MindChamps Preschool Limited v M & W Zaki Pty Limited ATF the Zaki Group Trust (No. 2)

[2022] NSWSC 1331

Supreme Court

New South Wales

Medium Neutral Citation:

MindChamps Preschool Limited v M & W Zaki Pty Limited ATF the Zaki Group Trust & Ors (No. 2) [2022] NSWSC 1331

Hearing dates:

27 September 2022

Date of orders:

30 September 2022

Decision date:

30 September 2022

Jurisdiction:

Equity

Before:

Slattery J

Decision:

The first, second and third defendants are ordered to pay 60% of the plaintiff’s costs of the proceedings, including the costs of the motions for special costs orders. No costs order made between the plaintiff and the fourth and fifth defendants. Judgment for interest entered in the sum of $143,500.28.

Catchwords:

COSTS – offer of compromise and Calderbank offer – motions for special costs orders – apportionment of costs – plaintiff sues five defendants in contract and for misleading and deceptive conduct – plaintiff succeeds in contract against the first, second and third defendants – plaintiff fails against all defendants in the misleading and deceptive conduct claim – claims against fourth and fifth defendants dismissed – plaintiff makes offer of compromise and then a Calderbank offer to all defendants to resolve proceedings – offers were open to acceptance only by all defendants – offers not accepted – whether the judgment the plaintiff obtained against the first, second and third defendants was no less favourable than the offers not accepted by them – consequences of the plaintiff’s failure on the misleading and deceptive conduct claim – whether the misleading and deceptive conduct claim was clearly dominant or severable from the contract claim – whether the final costs order should differentiate between the outcomes of the contract claim and the misleading and deceptive conduct claim.

Legislation Cited:

Civil Procedure Act 2005, s 100

Uniform Civil Procedure Rules 2005, Part 20, Division 4

Cases Cited:

Choo v Zhang (No. 2) NSWCA 301

MindChamps Preschool Limited v M & W Zaki Pty Limited ATF the Zaki Group Trust & Ors

[2022] NSWSC 881

Wardle v Agriculture and Rural Finance Pty Limited [2012] NSWCA 388

Waters v PC Henderson Australia Pty Ltd [1994] NSWCA 338

Category:

Consequential orders

Parties:

Plaintiff: MindChamps Preschool (Worldwide) Pty Ltd
First Defendant: M & W Zaki Pty Ltd ATF the Zaki Group Trust ABN 99233987815
Second Defendant: Child Care Income Protection Pty Ltd ATF The KZ Trust ABN 94358741310
Third Defendant: Mark Zaki
Fourth Defendant: Maged Zaki
Fifth Defendant: Kerelos Zaki

Representation:

Counsel:
Plaintiff: M. Izzo SC; B. Hancock
First to Fifth Defendants: R. Newlinds SC; A. Horvath

Solicitors:
Plaintiff: Dentons Australia Ltd
First to Fifth Defendants: Hitch Advisory

File Number(s):

2017/00063546

Publication restriction:

No

Judgment

1. This is the Court’s second judgment in these proceedings. In the Court’s first judgment the Court dismissed the plaintiff’s claim for misleading and deceptive conduct against the defendants but gave the plaintiff relief in contract against the first, second and third defendants, requiring them to repay a deposit of $500,000 to the plaintiff within 28 days: MindChamps Preschool Limited v M & W Zaki Pty Limited ATF the Zaki Group Trust & Ors [2022] NSWSC 881 (“the first judgment”). This judgment should be read together with the Court’s principal judgment. Events, matters and persons are referred to in both judgments in the same way.

2. In the first judgment (at [308]) the Court observed that because the plaintiff, MindChamps had been unsuccessful on an issue in its case involving substantial evidence, whether a special costs order may be warranted. Moreover because there might have been Calderbank letters to consider, the Court gave leave to the parties to apply by motion for a special costs order within 28 days.

