Merrindale Properties Pty Ltd v AIL C Sub TC Pty Ltd (Costs and Interest)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION
PROPERTY LIST

S ECI 2022 03785

IN THE MATTER OF

BETWEEN:

MERRINDALE PROPERTIES PTY LTD

(ACN 167 552 356)

Plaintiff

Defendant by counterclaim

- and -

AIL C SUB TC PTY LTD

(ACN 658 635 173)

Defendant

Plaintiff by counterclaim

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JUDGE:	Forbes J
WHERE HELD:	Melbourne
DATE OF HEARING:	9 April 2024
DATE OF JUDGMENT:	8 May 2024
CASE MAY BE CITED AS:	Merrindale Properties Pty Ltd v AIL C SUB TC Pty Ltd (Costs and Interest)
MEDIUM NEUTRAL CITATION:	[2024] VSC 222

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PRACTICE AND PROCEDURE – Costs – Defendant offers of compromise – Whether offers made were certain – Whether refusal to accept offer was unreasonable – Whether offers made were a capitulation – Whether costs should be apportioned because of parties mixed success in proceeding.

PRACTICE AND PROCEDURE – Interest – Whether entitlement to interest under the contract pleaded – Entitlement to interest under s 58 of the Supreme Court Act 1986 (Vic) – Whether entitled to compound interest – Whether interest already paid can be applied to calculation of statutory interest now owing – Supreme Court Act 1986 (Vic) ss 58 and 60 – The City Mutual Life Assurance Society v Giannarelli [1977] VR 463 – David Leahey (Aust) Pty Ltd v McPherson’s Ltd [1991] 2 VR 367 – Victorian WorkCover Authority v Esso Australia Ltd (2001) 207 CLR 520.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff Defendant by Counterclaim	P Santamaria KC R Peters	HWL Ebsworth Lawyers
For the Defendant Plaintiff by Counterclaim	C Archibald SC P Thiagarajan	Norton Rose Fulbright Australia

Contents

BACKGROUND

Summary of conclusions

COSTS

Offers of compromise
Submissions on offers of compromise

Apportionment
Submissions on apportionment

Consideration as to costs

INTEREST

Submissions on interest
Consideration as to interest

HER HONOUR:

BACKGROUND

On 5 March 2024 I published reasons for judgment in this proceeding. AIL C SUB TC Pty Ltd (AIL, or the defendant), as purchaser, obtained a declaration that it had validly rescinded the contract for sale of land at 130–140 Merrindale Drive, Kilsyth, Victoria (the contract). AIL had rescinded the contract when the plaintiff, as vendor, failed to procure an original bank guarantee by the contract deadline. Merrindale Properties Pty Ltd (Merrindale, or the plaintiff) contended that it had complied with the contract obligation to procure a bank guarantee and sought specific performance of AIL’s obligation to settle the contract. The plaintiff’s claim for specific performance failed. The defendant’s defence and counterclaim succeeded and the declarations it sought were made along with an order that the plaintiff’s solicitor pay the deposit and deposit interest to the defendant. These reasons deal with the outstanding issues as to costs and interest.

Summary of conclusions

The defendant seeks indemnity costs under r 26 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (the Rules), relying on having achieved a better outcome than the two purported offers of compromise made by it in the proceeding. Alternatively the defendant seeks indemnity costs in the exercise of discretion on the basis that the plaintiff unreasonably refused to accept AIL’s two offers to settle. The plaintiff accepts that it is liable to pay the defendant’s costs but contends costs ought be ordered on a standard basis. The plaintiff also seeks apportionment of those costs and submits an order that it pay 66% of the defendant’s costs is appropriate.
In summary, and for the reasons that follow, the questions and corresponding answers as to costs are:
(a)Question 1
Did the defendant made a valid offer of compromise under r 26 of the Rules on 19 December 2022 (the first offer) entitling it to indemnity costs from 21 December 2022?
Answer: No.
(b)Question 2
If the first offer is not in accordance with r 26 of the Rules because, as the defendant concedes, it was not open for 14 days, can and should the Court exercise a discretion now to abridge time so that the first offer becomes compliant with the Rules?
Answer: The Court will not abridge time.
(c)Question 3
Did the defendant made a valid offer of compromise under r 26 of the Rules on 27 July 2023 (the second offer) entitling it to indemnity costs from 29 July 2023?
Answer: Yes, it is a valid offer, but it does not entitle the defendant to indemnity costs because the plaintiff’s refusal was not unreasonable.
(d)Question 4
Should the Court as a matter of discretion nevertheless award indemnity costs treating the first offer or the second offer a Calderbank offer?[1]
Answer: No, for the same reasons as Question 3.
(e)Question 5
If standard costs are appropriate whether the Court should apportion costs to reflect the mixed success of the parties?
Answer: No.
[1]Calderbank v Calderbank [1976] Fam 93; Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No. 2) (2005) 13 VR 435.
While the parties agree that the defendant is entitled to statutory interest pursuant to s 58 of the Supreme Court Act 1986 (Vic) (the Supreme Court Act), they disagree on the basis that the entitlement is to be calculated. Further and in the alternative, the defendant seeks interest based upon a contractual entitlement to deposit interest and default interest until judgment. The defendant seeks default interest under the contract calculated at the rate of 12% pursuant to General Condition (GC) 26 of the contract on the basis of a contractual default by the plaintiff. Alternatively the defendant seeks interest pursuant to s 58 of the Supreme Court Act at the rate of 10%. The defendant also submits that on either basis it is entitled to interest calculated on a compound basis.
The plaintiff resists the claim for interest under the contract. It concedes the defendant is entitled to interest pursuant to s 58 of the Supreme Court Act but disputes the entitlement to compound interest.
The deposit which continued to be held by the vendor’s lawyers during the ongoing dispute continued to accrue interest. There is a further dispute as to how this additional interest is to be treated. The plaintiff submits that this amount is to be included in the calculation of interest to be paid by the plaintiff. The defendant contends it is a contractual entitlement separate to default interest under the contract or statutory interest, and is therefore payable to it, separately.
Some matters are agreed. They are:
(a)the demand for return of the deposit (Deposit Sum) was made by the defendant on 26 August 2022 and interest is to run from that date to 7 March 2024, a total of 560 days (the agreed period).
(b)The Deposit Sum is $4,011,084.54. It comprised the deposit paid of $4,000,000 and the $11,084.54 of interest that had accrued on that amount under the contract to 26 August 2022 (Deposit Interest).[2]
(c)The deposit interest earned during the agreed period is $225,068.44 (additional Deposit Interest).
(d)The parties have agreed the calculation of the interest amount from 26 August 2022 on the different bases that each contend for and have provided a schedule setting out those agreed calculations.
[2]Accrued pursuant to Special Condition 5.2 of the contract which dealt with investment of a deposit paid pending conclusion of the contract. Deposit Interest is defined in Special Condition 1.1 of the contract.
In summary, the questions and corresponding answers as to interest are:
(a)Question 6
Is the defendant entitled to interest under the contract from 26 August 2022 which it submits is calculated at 12% or is it entitled to interest under s 58 of the Supreme Court Act at 10%?
Answer: The defendant is entitled to statutory interest. The defendant had not pleaded a breach giving rise to default interest under the contract under GC 26.
(b)Question 7
Is the statutory interest calculated on the amount fixed as at 26 August 2022 or is it calculated on an amount that takes account of the interest as that figure continues to accrue, so that the Deposit Sum itself continues to increase?
Answer: Statutory interest is calculated on the sum fixed at 26 August 2022.
(c)Question 8
Is the defendant entitled to the additional Deposit Interest of $225,068.44 in addition to the statutory interest or, it having been paid by the plaintiff, is it to be treated as a part payment towards the interest owing under s 58 of the Supreme Court Act?
Answer: The additional Deposit Interest paid is to be deducted from the total interest amount payable by the plaintiff.
(d)Question 9
Is interest under s 58 of the Supreme Court Act calculated as simple interest or compound interest?
Answer: Simple interest.
According the agreed calculations therefore, the interest that remains payable by the plaintiff is $309,330.83.
I now set out my reasons for these conclusions.

