Midland Metals Overseas Pte Ltd (ARBN 053 006 330) v Powercor Network Services Pty Ltd (ACN 123 230 240) [No 2]
[2019] VSCA 90
•17 April 2019
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2018 0060
| MIDLAND METALS OVERSEAS PTE LTD (ARBN 053 006 330) | Applicant |
| v | |
| POWERCOR NETWORK SERVICES PTY LTD (ACN 123 230 240) [No 2] | Respondent |
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| JUDGES: | TATE JA and ALMOND AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 8 April 2019 |
| DATE OF JUDGMENT: | 17 April 2019 |
| MEDIUM NEUTRAL CITATION: | [2019] VSCA 90 |
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COSTS – Appeal – Successful respondent seeking indemnity costs – Inappropriate process –Disproportionate costs – Calderbank offer – Whether rejection of offer unreasonable – Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority [No 2] (2005) 13 VR 435, applied.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr P G Liondas | marshalls+dent+wilmoth (as town agents for Church & Grace, Solicitors and Attorneys) |
| For the Respondent | Mr C R Brown | Logie-Smith Lanyon |
TATE JA
ALMOND AJA:
On 8 April 2019 this Court (Tate and Whelan JJA and Almond AJA) delivered judgment refusing the application for leave to appeal brought by Midland Metals Pte Ltd (‘Midland’) against Powercor Network Services Pty Ltd (‘Powercor’).[1] The application for leave to appeal was brought in respect of the judgment given by Efthim AsJ setting aside three statutory demands served by Midland upon Powercor.[2] The three statutory demands were made on 12 October 2017 for $9,363.76, $18,727.51 and $84,273.83 relating to three separate orders of cable, respectively, under a contract between the parties for the supply of materials, including cables (‘the contract’).
[1]Midland Metals Overseas Pte Ltd v Powercor Network Services Pty Ltd [2019] VSCA 76 (‘the principal judgment’). These reasons presuppose familiarity with the principal judgment.
[2]Powercor Network Services Pty Ltd v Midland Metals Overseas Pte Ltd (Unreported, Supreme Court of Victoria, Efthim AsJ, 13 April 2018) (‘the Efthim AsJ reasons’).
Efthim AsJ found that there was a genuine dispute between the parties as to whether the relevant cables supplied by Midland complied with a technical specification under the contract, specification ZD056. The dispute was based upon the construction of certain clauses in the contract. In the principal judgment, this Court upheld the determination of Efthim AsJ as to the existence of a genuine dispute between the parties.
At the delivery of the principal judgment, counsel for Powercor, Mr Brown, sought indemnity costs against Midland in respect of the application for leave to appeal. This was resisted by counsel for Midland, Mr Liondas. Both counsel made extensive oral submissions, at the conclusion of which the parties agreed that this Court, constituted by two members of the bench that heard the application for leave to appeal (Tate JA and Almond AJA), would determine the application for indemnity costs based upon the oral submissions made.
An award for costs lies in the discretion of the Court. The basic rule, however, is that costs should follow the event. Mr Liondas accepted that, as Midland had been unsuccessful is seeking to overturn the orders of Efthim AsJ, costs would be awarded against Midland. He did not resist the making of an adverse costs order providing that the order was made on the standard basis and not on an indemnity basis.
Mr Brown identified three separate grounds on the basis of which he urged that an indemnity costs order should be made:
(1) The statutory demand process was inappropriate;
(2) The costs incurred are disproportionate to the claims made by the statutory demands;
(3) A Calderbank[3] offer was made by Powercor which put Midland on notice that indemnity costs would be sought.
[3]Calderbank v Calderbank [1976] Fam 93.
(1) The statutory demand process was inappropriate
The first ground was that the statutory demand process was inappropriate for the agitation of the issues raised. Midland was well aware long before the statutory demands were issued that Powercor contested its obligation to pay the invoices underlying the statutory demands. It must have been no surprise to Midland to find that Efthim AsJ set aside the statutory demands and this Court has agreed.