3. The plaintiff and the defendants each filed motions pursuant to the Court’s leave. The defendant’s filed a motion on 29 July 2022 seeking orders for the dismissal of the proceedings against the fourth and fifth defendants, that the plaintiff pay the fourth and fifth defendant’s costs of the proceedings on the ordinary basis and that the first, second and third defendants pay 33 per cent of the plaintiff’s costs of its claim against those defendants (excluding any of the plaintiff’s costs of its claim against the fourth and fifth defendants).

4. MindChamps filed a motion on 4 August 2022 seeking orders to take advantage either of an offer of compromise served on the defendants on 13 September 2017 or a Calderbank letter served on the defendants on 29 April 2021. In that motion MindChamps sought orders that the first, second and third defendants pay all the plaintiff’s costs of the proceedings on the ordinary basis up to and including 13 September 2017 (and in the alternative 28 April 2021) and thereafter on the indemnity basis.

5. The motions filed and the parties’ submissions in support of them join issue on two main questions: whether on the basis of the offer of compromise or the Calderbank offer costs should be awarded for any period on the indemnity basis; and, what order the Court should make to reflect the outcome in the first judgment, where MindChamps succeeded against the first, second and third defendants in contract but failed against all defendants in the misleading and deceptive conduct claim.

6. These reasons will deal with each of those questions in turn.

The Offer of Compromise and the Calderbank Issues

7. The defendants argue that both the plaintiff’s offer of compromise dated 13 September 2017 and the plaintiff’s Calderbank offer dated 29 April 2021 were ineffective. The plaintiff contests this argument.

8. The plaintiff made an offer of compromise on 13 September 2017. The offer of compromise was sent to the solicitors for the defendants in a letter which provided as follows:

“We enclose, by way of service, Offer of Compromise.

If for any reason the attached Offer of Compromise is ineffective or invalid, it nonetheless constitutes an offer which is made without prejudice save as to costs. In that event, we shall rely upon the principles referred to in cases such as Calderbank v Calderbank.”

9. Enclosed with the letter was a form of offer of compromise in accordance with Uniform Civil Procedure Rules 2005 (“UCPR”), Part 20, Div 4 which in its operative part provided as follows:

“The Plaintiff offers to compromise the whole of the Plaintiff’s claim in these proceedings in accordance with Division 4 of Part 20 of the Uniform Civil Procedure Rules 2005 on the following terms:

1.   The Defendants pay to the Plaintiff the amount of $450,000.00.

2.   This offer is made on a without prejudice basis.

3.   This offer is open for acceptance for 28 days after the date on which it is made.”

10. The defendants did not accept the offer of compromise within 28 days of 13 September 2017. Instead on 6 November 2017 the defendants’ solicitors wrote to the solicitors for the plaintiff in the following terms:

“We note that your client’s Offer of Compromise failed to comply with Rule 20.26 as it omitted to identify any proposed order for the disposal of the claim as required by Rule 20.26(2)(a).

Accordingly, it is our client’s position that your client’s Offer of Compromise does not afford your client any benefit under the Rules should it seek to rely upon same at any stage in these proceedings.

In any event the commercial sum offered is rejected by our client.

In the event that your client seeks to rely upon the Offer if Compromise, our client will tender this letter to the Court.”

11. Between late 2017 and early 2021 there was significant delay in getting these proceedings ready for hearing. The plaintiff changed solicitors several times and defaulted on orders for the service of evidence and did not provide discovery in a timely way. The parties frequently came before the Registrar in Equity on contested directions, hearings, and motions. The plaintiff served an Amended Statement of Claim in March 2020.

