Olympic Opal Pty Ltd v The Noodle Box Pty Ltd - [2011] SADC 110

District Court of South Australia

(Civil)

OLYMPIC OPAL PTY LTD v THE NOODLE BOX PTY LTD

[2011] SADC 110

Judgment of His Honour Judge Soulio (ex tempore)

15 July 2011

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - PARTIES

Plaintiff compromised action with defendant - defendant sued third parties and compromised action - third parties failed to comply with terms of settlement deed - judgment in default of defence - assessment of damages.

PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE

Application by defendant for order that costs be paid on indemnity basis - application for award of costs on a lump sum basis - principles - conduct of third parties - application granted.
District Court Rules r 264, 265, referred to.
Knowles v Roberts (1888) 38 ChD 263; Roberts v Gippsland Agriculture and Earth Moving Contracting Co Pty Ltd [1956] VLR 555; Greenslade v Commissioner of Taxation (1978) 19 SASR 474; Jardon Pty Ltd v Kephala [1992] SASC S3760 (unreported, White J), 18 December 1992; Cretazzo v Lombardi (1975) 13 SASR 4; Packer v Meagher [1984] 3 NSWLR 486; Singleton v Macquarie Broadcasting Ltd (1991) 24 NSWLR 103; Colgate-Palmolive Company Pty Ltd v Cussons Pty Ltd (1993) 46 FCR; Kenneally v Pouras & Ors [2007] SASC 303; Sunburst Properties Pty Ltd (In Liq) v Agwater Pty Ltd & Ors (No2) [2005] SASC 293; Flinders Diamonds Ltd v Tiger International Resources Incorporated & Ors (No2) (2006) 244 LSJS 435; TGM Civil Pty Ltd v Resourceco Pty Ltd (No2) [2008] SADC 109; Leary v Leary [1987] 1 All ER 261; Smoothpool Nominees Pty Ltd & Anor v Pickering & Ors [2001] SASC 131; Eat Media Pty Ltd v Mulready Media Pty Ltd (No2) (2010) 267 ALR 573; Cornwall & Ors v Rowan (No4) (2006) 244 LSJS 183, considered.

OLYMPIC OPAL PTY LTD v THE NOODLE BOX PTY LTD
[2011] SADC 110

Background

The plaintiff is the registered proprietor of certain premises. On 21 December 2004 the plaintiff leased the premises to the defendant for a period of five years, subject to rights of renewal, at an initial rental of $52,000 per annum.
Consistent with the terms of the lease, and with the consent of the plaintiff, the defendant granted a licence to use the premises to one of its franchisees, the first third party. The second and third third parties provided guarantees in relation to the franchise agreement, and are thereby guarantors of the first third party’s liability to the defendant.
Pursuant to the franchise agreement, the first third party was obliged to make payments pursuant to the lease, and failed to do so. The premises fell vacant during the term of the lease. The plaintiff re-advertised the premises, and ultimately was able to attract a new tenant. The plaintiff however suffered losses and sued the defendant. The defendant in turn joined the third parties.
Ultimately the plaintiff and defendant compromised the plaintiff’s claim, and entered into an agreement whereby the defendant agreed to pay the plaintiff the sum of $85,000 inclusive of interest and costs, in satisfaction of the plaintiff’s claim, but did so without making any admission of liability.

Compromise of Third Party Action

By its third party action, the defendant sought, pursuant to the terms of the franchise agreement and the guarantees, to recover the amount of $85,000 from the third parties. The third parties initially denied liability. They did not file a defence. They entered into negotiations with the defendant, compromised the action, and entered into a settlement deed whereby the third parties agreed to pay the defendant the sum of $50,000 inclusive of interest and costs, in satisfaction of the defendant’s claim against them.
The terms of the settlement deed included a requirement that the third parties pay to the defendant the sum of $10,000 on or before 1 April 2009, and the balance of $40,000 in 16 equal monthly repayments of $2,500, with the first payment due on 1 May 2009 and the final payment due on 1 August 2010.
On that basis the defendant and third parties agreed that the defendant’s third party action be adjourned until after 1 August 2010 to enable the terms of settlement to be carried out. The action was in fact adjourned to a directions hearing on 2 September 2010. The third parties paid the initial sum of $10,000 and made eight further instalment payments, thereby paying the defendant a total of $30,000 pursuant to the settlement deed. The third parties failed to make the remaining eight payments and the sum of $20,000 is said to remain outstanding.

