LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd (No 2)

[2002] NSWSC 72

CITATION:	LMI v Baulderstone (No 2) [2002] NSWSC 72
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50023/00
HEARING DATE(S):	31/10/01 Written submissions 07/12/01; 11/12/01
JUDGMENT DATE:	22 February 2002
PARTIES :	LMI Australasia Pty Limited - First Plaintiff LMI/HHI Limited - Second Plaintiff Baulderstone Hornibrook Pty Limited - First Defendant Docklands Stadium Consortium Pty Limited - Second Defendant Baulderstone Hornibrook International Pty Limited - Third Defendant
JUDGMENT OF:	Barrett J

COUNSEL :	Mr A.J. Sullivan QC/Mr R.J. Weber - Plaintiffs Mr R.B.S. Macfarlan QC/Mr P. Santamaria - Defendants
SOLICITORS:	Moray & Agnew - Plaintiffs Gadens - Defendants
CATCHWORDS:	DAMAGES - assessment of damages for breach of contract - present value of future income stream - PROCEDURE - costs - where each side enjoyed success - where "overall winner's" success as plaintiff confined to minor claim and defendants otherwise enjoyed substantial success - apportionment of costs - costs orders in favour of both parties - indemnity costs not awarded despite Calderbank letter
CASES CITED:	Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249 Associated Confectionery (Aust) Ltd v Mineral and Chemical Traders Ltd (1991) 25 NSWLR 349 Beregold Pty Ltd v Mitsopoulos (unreported, NSWSC, Cole J, 20 November 1992) Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 Fink v Fink (1946) 74 CLR 127 Hughes v Western Australian Cricket Association (1986) ATPR 40-748 Hungerfords v Walker (1989) 171 CLR 125 Johnson v Perez (1988) 166 CLR 351 Madden v McConnell [2001] NSWSC 1051 Mallett v McMonagle [1970] AC 166 Mok v Minister for Immigration (No 2) (1993) 47 FCR 81 Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No 2) [1999] NSWCA 133 Permanent Trustee Aust Ltd v FAI General Insurance Co Ltd (unreported, NSWSC, 3 June 1998) Robert v Collier's Bulk Liquid Transport Pty Ltd [1959] VR 280 Rolls Royce Industrial Power (Pacific) Ltd v James Hardie & Coy Pty Ltd [2001] NSWSC 461 Rosniak v Government Insurance Office (1997) 41 NSWLR 608 Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, FCA, 19 December 1995) Waters v P C Henderson (Australia) Pty Ltd (unreported, NSWCA, 6 July 1994) Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 77 Williamson v Commissioner for Railways (1960) 60 SR (NSW) 252
DECISION:	Refer to Paragraph 57

18

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BARRETT J

FRIDAY, 22 FEBRUARY 2002

50023/00 – LMI AUSTRALASIA PTY LIMITED & ANOR v BAULDERSTONE HORNIBROOK PTY LIMITED & ORS (NO 2)

JUDGMENT

1 In reasons for judgment published on 12 October 2001 ([2001] NSWSC 886), I concluded that heads of agreement entered into on or about 27 June 1997 between the second defendant, Docklands Stadium Consortium Pty Limited (“DSC”) and the first plaintiff, LMI Australasia Pty Limited (“LMIA”), had contractual force but that DSC had not breached the contract when it failed to appoint LMIA to be the manager of the Colonial Stadium. There was no breach because, in my judgment, the condition precedent to DSC’s contractual obligation to appoint LMIA had not been satisfied. I did find, however, that the first defendant, Baulderstone Hornibrook Pty Limited (“Baulderstone”), was liable to reimburse both LMIA and the second plaintiff, LMI/HHI Limited (“LMI”), for expenses actually and reasonably incurred in connection with the bid process envisaged by the heads of agreement. Two matters were left for further submissions, namely, the date from which interest should run on the sum to be reimbursed (being US$81,902.28) and the question of costs. I heard those submissions on 31 October 2001.

