Oneflare Pty Ltd v Chernih [No.2]

[2017] NSWSC 302

Supreme Court

New South Wales

Medium Neutral Citation:	Oneflare Pty Ltd v Chernih [No.2] [2017] NSWSC 302
Hearing dates:	On the papers
Date of orders:	31 March 2017
Decision date:	31 March 2017
Jurisdiction:	Equity - Commercial List
Before:	McDougall J
Decision:	Dismiss with costs the defendants’ application for indemnity costs.
Catchwords:	COSTS – whether indemnity costs should be awarded – whether offers of compromise were made – whether Court should otherwise order (UCPR r 42.15A)
Legislation Cited:	Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	Caine v Lumley General Insurance Ltd (No.2) [2008] NSWCA 109 Calderbank v Calderbank [1976] Fam 93 Oneflare v Chernih [2016] NSWSC 1271
Category:	Costs
Parties:	Oneflare Pty Ltd (Plaintiff) Nicholas Chernih (First Defendant) Linkbuild SEO Pty Ltd (Second Defendant)
Representation:	Counsel: G Lucarelli (Plaintiff) D W Robertson (Defendants)   Solicitors: Levitt Robinson Solicitors (Plaintiff) Robertson Saxton Primrose Dunn (Defendants)
File Number(s):	2014/336363

Judgment

1. HIS HONOUR:   I heard these proceedings over five days in March, and a further day in August, 2016 and gave judgment on 13 September 2016[1] . I concluded that the plaintiff’s claim failed, and that there should be judgment for the defendants. The parties accept that costs should follow the event. However, the defendants seek a special order for costs. That is the subject of these reasons.

   1. [2016] NSWSC 1271.

Nature of an issues in the proceedings

2. To give background to what follows, I set out [1] to [5] of my earlier reasons:

[1]   HIS HONOUR:   The plaintiff (Oneflare) operates an internet business which seeks to match service providers (such as removalists, plumbers, pest control experts and no doubt many others) with prospective customers. Service providers register with Oneflare. Prospective customers post details of the services they require on Oneflare’s website. Service providers who are interested will provide quotations for the work. The prospective customer can choose from among the quotations so provided.

[2]   Like other internet-based businesses, Oneflare depends critically on search engines, such as (and primarily) Google, to obtain business. Prospective customers who know the kind of service they require but do not know of Oneflare’s website will typically conduct a Google search. (In what follows, I shall focus on Google to the exclusion of other search engines, because the vast majority of searches in this country are conducted using Google.) The Google search results display, on a page by page basis, possible answers to the searcher’s request. Those pages are known as “Search Engine Results Pages”, or SERPs.

[3]   Oneflare, like other internet-based businesses, does what it can to improve its “page ranking”; to ensure that its website appears on the first page of the search results, and, preferably, towards the top of that page. To that end, it uses techniques known as “Search Engine Optimisation” (SEO) to improve its chances of being listed favourably in answer to a Google search. Oneflare engaged the first defendant (Mr Chernih) to provide SEO services. He did so, at first on his own account and, later on, through his company the second defendant (Linkbuild).

[4]   Oneflare says that on Mr Chernih’s advice, it adopted SEO techniques that were contrary to guidelines published by Google for webmasters, and that, as a result, it was penalised. It claims damages based on the loss of revenue that it says is attributable to the defendants’ activities. That claim is brought in contract and, in tort. A case based on statutory proscriptions of misleading or deceptive conduct was dropped in final submissions.

The real issues in dispute

[5]   Slightly rephrased, the agreed real issues are:

(1)   what were the terms of Oneflare’s retainer of Mr Chernih (since there is no relevant distinction between Mr Chernih and his company Linkbuild, I shall refer only to him unless it is necessary to distinguish between the two defendants)?

(2)   Did Mr Chernih devise and recommend the SEO strategy that Oneflare in fact pursued over the relevant period?

(3)   Did Mr Chernih use appropriate skill and competence in formulating any SEO strategy that he recommended to Oneflare?

(4)   If Mr Chernih did not use appropriate skill and competence, what if any damage has Oneflare proved?