COSTS

Offers of compromise

Offers of compromise are governed r 26 of the Rules.
Rule 26.01 provides that a plaintiff includes a defendant who serves a counterclaim, and a claim includes a counterclaim. One flexibility identified by the process of offers of compromise is that a defendant can offer to pay the plaintiff, or a plaintiff can offer to accept from a defendant, a sum that takes the counterclaim into account. Rule 26.02(2) provides:
An offer of compromise in respect of a claim may be on terms that take into account any other claim in the proceeding between the parties.
Rule 26.02(3) prescribes the content of such an offer:
An offer of compromise must—
(a) be in writing and prepared in accordance with Rules 27.02 to 27.04; and
(b) contain a statement to the effect that it is served in accordance with this Order.
The time for acceptance expressed by the offer of compromise may be limited, but must be not less than 14 days after service.[3] The terms of an offer of compromise must be stated in clear and precise language to be relied on for the issue of costs.[4] One purpose of the need for clarity of an offer of compromise is the need for the Court to compare the terms of the offer and the judgment on the claim to determine whether the judgment obtained is not more favourable to the party who failed to accept the offer of compromise.[5]
[3]Supreme Court (General Civil Procedure) Rules 2015 (Vic) r 26.03(3) (‘Rules’).
[4]Grbavac v Hart [1997] 1 VR 154, 160–1 (Tadgell JA); MT Associates Pty Ltd v Aqua-Max Pty Ltd (No 3) [2000] VSC 163, [56].
[5]Duncan & Weller Pty Ltd v Mendelson [1989] VR 386, 400-1 (Kaye J); AJ Lucas Drilling Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd (No 2) [2010] VSCA 128, [32].
The costs consequence of non-acceptance of an offer of compromise are provided for by r 26.08.
Where the offer of compromise has been made by a plaintiff, r 26.08(2) applies:
Where an offer of compromise is made by a plaintiff and not accepted by the defendant, and the plaintiff obtains a judgment on the claim to which the offer relates no less favourable to the plaintiff than the terms of the offer, then, unless the Court otherwise orders, the plaintiff shall be entitled—
(a) if the claim of the plaintiff is for damages for or arising out of death or bodily injury, to an order against the defendant for the plaintiff's costs in respect of the claim taxed on an indemnity basis;
(b)in the case of any other claim of the plaintiff, to an order against the defendant for the plaintiff's costs in respect of the claim before 11.00 a.m. on the second business day after the offer was served, taxed on the ordinarily applicable basis and for the plaintiff's costs thereafter taxed on an indemnity basis.
In some circumstances r 26.08(8) is also applicable to an offer of compromise made by a plaintiff. It provides:
Where the plaintiff obtains judgment for the recovery of a debt or damages, and the amount of the debt or the damages was not in dispute, but only the question of liability, paragraph (2) shall not apply unless the Court is satisfied that the plaintiff’s offer was of a genuine compromise.
The costs consequences of a plaintiff’s non-acceptance of an offer of compromise made by a defendant are slightly different. They are provided for by r 26.08 (3) and (4):
(3) Where an offer of compromise is made by a defendant and not accepted by the plaintiff, and the plaintiff obtains a judgment on the claim to which the offer relates not more favourable to the plaintiff than the terms of the offer, then, unless the Court otherwise orders—
(a) the plaintiff shall be entitled to an order against the defendant for the plaintiff's costs in respect of the claim before 11.00 a.m. on the second business day after the offer was served, taxed on the ordinarily applicable basis; and
(b) the defendant shall be entitled to an order against the plaintiff for the defendant's costs in respect of the claim thereafter taxed on the ordinarily applicable basis.
(4)Where an offer of compromise is made by a defendant and the plaintiff unreasonably fails to accept the offer and the claim to which the offer relates is dismissed or judgment on the claim is entered in favour of the defendant, then unless the Court otherwise orders –
(a) the defendant shall be entitled to an order against the plaintiff for the defendant’s costs in respect of the claim until 11.00am on the second business day after the offer was made taxed on the ordinarily applicable basis; and
(b) the defendant shall be entitled to an order against the plaintiff in respect of the defendant’s costs after the time referred to in paragraph (a) taxed on an indemnity basis.
Subsection (4) is to be distinguished from situations under subsection (3), which applies where the plaintiff succeeds on the claim but the outcome is not more favourable than the applicable offer. Under 26.08(3), where a plaintiff succeeds on the claim but obtains less by way of relief, a defendant obtains the benefit of an offer of compromise it has served. However, where a plaintiff is unsuccessful in its claim in the face of an offer of compromise served by a defendant, no prima facie entitlement to indemnity costs arises. Rule 26.08(4) only operates to provide indemnity costs if the Court is satisfied that the plaintiff’s non acceptance was unreasonable, unless the Court otherwise orders. As Elliott J said in Cargill Australia Ltd v Viterra Malt Pty Ltd (No 32): [6]
Thus rule 26.08(2) creates a presumption that indemnity costs will be awarded on circumstances where an offer of compromise is made by a plaintiff but not accepted, and the plaintiff subsequently obtains a judgment no less favourable than the terms of the offer. A like presumption is created for the benefit of a defendant where it has had its offer of compromise unreasonably not accepted and the claim against it is subsequently dismissed or judgment is entered in its favour.[7]
[6][2022] VSC 299.
[7]Ibid [42] (emphasis added).
The first offer relied on by the defendant was served on 19 December 2022. It offered:
(a)Judgment for AIL on the claim and counterclaim;
(b)$3,750,000 of the deposit be paid to the defendant;
(c)$250,000 of the deposit be paid to the plaintiff; and
(d)Each party would bear their own costs.
The first offer was open for acceptance until 5:00pm on 10 January 2023.
The second offer was served on 27 July 2023. It offered:
(a)Judgment for AIL on the claim and the counterclaim;
(b)Deposit and deposit interest under the contract be paid to AIL; and
(c)Each party would bear its own costs.
The second offer was open for acceptance until 5:00pm on 11 August 2023.
The second offer is contained in a written document stating it is served in accordance with Rule 26. The accompanying cover letter sets out a series of observations by the author as to the strength of the defendant’s position in the litigation and stating it makes ‘the offer contained in the enclosed offer of compromise’. It then sets out a series of reasons for the contention that refusal of the second offer would be unreasonable, concluding that:
Our client’s offer is made in accordance with the principles in Calderbank v Calderbank [1976] Fam 93, Cutts v Head [1984] Ch 290 and subsequent Australian authorities.[8]
[8]‘Second Offer of Compromise’ which forms part of exhibit bundle RCJ-1, Plaintiff, ‘Affidavit of Rebecca Caroline Jaffe’ affirmed on 15 March 2024 in Merrindale Properties Pty Ltd v AIL C SUB TC Pty Ltd S ECI 2022 03785, 4-8.