2 Mr Sullivan QC, who on that occasion again appeared for the plaintiffs, informed me that my decision with respect to the “failure to appoint” claim may become the subject of an appeal. He asked, therefore, that I make findings on the issue of damages on the assumption that, contrary to the conclusion I have reached, the “failure to appoint” case was made out, by which I mean that DSC did breach the heads of agreement by failing to ensure that LMIA was appointed manager of the stadium on the basis envisaged by the heads of agreement. Mr Macfarlan QC, who appeared for the defendants, indicated that his clients neither supported nor opposed the application made by Mr Sullivan. Because there are good reasons of practicality in favour of my deciding the issue of damages now, I shall do so before proceeding to deal with the other outstanding issues.

Damages

3 Submissions on the question of damages made in the course of the trial were, at my request, supplemented by further submissions made by both the plaintiffs and the defendants in writing. The plaintiffs’ further submissions are dated 7 December 2001 and the defendants’ are dated 11 December 2001.

4 It is common ground that a discounted net present value approach is the appropriate one for the determination of damages. This is because the relevant loss is the loss of the opportunity to earn and receive the remuneration envisaged by the heads of agreement. Since both parties approve that method of approach and it accords with my own view of the way in which the question of damages should be dealt with, I shall proceed in that way.

5 The remuneration envisaged by the heads of agreement has two elements. First, there is remuneration in relation to the “pre-opening phase”. Under this heading and pursuant to clause 7 of the heads of agreement, LMIA would have been entitled to a payment by DSC of $23,000 per month from 1 March 1998 until the Operation Start Date which was 29 February 2000 – in other words, a total of $552,000, representing $276,000 per year for two years. The remuneration to prevail after the Operation Start Date was defined by clause 8:

“8.1 From the Operation Start Date until the termination of this Agreement the Developer [ie DSC] shall pay LMI [ie LMIA] an Annual Management Fee of Five Hundred Thousand Dollars ($500,000.00) by equal monthly instalments.
8.2 The Annual Management Fee shall be increased in each year during the term of this Agreement in accordance with increasers in the Consumer Price Index (for Victoria) in the previous year.”

6 The reference to the term of the agreement is a reference to a term expiring on the twentieth anniversary of the Operation Start Date subject, however, to clause 2.3:

“The term of this Agreement may be extended for three (3) consecutive 5 Year Renewal Period after the expiration of the Initial Term, provided that, at the date of such renewal LMI (ie LMIA] is satisfactorily achieving agreed performance and operational standards.”

7 In this context, seven questions arise in relation to the assessment of damages. First, there is a question as to the date as at which damages should be assessed, the candidates being the date of breach and the date of trial. The second question concerns the impact of expenses and outgoings on the income stream. Third, there is a question about the incidence of tax. Fourth, it is necessary to decide the discount rate. Fifth, there is a question whether elements of uncertainty about the continuation of the relationship for the full initial term of twenty years warrants some additional discount. Sixth, there is a question about the assumptions that should be made about extension of the initial twenty year term pursuant to clause 2.3. The seventh question concerns the rate of inflation that should be assumed for the purposes of the CPI increases provided for in clause 8.2.

8 On the first issue, the general rule is that damages for breach of contract are assessed at the date of breach, unless some later date is judged more apt to ensure that the injured plaintiff will receive fair compensation for the wrong suffered: see, for example, Johnson v Perez (1988) 166 CLR 351 at 367, 371 and 380; Hungerfords v Walker (1989) 171 CLR 125 at 146. It was submitted by Mr Sullivan for the plaintiffs that the general rule should be departed from in this case and that damages should be assessed as at the date of trial rather than the date of breach, so that there is built into the assessment the benefit of actual experience in relation to certain risks or imponderables which prevailed at the date of breach. For reasons outlined in submissions advanced on behalf of the defendants, however, I am not comfortable with this approach. No advantage is, I think, to be derived from considering subsequent events which might be thought relevant to an appreciation of risks or uncertainties prevailing at the time of breach. The course better calculated to reflect the detriment suffered by LMIA and the legal responsibility therefor of DSC is to view matters as at the date of breach.

9 That raises a question about when breach actually occurred. The appropriate approach, in my judgment, is to regard the relevant date as 1 March 1998. This is the date for which the plaintiffs contend, being the date from which remuneration would have been payable, first at the monthly rate applicable to the pre-opening phase and, from 1 March 2000, in accordance with clause 8. On the approach I have outlined, damages should therefore be assessed as at 1 March 1998.