12. Finally, as the matter approached a hearing listed in mid July 2021, the plaintiff made a Calderbank offer to the defendants dated 29 April 2021.The letter pointed out that the plaintiff maintained the defendants would be found liable to pay the $500,000 which the plaintiff claimed was owing as a deposit on the contract. The letter set out some reasoning explaining why MindChamps believed that the defendants would be found liable to repay the deposit and then concluded with an offer which was said to be made in accordance with the Calderbank principles. The offer was said to be open for acceptance for 28 days, namely up to 14 May 2021. The offer was not accepted. The offer was as follows:

“Notwithstanding the above, our client appreciates there is a risk with all litigation and in an attempt to avoid a contested hearing of this matter where the costs of the proceedings far outweigh the quantum of the claim. Our clients’ costs, including disbursements, to date are at least $548,578 (incl. GST). We are therefore instructed that our clients are prepared to accept payment of $450,000 in full and final settlement of this dispute. This includes GST and costs.”

13. The parties’ submissions canvassed several issues as to the validity of the offer of compromise and the Calderbank letter. The defendants submitted there had not been compliance with UCPR, r 20.26(ii). The defendants also submitted that the offer of compromise was not effective as a Calderbank letter because it did not include any reasoning and it did not state whether the offer was inclusive or exclusive of costs. The defendants also submitted that the 29 April 2021 Calderbank letter was not effective for reasons that included that the offer was not a genuine compromise of its claim, given costs orders already made in the defendants’ favour during the proceedings.

14. It is not necessary for the Court to determine the merits of these various arguments. A common feature of the offer of compromise and the Calderbank offer allows the Court to determine their effectiveness. The offer of compromise clearly states, “the defendants pay to the plaintiff the amount of $450,000”. It does not provide any scope for acceptance by some defendants. It envisages that the payment will “compromise the whole of the plaintiff’s claim in these proceedings”, which must mean the whole of the plaintiff’s claim against all defendants.

15. The Calderbank letter is couched in similar language. When the Calderbank letter says that the plaintiff is “prepared to accept payment of $450,000 in full and final settlement of this dispute” that clearly means settlement of the whole of the dispute against all defendants.

16. On their proper construction the offer of compromise and the Calderbank offer were both ineffective. They were only open to be accepted by all the defendants. They could not have been accepted by only the first, second and third defendants. The plaintiff could have refused purported acceptance by those three defendants. And any acceptance by those three defendants would have left open the plaintiff’s claims against the fourth and fifth defendants. The situation here is not dissimilar in that in Choo v Zhang (No. 2) NSWCA 301, where an offer of compromise was found ineffective, where (at [20] and [21]) an unaccepted offer of compromise was made to two the defendants and where the plaintiff was successful against only one of them.

17. Had either of the offers been accepted by all defendants in this case, the fourth and fifth defendants would have become jointly liable to pay the plaintiff the sum of $450,000 in respect of the claim that was ultimately dismissed against them. In respect of the Calderbank letter, it could hardly be said that it was unreasonable of the defendants to reject an offer that would have left the fourth and fifth defendants in this position.

18. In respect of the offer of compromise, it cannot be said that the judgment outcome that the plaintiff achieved was no less favourable to the plaintiff than the offer the plaintiff rejected, because the plaintiff did not obtain a judgment against all defendants that exceeded the amount for which the plaintiff offered to settle.

19. The Court will therefore not make an indemnity costs order in favour of the plaintiff for any period.

MindChamps’ Failure Against the Fourth and Fifth Defendants

20. The Zaki parties correctly contend that these proceedings should be dismissed against the fourth and fifth defendants. But MindChamps resists any order that the plaintiff pay the fourth and fifth defendant’s costs of the proceedings or that the first, second or third defendants should pay anything less than all MindChamps’ costs of the proceedings on the ordinary basis.

21. Two related issues arise: whether costs orders should be made in favour of the fourth and fifth defendants and so, in what amount; and if not, what costs orders should be made between the plaintiff and the defendants.

