MAHA-ASHI Pty Ltd v Innes - [2011] SASCFC 72

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)
MAHA-ASHI PTY LTD v INNES
[2011] SASCFC 72
Judgment of The Full Court
(The Honourable Justice Gray, The Honourable Justice Vanstone and The Honourable Justice Peek)
29 July 2011
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - IMPLIED TERMS - GENERALLY
APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES - INTERFERENCE WITH JUDGE'S FINDINGS OF FACT - PROOF AND EVIDENCE - OTHER MATTERS
Appellant sued the respondent for monies said to be owed pursuant to an oral agreement - the statement of claim averred that no price was settled upon and claimed that the Court should imply a term of reasonable remuneration - trial judge found that agreement was for respondent to use appellant's facilities without payment pending another arrangement being struck - whether judge erred in so finding - whether judge overlooked relevant evidence.
Held: appeal dismissed.

PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - ORDER FOR COSTS ON INDEMNITY BASIS
Trial judge awarded costs against the appellant on an indemnity basis in relation to part of the action - whether trial judge erred in exercise of her discretion.
Held: appeal dismissed.
Sands v Channel Seven Adelaide Pty Ltd [2009] SASC 365; Olivaylle Pty Ltd v Flottweg GMBH & Co, KGAA (No 5) [2009] FCA 571; Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; Seven Network Ltd v News Ltd (2007) 244 ALR 374, applied.

MAHA-ASHI PTY LTD v INNES
[2011] SASCFC 72
Full Court: Gray, Vanstone and Peek JJ

GRAY J: I would dismiss the appeal. I agree with the reasons of Vanstone J.