10 I turn now to the second of the questions concerning damages to which I earlier referred, that is, the impact of expenses and outgoings on the income stream. This was one of the matters on which I sought further written submissions from the parties, given that it is clear that it would have cost LMIA something to perform the services in return for which it would have been paid the contracted remuneration. On the evidence, LMIA’s activities at the relevant times were relatively modest. It had been awarded the contract to operate the Superdome at Homebush Bay in Sydney but otherwise, as I understand it, LMIA had no ongoing business and, in particular, no presence in Melbourne although, of course, its shareholders or principals, LMI and International Sports Facilities Management Pty Limited, had certain facilities and infrastructure which might have been deployed to assist LMIA. But one would expect that any such assistance would have come at the cost of some appropriate inter-company charge. At a practical level, it is to be expected that LMIA would have had to place at least one person “on the ground” on a permanent basis in Melbourne and that the employment costs associated with employing one additional staff member would have been a cost of earning the remuneration from DSC.

11 It was submitted on behalf of the defendants that the conclusion to be drawn from the evidence on this matter was that, because of the substantial degree of uncertainty about the extent of the expenses to which LMIA would be put, LMIA should be regarded as having declined to put before the Court evidence enabling it to determine the extent of the loss, with the result that the proper conclusion is that LMI has not proved any loss. I do not think this is the correct approach. As is made clear in Fink v Fink (1946) 74 CLR 127, difficulties in calculating loss arising from breach of contract must not stand in the way of a court’s making the necessary and appropriate estimate. There is no basis on which the court should, in this case, conclude that such difficulty attends the estimation of off-setting expenses as to justify a conclusion that no loss has been suffered. The conclusion I draw is that, in order to earn the management fees provided for in the heads of agreement, LMIA would have found it necessary to outlay $60,000 per year (without regard to inflation) by way of additional employment and support costs to satisfy the need to establish and maintain a presence in Melbourne which it did not already have. For the period 1 March 1998 to 29 February 2000, the annual fee of $276,000 would have been reduced to $216,000 while for each year to which clause 8.1 applied, the annual fee of $500,000 would have been reduced to $440,000. Because the employment and support costs might reasonably be expected to increase with inflation, it is that reduced sum of $440,000 which should be regarded as subject to the CPI increase stipulation in clause 8.2.

12 As for the incidence of tax, it was accepted in written submissions received from counsel for both parties in December 2001 that, as the income stream would have been regarded as income subject to taxation in LMIA’s hands and damages awarded for loss of that income stream would also be treated as income for tax purposes (Robert v Collier’s Bulk Liquid Transport Pty Ltd [1959] VR 280; Williamson v Commissioner for Railways (1960) 60 SR (NSW) 252), there was no need to seek to accommodate the incidence of tax in the assessment of damages. I agree.

13 I come now to the question of discount rate. The aim of the discounting procedure applied in a case such as this is to convert the future and hypothetical stream of income to be derived over the relevant period into a present lump sum which represents, in terms of immediate enjoyment, the deferred stream with all of the risks, contingencies and uncertainties to which it may be subject.

14 Both LMIA and Baulderstone led expert evidence on the question of the appropriate discount rate, both experts (and the parties) being agreed as to the appropriateness of the discounted value approach.

15 Mr Slattery, a partner of Dawson Partners, chartered accountants, who gave expert evidence for LMIA expressed the opinion that the appropriate discount rate is 12%. His rationale for doing so was stated in his report as follows:

“10.3.1 The discount rate adopted reflects the return that a rational, risk-neutral investor requires to compensate them for the risks associated with the income stream which flows from their investment.
10.3.2 In its disaggregated form a discount rate consists of the return available from virtually risk free investments plus a premium for the specific risk associated with the investment.
10.3.3 The return available on government bonds is commonly used as a proxy for the risk free rate. For the purpose of deriving a discount rate I have adopted the current Commonwealth Treasury Ten-Year Bond Rate of 5.6%.
10.3.4 The receipt of the management fee by LMI Australasia is contingent on LMI Australasia satisfying its duties and obligations under the agreement. Clause 6 provides that the management fee is payable out of an operating fund into which is paid all operating revenues of the facility. Operating expenses and other payments agreed with the developer are also to be paid from this fund. The security of the management fee, and as such its inherent risk, is therefore a function of the capacity of LMI Australasia to generate sufficient operating revenues to provide for payment of the fee after allowance has been made for operating and other payments.
10.3.5 I have assumed a continuing capacity on the part of LMI Australasia to generate sufficient operating revenues to fund the annual management fee. In this respect I believe a premium of 6.4% is appropriate.
10.3.6 I have therefore formed the view that a discount rate of 12% is appropriate in determining the present value of the future management fees.”