Submissions on offers of compromise

Merrindale submits that the first offer cannot be relied on by AIL for three reasons. First, the offer was not in accordance with the Rules as it was not open for acceptance for fourteen days. The suspension of time by r 3.04(1) of the Rules means the period from 24 December to 9 January is excluded from the calculation of fourteen days. The first offer was therefore only open for five days. Second, Merrindale submits the offer was uncertain as it failed to state what would happen in respect of entitlement to interest under the contract, a sum of $40,451.56 to that time. Third, Merrindale says that its failure to accept the first offer was not unreasonable such that, even if the Court finds the first offer is valid, the Court should only order costs on a standard basis.
Merrindale similarly contends that the second offer was uncertain because the cover letter to the offer of compromise referred to it as a Calderbank offer, but the enclosed document was an offer in accordance with r 26. The different consequences flowing from each form of offer make the effect of it uncertain. Merrindale submits the second offer also ought not be a basis for an entitlement to indemnity costs because it amounted to a capitulation, even more so than the first offer, and as such the plaintiff’s failure to accept it was not unreasonable.
AIL’s written submissions relied on r 26.08(2)(b) of the Rules, which is the provision applicable to an offer served by a plaintiff. AIL submits it obtained a judgment no less favourable than the terms of its first and second offers. In its reply submissions filed on 27 March 2024, AIL accepts that the first offer was not open for fourteen days as required by the Rules but submits that r 3.04(1) permits the Court to otherwise order that the period from 24 December 2022 to 9 January 2023 not be excluded when calculating the time the first offer was open or it would otherwise be appropriate for the Court to abridge the time that the first offer was open. AIL submits that the first offer was certain and silence on the treatment of the contractual interest meant Merrindale was entitled to retain it, because this reflected the contractual entitlement of Merrindale to that interest unless AIL lawfully rescinded the contract. AIL submits that the first offer was a genuine compromise in forgoing costs and the sum of $250,000. Finally, AIL submits that if the first offer did not comply with the Rules, it should be approached as a Calderbank offer and the Court ought to conclude that the failure to accept it was unreasonable.
AIL submits that the second offer was not uncertain, and whether it was an offer under r 26 or a Calderbank letter, or both, has no impact on Merrindale’s ability to consider whether to accept or reject it. AIL submits the second offer was not an offer to capitulate because, as increased costs had been incurred at the stage that the offer was made, an offer to ‘walk away’ inclusive of costs was a ‘real compromise for consideration of real value’.[9]
[9]Defendant, ‘Defendant’s Outline on Costs and Pre-judgment Interest’, Submissions in Merrindale Properties Pty Ltd v AIL C SUB TC Pty Ltd S ECI 2022 03785, 8 March 2024, [19], citing University of Melbourne v Commissioner of State Revenue (No 2) [2021] VSC 322, [39]-[40].

Apportionment

The general rule is that costs follow the event. On that basis AIL, who has established it lawfully rescinded the contract, is entitled to its costs.
Absent disqualifying conduct, the successful party should recover its costs even where it has not succeeded on all heads of claim. [10]
[10]Chen v Chan [2009] VSCA 233, [10], citing Ritter v Godfrey [1920] 2 KB 47; Oshlack v Richmond RiverCouncil (1998) 193 CLR 72, 97–8 (McHugh J); 124 (Kirby J).
However, as part of the Court’s broad discretion as to an award of costs, r 63.04 permits an order fixing a proportion of costs in relation to a particular question of part of the proceeding. In doing so, the Court may take a pragmatic approach to the realities of the case where there has been ‘a multiplicity of issues and mixed success has been enjoyed’.[11]
[11]Chen v Chan (n 10) [10].

Submissions on apportionment

Merrindale submits that apportionment is appropriate in this case. Merrindale submits that there are two discrete and severable issues: first, whether Merrindale had complied with or was in breach of Special Condition (SC) 23.1 in procuring the bank guarantee and second, whether if not in breach, it was entitled to seek specific performance of the contract or, as AIL contended, it was limited to remedies provided by SC 26.6. AIL succeeded on the first issue and failed on the second. Merrindale submits it should pay 66% of the defendant’s costs on a standard basis on the grounds that the two substantive issues in the proceeding were severable and the plaintiff succeeded on the issue of specific performance.
AIL submits that there are no circumstances in this case warranting a departure from the general rule that costs follow the event. It submits that the issue of specific performance occupied little hearing time and required no witness or documentary evidence, so cannot be said to be 34% of the total costs of the matter.