Action on the Compromise

Clause 3 of the settlement deed provided that in the event of the third parties failing to pay all or any part of the settlement sum as and when it fell due, the defendant would be at liberty to have the District Court proceedings called on for further directions. At the directions hearing on 2 September 2010 the defendant appeared, but the third parties did not. On 23 November 2010, the third parties’ solicitors were granted leave to withdraw from the file.
On 25 January 2011 the defendant sealed a judgment in default of defence, pursuant to which the defendant was entitled to recover from the third parties, its damages to be assessed. On 31 March 2011 a master of this Court ordered that the matter be referred to a judge of this Court for trial so that the defendant’s damages could be assessed. The defendant was required to notify the third parties of the orders and of the listing of the matter for trial. I am satisfied, on the basis of affidavit evidence, that there has been compliance with the requirement to notify.
Pursuant to the settlement deed, the rights and obligations as between the defendant and the third parties which were the subject of the defendant’s third party action, were merged into the rights and obligations created between the defendant and the third parties by virtue of the settlement deed.[1]
[1] Knowles v Roberts (1888) 38 ChD 263 at 272.
In Roberts v Gippsland[2] the Court held that an agreement for the compromise of an action may be enforced on a motion for judgment in the action itself in accordance with the agreed terms where the action was still on foot, not having been stayed or discontinued or struck out or its normal progress otherwise interrupted. The court further held that the Court has jurisdiction to direct that judgment be entered for the agreed sum if the defendant makes default in payment, even if at that stage the defendant is no longer a consenting party.
[2] Roberts v Gippsland Agriculture and Earth Moving Contracting Co Pty Ltd [1956] VLR 555.
Here, as I have said, the action was not discontinued or otherwise interrupted, and in fact was adjourned for a directions hearing to a date after the anticipated compliance with the obligations under the settlement deed. It is appropriate to enforce the compromise where action is settled, but left on foot for the terms of settlement to be carried out.[3] Judgment in default of the performance of the terms of settlement is appropriately sought within the existing action, rather than in fresh proceedings.[4]

Assessment of Damages

[3] Greenslade v Commissioner of Taxation, (1978) 19 SASR 474 at 477.

[4] Jardon Pty Ltd v Kephala [1992] SASC S3760 (Unreported, White J), 18 December 1992.

The third parties did not appear at the trial to assess damages. Whilst the judgment signed by the defendant on 25 January 2011 was a judgment in default of defence, once the matter had been referred for an assessment of damages and the third parties were duly notified and still failed to attend, it seemed to me to be appropriate to proceed to assess the damages on the merits, albeit on the basis of affidavit evidence.
The settlement deed was, I accept, duly executed by the third parties. I accept, on the basis of the affidavit of Joseph De Ruvo sworn 9 November 2010, that the settlement deed is genuine; that pursuant to the settlement deed the third parties were jointly and severally liable to pay the sum of $50,000; that only $30,000 of that amount has been paid; and that the balance of $20,000 is owed by the third parties to the defendant.
It is appropriate that damages be assessed in the sum of $20,000. The entirety of that sum should have been paid, pursuant to the settlement deed, by 1 August 2010. Some of that sum should have been paid prior to that time given the agreed repayment schedule. I award a lump sum in lieu of interest of $1,500.