16 Baulderstone’s expert, Mr Phillips of Deloitte Touche Tohmatsu, considered the rate adopted by Mr Slattery to be too low. His reason for this view was stated as follows:

“The key difference between their [ie, Mr Slattery’s] opinion and mine is my assessment of unsystematic risk, risk particular to this entity and this project. In assessing this risk, I have considered the following factors:

· Size premium – LMI is a very small entity;

· Early stage of development;

· Limited history;

· Lack of negotiability of shares;

· Length of contract; and

· Value of management fee as finally negotiated.”

17 Mr Phillips’s conclusion was that a discount rate of 31% was appropriate. In reaching that conclusion, however, he drew certain analogies with (or inferences from) the performance of enterprises of a venture capital kind in their start-up and expansion phases and listed “smaller companies”, neither of which, it was submitted for LMIA, provided any valid comparison with or guidance in relation to LMIA and its activities.

18 I think there is substance in the reservations about these aspects of Mr Phillips’s approach. At the same time, however, it is clear that the Colonial Stadium itself was a start-up business without any established record and facing imponderables as to whether it would be successful in its endeavours. A degree of uncertainty on that score would appropriately be built in to the equation and I do not think that Mr Slattery’s approach sufficiently accommodates that.

19 In the end, it is for the court to do the best it can in selecting an applicable rate. In my judgment, the appropriate rate lies somewhere between Mr Slattery’s and Mr Phillips’s. Having regard to the particular emphasis placed by Mr Phillips on the factors derived from questionable analogies, I consider the correct rate to be more towards Mr Slattery’s end of the spectrum and I assess it to be 18%.

20 The next matter in the list of considerations is any element of uncertainty there may be as to whether LMIA would see out the full 20 year term provided for in clause 8. There is thus a need to form a view about the future. The following passage in the speech of Lord Diplock in Mallett v McMonagle [1970] AC 166 quoted with approval by Aickin J in Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249 is relevant to that task:

“The role of the court in making an assessment of damages which depends upon its view as to what will be and what would have been is to be contrasted with its ordinary function in civil actions of determining what was. In determining what did happen in the past a court decides on the balance of probabilities. Anything that is more probable than not it treats as certain. But in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate as to what are the chances that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards.”

21 I am thus called upon to assess the chances that LMIA, once appointed, would have ceased to be the manager of the stadium before the end of the 20 year term. This could have happened in any of several ways, most obviously agreement by the parties to terminate their relationship, repudiation by one which was accepted by the other or termination under the contract itself on account of unremedied breach.

22 There is nothing in the evidence which enables me to make any firm finding that termination would have occurred before the end of the 20 year term. Nor is there any apparent basis on which I may infer any degree of likelihood or possibility that this would have occurred, except for a general perception (which I do not think should be taken into account) that 20 years is a long time for any service provider relationship to remain fully acceptable to both parties. In the end, I must, I think, take the view that damages in relation to the loss of the clause 8 fee are appropriately assessed by reference to a period of 20 years.

23 The penultimate question is as to the assumption which should be made in relation to clause 2.3 of the heads of agreement:

“The term of this Agreement may be extended for three (3) consecutive 5 Year Renewal Periods after the expiration of the Initial Term, provided that, at the date of such renewal LMI is satisfactorily achieving agreed performance and operational standards.”

24 It was submitted on behalf of DSC not only that the possibility of extension after 20 years was so remote that it should not be taken into account in assessing damages but also that, on the wording of the clause, neither party would have a legal right to insist on any extension. There is merit in both these contentions and particularly in the second. Clause 2.3, by its terms, does not give either party a right to extend. It may be intended to give such a right to LMIA but it does not do so in any clear way. Furthermore, the condition is, to my mind, cast in such terms as to make the whole provision uncertain. There are no “agreed performance and operational standards”, nor is there any contractual mechanism for bringing any into existence. For these reasons (including remoteness), I consider the appropriate course to be to make no assumption of any relationship between the parties beyond the clearly agreed term of 20 years.