Consideration as to costs

A preliminary matter requires comment. The defendant relies on its offers of compromise under the rules that have not been accepted by the plaintiff. However, its written submissions rely specifically on r 26.08(2)(b),[12] which is applicable to offers where served by a plaintiff, rather than either 26.08(3) or (4), which are applicable to offers served by a defendant. It is possible, though not explicitly stated by the defendant, that as it had made a counterclaim and a defendant by counterclaim is a plaintiff as defined by r 26, it approached the exercise as one where it is entitled to rely on r 26.08(2)(b).
[12]Defendant’s Submissions dated 8 March 2024, [16].
Against this possibility, in both its written and oral submissions AIL continued to refer to itself as the defendant and Merrindale as the plaintiff. The offers of compromise themselves identified them as being made by the ‘Defendant/Plaintiff by Counterclaim’ and, as set out above, specified the terms of compromise on both the claim and the counterclaim. The offers are not confined only to the counterclaim in which AIL would be considered plaintiff. There may be circumstances where a defendant ought be regarded as a plaintiff making a claim for relief in the proceeding despite its designation as defendant, and an offer of compromise in that claim may be governed by the rule applicable to a plaintiff.[13] However, it was not argued that such an approach was appropriate here. I intend on applying the rules applicable to a defendant who has served an offer of compromise, in circumstances where the plaintiff’s claim has not succeeded, notwithstanding AIL’s reference to r 26.08(2)(b).
[13]See for example Whitehouse Properties Pty Ltd v Bond Brewing(NSW) Ltd (1992) 28 NSWLR 17.
A party is not limited in the number of offers of compromise it can serve. The non-compliance of the first offer as to time was within the power of the defendant to rectify by service of a further offer in the same terms, open for the requisite time. AIL did not do so but continued to rely on the first offer as if it were valid. AIL expressly relied on the first offer when making the second offer and again in its written submissions filed 8 March 2024. The concession that the first offer did not comply with the Rules was eventually properly made but not until the non-compliance had been highlighted by the plaintiff.
Whilst the Court has the power to not exclude the relevant period when calculating the time the first offer was open or otherwise order that the time be abridged, any such application to do so was only raised informally and in response to the argument that the first offer was non-compliant. To retrospectively regularise an irregular offer of compromise in this way and at this late stage would fundamentally change the position of the plaintiff who has not responded to the offer on its terms, to the advantage of the party who was non-compliant. The defendant was not prejudiced by any error it made in calculating the required time, has not taken any step itself to regularise the position in accordance with the Rules, and seeks to do so now only after the outcome of the case is known. By contrast the plaintiff, having not responded to an offer of compromise that is not compliant with the Rules and so creating no risk of cost consequences, would now be prejudiced in terms of costs.
The reason advanced by AIL for why time should be abridged retrospectively was that parties are required to attempt to settle disputes and Merrindale’s argument was a technical one unrelated to any attempt on its part to say that the shortened time had any bearing on its decision making. In my view the Rules provide a particular tool for use that gives the party utilising that tool the protection of costs consequences in certain circumstances. Given the benefit goes to the party serving an offer of compromise, it is incumbent on that party to ensure compliance with the Rules. There is in my view good reason for requiring compliance with the Rules at the time the other party is considering the offer. The first offer was not compliant with the Rules at the time it was made nor at the time it expired. The settlement of disputes is unlikely to be advanced by one party pointing out technical defects in an unattractive offer made by the other and the plaintiff’s failure to act on a non-compliant offer says little, if anything, about the obligation on either party to attempt resolution of the dispute.
I am not prepared to retrospectively extend the time that the offer was open for acceptance or abridge time where to do so would give Merrindale no opportunity to accept and would otherwise confer a benefit to AIL that it failed to obtain through compliance with the Rules.
That is sufficient to dispose of the defendant’s reliance on the first offer under the Rules.
Were it necessary to do so I would also conclude that the first offer lacked the necessary certainty as it did not deal with the question of what was to occur with the Deposit Interest. The defendant submits that an offer of compromise does not need to expressly deal with the question of interest, and while that may be so in respect of prejudgment interest, it is desirable that offers of compromise deal with other interest entitlements and do so with some precision.[14] The question of what was to occur regarding Deposit Interest under the contract was a different question. That was governed by the contract and in particular SC 5.2, dealing with investment of the deposit. That condition provided for accrual for the benefit of the vendor[15] save where the purchaser lawfully rescinds the contract.[16] The defendant submits that as lawful rescission was in issue in the case, the first offer was certain because it meant that AIL was forgoing any entitlement to Deposit Interest. However, an offer of ‘judgment on the claim and counterclaim’ which in substance reflects the position of AIL that it had lawfully rescinded the contract provides no certainty that AIL considered Merrindale was entitled to retain the deposit. In my view, the absence of any reference to Deposit Interest renders the first offer open to argument over entitlement to the sum of $40,451 as it then stood, and so renders it uncertain. By contrast the second offer was specific as to the defendant’s entitlement to interest but was otherwise in the same terms as to judgment on the claim and counterclaim. In other words, it was explicit as to how clause 5.2 was to operate if the second offer was accepted.
[14]See Primus Telecommunications Pty Ltd v CCP Australian Airships Ltd [2003] VSC 141.
[15]‘Contract of sale for 130-140 Merrindale Drive, Kilsyth VIC 3137’ which forms part of exhibit bundle AGM-1, Plaintiff, ‘Affidavit of Andrew John Meese’ sworn on 19 April 2023 in Merrindale Properties Pty Ltd v AIL C SUB TC Pty Ltd S ECI 2022 03785, 48-123 (‘Contract of Sale’) (this affidavit and its exhibits form part of tendered Exhibit 1), Special Condition 5.2(b).
[16]Contract of Sale, Special Condition 5.2(d)
AIL argued that the plaintiff should, if necessary, have seen if a path could have been steered which may have resulted in acceptance of the offer, relying on the observations of J Forrest J in DP v Bird.[17] Those observations were made in the context of an offer of compromise said to be uncertain because acceptance would leave the plaintiff liable to repay a third party an undetermined amount. As was said by His Honour:
The problem is not with the offer of compromise. It lies in endeavouring to determine what will be the result if accepted. This is a problem that is faced and has been met by thousands of plaintiffs, claimants and their lawyers throughout Australia for many decades.[18]
The present circumstances are significantly different. It is the terms of the offer itself, not the consequences involving any third party rights, which is relevantly uncertain. The question of who is entitled to Deposit Interest is governed by the terms of the contract and would be determined by the outcome of the dispute between the parties. It was incumbent upon either party making an offer of compromise to deal with that entitlement. The terms of the first offer therefore was not sufficiently certain.
[17][2022] VSC 58, [49].
[18]Ibid [44].
The document comprising the second offer itself is in writing, is in accordance with r 27.02 to 27.04 and is compliant with both r 26.02(3) and (4). On its face it is a valid document. It may be that in the covering letter setting out reasons why a failure to accept the offer would be unreasonable, the author had in mind that r 26.08(4) and the principles applying to Calderbank offers overlap.
The question of whether to award indemnity costs turns on the reasonableness of the refusal. In this way, the operation of r 26.08(4) raises considerations akin to those applicable to Calderbank offers. Therefore while it is not necessary to decide if the second offer is invalid because of uncertainty, I would say that it was not invalid given the document itself was clear.
The real question is whether the plaintiff acted unreasonably in failing to accept the second offer. The question of whether the second offer was a genuine compromise is relevant but not necessarily determinative of that question.
First, the plaintiff’s claim was for specific performance of the contract. The nature of the remedy sought is in my view a relevant matter in assessing the reasonableness of the plaintiff’s failure to accept. The plaintiff sought an order compelling the defendant’s performance of the contract. It may be more difficult to contemplate the ways in which there might be a genuine compromise of the plaintiff’s desire to enforce the contract, or how such a compromise might be reflected in an offer of compromise, than where contemplating a claim is for a debt or damages.
Second, the central issue in the case was one of construction of SC 23 and in particular what was required to comply with the obligation to procure an original bank guarantee. In some ways the issue was not one of great factual dispute. The plaintiff conceded that it was not in physical possession of the original bank guarantee by the deadline, but contended that, as it had been produced and signed by the bank and was held by the bank on its behalf for collection, it had procured the document. In contrast, the defendant contended that physical possession of the original was required. The question of construction as to the meaning of procurement was not assisted by any identified authority on point and the principles applicable to construction of commercial contracts was not in dispute. As with most, if not all, questions of construction, one will be preferred by a court over others. It does not follow that another construction was a hopeless or unarguable one.
Third, while the plaintiff’s claim was unsuccessful because the contract had been validly terminated, it did establish an entitlement to seek specific performance under the contract if breach was established, contrary to the defence raised against it. Although not something upon which I consider it a basis to apportionment of costs, I take the plaintiff’s success in principle on that issue into account as part of an overall assessment of the reasonableness of the plaintiff’s failure to accept the offer.
Fourth, the second offer was made upon receipt of the affidavits to be relied on by the plaintiff. The covering letter made a number of other assertions about the evidence of the bank employees as to the creation of the original bank guarantee and the need for the bank to create a duplicate original for collection the following day. The letter alleged misleading and deceptive conduct on the part of a bank employee and a posed a rhetorical question as to the conduct of Mr Meese. The letter also erroneously stated that the original bank guarantee never came into the vendor’s possession. Ultimately at hearing no such allegations were put to Mr Meese or the bank witnesses and AIL accepted that an original document was in the plaintiff’s possession but not until after the relevant deadline. The description of the evidence and its effect, as expressed in the letter, lacked a balanced evaluation of the relative risk and merit of the parties’ positions and did not survive in the way the hearing was conducted. It appears to me designed to inflame the dispute.
Fifth, as the responding correspondence made clear, the plaintiff’s view had always been that procurement was not identical with possession and formed the view that the defendant’s offer of compromise ‘does not accord reasonable recognition of the merit of [the plaintiff’s] construction’.[19] The response to the second offer and the explanation as to why that offer was not accepted was balanced and indicative of a reflective and reasonable position.
[19]’Letter from HWLE dated 10 August 2023’ which forms part of exhibit RCJ-1 in Affidavit of Rebecca Caroline Jaffe affirmed 15 March 2024, 9-10.
Sixth, the second offer made no allowance for the prospect that, on the question of construction, the circumstances in which the contract came to an end might be unfavourable to the defendant. Nor did it make any allowance for the prospect that specific performance might be available and, if the construction of the contract favoured the plaintiff’s argument, might require it to complete the purchase at the $40,000,000 sale price. Approached holistically, the defendant’s second offer did in my view require the plaintiff to accept the defendant’s substantive position, without compromise as if the plaintiff’s position was hopeless.
Seventh, it was clear from 26 August 2022 that the defendant expressed no willingness to engage with Merrindale for remedying any alleged breach by it but sought to rely on its contractual entitlement to terminate the contract. The defendant identified its commercial reasons to do so as were submitted in its resistance to a discretionary grant of specific performance.[20] As the amount of the deposit and interest was not in dispute both offers sought little or no real compromise of the issues between the parties. By its second offer, AIL sought a complete vindication of its counterclaim, coupled with judgment in its favour on the plaintiff’s claim. Whatever might be said of the small concession in the first offer, the second offer is fairly characterised as an offer to capitulate.
[20]These were outlined in the submissions as to the discretionary factors going to any grant of specific performance in the proceeding.
Essentially the outcome of the case turned on two competing constructions, neither of which was improbable or would necessarily have led to the commercial absurdity that the defendant anticipated. There is nothing that persuades me that the plaintiff’s failure to accept the second offer was unreasonable. Therefore there is no basis to order indemnity costs under r 26.08(4)(b).
The defendant submitted that if not valid under the rules, then the first offer and second offer ought be considered as Calderbank offers and indemnity costs ought be awarded on that basis. The defendant submitted that each letter and surrounding circumstances manifested an intention by the defendant to rely on the offers with respect to indemnity costs irrespective of its effectiveness as an offer of compromise under the rules.[21] The first offer made no reference to indemnity costs nor was it accompanied by any covering correspondence that suggested reliance on the offer with respect to costs even if not an effective offer under the rules.
[21]M C Wholesaling Pty Ltd & Anor v Che & Ors (No 5) [2023] VSC 267, [47] (‘MC Wholesaling’).
The second offer was accompanied by a covering letter and within that covering letter was this specific reference:
Our clients will bring this offer and the offer of compromise served on 19 December 2022 to the attention of the court and seek an order that your clients pay our clients’ costs on the indemnity basis from 11am on 21 December 2022, or if the court declines to make that order, from 11.00am on 31 July 2023. By accepting this offer, your client will avoid having to pay our client’s costs of the proceeding.
This reference, tying indemnity costs clearly to the service of two offers of compromise, when read in the context of the letter as a whole, in my view does not manifest an intention to seek indemnity costs otherwise. Even if it did, for the reasons expressed above, the plaintiff’s failure to accept that offer was not unreasonable. It is not necessary to consider further whether the surrounding circumstances of informal offers relevantly should inform a discretionary award of indemnity costs.[22]
[22]The defendant’s argument as to the costs consequences of informal offers relied on MC Wholesaling (n 21), and also referred me to Hawkes Menangle Pty Ltd v Brennan (No 2) [2023] NSWSC 1486, [19] and Ziliotto v Hakim [2013] NSWCA 359, [14]-[16], both of which are relevant where considering an unreasonable response.
As to the plaintiff’s application for an apportionment of those costs I am not persuaded that apportionment is appropriate. The reality of this case is that it fell to be determined principally on the construction of SC 23 and the timely procurement of the original bank guarantee. That argument was sufficient to dispose of the claim. The secondary issue of the availability of specific performance became relevant only if the plaintiff was successful on the first issue. However, the availability of relief, but not the discretionary exercise as to its grant, was determined bearing in mind the need for trial judges to be astute in assessing whether it is necessary to decide issues which do not strictly fall for decision.[23] It could not fairly be said that the outcome was one where the parties had truly mixed success.
[23]Housden v Boral Australian Gypsum Ltd [2015] VSCA 162, [154] (McLeish JA), [6]–[7] (Tate JA).

