presently intend to cross-examine. … Overall, it was submitted that … it was inappropriate to quantify a sum in excess of $50,000. …

[4]   Whilst the plaintiffs’ senior counsel may see the hearing as involving a short, crisp issue, and may see only the evidence of the two plaintiffs as being relevant to that issue, that does not seem to me to preclude the defence which is proposed to be advanced at the trial. The defendants’ senior counsel clearly sees the evidence of other witnesses as being relevant to whether, when the shares were issued, the current shareholders knew and approved of it or the issue was otherwise valid. Given the number of lay witnesses identified by the defendants’ senior counsel, I think two days is a reasonable estimate.

24. I accepted the plaintiffs’ submission that the costs estimate may involve some unnecessary tasks. I estimated the defendants’ future costs to be $120,000, and ordered the plaintiffs to provide security for costs of $92,400: Pacific Springs (No 2) at [6].

25. The parties proceeded to complete the service of their evidence. In November and December 2019, the defendants served affidavits by Pacific Springs’ accountants, Mr Salameh and Douglas Trood of Trood Pratt & Co; Pacific Springs’ former solicitors, Timothy L’Orange of Mills Oakley Lawyers and Tom Suttie of HWL Ebsworth Lawyers; Pacific Springs’ office manager, Bradley Teuma; and, an electrician and refrigeration mechanic who worked for Pacific Springs, Brian Summerfield; and Mr Dzleme. The defendants relied on portions of this evidence – accepted at trial – which indicated that the plaintiffs’ claims would fail. In relation to Mr Salameh’s affidavit, the defendants pointed to my observation in Pacific Springs at [62]. In relation to Mr Summerfield, the defendants pointed to my observations in Pacific Springs at [63]-[64] and [66]. Further, the defendants pointed to my observations as to the evidence of the defendants’ witnesses generally in Pacific Springs at [141] and [143].

26. On 9 December 2019, Black J noted that all evidence had been served and ordered the parties to attend a mediation. The matter was listed for final hearing on 28 April 2020 with an estimate of three days.

27. On 8 April 2020, the parties attended a court ordered mediation. In advance, the parties exchanged position papers setting out their respective positions. The mediation was unsuccessful, following which final preparations were made for the hearing to commence on 28 April 2020.

28. By this time, the COVID-19 pandemic had erupted and the plaintiffs, then living in Singapore, proposed to give evidence from Singapore via video link and through interpreters. The defendants sought to vacate the hearing as the plaintiffs’ credit was said to be in issue and the logistical difficulties posed by the number of documents needed to be put to the plaintiffs in cross-examination was said to impede upon the defendants’ ability to have a fair trial. On 15 April 2020, I vacated the hearing and listed the matter for four days commencing before me on 14 July 2020.

Third offer

29. On 16 April 2020, the defendants made a third offer. The defendants offered to pay $200,000 to the plaintiffs, with the proceedings to be dismissed with no order as to costs and the parties to enter into a deed of settlement and release. The offer was open for acceptance until 5.00 pm on 23 April 2020. The offer was expressed to be made in accordance with the principles in Calderbank v Calderbank [1975] 3 All ER 333 and, if the plaintiffs did not accept the offer and the proceedings were dismissed, the defendants would rely upon the letter in support of an application for indemnity costs from the date of the letter.

30. The plaintiffs did not accept this offer. Mr Horton does not suggest that he did not have sufficient time to consult his clients in respect of this offer. By the time the third offer was made, the defendants had incurred costs of some $308,000 including GST. The defendants say that, whilst the offer did not precisely disclose the defendants’ costs incurred to date or the anticipated costs to the completion of the hearing, the plaintiffs were nonetheless aware of the anticipated costs given the defendants’ evidence in support of the application for security for costs and my two judgments on the subject. I agree that, by reason of the attention given to the defendants’ costs in the application for security for costs, the plaintiffs would have been apprised of the defendants’ costs incurred to date and the likely costs going forward. Of course, the plaintiffs were also incurring their own legal costs, which would have given them a further indication of the costs being incurred by the defendants.

31. On 26 June 2020, the plaintiffs were ordered to provide further security for costs of $70,000 to reflect the fact that the hearing was now listed for four days, rather than the two days on which security for costs had been calculated and previously ordered. On 14 July 2020, the hearing commenced and, on 11 September 2020, I gave judgment in favour of the defendants. I concluded that the share issue was done with the plaintiffs’ knowledge and consent and they had “either since forgotten or have otherwise chosen to deny that they knew and agreed in order to advance their financial interests”: Pacific Springs at [146].