Resolution of the issues

3. I concluded that the issues, as stated at [5] of my earlier reasons, should be disposed of as follows:

1. first issue: I concluded that the terms of the retainer were in substance that Oneflare retained Mr Chernih to provide “aggressive” SEO strategies that included link-building; that Mr Chernih was retained to design the strategy and process that would give effect to what Oneflare wanted; that he was required to use reasonable care and skill in the performance of the retainer; and that there was no general duty of care to warn of the risks attaching to the strategies that Oneflare told Mr Chernih it wanted him to pursue, and for the execution of which it retained him [2] .

2. Second issue: I concluded that Oneflare, through its principals Messrs Dong and Lim, laid down the essential elements of the strategy to be employed, and that Mr Chernih assisted Oneflare in the execution of that strategy; and (contrary to the evidence of Messrs Dong and Lim) that steps in the execution of that strategy were not undertaken at the direction or on the instruction of Mr Chernih [3] .

3. Third issue: on my findings as to the scope and performance of the retainer, the question of breach did not arise.

4. Fourth issue: I concluded that if it were necessary (contrary to my conclusion as to breach) to assess damages, they should be assessed at $673,560.00, together with interest from 17 March 2015 [4] .

   2. See at [139] to [147], [151] of my earlier reasons.

   3. See at [218] to [221] of my earlier reasons.

   4. See at [275] of my earlier reasons.

The special order that the defendants seek

4. The defendants (from now on, I shall do as I did in my earlier reasons, and refer only to Mr Chernih) ask for an order that their costs be paid on the ordinary basis up until 3 February 2015, and on the indemnity basis from 4 February 2015. They rely on an offer of compromise dated and served on 3 February 2015. That offer of compromise offered to settled the whole of Oneflare’s claim on the basis that there be judgment in favour of the defendants with no order as to costs.

5. Although the offer was stated to be open for acceptance until 9 March 2015, it was in fact rejected by email, sent within an hour or so after service, on 3 February 2015.

6. In those circumstances, Mr Chernih invokes UCPR r 42.15A. That rule reads:

42.15A Where offer not accepted and judgment no less favourable to defendant

(cf SCR Part 52A, rule 22; DCR Part 39A, rule 25; LCR Part 31A, rule 20)

(1)   This rule applies if the offer is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim no less favourable to the defendant than the terms of the offer.

(2)    Unless the court orders otherwise:

(a)    the defendant is entitled to an order against the plaintiff for the defendant’s costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and

(b)    the defendant is entitled to an order against the plaintiff for the defendant’s costs in respect of the claim, assessed on an indemnity basis:

(i)    if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and

(ii)    if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made.

7. The letter under cover of which the offer of compromise was served stated that if for any reason it were held to be invalid (presumably, by reference to the formal requirements of UCPR r 20.26), it would nonetheless be relied upon as a Calderbank [5] offer. The submissions for Oneflare did not take any issue with the form of the offer of compromise, and it is thus unnecessary to consider that alternative characterisation of the offer.

   5. Calderbank v Calderbank [1976] Fam 93.

8. I should note that Oneflare’s submissions included the proposition that there was no real element of compromise, and hence that the offer did not engage r 20.26. I do not read that to suggest any defect of form. In any event, if the rule were not engaged for that reason, the alternative characterisation of the offer as a Calderbank offer would be unlikely to advance Mr Chernih’s claim for indemnity costs.

The parties’ submissions

9. Mr Chernih’s submissions, relying on the offer in its character as an offer of compromise, noted that the default position under r 42.15A was that the costs consequences specified should operate unless the court ordered otherwise. That meant, the submissions said, that the onus was on Oneflare to demonstrate why the default consequences should not follow. The submissions referred to the judgment of McColl JA in Caine v Lumley General Insurance Ltd (No.2) [6] . Her Honour said[7] :

35   The onus is on the respondent to demonstrate why the Court should not order the respondent to pay the appellants’ costs on an indemnity basis. In particular, the respondent must establish that it had given serious thought to the risks involved in not accepting the offers, had assessed the appellants’ case properly and in the context of the relevant rules and the achievement of their purpose as outlined in Morgan. Generally, exceptional circumstances are required to justify such an order denying the appellants’ entitlement: South Eastern Sydney Area Health Service v King [2006] NSWCA 2 (at [83]) per Hunt AJA (Mason P and McColl JA agreeing).