Mr Liondas responded by observing that the inappropriateness of the process was raised as an issue before Efthim AsJ who did not accept that the process was inappropriate. As Efthim AsJ rejected Midland’s submissions on the construction of the contract, it then became necessary for Midland to seek leave to appeal to ensure that Efthim AsJ’s conclusions on construction did not become determinative for any subsequent trial between the parties.
In the principal judgment we expressed our conclusion that the statutory demand process was inappropriate in the circumstances of this case:
[W]e consider that the approach taken by Midland to pursue recovery of a purported debt by means of the statutory demand mechanism under the Act was precipitate and misconceived. This is a commercial dispute about some (but not all) of the cable delivered by Midland, where the issues were obviously contested at the time the statutory demands were made, where there was no suggestion of an actual or perceived incapacity to pay, and where the amounts involved were (in relative terms) minimal.
In our view, the appropriate course would have been for Midland to issue proceedings, to articulate a statement of its claim and to allow Powercor to articulate a statement of its defence. That course is still open to the parties if the matter cannot be resolved commercially. Necessary discovery and any contest over admissibility can be dealt with in the usual way.[4]
[4]The principal judgment [65]–[66].
Nevertheless, we agree that it became necessary for Midland to seek leave to appeal to ensure it was not precluded from contesting all the issues with respect to the construction of the contract and the compliance of the relevant cables with the technical specifications under the contract.
In the principal judgment we make it clear that we do not read the reasons of Efthim AsJ as doing anything more than acknowledging that there was a genuine dispute as to whether the cables supplied complied with specifications under the contract, which depended upon the proper construction of the contract. The associate judge did not decide or purport to decide any ultimate question on the issue of construction or otherwise.
However, we observe that Powercor did intend, in the absence of the principal judgment, to rely upon what it took to be the associate judge’s final determination in its favour with respect to the construction of the contract. That is, it intended to treat Efthim AsJ’s reasons not as simply concluding that there was a genuine dispute but also as having resolved the dispute as a simple construction point, in accordance with the approach approved in Delnorth Pty Ltd v State Bank of New South Wales.[5] Indeed, during the hearing of the application for leave to appeal, Mr Brown, for Powercor, in response to a question from the bench, acknowledged, after obtaining instructions, that Powercor would seek to rely upon the reasons of Efthim AsJ as precluding further submissions on how the relevant clauses of the contract were to be construed. In other words, if the dispute about the unpaid invoices proceeded to another court , Powercor would rely upon what it described as Efthim AsJ’s ‘finding’ that specification ZD056 applied to the relevant cables. In those circumstances we consider that Midland is correct to submit that it had in effect no option but to seek leave to appeal.
[5](1995) 17 ACSR 379.
We reject the first ground.
(2) The costs incurred are disproportionate
The second ground relied upon by Powercor in support of its application for indemnity costs was that Midland had caused costs to be incurred that were disproportionate to the sums involved. The three statutory demands Midland served on Powercor on 12 October 2017 were, as set out above,[6] demands for comparatively modest amounts. Given Powercor’s status, there was no real risk that payment would not be made, if differences could be resolved, and no risk of insolvency. Powercor relies upon the overriding obligation under s 24 of the Civil Procedure Act 2010 to ensure costs are reasonable and proportionate to the amount in dispute. It also relies upon the court taking into account a contravention of the overriding obligations in making a decision on costs, under s 28:
[6]See [1] above.
24 Overarching obligation to ensure costs are reasonable and proportionate
A person to whom the overarching obligations apply must use reasonable endeavours to ensure that legal costs and other costs incurred in connection with the civil proceeding are reasonable and proportionate to—
(a) the complexity or importance of the issues in dispute; and
(b) the amount in dispute.
…
28 Court may take contravention of overarching obligations into account
(1) In exercising any power in relation to a civil proceeding, a court may take into account any contravention of the overarching obligations.
(2) Without limiting subsection (1), in exercising its discretion as to costs, a court may take into account contravention of the overarching obligations.
Powercor submits that this Court should take account of Midland’s likely contravention of s 24 of the Civil Procedure Act as supporting an award of indemnity costs.
In response Midland submitted that, given that the only option available to it, after Efthim AsJ delivered his reasons, was to seek leave to appeal, any costs incurred have been proportionate to an appellate process.