SUBMISSIONS

32. The defendants submit that an indemnity costs order should be made as the plaintiffs unreasonably refused Calderbank offers of settlement. Whilst neither offer was an offer of compromise under rule 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), both offers were marked “without prejudice save as to costs” and referred to the prospect of the offers being relied upon to support an application that the plaintiffs pay the defendants’ costs on an indemnity basis. The last (third) offer specifically referred to Calderbank v Calderbank.

33. The defendants submitted that the second offer was in the appropriate form to constitute a Calderbank offer. The offer was said to be open for a reasonable period of time: almost three days were given to permit consideration of a walk-away offer. Given the discrete nature of the issues in dispute, being whether the plaintiffs consented to the allotment of 1,800 ordinary shares in Pacific Springs to their son, this was said to be ample time. Indeed, immediately before the offer was made, the plaintiffs had sought and obtained an adjournment of the proceedings for the purposes of allowing the parties to discuss and agree upon a “sensible outcome to the matter”.

34. Whilst the second offer was made at a relatively early stage of the proceedings, the defendants submitted that the offer was made at a time when the plaintiffs had settled upon the relief sought, having served the proposed Third Amended Originating Process. The discrete nature of the plaintiffs’ claim was clear in their mind. The present case was not one concerning questions of liability and quantification of damages, upon which expert evidence would bear significantly: cf. Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 at [17]-[21]. The discrete nature of the issue in dispute, being whether they had consented to an allotment of shares, was said to permit the offer to be considered quickly. Further, as in Atton v National Mutual Life Association of Australasia (No 2) [2007] NSWSC 348, the facts germane to that issue were within the plaintiffs’ knowledge. The plaintiffs would have been aware that they had no documentary evidence to support their contentions, whilst the defendants had documents pointing to a contrary conclusion.

35. The defendants submitted that the second offer embodied a genuine compromise. Whilst made at an early stage of the proceedings, it provided the plaintiff with the prospect of avoiding an adverse costs order in circumstances where it was apparent that the defendants had incurred costs, as disclosed in the affidavit served in support of the application for security for costs. Acceptance of this offer would have enabled the plaintiffs to withdraw from the proceedings without having to provide security for costs, which they were ultimately ordered to do. Thus, it was said that the plaintiffs’ rejection of the second offer was unreasonable.

36. As to the second offer, the plaintiffs submitted that it was not a genuine offer of compromise and it was not open for a reasonable period of time, particularly in light of the fact that the plaintiffs were residents of Indonesia and not fluent in English.

37. In the alternative, the defendants submitted that the third offer provided a compelling basis for invoking the Court’s discretion to order indemnity costs from 17 April 2020 on. The offer was in an appropriate form. The offer was open for seven days in circumstances where the parties had recently mediated and exchanged offers (referred to in the third offer). The proceedings had been on foot for over a year, with the parties having served their evidence, and the matter close to being heard. The plaintiffs were “fully apprised of the strengths and weaknesses of their own case and that of the opposite party”: see Fan v Han (No 2) [2016] NSWSC 1651 at [29] per White J. The third offer was said to constitute a significant compromise, and was an offer that was decisively bettered at trial. If accepted, the plaintiffs would have received $200,000 and avoided an adverse costs order. These were benefits of substantial value, even if they did not involve any rectification to the share register of Pacific Springs.

38. Whilst the third offer did not disclose what the defendants’ costs were, or were expected to be, “the offer is to be assessed objectively by reference to the information available to the parties at the time of the offer, not by later re-estimation”: Perisher Blue at [58]. The plaintiffs would have known that the defendants had incurred significant legal expenses and would incur further legal costs for the trial. The prospect of the plaintiffs avoiding an adverse costs order would have been of significant commercial value, even without the payment of $200,000. The defendants further submitted that, objectively speaking, the plaintiffs’ prospects were low and this must have (or should have) been apparent to them. The defendants had served evidence from disinterested third parties corroborative of the proposition that the plaintiffs had consented to the allotment of shares to Dean Mualim. By contrast, the plaintiffs called no person to corroborate their account. Unlike the defendants’ case, there was a complete lack of documentary evidence to support the plaintiffs’ contentions that they were unaware of the allotment of shares to their son: Pacific Springs at [138]- [139].