25 Finally, there is the question of the approach to be taken to the CPI increase provided for in clause 8.2 of the heads of agreement. Mr Slattery expressed the opinion that an annual increase of 3% should be assumed. Mr Phillips agreed. I am therefore content to adopt that rate of annual CPI increase.

26 Taking all these matters into account, I consider that damages should be assessed as follows:

(a) in respect of the period 1 March 1998 to 29 February 2000 – a sum of $552,000 (being 24 monthly payments of $23,000 each) plus interest at Supreme Court rates on each monthly component of $23,000 thereof from the last day of the month to the date of judgment;

(b) in respect of the income stream provided for in clause 8 of the heads of agreement – a net present value sum calculated on the basis that

(i) the net revenue receivable would have been $440,000 per year;

(ii) the period for which that net revenue would have been received is the period of 20 years commencing 1 March 2000;

(iii) the rate of CPI increase for inflation to be accommodated pursuant to clause 8.2 is 3% per annum;

(iv) a discount rate of 18% should be applied in determining the net present value of the net revenue stream as so adjusted for inflation;
(v) no allowance should be made for the incidence of tax.

27 If it became necessary for me to award damages to LMIA for the “failure to appoint” breach, I would ask the parties to attempt to agree the calculation on the basis I have just stated and, if possible, to bring in agreed short minutes, failing which I would be inclined to refer out the question of calculation under Pt.72 of the Supreme Court Rules.

Interest

28 It was made clear by both Mr Sullivan and Mr Macfarlan on 31 October 2001 that both parties accept 20 December 1997 as the date from which interest should be computed in respect of the sum of US$81,902,902.28 to which I found the plaintiffs to be entitled in respect of the reimbursement of expenses claim.

29 The appropriate order will therefore be a verdict for the plaintiffs in the sum of US$81,902.28 plus interest thereon at the rates prescribed by the Supreme Court Rules from 20 December 1997 to the date of judgment.

30 This assumes that there is no reason for judgment to be entered in Australian currency, that being a possibility briefly mentioned on 31 October 2001. On that, I must say that my view is that judgment should be in United States currency since the expenses incurred which I have held should be reimbursed by the defendants were, for the most part, incurred in United States dollars and were certainly claimed and billed in that currency which would accordingly seem to represent the appropriate means of vindicating the plaintiffs in respect of their entitlement to reimbursement. In addition, the plaintiffs’ expenses reimbursement claim was denominated in United States dollars.

Costs

31 The outcome of the proceedings was that the plaintiffs succeeded in their claim against the first and second defendants for reimbursement of expenses but the first plaintiff (LMIA) failed in its “failure to appoint” claim against the second defendant (DSC) and its claim against the first and third defendants that they had induced breach by the second defendant. In terms of evidence, submissions and treatment in the judgment, the “failure to appoint” aspects involved a great deal more time and application than the reimbursement aspects.

32 Two substantive questions in relation to costs need to be determined: first, whether the factors I have just mentioned warrant departure from the normal rule under Pt 52A r 11 that the plaintiffs, having been successful in obtaining an award of damages, should have their costs of the proceedings; and second, as to the exercise of the court’s discretion in light of a rejected offer of compromise.

33 The argument that the general rule that costs follow the event should be displaced here is based on the fact that the plaintiffs’ success was restricted to the relatively minor claim against the first and second defendants for reimbursement of expenses and that, in relation to the “failure to appoint” claim, success was enjoyed by the defendants.

34 Caution must be exercised in seeking to split up cases into successful and unsuccessful components from the parties’ respective viewpoints. That caution is enjoined in the judgment of Mahoney JA in Waters v P C Henderson (Australia) Pty Ltd (unreported, NSWCA, 6 July 1994). Such an exercise may, however, be undertaken in an appropriate case and, in that respect, it is pertinent to note the following observations of Hamilton J in Madden v McConnell [2001] NSWSC 1051 (13 November 2001) concerning the general rule that costs should follow the event:

“This rule will be departed from only for good reason. In general terms, the fact that the moving party obtains only some of the relief originally sought does not detract from the proposition that the event is in the moving party’s favour, albeit it fails on other issues. There is a rule, however, that, where there are quite discrete issues and the time taken on each at the hearing can be identified or realistically estimated, then the costs may flow in opposite ways according to the different events and an order may be made which will encompass those opposing flows: see generally Supreme Court Rules 1970 Pt 52 r 11; Hughes v Western Australian Cricket Association (1986) ATPR 40-748; Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261; Waters v P C Henderson (Australia) Pty Ltd 6 July 1994 NSWCA unreported; Ronnoc Finance Ltd v Spectrum Network Systems Ltd 19 November 1997 NSWSC Santow J unreported; and my own decisions in Domino Hire Pty Ltd v Pioneer Park Pty Ltd (In Liq) [2000] NSWSC 313; JDM Investments Pty Ltd v Todbern Pty Ltd [2000] NSWSC 432; Ell v Cisera [2000] NSWSC 961; and Cumming v Sands [2001] NSWSC 507.”

35 Also apposite are the following observations of Toohey J in Hughes v Western Australian Cricket Association (1986) ATPR 40-748:

“1. Ordinarily, costs follow the event and a successful litigant receives his costs in the absence of special circumstances justifying some other order. Ritter v Godfrey [1920] 2 KB 47.
2. Where a litigant has succeeded only upon a portion of his claim, the circumstances may make it reasonable that he bear the expense of litigating that portion upon which he has failed. Forster v Farquhar [1893] 1 QB 564.
3. A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the party’s costs of them. In this sense, ‘issue’ does not mean a precise issue in the technical pleading sense but any disputed question of fact or of law. Cretazzo v Lombardi (1975) 13 SASR 4 at 12.”

36 I refer also to what was said by Gummow, French and Hill JJ in Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261:

“Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion for the trial judge. Mathematical precision is illusory and the exercise of the discretion will often depend upon matters of impression and evaluation. His Honour’s determination that in this case there should be no order as to costs was explicitly based upon his rough assessment of the time occupied at trial by the various issues in dispute. No reason for overturning the exercise of that discretion has been demonstrated and the court is satisfied that the appeal fails on this ground also.”

37 Also instructive is the following comment by Hodgson CJ in Eq in Permanent Trustee Aust Ltd v FAI General Insurance Co Ltd (unreported, NSWSC, 3 June 1998):

“… I am not dealing here with a situation where there are separate claims for a different relief, such as two claims by a plaintiff for different relief, or a claim by a plaintiff and a cross-claim by a defendant. In those cases, it is generally fairly clear that the overall winner will get the general costs of the action, but will be liable to pay costs to the extent that they were increased by the separate claim on which he or she was unsuccessful.”

38 There is some question whether the “overall winner” should suffer an order for costs in respect of the issue on which success was not achieved unless that issue was raised and pursued unreasonably. In Mok v Minister for Immigration (No 2) (1993) 47 FCR 81, Kealy J said:

“In my opinion the court’s power to order a successful applicant to pay the costs in respect of an issue raised by the applicant, on which the applicant has failed, ought to be exercised only where the Court, on a consideration of all the circumstances, has concluded that the raising of that issue by the applicant was so unreasonable that it is fair and just to make the order.”

39 In Rosniak v Government Insurance Office (1997) 41 NSWLR 608, however, Mason P (with whom Clarke AJA agreed), referring to this statement in Mok, said that “no such principle exists in the sense of a fixed proposition of law”. His Honour continued:

“In a proper case, and this was one, the party that is successful overall may be ordered to pay the costs of a discrete issue.”

40 The Court of Appeal’s later treatment of the same issue in Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 77 contains no suggestion that the qualification suggested in Mok should be applied and I do not regard the comments of Stein JA (with whom Davies AJA agreed) in Rolls Royce Industrial Power (Pacific) Ltd v James Hardie & Coy Pty Ltd [2001] NSWCA 461 (12 December 2001) about what was said by Hodgson CJ in Eq as supporting any such qualification.

41 It is, to my mind, clear that the present case was one involving separate issues and that one of them was dominant. As between the plaintiffs and the first and second defendants, the major controversy concerned the “failure to appoint” claim. This involved a documentary framework and a series of factual events which had nothing to do with the facts and circumstances underpinning the plaintiffs’ reimbursement of expenses claim against the same defendants. It is true that the same witnesses gave evidence about both. But it is clear that, in both their witness statements and in oral testimony, there was very little, if any, overlap between their evidence on one strand and their evidence on the other.