I should record that although the two issues were presented separately by senior and junior counsel, this of itself did not demonstrate some severability or separateness of issues that might warrant an apportionment. The encouragement of all counsel briefed in a matter to take carriage of appropriate parts of the case presentation is a separate matter to whether in substance the parties have had mixed success on discrete issues such that costs should be apportioned. Both parties took up the expectation of the Court that junior counsel will have a speaking role where appropriate in a particular case. The presentation of the case for both parties in this matter was improved by the involvement of all counsel.
Therefore, AIL is entitled to costs on a standard basis and those costs are not apportioned.

INTEREST

On 7 March 2024 Merrindale’s solicitors transferred $4,236,152.98 to the defendant’s nominated account. By separate open letter on the same day the solicitors set out the basis for their calculations and this methodology is repeated in the submissions filed. Both letters are exhibited to the affidavit of Therese Megens affirmed on 8 March 2024. The plaintiff’s calculation comprised four steps:
(a)First, calculate the money that should have been paid on 26 August 2022 (the Deposit Sum);
(b)Second calculate the amount of penalty interest at 10% for the agreed period (total interest);
(c)Third, calculate the interest component of the sum paid on 7 March 2024 (interest paid); and
(d)Deduct interest paid from the total interest to arrive at the additional amount of penalty interest (interest payable).
The actual calculations are set out and the letter concludes that the plaintiff will consent to an order for payment of $390,129.66 as interest payable.
The affidavit of Therese Megens affirmed on 8 March 2024 and relied on by the defendant deals with two issues: the amount of Deposit Interest earnt and the calculation of pre-judgment interest under s 58 of the Supreme Court Act. The first issue has now been resolved. On the issue of pre-judgment interest the affidavit asserts that:
…pre-judgment interest is payable to the defendant on the debt (being the Deposit and Deposit Interest) from 26 August 2022 to 5 March 2024.[24]
[24]Defendant, ‘Affidavit of Therese Megens’ affirmed on 8 March 2024 in Merrindale Properties Pty Ltd v AIL C SUB TC Pty Ltd S ECI 2022 03785, [28].