VANSTONE J:
Introduction

Pursuant to an oral agreement, the defendant used the plaintiff’s gymnasium facilities. The plaintiff sued for monies said to be due for that use. It claimed that a term should be implied into the agreement to the effect that reasonable payment would be made. The claim was dismissed in the District Court and the judge ordered that the plaintiff pay the defendant’s costs on an indemnity basis from the date that a particular offer from the defendant was rejected. This appeal challenges both orders. While the plaintiff was represented by counsel at trial, its sole director appeared for the company upon the appeal hearing.
Background
The appellant company operated a gymnasium at Mount Barker from about March 2003. The director of the appellant, and its principal, was Mr Mark Mahanets. He represented the company in its negotiations with the previous owner, Mr Wegener, and with the defendant, and he also operated the gymnasium. The plant and equipment was purchased from Mr Wegener. The defendant and respondent, Ms Annette Innes, worked as a physiotherapist in the adjacent rooms. She had been encouraged to lease that space and to bring clients to the gymnasium by Mr Wegener as he had seen it as advantageous to his business.
There had been an agreement between Ms Innes and Mr Wegener allowing clients of the physiotherapy business to use the gymnasium facilities for the nominal amount of $10 per annum. A licence agreement dated 2002 reflecting that and other terms was tendered in evidence, D22, as part of the defendant’s case. It was common ground that from the time when the appellant took over the gymnasium to early 2004 Ms Innes and her clients used the facilities of the gymnasium, including swimming pool and hydro-pool, for classes and exercise programs. There was no payment by Ms Innes for that use until she paid the sum of $550 (including GST) by cheque dated 3 April 2004. No further or other payment was made.
The plaintiff initially took proceedings in the Magistrates Court claiming the sum of $6,930. In the particulars of claim it was asserted that in about February 2003 the plaintiff and defendant entered into an oral agreement pursuant to which the defendant could continue her use of the swimming pool and hydro-pool in the plaintiff’s gymnasium and for that use she would pay $550 per month, commencing in February 2003, as well as $6.60 for any casual visits by Ms Innes or her associates for the rehabilitation of their clients. It was claimed that there were 50 such casual visits, amounting to $330 and the sum of $6,600 was due for the period February 2003 to January 2004 inclusive.
The claim was later removed to the District Court where the sum of $47,088 was claimed. In its further amended statement of claim filed on 21 December 2007 the plaintiff now claimed that while there was an oral agreement pursuant to which the defendant could continue to use the plaintiff’s gymnasium, including the swimming pool, hydro-pool, aerobics room and other facilities for the use of her professional clients, there was no express agreement as to the amount of remuneration which was to be paid. It was asserted that the common law would imply a term into that agreement to the effect that the defendant would pay a “reasonable remuneration”. Annexed to the statement of claim were schedules showing the defendant’s usage of the gymnasium for “smart ball classes”, “aerobic classes”, as well as use of the swimming pool and hydro-pool. The total of the sums claimed in relation to that usage was $47,308. A further claim was made for “50 casual visits for rehabilitation” during the period February 2003 to February 2004. The sum of $330 was sought for those casual visits. After giving credit for the payment of $550 already made, the claim was for $47,088.
The claim was tried in the District Court. Mr Ower, counsel for the plaintiff at trial, opened the plaintiff’s case to the effect that, upon the plaintiff taking over the gymnasium in early 2003, an agreement was struck that Ms Innes would use the facilities of the gymnasium for smart ball classes, post-natal mothers and babies classes as well as the swimming pool and hydro-pool and the crèche, but that the agreement did not extend to what price would be paid by Ms Innes. He said there was discussion on that topic at various times but no agreement was reached. He said his client permitted the use to commence and to continue during 2003 because he believed that agreement would be reached, but that it was not. Mr Ower said Mr Mahanets would tell the Court that in a conversation which he believed occurred in early February 2003 Ms Innes offered the sum of $550 per month for the pool and that Mr Mahanets said that he would consider it and that they would have to come to an arrangement. He said Mr Mahanets would say that towards the end of March it was agreed with the defendant that there would have to be further discussion in respect of the cost. This was reiterated in July, when Mr Mahanets approached Ms Innes at the gymnasium and remarked to her that there had not been any payments yet. She was alleged to have responded that she would have to make some payments. It was said that Mr Mahanets raised the question of payments in August and that caused Ms Innes to become distressed and to say that she was unable to pay. Counsel foreshadowed that Mr Mahanets would say that relations remained good through October, but broke down in about November, by which time she seemed to be avoiding him. In March of the following year Mr Mahanets effectively locked the doors against Ms Innes.
However, in his evidence, Mr Mahanets gave an account which differed in important respects. Mr Mahanets said that he first met the defendant during the period when he was doing “due diligence” in relation to the purchase. Mr Wegener explained to him that the defendant was a physiotherapist who was taking a class at the gymnasium. He told her that the arrangement she had with Mr Wegener could continue for the moment and they would “sort things out later”. He said he believed on the basis of what she told him that the arrangement she had with Mr Wegener was for the payment of $550 per month for use of the pool. She made that statement in Mr Wegener’s presence. There was talk of Ms Innes taking extra classes in the gymnasium and he told her that he would have to look at how that would affect the situation. This conversation occurred at about the beginning of February and the defendant’s use of the facilities continued as before.
Towards the end of March he spoke with Ms Innes again on the topic of payment. He told the Court that they discussed her requirements for usage of the gymnasium and he said to her: “Look, let’s just give it at $550 as an ongoing situation. With the rest of the classes we’ll look and see how many classes you’re running extra and, you know, we’ll charge you accordingly.” He said that before they parted they agreed that there “was going to be some sort of payments”. She did not object to the figure he proposed. If there was to be further use of the facilities beyond the $550 they would come to an agreement about that.
The defendant denied any liability. She pleaded that Mr Mahanets permitted her to use the facilities of the gymnasium in the same manner as she had done under the regime of the previous operator, pending a different arrangement being struck. Her several attempts to speak with Mr Mahanets to formalise the matter were unsuccessful. Twice, appointments she made with him were not kept by him. Ms Innes’s evidence was consistent with her pleaded defence.
The trial was essentially a contest of credibility between Mr Mahanets and Ms Innes. Ms Innes called Mr Wegener as part of her case. He said that during the negotiations for the sale of the plant and equipment he told Mr Mahanets of the arrangement he had with Ms Innes and explained that the agreement only required payment by her of $10 per annum because there were “spin-off” benefits to the gymnasium business from her use of it. He said a copy of the licence agreement D22 was provided to Mr Mahanets at the time of the sale.
The judge preferred the evidence of the defendant to that of Mr Mahanets. The judge found that there was an oral agreement that the defendant would continue to use the facilities as before, without payment, until a different arrangement was made. The claim was dismissed. Because the judge found that the plaintiff had unreasonably and imprudently refused offers of settlement made by the defendant, an award of indemnity costs was made.
The appeal is against both judgments; the appellant complains of the factual findings made against him leading to the dismissal of the claim and of the order for indemnity costs.
Arguments going to the claim
The central argument put on behalf of the appellant by Mr Mahanets was that in accepting the defendant’s case the judge overlooked certain evidence and important arguments.