42 In those circumstances, “the failure to appoint” claim and the reimbursement claim should be separately dealt with in relation to costs. It is appropriate to embark upon the kind of percentage apportionment which commended itself to Young J in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20, as well as to the Court of Appeal in the subsequent appeal: ((2001) 37 ACSR 672), that being a course which Pt 52A r 6(2) makes available.

43 Mr Macfarlan tendered on 31 October 2001 an analysis of the transcript showing that 10.7% related to the reimbursement of expenses claim. Mr Macfarlan also pointed out that the plaintiff’s claim, as quantified by it, was of the order of $5.9 million, whereas it was successful only to the extent of US$81,902.28, or about $163,000 in Australian currency, that is, to the extent of about 2.7% of its total claim. Mr Sullivan said that, if I were minded to depart from the normal rule, the arithmetic put forward by Mr Macfarlan constituted an unsatisfactory and over-simplistic basis for making the necessary apportionment. He noted that the defendants’ main contention was that there was no contract and that that was an issue on which the plaintiffs succeeded; also that a great deal of time was devoted to evidence relevant to the assessment of damages in relation to the “failure to appoint” breach which was not established. For these reasons, it was submitted, the plaintiffs should be regarded as having been successful as to roughly one half of the total controversy.

44 My view is that the plaintiff should be regarded as having achieved success to the extent of 20% against the first and second defendants. The matters of arithmetic to which Mr Macfarlan referred play a part in making this the appropriate percentage. So do the outcomes in relation to the major matters for argument – whether there was a contract (on which the plaintiffs were successful), whether there was a breach in relation to “failure to appoint” (on which the first and second defendants were successful) and whether there was any basis for the reimbursement of expenses claim (on which the plaintiffs succeeded).

45 The plaintiffs should recover costs against the first and second defendants on the basis that the aspects in respect of which they enjoyed success accounted for 20% of the costs of the whole proceedings.

46 There is then a question whether, in relation to the plaintiffs’ unsuccessful “failure to appoint” claim against the first and second defendants, there should be an award of costs in favour of those defendants. In my view there should be. The two claims were so separate and dissociated (although involving common witnesses) that I think they should be treated, for costs purposes, as if they had been the subject of separate trials, with the plaintiffs enjoying success in the reimbursement trial and the first and second defendants successfully resisting the plaintiffs’ claims in the “failure to appoint” trial.

47 On that basis, it is appropriate that, with the first and second defendants paying the 20% of the plaintiffs’ costs which I consider to be the portion fairly attributable to the plaintiffs’ success on the reimbursement issue, the plaintiffs should bear 80% of the first and second defendants’ costs, that portion being in the same way fairly attributable to those defendants’ success on the “failure to appoint” issue.

48 I turn now to the second aspect of the submissions on costs, namely, the significance of the offer of compromise. The evidence shows that, by letter dated 16 July 2001, the defendants’ solicitors conveyed to the plaintiffs’ solicitors an offer of $450,000 in full and final satisfaction of all causes of action, claims for interest and costs raised in the plaintiffs’ summons filed on 31 March 2000. This letter was a Calderbank letter expressed to be without prejudice except as to costs. By letter dated 25 July 2001, the plaintiffs’ solicitors rejected that offer.

49 Mr Sullivan submitted that the form of the offer makes the defendants incapable of invoking Pt 52A r 22 of the Supreme Court Rules because it is an offer inclusive of costs. That proposition is borne out by the decision of Giles J (as he then was) in Associated Confectionery (Aust) Ltd v Mineral and Chemical Traders Ltd (1991) 25 NSWLR 349. The reason is that determining whether the offer was or was not more favourable than the result of the proceedings makes it necessary to determine the amount of costs the party who rejected the offer will receive and, as Giles J said, that is “simply not practicable”.

50 I accept that, on the basis outlined, the defendants cannot invoke Pt 52A r 22 and therefore cannot assert the prima facie entitlement which that provision confers. But these provisions of the rules are not a code and it is still open to the defendants to put before the court evidence of their settlement offer and its rejection in support of a submission that, in the exercise of its undoubtedly broad discretion as to costs (Supreme Court Act s.76), the court should take it into account: Beregold Pty Ltd v Mitsopoulos (unreported, NSWSC, Cole J, 20 November 1992); Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No 2) [1999] NSWCA 133.