Submissions on interest

In its initial submissions on costs and prejudgment interest dated 8 March 2024, the defendant sought pre-judgment interest at a rate of 10% for the agreed period pursuant to s 58 of the Supreme Court Act, and identified a dispute as to the method of calculating that amount. That dispute was in the context that the parties had, by 8 March 2024, agreed that the quantum of the Deposit Interest was $236,152.98 (being $11,084.54 to 26 August 2022 plus $225,068.44 for the agreed period).[25] The defendant submitted that the interest under s 58 was to be calculated on ‘the sum demanded plus contractual interest’.[26] This was because s 58 contained no prohibition on charging interest on interest as is found in s 60(2). The submissions were silent on the defendant’s position as to the method for calculating contractual interest. It became apparent, as detailed below, that the defendant’s submissions were based upon pre-judgment interest being applied to the ongoing accrual of the additional Deposit Interest said to be accruing under SC 5.2 of the contract.
[25]Defendant’s Submissions dated 8 March 2024, [21].
[26]Defendant’s Submissions dated 8 March 2024, [23].
The defendant’s reply submissions began with a new and alternative submission. AIL now submits it is entitled to contractual interest on its deposit under SC 5.2 and default interest calculated under GC 26. GC 26 provided a rate of 2% per annum plus the rate fixed by the Penalty Interest Rates Act1983 (Vic) (Penalty Interest Rates Act), hence the 12% now claimed. The explanation and calculation of that amount was first set out in correspondence dated 21 March 2024.[27] The explanation was that the plaintiff was in default of the contract by failing to return the deposit and Deposit Interest (as it had accrued and as it continued to accrue) when demanded on 26 August 2022. Therefore, the defendant submits it is entitled under the contract to interest calculated in accordance with GC 26. The letter calculated interest at 12% on both a compound and simple basis, claimed in the alternative.
[27]See ‘Letter from NRF to HWLE dated 21 March 2024’ which is annexed to ‘Defendant’s Brief Outline in Reply on Costs and Pre-judgment Interest’, Submissions in Merrindale Properties Pty Ltd v AIL C SUB TC Pty Ltd S ECI 2022 03785, 21 March 2024.
AIL submits it had requested the Deposit Sum be returned in its correspondence of 26 August 2022 notifying Merrindale that it elected to rescind the contract. On 30 August 2022 it wrote to HWLE stating:
Now that the Contract has been rescinded, pursuant to Special Conditions 23.1(f), 5.2(c) and 5.2(d) of the Contract our client is absolutely entitled to the Deposit and Deposit Interest.
…
Should your firm not make payment…by 5pm tomorrow and provide us with written evidence of payment, our client will take all necessary steps…[28]
[28]‘Letter from NRF to HWLE dated 30 August 2022’ which forms part of exhibit bundle AGM-1, Affidavit of Andrew John Meese sworn on 19 April 2023, 160-1.
The plaintiff filed reply submissions on the question of interest. Merrindale submits that a claim for interest under GC 26, based upon a default occurring on 26 August 2022, was never pleaded by AIL and an amendment now ought not be permitted. The defence and counterclaim makes no mention of GC 26. It is a pleading that identifies valid rescission bringing the contract to an end,[29] a demand in writing for repayment of the deposit and Deposit Interest,[30] relief including payment of the deposit and Deposit Interest and a claim for interest and costs. The pleaded breach is therefore a failure to pay back the amount owing as at 26 August 2022. No additional amounts owing under the contract by reference to the operation of GC 26 are alleged in the defence and counterclaim. Merrindale submits that any amendment now should not be permitted as the effect is to increase its exposure from 10% under statute to 12% under the contract, long after the expiry of the two offers of compromise.
[29]Defence and Counterclaim dated 20 October 2022 in Merrindale Properties Pty Ltd v AIL C SUB TC Pty Ltd S ECI 2022 03785, [12A].
[30]Defence and Counterclaim [23], referencing the demand of 30 August 2022.
AIL declined to make any application to amend its pleadings[31] submitting that the defence and counterclaim does raise a claim for contractual interest pursuant to GC 26 as:
(a)the statement of claim at paragraph 4(e) pleaded GC 26 and this was admitted by paragraph 4 of the defence; and
(b)the defence and counterclaim pleads that AIL may elect to rescind the contract and upon receipt of such a notice the deposit shall be refunded under SC 23.1(f) and it is entitled to any interest earnt on the deposit in accordance with SC 5.2(c).
[31]Transcript of Proceedings, Merrindale Properties Pty Ltd v AIL C SUB TC Pty Ltd (Supreme Court of Victoria, S ECI 2022 03785, Justice Forbes, 9 April 2024), 26.7-14 (‘T’).
AIL submitted the real question is how GC 26 applies in the current circumstances.
If an amendment were permitted, Merrindale submits that the question of whether GC 26 entitles a non-defaulting party to compound interest is a question of construction. The plaintiff contends on a proper construction the contract provides for simple interest only.
As to compound interest under s 58 of the Supreme Court Act, the plaintiff refers to and relies on the comments of Tadgell J in David Leahey (Aust) Pty Ltd v McPherson’s Ltd (‘David Leahey’),[32] expressing a view against s 58 authorising an award of compound interest, but ultimately finding it unnecessary to decide the question.
[32][1991] 2 VR 367 (‘David Leahey’).
The defendant contends that the contract definition of Deposit Interest, being ‘any interest earned on the deposit’, means that it includes interest earned while the deposit continued to be held during the period of dispute in the stakeholder account. As such, even absent default, it is part of the sum under the contract to be repaid to the defendant. The defendant submits GC 26 applies to any money owing under the contract and so is addressing a compound calculation. Submissions as to errors in calculations of interest, both simple and compound, have now been overtaken by the agreement between the parties.
Similarly, the defendant submits that s 58 of the Supreme Court Act applies to the debt owed under the contract, which in turn provides for interest on the deposit to be held for the benefit of one or other party under the contract. Having lawfully rescinded the contract, the defendant submits it as the purchaser is entitled to the Deposit Interest that has continued to accrue as part of its debt in the same way as was submitted in relation to the contract.
The defendant submits that, analogous with the way that it submitted the contract provided for interest, statutory interest is to be applied on the basis that the interest calculated on each day forms part of the amount that is subject to the judgment to which that interest is then applied. It submits that this is consistent with the defendant being held out of the Deposit Sum since 26 August 2022.
One further point in the calculations remains in issue. The plaintiff says that the defendant’s calculations, whether on a simple or compound basis, and whether payable under the contract or statute, fail to ‘give credit’ for the interest that has already been paid by the plaintiff on 7 March 2024 – being the amount of $236,152.98. The plaintiff submits that the additional Deposit Interest earnt after 26 August 2022 forms part of the interest owed either under GC 26 or s 58 of the Supreme Court Act. The defendant, consistent with its submission that the additional Deposit Interest is an entitlement it has under the contract, submits it is not something that is offset against the default interest owed.