22. It is in theory possible for the Court to make an order in favour of the fourth and fifth defendants for their equal proportionate share of the joint costs of the defendants, in addition to their separate costs referable to defending the plaintiff’s claim against them: Wardle v Agriculture and Rural Finance Pty Limited [2012] NSWCA 388, per Campbell JA [46] – [48]. But that risks the unnecessary expense at a future costs assessment of attempting to isolate costs referable to the fourth and fifth defendants defending the claim against them and then adding those to a calculation of the common defence costs of all defendants.

23. A simpler and more cost-effective approach is attractive. The plaintiff’s failure on the misleading and deceptive conduct claim can be reflected in orders encompassing all defendants that do not invite complexity at a costs assessment and which can be structured to be fair.

24. A very substantial part of the active evidentiary contest in these proceedings related to the misleading and deceptive conduct claim. A strong contest took place about what meetings took place between the parties before the signing of the Term Sheet on 1 September 2015. The differences between the parties on these contested factual issues were great and required to be resolved and could only be sensibly resolved through extensive cross-examination. The Court is confident that the proceedings would have been several days shorter if the misleading and deceptive conduct claim had not been included in the plaintiff’s claim.

25. MindChamps sought to deflect this conclusion by pointing out that it would have been necessary for the parties to contest some events before 1 September 2016, even if the misleading and deceptive conduct claim had not been made. That argument can be accepted as far as it goes but the length intensity of the conflict about the events of this earlier period would have been markedly reduced if the misleading and deceptive conduct claim had not been made.

26. This is a case where the Court can say that a group of issues is “clearly dominant or separable” such that it is not appropriate, as it ordinarily would be, to award costs of the proceedings to the successful party without attempting to differentiate between those issues on which the party was successful and those on which it failed: Waters v PC Henderson Australia Pty Ltd [1994] NSWCA 338, per Mahoney JA. Such a differentiation should occur here.

27. The fourth and fifth defendants are principals of the other active defendants. They did not pursue interests in the proceedings that were separate from those other defendants, and they were all represented by the same solicitors. Rather than make any orders for a proportion of defendnats’ costs in favour of the successful fourth and fifth defendants, it is appropriate in these circumstances for the Court to make an order which takes into account the fourth and fifth defendants’ success in an overall order that simplifies the cost assessment process. Here it is not unjust for no costs order to be made in respect of the fourth and fifth defendants. A costs order fairly reflecting the defendants’ success on the plaintiff’s misleading and deceptive conduct claims would be reflected in an order that the first, second and third defendants pay 60 per cent of the plaintiff’s costs of these proceedings.

Conclusion and Orders

28. In [307] of the Court’s principal judgment the Court observed it had not received submissions in relation to the proper calculation of interest, and whether the calculation should be from 16 September 2016 or 16 October 2016. The parties have now agreed that the appropriate date is 16 September 2016 and they have provided a calculation to the Court of interest in accordance with Civil Procedure Act 2005, s 100 for that period of $143,500.28. Judgment for that amount will be entered in addition to the cost orders made in this judgment.

29. The Court must make orders that cover the costs of the present motions. The plaintiff has failed in its motion. The defendants have mostly failed on their motion. The Court has made costs orders that do not reflect either party’s original position. In these circumstances the Court will not make separate orders for the costs of these motions. It is appropriate that the costs of the motions fall in the same way as the costs of the proceedings, and the Court will so order.

30. Accordingly, the Court makes the following orders:

1. Dismiss the plaintiff’s claim against the fourth and fifth defendants.

2. The first, second and third defendants are ordered to pay 60% of the plaintiff’s costs of the proceedings, including the parties’ costs of the motions for special costs orders.

3. Note that there is no order as to costs between the plaintiff and the fourth and fifth defendants upon dismissal of the claim against the fourth and fifth defendants to the intent that the plaintiff and the fourth and fifth defendants will each bear their own costs of their claims between them.

4. Order that interest in the sum of $143,500.28 be paid payable on the deposit of $500,000 the subject of the Court’s orders on 1 July 2022, such interest being calculated from 16 September 2016 up to 1 July 2022.

**********

Decision last updated: 30 September 2022