Costs

The defendant seeks an order for costs. The defendant is undoubtedly entitled to costs on a party and party basis. The defendant goes further and seeks costs on an indemnity basis, and an award of costs on a lump sum basis.
The ordinary rule is that the order for costs in favour of a successful party to litigation will be on a party and party basis. The court however, has a wide discretion as to the award of costs.[5] That includes a discretion to order costs on a solicitor/client basis where appropriate,[6] or to order costs on an indemnity basis.[7]
[5]    Cretazzo v Lombardi (1975) 13 SASR 4 at 11.
[6]    Packer v Meagher [1984] 3 NSWLR 486.
[7]    Singleton v Macquarie Broadcasting Ltd (1991) 24 NSWLR 103.
Indeed, Chapter 12 of the 2006 Rules specifically provides a discretion to award costs on any basis considered appropriate, including as between solicitor and client, or on the basis of indemnity.[8] I bear in mind that the circumstances of the case must be such as to warrant departing from the usual course; that is, there should be some special or unusual feature in the case to justify the court in departing from the ordinary practice.[9]
[8] 6 DCR 264.
[9] Colgate-Palmolive Company Pty Ltd v Cussons Pty Ltd (1993) 46 FCR at 233.
As White J pointed out in Kenneally v Pouras[10] the circumstances in which a court may appropriately order costs to be paid on an indemnity basis are generally speaking associated with the conduct of the litigation, for example: the making of allegations which ought never have been made; or the undue prolongation of the case by groundless contentions; or an unreasonable refusal of an offer of compromise; or when an action is commenced, continued or defended with no chance of success.[11] In particular, unreasonable conduct on the part of a party is sufficient to enliven the discretion to award indemnity costs.[12] I bear in mind that the purpose of an award of indemnity or solicitor/client costs is to compensate a party and not to punish the opponent.[13]
[10] Kenneally v Pouras & Ors [2007] SASC 303 at [13].
[11] See Colgate-Palmolive Company Pty Ltd v Cussons Pty Ltd (1993) 46 FCR at 233.
[12] Sunburst Properties Pty Ltd (In Liq) v Agwater Pty Ltd & Ors (No2) [2005] SASC 393.
[13] Kenneally v Pouras & Ors [2007] SASC 303 at [13]; and see Flinders Diamonds Ltd v Tiger International Resources Incorporated & Ors (No2) (2006) 244 LSJS 435 at 440-441.
Here, the defendant asserts that the conduct of the third parties was unreasonable in that the third parties failed to provide instructions to their former solicitors, thereby prolonging the interlocutory process which followed the failure to comply with obligations under the settlement deed; failed to respond to correspondence from the defendant’s solicitors seeking a resolution of the third parties’ obligations pursuant to the settlement deed; failed to attend at directions hearings; and necessitated an unduly complex process for the enforcement of their obligations under the settlement deed.
As I have said, the third parties compromised the defendant’s claim in the sum of $50,000; the defendant having previously compromised the plaintiff’s claim against the defendant in the sum of $85,000. Such compromises are no doubt entered into so that the parties can achieve certainty, and so that the costs of initiating or continuing litigation can be avoided. Such costs are significant and the benefits of compromise are therefore, in turn, significant.
I am persuaded that the conduct of the third parties subsequent to entering the settlement deed has been unreasonable, and has resulted in the unnecessary and expensive prolongation of this litigation.
For the purposes of an action in this Court, solicitor/client costs may be equated with indemnity costs, given the provisions of 6 DCR 265(5), except that the onus of persuading the taxing master that a particular item of costs was reasonably incurred, falls upon the moving party in the case of solicitor/client costs, and on the party liable to pay in the case of indemnity costs.[14]
[14] TGM Civil Pty Ltd v Resourceco Pty Ltd (No2) [2008] SADC 109.
Subject to what I say below, it seems to me that it would have been appropriate to order that the onus of persuading the master on a taxation should be on the third parties, and accordingly it is appropriate that the defendant have its costs against the third parties on an indemnity basis.
The defendant seeks an order that the award of costs be by way of lump sum.[15] The discretion to award a lump sum by way of costs must be exercised judicially, and usually only after giving the parties an adequate opportunity to make submissions. Given the failure of the third parties to appear such an opportunity has been foregone.[16]
[15] Pursuant to 6 DCR 264(5)(c).
[16] Leary v Leary [1987] 1 All ER 261.
The power to award a lump sum can be exercised at or after the delivery of judgment, but only on sufficient evidence which allows a proper assessment of the lump sum which is fair to all parties.[17] However, the general discretion should not be unnecessarily fettered by prescriptions as to its exercise, and should be dealt with on the basis of that which promotes the interests of justice in the circumstances of a particular case.[18] Further, the power may be exercised where the fixing of costs may be more conveniently dealt with by a lump sum than by taxation, particularly where recovery of the full cost is questionable, or where the taxation process is likely to be costly.[19]
[17] Smoothpool Nominees Pty Ltd & Anor v Pickering & Ors [2001] SASC 131.
[18] Eat Media Pty Ltd v Mulready Media Pty Ltd (No2) (2010) 267 ALR 573.
[19] Cornwall & Ors v Rowan (No4) (2006) 244 LSJS 183.
Here, where the defendant has already been put to considerable expense, and it can perhaps be inferred from the conduct of the third parties, or rather the absence of any participation by the third parties, that recovery will be difficult, it seems to me appropriate to exercise the discretion to award costs by way of a lump sum.
The defendant seeks the sum of $18,605 being the total of the amount it has been charged to date and the amount which will be charged up to and including judgment in the action. I am satisfied on the basis of the affidavit material, and the submissions of counsel, as to the costs incurred in respect of the trial, that that is the amount incurred by the defendant. I note from the court record that following the attendance of the defendant’s solicitors on 2 December 2010, the master made an order that there be no order as to costs. Making some allowance for that, it is appropriate to award costs by way of a lump sum, rounded down to $18,000.

Orders

There will be judgment for the defendant against the third parties in the sum of $21,500. The third parties are to pay the defendant’s costs fixed in the lump sum of $18,000.