Consideration as to interest

GC 26 was one of a number of conditions referred to and relied on in the statement of claim and admitted in the defence and counterclaim. GC 26 is found under the heading ‘Default’. It provides:
26. INTEREST
Interest at a rate of 2% per annum plus the rate for the time being fixed by section 2 of the Penalty Interest Rates Act 1983 is payable on any money owing under the contract during the period of default, without affecting any other rights of the offended party.
The other general conditions under the heading ‘Default’, GC 27 and 28 which provided for default notice, have been deleted.[33]
[33]By Contract of Sale SC 2.
SC 26 is also headed ‘Default’ and sets out the rights and remedies of purchaser and vendor in the event of breach by the other, in addition to any other rights and remedies. The default procedure permits the purchaser, in conformity with SC 26.2, to elect to affirm the contract[34] or terminate the contract and sue.[35] The rights are subject to SC 26.3 which provided that the party exercising its rights and remedies under SC 26.2 must give written notice which:
(a) specifies the breach complained of; and
(b)requires the breach (if capable of remedy) be remedied within the period stated in the notice, not being less than 14 days, or if a longer minimum period is required under any law that applies to this contract then that longer minimum period.
[34]Contract of Sale SC 26.2(a).
[35]Contract of Sale SC 26.2(b).
Insofar as the statement of claim at paragraph 4 refers to GC 26 and is admitted by the defendant, its relevance is in the context of the plaintiff’s pleading of its service of a Default Notice under the contract as required by SC 26.3. The defendant’s counterclaim refers to and specifically relies on SC 5.1, 5.1(b), 5.2(c) and 23.1(f). The effect of SC 5.2 is set out below at [100]. SC 23.1 deals with the Lease Conditions Precedent and subparagraph (f) gives the purchaser the election to rescind the contract. SC 23.1(f) makes clear that if the purchaser rescinds the contract, the contract is at an end upon the receipt by the vendor of the written notice of rescission. The counterclaim makes no reference to a claim or entitlement for default interest pursuant to GC 26.
The pleaded breach at paragraph 24 of the defence and counterclaim was no more than an allegation that the debt was owed because the contract had been lawfully rescinded, and had not been paid. The joint statement of issues did not identify any breach by Merrindale giving rise to contractual remedies, including default interest. Rather the joint statement confirmed there was dispute about only two issues: lawful rescission of the contract and the availability of specific performance if not validly rescinded.
I accept the plaintiff’s argument that the pleadings do not raise a dispute as to an entitlement to default interest under the contract from 26 August 2022. Therefore, it is not necessary to deal with whether the contract, properly construed, contemplates simple or compound interest in the event of default by one of the parties.
The defendant is entitled to pre-judgment interest pursuant to the Supreme Court Act. The parties agreed that an entitlement to interest under the statute arose under s 58 which provides:
58 Interest to be allowed when debts or sums certain recovered
(1) If in a proceeding a debt or sum certain is recovered, the Court must on application, unless good cause is shown to the contrary, allow interest to the creditor on the debt or sum at a rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 or, in respect of any bill of exchange or promissory note, at 2% per annum more than that rate from the time when the debt or sum was payable (if payable by virtue of some written instrument and at a date or time certain) or, if payable otherwise, then from the time when demand of payment was made.
(2) Subsection (1) does not authorise the computation of interest on any bill of exchange or promissory note at a higher rate than the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 if there has been no defence pleaded.
(3) A debt or sum payable or a date or time is to be taken to be certain if it has become certain.
It is helpful to also set out s 60 of the Supreme Court Act to understand the submissions that have been made:
60       Interest in proceedings for debt or damages
(1) The Court, on application in any proceeding for the recovery of debt or damages, must, unless good cause is shown to the contrary, give damages in the nature of interest at such rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 as it thinks fit from the commencement of the proceeding to the date of the judgment over and above the debt or damages awarded.
(2)       Nothing in this section—
(a)       authorises the granting of interest on interest;
(b) applies in relation to any sum on which interest is recoverable as of right by virtue of any agreement or otherwise;
(c) affects the damages recoverable for the dishonour of a negotiable instrument;
(d) authorises the allowance of any interest otherwise than by consent on any sum for which judgment is entered or given by consent;
(e) applies in relation to any sum on which interest might be awarded by virtue of section 58 or 59; or
(f) limits the operation of any enactment or rule of law which, apart from this section, provides for the award of interest.
(3)If the damages awarded by the Court or jury include or if the Court in its absolute discretion determines that the damages awarded include any amount for—
(a) compensation in respect of liabilities incurred which do not carry interest as against the person claiming interest;
(b) compensation for loss or damage to be incurred or suffered after the date of the award; or
(c) exemplary or punitive damages—the Court must not allow interest in respect of any amount so included or in respect of so much of the award as in its opinion represents any such damages.
The defendant’s first written submissions did not articulate a basis upon which compound interest was payable under s 58. These initial submissions sought interest calculated on the sum demanded. While mentioning that s 58 lacked a prohibition on the payment of statutory interest on interest, that submission did no more than assert that the defendant was not confined to statutory interest on the deposit amount of $4,000,000 but was also entitled to interest on the Deposit Interest of $11,084.54 that had accrued at the time of demand for payment, and, as discussed below, on interest accrued since that time.
The correspondence from AIL to Merrindale that followed those submissions set out the calculation of the defendant’s entitlement to interest under s 58.[36] Schedule 1 accompanying that letter calculated interest on a compounding basis. No explanation was provided as to why the defendant believed it was entitled to statutory interest calculated on this basis. In response, the plaintiff addressed the assumption in the correspondence by citing David Leahey.[37]
[36]Letter from NRF to HWLE dated 12 March 2024 which forms part of exhibit bundle RCJ-1 of the Affidavit of Rebecca Caroline Jaffe affirmed on 15 March 2024.
[37]Letter of 15 March 2024, SCB 118; David Leahey (n 32).
The defendant’s reply submissions did not enlighten as to an argument in favour of compound interest as of right, submitting only that the assumptions upon which the calculations were based, including the entitlement to compound interest, were sound.[38] Finally by letter of 21 March 2024 to Merrindale, the defendant’s lawyers addressed the question of an entitlement to compound interest, asserting that as a matter of discretion, interest on a compound basis may be awarded if the justice of the case requires it. The letter submitted that the application of compound interest is appropriate because it is:
‘consistent with the parties’ provision for Deposit Interest to be applied, and the standard practice of holding deposits in real estate transactions.’[39]
[38]Defendant’s Reply Submissions dated 21 March 2024, [15].
[39]Letter from NRF to HWLE dated 21 March 2024, annexed to the Defendant’s Reply Submissions dated 21 March 2024.
The defendant relied on Victorian WorkCover Authority v Esso Australia Ltd ('Victorian WorkCover Authority v Esso’)[40] in support of its submissions on the operation of s 58. The relevant question considered by the High Court in that case was whether the claim for indemnification under statute was the recovery of ‘debt or damages’ attracting s 60 of the Supreme Court Act. Noting that s 60(2)(e) specifically provides that nothing in s 60 applies in relation to any sum on which interest might be awarded by virtue of ss 58 or 59, the Court made two references to those sections. The first was an observation about the different legislative history in Victoria of ss 58 and 59 on the one hand and s 60 on the other. That history had been traced by McInerney J in The City Mutual Life Assurance Society v Giannarelli (‘Giannarelli’)[41] and by Callaway J in Braeside Bearings Pty Ltd v H J Brignell & Associates.[42] Identifying those different histories the plurality in Victorian WorkCover Authority v Esso observed:
The result is that, in a case to which s 58 applies, the prohibition in par (a) of s 60(2) upon the granting of interest upon interest does not apply.[43]
[40](2001) 207 CLR 520 (‘VWA v Esso’).
[41][1977] VR 463 (‘Giannarelli’).
[42][1996] 1 VR 17.
[43]VWA v Esso (n 41) 532 [26] citing Giannarelli (n 42), 468.