51 When it comes to the court’s general discretion, the question is whether it was reasonable for the plaintiffs to have rejected the defendants’ offer of 16 July 2001 – that is, four weeks before the hearing began and at a time when lines were clearly drawn and issues were defined. In other words, was the offer, when made, properly seen as a sensible commercial offer and a reasonable proposal to bring the proceedings to an end, so that the defendants’ rejection of it was not reasonable?

52 Judged purely in light of the outcome of the litigation (and having regard to the timing factors I have just mentioned), the offer might be said to have been reasonable and rejection of it to be unreasonable. Even a rough calculation by reference to approximate exchange rates and interest rates indicates that the offer of $450,000 (Australian) inclusive of costs may be seen to include, in addition to the sum of US$81,902.28 and interest, a balancing component referable to costs of more than A$200,000 which, on the material before me, would have covered costs on the apportioned basis I have outlined as being appropriate. It was submitted on behalf of the defendants that it should follow that the plaintiffs should bear all costs after 16 July 2001 on an indemnity basis.

53 I do not think that that conclusion follows in any inevitable way from the fact that the proffered settlement can, with hindsight, be seen to have been more advantageous to the plaintiffs than the result they achieved in the litigation. The unreasonableness which might perhaps be presumed to have been inherent in the plaintiffs’ rejection of the settlement needs to be probed more deeply.

54 In Nobrega (above), Powell JA (with whom Priestley JA and Sheppard AJA agreed) quoted with approval a passage in the judgment of the last mentioned judge as a judge of the Federal Court in Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, FCA, 19 December 1995):

“The ordinary rule is that costs when ordered in adversary litigation are to be recovered on the party and party basis. Any attempt to disturb that situation needs to be carefully considered. It should only be departed from where the conduct of the party against whom the order is sought is plainly unreasonable.

This was a difficult case involving a myriad of issues both of fact and of law … My own reasons for judgment reflect the difficult contractual and other issues which had to be considered. In the judgment I have also alluded to the difficulties that arose because of the need to sift and weigh evidence from a multiplicity of witnesses who gave evidence through interpreters. The case was certainly not clear cut and was hard fought. In those circumstances it seems to me very difficult to reach the conclusion that either party was acting at all unreasonably.

It was for those reasons that I considered that the appropriate order for costs was the usual order which would involve the payment by the plaintiffs of the defendant’s costs on the party and party basis.”

55 Mr Sullivan submitted that the description given by Sheppard J generally fits the present case. I agree. As there, this case was not clear cut and was hard fought, with a myriad of issues of some complexity on which it would have been by no means easy to predict the outcome in advance of full presentation of evidence and full argument. Those factors indicate that there should be no departure from the general rule of party and party costs, even though the rejected compromise turned out to be more favourable to the rejecting party than the eventual outcome.

56 I have not so far mentioned the third defendant. The only claim mounted against it by the plaintiffs was the claim in tort based on the alleged breach of contract involved in the “failure to appoint” claim and a contention that the third defendant had wrongfully induced that breach. The third defendant was totally successful. Not only did I find that there was no “failure to appoint” breach, I also found that there had not been a procuring in the relevant sense. The third defendant is therefore entitled to its costs against the plaintiffs.

Orders

57 In light of the conclusions in the reasons of 12 October 2001 and those stated in these reasons, the orders of the Court in these proceedings are as follows:

1. That judgment be entered for the plaintiffs against the first and second defendants in the sum of $81,902.28 in United States currency together with interest thereon at the rates applicable under Schedule J to the Supreme Court Rules from 20 December 1997 to the date of judgment.
2. That the first and second defendants pay 20% of the plaintiffs’ costs of the proceedings (including reserved costs) assessed on a party and party basis.
3. That the plaintiffs pay 80% of the first and second defendants’ costs of the proceedings (including reserved costs) assessed on a party and party basis.
4. That the plaintiffs pay the third defendant’s costs of the proceedings (including reserved costs) assessed on a party and party basis.

5. That, pursuant to Pt 52 r 1(1)(c) of the Supreme Court Rules, Pt 52 r 58 apply for the purposes of these proceedings.

58 I note that the costs orders made by the court on 20 November 2000, 30 May 2000 and 9 March 2001 are not affected by these orders.

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Last Modified: 02/26/2002