We agree. We have already accepted that it was appropriate for Midland to come to this court to clarify the character and status of the conclusions reached by Efthim AsJ. In those circumstances, and in the absence of any evidence that, within the context of an appellate process, costs were incurred that were unreasonable or could not be justified as an ordinary part of the process, we reject Powercor’s second ground.
(3) Calderbank offer
The third ground relied upon by Powercor is what it described as the unreasonable rejection by Midland of a Calderbank offer Powercor made to compromise the proceeding. Powercor relied upon an exchange of correspondence between 26 October 2017 and 6 August 2018. It submitted that an offer it made was clear in its terms and was in substance an offer to pay the debt with each party bearing its own costs. Mr Brown conceded, appropriately, in our view, that the duration specified for acceptance was short.
As was observed in Lo v Russell [No 2],[7] the critical question in assessing the impact of a Calderbank offer in the circumstances of a case is whether the party that rejected the offer, or failed to accept it, acted unreasonably:
In exercising the Court’s discretion as to costs following the rejection or non-acceptance of an offer of settlement, the critical question is whether the rejection or non-acceptance of the offer was unreasonable in the circumstances.[8]
[7][2017] VSCA 14.
[8]Ibid [15] (citation omitted).
The factors identified in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority [No 2] (‘Hazeldene’s’)[9] may guide an assessment of unreasonableness. The ‘Hazeldene factors’ are:
[9](2005) 13 VR 435.
(a) the stage of the proceeding at which the offer was received;
(b) the time allowed to the offeree to consider the offer;
(c) the extent of the compromise offered;
(d) the offeree’s prospects of success, assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed;
(f) whether the offer foreshadowed an application for … indemnity costs in the event of the offeree’s rejecting it.[10]
[10]Hazeldene’s (2005) 13 VR 435, 442 [25]. For an application of these factors see, for example, Marriner v Australian Super Developments Pty Ltd [No 2] [2016] VSCA 150.
However, as the Court noted in Lo v Russell [No 2] the Hazeldene factors are not necessarily determinative:
The list of factors set out earlier from the Court’s reasons in Hazeldene’s is not exhaustive; rather, they are matters to which a court considering an application such as that made by the appellants in this case will ordinarily have regard.[11]
[11]Lo v Russell [No 2] [2017] VSCA 14 [15].
In this matter, the relevant correspondence began with a letter from Powercor to Midland dated 26 October 2017 in which, after setting out details seeking to establish that there was a genuine dispute between the parties such that the statutory demands were liable to be set aside under ss 459G and 459H of the Corporations Act 2001 (Cth) (‘the Act’), as indeed they have been, Powercor invited Midland to withdraw the statutory demands and put it on notice that if Powercor was obliged to issue applications to set aside the statutory demands, it would seek indemnity costs. By a further letter dated 29 June 2018, after Efthim AsJ had delivered his reasons, Powercor made a Calderbank offer to resolve the proceeding (‘the Offer’) relevantly, on the following basis:
4. Offer
4.1 [Powercor] offers to resolve the Application for Leave, the Judgment and the underlying dispute on the following basis:
(a) PNS [Powercor] pays Midland $104,041.75 all inclusive. For the avoidance of any doubt the amount offered is inclusive of:
(i) the amounts claimed in Invoices the subject of the Statutory Demands;
(ii) any interest claimed;
(iii) costs of and incidental to the Statutory Demands, the Applications to Set Aside and the Application for leave, including release of the costs orders made in PNS’s favour on 13 April 2018 in the Proceedings; and
(iv) GST.
(b) Payment will be made within 30 days of execution of terms of settlement to give effect to this offer.
...
(d)In consideration for the payment, Midland will release and discharge [Powercor] from all claims, obligations, sums of money, actions, suits, causes of action, proceedings, claims, demands, accounts, costs and expenses whatsoever at law, or in equity or pursuant to statute which Midland now has, could, would or might have against [Powercor], in respect of the subject matter of the Alleged Debts, the Invoices, the Statutory Demands, the Cables and/or the Contract.