The ability to order interest under s 58 on interest included under a debt or sum certain addresses a different issue than the rate at which that statutory interest is calculated. That difference is well illustrated by the facts of Giannarelli. In that case, McInerney J dealt with an appeal against a decision refusing to set aside judgments entered in default of appearances. The claims upon which default judgments were obtained were for interest owing on loans made to the defendants. The claimed sums were two quarterly interest instalments owing, in total a sum of $11,200. Judgment was entered for amounts in excess of this sum because interest under the Supreme Court Act was added. An application had been brought to set aside the judgments for irregularity as they were for an amount greater than that to which the plaintiff was entitled, because they impermissibly allowed for interest upon interest. That application had been refused. The refusal was then appealed.
In this context His Honour traced the history of the then applicable provisions of the Supreme Court Act, ss 78 and 79 on the one hand and s 79A on the other. Sections 78 and 79 were the predecessors to the current ss 58 and 59, and s 79A a predecessor of s 60. Sections 78 and 79 were based upon two provisions in the Common Law Procedure Act 1833, called by some Lord Tenterden’s Act. The English provisions, upon which the Supreme Court Act sections were based, had been interpreted narrowly which restricted the availability of statutory interest. As a result the English provisions had been repealed in 1934 and a new statutory provision enacted. As McInerney J said, the effect of the repeal and the enactment of a new provision was that, in England:
…in any proceedings in any court of record for the recovery of any debt or damages, the court was given a discretionary power to award interest for the whole or any part of the period between the date when the cause of action arose and the date of judgment.[44]
[44]Giannarelli (n 42), 466.
By contrast, McInerney J noted that Scottish courts had allowed interest on liquid debts as a matter of course from service of proceedings and as a general rule from when payment was first requested when it fell due. Separate legislation in Scotland provided courts with discretionary power to award interest on damages.
All of this was pertinent to the changes introduced in 1962 in response to the Chief Justice’s Law Reform Committee report. That report concluded that the situation in Scotland was preferable to that in England. It recommended that the existing provisions remain in force with amendments that removed the restrictive interpretation, and that a special provision should be made for awarding interest in respect of time from the commencement of proceedings. As a result, ss 78 and 79 were amended and s 79A was introduced dealing with ‘actions for debt or damages’ which allowed a judge to award damages in the nature of interest from the commencement of a proceeding. Section 79A specifically did not authorise an award of interest on interest.
Returning to the situation before the Court, His Honour in Giannarelli concluded that the judgment sum fell within s 78 and not s 79A, so that statutory interest was permitted on the debt that was itself interest.[45] However, at that time statutory interest could not be ordered by the Prothonotary and so the judgments were irregular.
[45]Giannarelli (n 42), 468.
By analogy, under s 58, Giannarelli would entitle the defendant to statutory interest on the interest earned on the deposit. Neither that case, nor Victorian WorkCover Authority v Esso which referred to it, is authority for the proposition that s 58 provides for statutory interest calculated on a compound basis.
In Victorian WorkCover Authority v Esso, the plurality discussed the distinction between s 60 applying to actions for ‘debt or damages’ and s 58 applying to ‘debt or sums certain’. The different legislative histories was one matter bearing on the proper construction of s 60. Another was the historic distinction between an action for debt and an action in assumpsit. Nothing was said by the Court that would suggest that interest on a debt under s 58 would be calculated on a different basis to interest on a debt calculated under s 60. Both are considered to be an award of interest that is in the nature of damages.[46] The beneficial purposes of the interest provisions are to provide for an award of interest to compensate those who need to commence proceedings to recover the sum owing and who have been kept out of the use of that money, to deter delay by judgment debtors and to encourage realistic assessments of debtors to potential liability.[47]
[46]Giannarelli (n 42), 467, citing Coane and Grant v Thomas Bent Land Co (1891) 17 VLR 198.
[47]VWA v Esso (n 41), 546 [69] (Kirby J); Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (No 3) [2003] VSC 244, [61] (‘Johnson Tiles’).
The observations of Tadgell J in David Leahey are a convenient starting point when specifically looking at s 58. His Honour, while joining with McInerney J in having some puzzlement about the reference to ‘recovery of debt’ in s 60 and ‘a debt recovered’ in s 58, concluded that ss 58 and 60 are not intended to overlap and the amount recovered by the plaintiff in that case fell within s 58 and not s 60.[48] As to the rate of interest, the plaintiff sought compound interest on the basis that s 58 did not deny such a basis and that it would better compensate the plaintiff for being denied the receipt of the funds. His Honour said:
It by no means follows, because s 60(2)(a) does not apply, that s 58 authorises or even contemplates an award of compound interest. The general rule is that compound interest will not be allowed except where there is an agreement, express or implied, to pay it or where the debtor has employed the money in trade and has presumably earned it, or unless its allowance is in accordance with a usage of a particular trade or business. It is unnecessary to decide whether an award of compound interest under s 58 could ever properly be made. It is difficult, however, to suppose that the section, in conferring a prima facie right to interest, and in referring to the rates fixed under the Penalty Interest Rates Act and that Act itself, are not both concerned with interest calculated on a simple and not a compound basis. Even if compound interest could be awarded under s 58 I should not be prepared to award it unless the necessity to do so in order to achieve a just result were demonstrated.[49]
[48]David Leahey (n 32), 381.
[49]Ibid 383 (citations omitted).
Like Tadgell J, it is difficult to see that in conferring a prima facie right to interest, s58 operates differently to s 60. In my view, s 58 properly construed provides for simple interest. The important difference is that where interest is awarded under s 58, there is no bar to that award being applied to interest that had otherwise formed part or all of the sum owed or demanded. It is quite a different thing to say that, because awarding compound interest necessarily involves giving interest on interest, s 58 should be construed as authorising interest on that basis. The defendant’s submissions did not address why the words of the section should, as a matter of construction, permit compound interest as a matter of principle.
I am particularly mindful that the Penalty Interest Rates Act itself contains a penalty component over and above the compensatory function of an award of interest.[50] The compensatory purpose of an award of interest applies to interest under both s 58 and s 60.
[50]See Penalty Interest Rates Act 1983 (Vic) s 2(2)(b) and (3); Johnson Tiles (n 48) [60]–[65].
In those circumstances on its proper construction s 58 does not permit compound interest.
Ultimately the defendant’s position, as set out above at [83], seems to accept that compound interest – if available at all – was a matter of discretion rather than something provided by the terms of s 58 itself as had been initially assumed. The general rule applying to allow compound interest under s 60 referred to by Tadgell J is expressly preserved by s 60(2)(f). Section 58 makes no express preservation of the general law in respect of awarding interest. Therefore any discretionary power to award statutory interest under s 58 other than on a simple basis at a rate not exceeding the penalty interest rate must find its origin elsewhere.
In any event, were I to have a discretion in the matter, I would not accept that an application of compound interest is consistent with the standard practice of holding deposits in real estate transactions. The defendant led no evidence on the existence of such a practice and it is a matter which the plaintiff disputes. Nor do I consider that the dictates of justice require such an order.
The final issue to be addressed is how to account for the continuing interest that has accrued since the demand for payment upon rescission. The defendant says that as defined in the contract, Deposit Interest is a continuing contractual entitlement separate to any award of statutory interest. It submits that the interest earned on the deposit is payable on top of any award of statutory interest. The plaintiff submits that the interest earnt on the deposit while it continued to be held by the independent stakeholder is an amount that is applied to the interest payable to the defendant.
The present situation is quite different from that where debtor party holds the money in dispute, or where a party delays settlement with a creditor, and has the ongoing benefit of its use. In this situation, the deposit was held prior to termination of a contract by an independent stakeholder pending completion. This is governed in this contract by SC 5.2.
It is helpful to set out the relevant parts of the Special Condition dealing with the investment of the deposit.
5.2 Investment of Deposit
(a)The purchaser authorises the vendor’s legal practitioner, without imposing any obligation on the vendor’s legal practitioner, to hold the Deposit in an interest bearing trust account or an interest bearing trust account term deposit with a bank nominated by the vendor’s legal practitioner.
(b) Subject to Special Condition 5.2(c), any Deposit Interest will accrue for the benefit of the vendor.
(c) If the purchaser lawfully rescinds this contract the purchaser is entitled to the Deposit Interest.
(d) The vendor and the purchaser authorise and direct the vendor’s legal practitioner to pay the Deposit Interest to the party entitled to it at the settlement date or immediately following lawful recission or termination of this contract (whichever occurs first).
The resolution of the dispute in this case determined which of the events in subparagraph (d) occurred first – settlement or rescission - and with it, the associated question of whether the Deposit Interest was payable to the vendor under sub-condition (b), or to the purchaser under sub-condition (c). The contract is silent as to an entitlement by either party to interest earnt after the conclusion of the contract by one of the three circumstances in sub-condition (d).
This Court’s declaration that the contract was validly rescinded means the contract came to an end as a result of the purchaser rescinding it. It follows that the defendant was kept out of funds to which it was entitled. It does not follow that interest on the funds held by the independent stakeholder continued to be Deposit Interest, as defined, after the contract had concluded. The contractual requirement to pay Deposit Interest immediately on concluding the contract supports a construction that Deposit Interest does not continue to accrue after that time.
The fact that the deposit continued to be held by a neutral stakeholder pending resolution of the dispute has bearing on whether the interest actually earnt forms part of the statutory interest calculation. Were the funds not held by an independent stakeholder but by a debtor, who earned interest on the deposit for himself, the creditor would be compensated by the right to statutory interest, not by recovery of interest actually earnt for the duration of the dispute. Because the deposit continued to be held by an independent stakeholder, and accrued interest that was not used to benefit either party pending resolution of the dispute, I consider it appropriate that the interest earnt is applied toward the statutory interest calculation that is owed. This means that interest earnt on those funds is to be applied towards the interest entitlement of the party entitled to the deposit on conclusion of the contract.
As the additional Deposit Interest is applied towards the interest awarded under s 58, which is awarded on a simple basis, it is not appropriate to allow for interest on this sum.
Therefore, the plaintiff is entitled to take account of interest already paid by it to the defendant, over and above the Deposit Interest that accrued under the contract, in calculating the statutory interest that it is obliged to now pay. Looked at from the opposite perspective, the defendant is not entitled to s 58 interest on the Deposit Sum and, in addition, the interest actually earned on the funds after conclusion of the contract.
As a result the defendant is entitled to statutory interest at 10% under s 58 of the Supreme Court Act on the sum of $4,011,084.54. The parties are agreed that that 10% sum owed is $615,399.27. The defendant is not entitled to compound interest on the additional Deposit Interest. The sum of $225,068.44 already paid by Merrindale on 7 March 2024 is applied toward the statutory interest owed to AIL. Therefore the remaining interest amount owing is $390,330.83.

[2024] VSC 222

8 May 2024