Mr Mahanets argued that the licence agreement D22 between the defendant and Mr Wegener assumed far too much importance in the trial. He observed that he had bought only plant and equipment and not Mr Wegener’s business. Any agreement between Mr Wegener and the defendant was irrelevant, as it was neither signed by him nor assigned to him. He stated that if the arrangement between himself and the defendant had been as found by the judge, then the licence agreement would have been signed and dated on behalf of the appellant as purchaser. Mr Mahanets pointed to the unlikelihood that he would ever have accepted such an arrangement, particularly when not one, but four or five physiotherapists were using the facilities during 2003. Indeed, Mr Mahanets went further. He stated that the licence agreement was not mentioned in discussions with Mr Wegener or the defendant until 2006. He argued that if the existence of the relationship between Mr Wegener and the defendant was indeed as beneficial to each as claimed, then Mr Wegener would have used the arrangement as a bargaining tool in negotiations for the sale of the business. It would have amounted to an enhancement of what he was selling and would have enabled him to “up-sell”. He pointed to the fact that there was no evidence that the $10 annual fee referred to in the licence agreement was ever paid by the defendant. Mr Mahanets argued that the licence agreement was a “false document”, created to advance the defendant’s argument. At best, he argued, it was an “obsolete document”.
Mr Mahanets argued that the judge had overlooked that, consistent with his case, Ms Innes had paid to him the sum of $550. He argued that if she had believed that only $10 was owing to the plaintiff during 2003, then she would have made this assertion to him and would not have paid $550. Indeed, she would have paid $10 only.
The only documents in the trial purporting to be notes of a discussion in which payment of the sum of $500 per month was mentioned were D12 and D13. These were notes made mainly by the defendant during a meeting with Mr Mahanets, the date of which was in dispute. Mr Mahanets put it at March 2003. He claimed that in the meeting the defendant had apprised him of fees charged by the Stirling pool operators for services such as he was providing to the defendant. He said that during the meeting he had taken a photocopy of the notes the defendant had made. The notation referring to $500 did not appear on his photocopy. (There was a dispute as to why that might have been but it is unnecessary to outline it.) Later, he had dated them for his solicitor’s purposes. On the defendant’s version these notes were made during a meeting in early 2004. Notably the document containing notes retained by the defendant (D13) were notes made on the back of an SA Water invoice issued on 10 December 2003. In answer to the suggestion that the invoice was powerful evidence tending to “date” the handwritten notes, the appellant argued that the defendant could easily have photocopied the notes onto the back of the water invoice in her own time. The judge found that the notes must have been made in or after December 2003.
On the question of the benefits which Ms Innes claimed flowed to the appellant by reason of the arrangement between them, Mr Mahanets suggested the defendant’s approximation of a value of those benefits of $20,000 was contradicted by documents provided by him proving that membership income for the period 1 February 2003 to the end of 2004 was only $7,386.
It was argued by Mr Mahanets that the judge failed to take into account that the defendant had made offers to settle the claim for substantial monetary sums. He argued that such offers should have been used as evidence that the defendant considered that she was, at least to some extent, liable. He put that the fact of such offers demonstrated that the denial of the appellant’s claim was unjust.
Analysis
In my view, there was, underlying Mr Mahanets’ arguments in relation to the relevance of the licence agreement D22, a misapprehension as to the use the judge made of that agreement. The judge acknowledged that only the plant and equipment was purchased by the plaintiff. The judge did not find that the licence agreement had any direct relevance to the plaintiff. She did not find that the licence agreement bound the plaintiff. She did find, however, that Mr Mahanets was aware of the licence agreement, it having been provided to him at the time of the sale and purchase of the plant and equipment. She also found that the pre-existing arrangement had been discussed between Mr Mahanets and Mr Wegener. The relevance of the licence agreement on the defendant’s case and, as the judge found, was that it was orally agreed between the plaintiff and defendant that she would be entitled to continue to use the gymnasium facilities on the same basis as had previously applied, until such time as some different arrangement might be struck. Consequently, Mr Mahanets’ argument that the defendant’s preparedness to pay him $550, as opposed to $10, indicated that the licence agreement was not in force, was misconceived. It was difficult for Mr Mahanets to make good an argument that he would not have accepted a continuation of the existing arrangements, because Mr Wegener, whose evidence was accepted by the judge, had found the arrangement advantageous. There was evidence from both Mr Wegener and the defendant going to the quantum of benefits flowing to the gymnasium operation due to its association with the defendant’s business. Whether or not the arrangement with Ms Innes was ultimately beneficial to the plaintiff’s business is not to the point. No doubt it would be hard to quantify such a benefit. But in any event, the judge was entitled to take the view that Mr Mahanets’ preparedness to allow the pre-existing arrangement to continue was, in all the circumstances, unsurprising.
Mr Mahanets’ argument to the effect that the document D13 might have been falsified by Ms Innes was not put to Ms Innes or otherwise agitated in the trial. It is too late to make such an argument. It is noteworthy however, that just as the notation of $500 on D13 was linked by the water invoice to the period not earlier than the end of 2003, so was the actual payment of $550 made early in the following year.
The offers made by the defendant at various times leading up to the trial were made either “without prejudice” or were made in accordance with the rules of court. The judge was not apprised of them until after judgment was given. It is therefore impossible to make an argument that any judgment given should have led to a payment to the plaintiff of not less than the highest offer.
As I observed earlier, the issue in the trial for determination was fundamentally one of credibility. None of the arguments raised by the appellant give rise to concern that the judge misunderstood the evidence or the arguments put on behalf of the appellant, or that any principle of law was misapplied.
There was a further ground of appeal although it was not agitated upon the appeal hearing. It contended that, in indicating that she would have upheld the alternative defence based on an estoppel, the judge erred. There was evidence to support the plea. The defendant said in effect that she relied on Mr Mahanets’ conduct in not crystallising the arrangement and indicating that the present arrangement would stand until changed. She further said that in the event that she was to be required to pay for the gymnasium she would have considered her options including terminating her lease, as she was entitled to do.
No fault in the judge’s reasoning is identified. I consider that the ground is without substance.
The appeal against dismissal of the claim must be dismissed.
Arguments going to costs
The plaintiff complained that the trial judge erred in awarding the defendant any part of her costs on an indemnity basis. After hearing argument on the defendant’s application for costs on that basis, the judge ordered that the defendant have costs in the matter on an indemnity basis from 11 July 2008, when the plaintiff rejected the defendant’s second offer of settlement, and otherwise on a party‑party basis.
During the period prior to trial, the defendant made four settlement offers by letter, and filed in court two offers of settlement pursuant to Rule187 District Court Rules. All were rejected. The first offer was made in December 2007 for an amount of $8,000. On 12 June 2008 the defendant’s solicitors wrote to the plaintiff’s solicitors with a second offer. They advised that it had come to light that a key document which Mr Mahanets was relying on to support his assertion that the parties had held negotiations in March 2003 objectively disproved that claim. This was the document D13. It was proposed that each party walk away from the action bearing their own costs. On 11 July 2008 the plaintiff’s solicitors, by mail, rejected that offer, and made a counter offer. Thereafter further offers, including two filed offers, were made by the defendant.