(e)Save and except as set out in the following subparagraph, [Powercor] will release and discharge Midland from all claims, obligations, sums of money, actions, suits, causes of action, proceedings, claims, demands, accounts, costs and expenses whatsoever at law, or in equity or pursuant to statute which [Powercor][[12]] now has, could, would or might have against Midland, in respect of the subject matter of the Alleged Debts, the Invoices, the Statutory Demands, the Cables and/or the Contract.
(f)[Powercor] does not release Midland in relation to any materials provided by Midland to [Powercor] (except in relation to the Cables the subject matter of the Statutory Demands), including in relation to defects liability obligations in clause 17.1 of the Contract.
[12]The original letter refers here to ‘Midland’ but this would appear to be a mistake.
As conceded, the time permitted for acceptance of the Offer was short:
5. Duration of offer and further conditions
5.1 The offer contained in this letter:
(a)is open for acceptance in principle in writing until 4:00 pm on 3 July 2018, after which it will lapse; and
(b)will be subject to the parties, a reasonable period after acceptance of this offer in principle, entering terms of settlement to give effect to the agreement. A reasonable period will take into account that [Powercor] has a limited time to respond to the Application for Leave if the matter is not finalised, and contact with the Court may be required to extend the current timetable.
The time for acceptance was ultimately extended to 9:00 am on 4 July 2018.
The letter otherwise made it plain that if the Offer was not accepted, and the application for leave to appeal was no more favourable to Midland than the terms of the offer, Powercor would produce the letter on the question of costs and seek indemnity costs in accordance with the principles in Calderbank v Calderbank[13] and Hazeldene’s.[14]
[13][1976] Fam 93.
[14](2005) 13 VR 435.
Midland responded by letter dated 3 July 2018 stating that it was not able to understand the Offer and therefore it was unable to make an informed decision to accept or reject it:
For (at least) the reasons which follow, Midland is not able to … understand the terms of the Offer, and its commercial consequences, sufficiently to enable it to:
(a) evaluate the Offer; or
(b) determine whether, and if so to what extent, the Offer represents a real compromise of Powercor’s entitlements against Midland.
Accordingly Midland is not able to make any informed decision regarding the Offer and whether Midland should accept the Offer or reject it. In those circumstances, Midland will neither accept nor reject the Offer before the (extended) time by which it may be accepted and the offer will lapse.
Midland specified the reasons that inhibited its understanding of the offer made by Powercor. These particularly focused on the scope of the releases Midland would be expected to give:
Midland has previously notified Powercor that Midland considers it has claims including the following against Powercor ...
(i)A claim arising from Powercor having, during the term of the Contract, purchased from other suppliers goods in respect of which Powercor agreed Midland would be the preferred supplier or secondary supplier. The quantum of this claim depends on the quantum and value of goods which Powercor so purchased which is known to Powercor but not to Midland.
(ii)A claim for the amount of discounted prices allowed by Midland to Powercor in consequence of Powercor having agreed to name Midland as preferred supplier, or secondary supplier, and Midland having done so and having treated Midland as preferred supplier or secondary supplier.
(iii)Claims arising from Powercor having lodged with Midland purchase orders which Powercor did not intend to honor.
These are apparently claims within the expression ‘under the Contract’ as used in the offer ... and accordingly [are to] be released by the terms of Powercor’s Offer.
Mr Liondas, for Midland, submitted in this Court that the uncertainty of the releases placed Midland in a position where it could not properly determine whether to accept or reject the Offer. In particular, he submitted that the release that Midland was invited to grant appeared to be so broad as to encompass all claims Midland might have had under the whole of the contract. As set out above, Midland alleged that Powercor engaged in a breach of contract by failing to treat Midland as a preferred supplier (or secondary supplier) when it had agreed to do so and had benefitted from having so agreed. This was a matter that fell outside the scope of the statutory demand proceedings but appeared to fall within the scope of a claim under the contract.
Midland’s response of 3 July 2018 also queried what ‘inclusive of’ costs meant in the Offer given that they were not quantified; Midland did not understand how it could have liability to Powercor for the costs of the statutory demands (as opposed to the applications for setting aside the statutory demands); and Midland understood that the costs to date for the application for leave to appeal would not be material.