39. The defendants submitted that, if the plaintiffs knowingly denied consenting to the share allotment in order to advance their financial interests, this fortifies the unreasonableness of their rejection of the third offer and, indeed, any offer. The plaintiffs were found to have lied under oath on multiple occasions whilst giving evidence in the proceedings: Pacific Springs at [14]-[16], [83], [89], [91]-[100]. Whilst such conduct did not perhaps rise as high as the moral and ethical delinquency exhibited in other cases (Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354 at 358 per Holland J; Maule v Liporoni (No 2) [2002] NSWLEC 140; (2002) 122 LGERA 216 at [34]-[39] per Lloyd J), the defendants submitted that it fortified the basis upon which this Court should, in the exercise of its discretion, award indemnity costs in favour of the defendants.

40. As to the third offer, the plaintiffs submitted that their decision not to accept the offer was not unreasonable. The defendants' resistance of the plaintiffs' claim was said to be founded entirely on uncorroborated evidence which contained significant inconsistencies. That should not have inclined the plaintiffs to consider that there was any significant likelihood that their evidence that they did not know of or consent to the impugned allotment would not be accepted as truthful, particularly when much of their evidence otherwise was not the subject of any contradiction by the defendants or any witness called by them. Moreover, they were entitled to take into account the fact that their son never told his de facto husband that his parents had agreed to give him complete control over the company in determining the likelihood of the court's assessment of whether or not that "fact" had actually occurred.

CONCLUSION

41. In considering the defendants’ application, I note the comments of Allsop P in Baulderstone Hornibrook Engineering at [5]:

Three things need be borne in mind in a judgment such as this on costs: the desirability of avoiding unnecessary recitation of cases (abounding as they are in this area); the desirability of not restating, in different terms, approaches to the broad discretion that have been well settled; and the desirability of dealing with the arguments without over-elaboration, if this is possible.

The principles have been correctly recited by the defendants in their submissions, from which the plaintiffs did not relevantly demur.

42. Although I was invited by the defendants to exercise my discretion having regard to the fact that I found the plaintiffs to have lied about what had happened (Pacific Springs at [14]-[16]), I have determined the application “by reference to the conduct of the proceedings, not the conduct that is the subject of the substantive dispute”: In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356 per Black J at [8].

43. These proceedings have certainly proceeded in ‘fits and starts’ in terms of whether the proceedings would be pursued as a derivative suit or not, whether the proceedings were worth pursuing at all, and whether the plaintiffs wished to engage in settlement discussions or to fight on. Some of this indecisiveness may be referable to the distressing circumstances in which these proceedings were commenced, being soon after the death of Dean Mualim. However, such distress was no doubt equally visited upon Mr Dzelme who, having lost his husband, was now being sued by his husband’s parents.

44. Some of this indecisiveness may have reflected the plaintiffs’ lack of familiarity with Australian legal process and language difficulties. As I noted in Pacific Springs at [5] and [193(a)], Jorida Mualim speaks and understands English to a limited extent whilst Gani Mualim does not speak or understand English at a relevant skill level to enable him to converse in English. Gani Mualim can read English but not well. Having said that, the plaintiffs are both experienced businesspeople, having been engaged in manufacturing and hotels for some years.

45. Some of the indecisiveness may have reflected the convoluted communication channels operating in the plaintiffs’ camp: although the parents are the plaintiffs, Mr Horton communicated with the plaintiffs through their children and, by the hearing, had not “corresponded or discussed issues directly with the first and second plaintiff at any time”: Pacific Springs at [5]. For whatever reason, engaging the plaintiffs in meaningful settlement discussions appears to have been no simple task.

46. As to the second offer, by the time it was made, the pleadings had been amended several times over three months such that the relief sought by the plaintiffs had been refined. The plaintiffs had obtained documents, by way of notices to produce and subpoena, to assist them to ascertain what had happened. A security for costs application was on foot; this provided the plaintiffs with an insight into the costs exposure which they faced if they failed in their suit, and also presented the prospect that they would be ordered to provide security for costs in the near future. The plaintiffs also knew, from the two affidavits served in April 2019, the sort of case the defendants would run at trial.

47. Further, the lack of commercial utility of the proceedings had been identified. Indeed, the plaintiffs had obtained an adjournment of the proceedings to consider discontinuance, the ordinary consequence of which would be that the plaintiffs would have to pay the defendants’ costs of the proceedings: rule 42.19(2), UCPR. Black J adjourned the proceedings for two weeks to enable settlement discussions to take place, but the plaintiffs failed to engage with the defendants during that time, notwithstanding a reminder from the defendants’ solicitor. Rather, the plaintiffs directed their efforts to preparing a substantive affidavit for Gani Mualim.