The last of those filed offers was filed on 10 June 2009 for an amount of $14,000 plus $6,000 in costs. The trial commenced on 15 March 2010. On that day Mr Mahanets gave evidence that the agreed price for use of his facilities was $550 per month. On that basis the claim would have amounted to roughly $6,050. The defendant’s solicitor deposes that in light of that evidence, the defendant withdrew her filed offers.
The judge relied on principles outlined in Sands v Channel Seven Adelaide Pty Ltd [2009] SASC 365, and Olivaylle Pty Ltd v Flottweg GMBH & Co, KGAA (No 5) [2009] FCA 571. In turn, both those cases refer to Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 for the principle that indemnity costs may be awarded in cases where there is “an imprudent refusal of an offer of compromise”: 233. In Olivaylle, Logan J also accepted the statement of Sackville J in Seven Network Ltd v News Ltd (2007) 244 ALR 374 that in determining whether a rejection of an offer was unreasonable the court must consider the strengths and weaknesses of the refusing party’s case prospectively at the time when the offer was made: [45].
The judge noted that the six offers made amounted to a significant commercial compromise, that the claim was commenced in the Magistrates Court, and that even as ultimately formulated it was below the jurisdictional limit of the District Court. The judge accepted the defendant’s arguments that given the plaintiff’s claim had proceeded on an inflated quantum and that the problems with proof had been clearly outlined to the plaintiff in the letter of 11 June 2008, it was imprudent and unreasonable not to abandon the claim, as suggested.
Before this Court Mr Mahanets submitted that the judge was wrong to take into account the defendant’s settlement offers, particularly the offer of $20,000, because at the time they were made he had already incurred legal costs in an amount that made the offers unrealistic. I consider that argument is a barren one.
In my view, the judge correctly identified the principles governing an exercise of discretion to award indemnity costs. I agree with her finding that the plaintiff’s decision to proceed in the face of being alerted to D13 was imprudent and unreasonable. The plaintiff has demonstrated no basis on which this Court should interfere with that exercise of discretion.
Conclusion
None of the arguments advanced has been made good. I would dismiss the appeal.

PEEK J: I would dismiss the appeal. I agree with the reasons of Vanstone J.