Powercor replied by letter dated 9 July 2018 indicating that a ‘wide release to Midland’s benefit was proposed to give your client comfort the dispute in relation to the subject matter of the proceeding would be finalised by accepting the Offer’. However, it indicated that it was prepared to amend the Offer to modify the proposed release to refer to any claims, obligations, and so on ‘in respect of the subject matter of the Alleged Debts, the Invoices, the Statutory Demands and/or the Cables’. This had the effect that the broad reference to ‘and/or the Contract’ would not be included. Alternatively, Powercor invited Midland to propose the terms of a release that it would be prepared to give and asked whether Midland required more time to consider the Offer. With respect to costs, Powercor clarified that the Offer was made on the basis that ‘neither party would have any further costs liability to the other if the Offer was accepted and terms executed’.
Midland did not propose alternative terms of release.
On 6 August 2018, when preparation relating to the application for leave to appeal was well underway (Powercor having filed its written case on 11 July 2018), Midland responded by letter saying that it still did not understand the Offer. This was because, Midland said, there were several matters in issue between Midland and Powercor including the statutory demands but also including the further claims Midland had previously notified under the contract. The letter said:
Powercor is on notice that Midland considers that Midland has substantive claims against Powercor separate from, and additional to, the amounts claimed in the statutory demands (and notwithstanding that Powercor may not presently ascribe any … value to those claims). Powercor is seeking a release from those claims.
The letter also expressed the view that, by contrast with the breadth of the release Midland was expected to give Powercor under the Offer, the release that Powercor was to give Midland under the Offer was very narrow and limited:
Conversely, the release proposed in favour of Midland, which your Letter asserts to be a ‘wide release’, is in fact quite limited (to the point of being illusory), including because:
(a) its definition is such that it applies only to the subject matter of the stated topics (it is not general, or, indeed, even general with exceptions); and
(b) whilst it applies to the ‘Contract’ (namely, the master supply agreement), the proposed release does not extend to [any] liability (other than for defective product) under the individual contracts for supply which arose between Midland and Powercor each time Powercor lodged a purchase order with Midland; and
(c) Midland is aware of no claim against it, and Powercor has not notified Midland of any claim against [it], to which the proposed release would apply or of any circumstances which could give rise to a claim against Midland to the proposed release could apply.[15]
[15]Citations omitted.
The 6 August 2018 letter went on to note that Powercor’s letter of 9 July 2018 appeared to offer to amend the earlier offer from Powercor after it had expired. Midland also requested further clarity from Powercor about a number of the aspects of the Offer. In particular, the letter stated that the Offer, if accepted, would leave the judgment of Efthim AsJ on the interpretation of provisions of the contract on foot as a determination of the Supreme Court.
In all the circumstances we consider that it was not unreasonable for Midland not to accept, or to reject, the Offer.
While the Offer was made at a suitable stage in the proceeding, and the extent of the compromise with respect to the unpaid invoices was considerable (namely, substantively, to pay the debt) as was the foreshadowing of an application for indemnity costs, there was, in our view, uncertainty about the breadth of the proposed release that Midland was being invited to grant. Midland requested clarification of the scope of that proposed release by letter dated 3 July 2018, before the expiry of the Offer. The first purported clarification did not occur until 9 July 2018. This had the effect that the Offer, which had a short duration even when extended, lapsed on 9:00 am on 4 July 2018 without the terms of the Offer being clear. The subsequent correspondence was set against the background of the Offer having lapsed. That subsequent correspondence amounted to further requests by Midland for clarification and invitations from Powercor for Midland to propose a counter-offer which never eventuated. There was no subsequent offer made.
We consider that the terms of the Offer lacked clarity in the breadth of the release being sought from Midland and this was not resolved before the Offer lapsed. We consider that, in those circumstances, it was not unreasonable for Midland not to accept, or to reject, the Offer.
Conclusion
As none of the grounds on which the application for indemnity costs has been successful, it follows that Powercor’s application for indemnity costs should be refused.
The Court has already ordered that Midland’s application for leave to appeal is refused. Midland will also be ordered to pay Powercor’s costs on a standard basis.
The orders of the Court will be that the applicant pay the respondent’s costs of the application for leave to appeal on a standard basis.
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