48. The second offer presented a convenient and cost-free exit from the proceedings, with no exposure to the defendants’ costs should the plaintiffs fail in their suit, no impending obligation to provide security for costs, and where the relief sought of the proceedings appeared to be of little commercial value. It reflected a reasonable compromise on the defendants’ part, as the defendants forewent their right to recover costs in the event that the proceedings were discontinued or the defendants ultimately succeeded. In circumstances where the plaintiffs did not seek a monetary sum from the defendants but only shares of nominal value, it is difficult to think what else the defendants could have offered to resolve the proceedings.

49. The only consideration which detracts from making an order for indemnity costs by reason of the plaintiffs’ refusal to accept the second offer, which refusal was otherwise objectively unreasonable, is the limited period of time for which the second offer was open. An offer of settlement must be open for a reasonable period of time. What constitutes a reasonable period depends upon the circumstances.

50. In Leda v Weerden (No 3) [2006] NSWSC 220 at [6]-[12], Gzell J held that an Offer of Compromise under the UCPR made a week before trial and left open for four days was open for a reasonable period of time. In Fan v Han (No 2) [2016] NSWSC 1651, an offer made in the week before trial and left open for four days was open for a reasonable period of time. By contrast, in Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268, a walk away offer served very early in the proceedings and open for only 32 hours was held not to be open for acceptance for a reasonable period. The plaintiff’s solicitor in that case was not able to obtain instructions during the period in which the offer was open. No particulars as to damage in relation to the personal injury claim the subject of the proceeding had yet been provided. No expert evidence had been served, nor any quantification of damages, which were likely to be substantial: at [21]. These features meant that greater time was required in order to permit the plaintiff to assess the strength or otherwise of her case. Similarly, in Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2008] NSWCA 85 at [18]-[24], Basten JA (Giles and Tobias JJA agreeing) held that an Offer of Compromise, made the day before trial and only open for less than 24 hours, was not open for a reasonable period of time.

51. In this case, the defendants were on notice, by Mr Horton’s email of 22 May 2019, that he was having difficulty explaining matters to his clients given their overseas residence, a language barrier, and a lack of familiarity with Australian legal processes. Given the time period during which the second offer was open, consultation between the plaintiffs and their solicitor and counsel could only realistically take place over a weekend. I consider that the plaintiffs did not have adequate time, in the circumstances of this case, to consider the second offer. Whilst it is understandable why the defendants made an offer which was open for such a short time frame – and it was not the first time that the defendants had made such an offer and nor was it made ‘out of the blue’ – the plaintiffs’ refusal to accept the offer within the short time frame allotted was not in the circumstances of this case unreasonable.

52. There can be no doubt, however, that an indemnity costs order should be made from the third offer, which can only be described as generous having regard to the factors described at [48] which continued to apply and further considerations which had become relevant by the time of the third offer. The third offer enabled the plaintiffs to be reimbursed for their own legal costs, retrieve their security for costs and extinguish their exposure to the defendants’ costs where the relief sought in the proceedings was likely of low value. In addition, as noted at [20]-[22], the plaintiffs’ submissions made in the course of the security for costs application suggested that their view of prospects was robust, to say the least. The observations made in my ex tempore judgment should have provided an alternate perspective which would have caused a reasonable litigant to re-consider their perception of their case as “unanswerable”.

42. Further, the plaintiffs had by then been served with all of the defendants’ evidence which indicated that a significant number of witnesses would be called and documentary evidence tendered which, if accepted, would mean that the plaintiffs’ claims would fail. Such matters were no doubt the subject of discussion at the mediation, canvassed in the position papers, and informed the offers of settlement which were made at that time. The only remaining ‘unknown’ was how the various witnesses would perform at the hearing, and what a judge would ultimately decide. The plaintiffs had all the information that they needed and sufficient time to consider it. In all of the circumstances, and for the reasons advanced by the defendants’ submissions in respect of this offer, I consider that the plaintiffs’ rejection of the third offer was unreasonable and warrants an order for indemnity costs from the date of the offer.

ORDERS

54. For these reasons, I make the following orders:

1. Vary Order 3 made on 11 September 2020 such that the plaintiffs are to pay the defendants’ costs of these proceedings, comprising both the plaintiffs’ claim and the defendants’ cross-claim (the Proceedings), on the ordinary basis up to and including 16 April 2020 and on an indemnity basis thereafter.

2. That the security for costs previously paid into Court by the plaintiffs in the amount of $162,400 continue to be held in Court pending the defendants’ costs of the Proceedings being agreed or assessed.

3. Order the plaintiffs to pay the defendants’ costs of the defendants’ motion filed on 18 September 2020.

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Decision last updated: 10 February 2021