6. [2008] NSWCA 109.

7. At [35].

10. Mr Chernih’s submissions made the following points:

1. Oneflare had made two previous offers to settle, on 3 and 14 November 2014, for $300,000.00 inclusive of costs and $413,000.00 (without any specification as to costs) respectively.

2. The significance of the sums offered should be assessed against the fact that Oneflare’s particularised loss of revenue was said to be $2.1 million, and this was the measure of damages sought from Mr Chernih.

3. At the time the later of those offers had been made, Oneflare’s evidence in chief had been served.

4. That evidence in chief was remarkable because it excluded almost all the emails passing between the parties, which in my view were significant (including because they were inconsistent with Oneflare’s case), a matter on which I commented in my earlier reasons[8] :

[169]   Whilst I accept that it is the right of any party in litigation to put before the Court the material that it thinks appropriate, the fact that neither Mr Dong nor Mr Lim presented those emails as part of his evidence in chief, and thus offered no evidence in relation to them, suggests very strongly that each was aware that the emails were inconsistent with Oneflare’s case. It follows, in my view, that the Court may infer that each of them was afraid to give evidence in chief of those emails, and that where there is an inference available from them which is favourable to the case of the defendants, the Court may feel more comfortable in drawing that inference because of their failure to address the material in chief.

5. The offer of compromise had been rejected extremely hastily, leading to the inference that it had not been seriously considered.

   8. At [169].

11. Oneflare’s submissions made the following points:

1. there was no significant element of compromise; although Mr Chernih had offered to forego his costs, there was no evidence of the amount of those costs; it was likely that those costs would have been “relatively modest” as at 3 February 2015, because of the relatively limited amount of work that would have been done by then; and cases supporting the proposition that an offer to forego costs could contain an element of compromise[9] were distinguishable, because in each case the court had pointed out that by reason of the procedural history and the time at which the offers were made, the costs offered to be foregone could be inferred to have been substantial.

2. Alternatively, there was no general requirement to show exceptional circumstances before ordering otherwise; the discretion was one to be exercised having regard to all the circumstances of the case[10] .

3. The speed of rejection of the offer was irrelevant, because an identical offer made some seven months earlier had been rejected.

4. By the time the offer was made, Oneflare had obtained expert evidence quantifying its claim at $2.1 million.

5. The deficiencies in Oneflare’s evidence in chief had nothing to do with the question, because the offer of compromise was made before Mr Chernih served his evidence.

   9. For example, Leichhardt Municipal Council v Green [2014] NSWCA 341; Melchior v Sydney Adventist Hospital Ltd (No.2) [2009] NSWSC 65; Hearse v Staunton [2011] NSWSC 1065; Evans v Braddock (No.2) [2015] NSWSC 518.

   10. Relying on The Owners – Strata Plan No. 61162 v Lipman [2014] NSWSC 622 at [44].

12. In reply, Mr Chernih submitted that UCPR r 20.6 expressly provided[11] for a “walk away” offer to be a valid offer of compromise. There was a real element of compromise because Mr Chernih offered to give up any claim for costs.

    11. UCPR r 20.26(3)(a).

Decision

13. I set out UCPR r 20.26:

20.26 Making of offer

(cf SCR Part 22, rules 1A, 2, 3 and 4; DCR Part 19A, rules 1, 2, 2A, 3 and 4; LCR Part 17A, rules 2 and 5)

(1)    In any proceedings, any party may, by notice in writing, make an offer to any other party to compromise any claim in the proceedings, either in whole or in part, on specified terms.

(2)    An offer under this rule:

(a)    must identify:

(i)    the claim or part of the claim to which it relates, and

(ii)    the proposed orders for disposal of the claim or part of the claim, including, if a monetary judgment is proposed, the amount of that monetary judgment, and

(b)    if the offer relates only to part of a claim in the proceedings, must include a statement:

(i)    in the case of an offer by the plaintiff, as to whether the balance of the proceedings is to be abandoned or pursued, or

(ii)    in the case of an offer by a defendant, as to whether the balance of the proceedings will be defended or conceded, and

(c)    must not include an amount for costs and must not be expressed to be inclusive of costs, and

(d)    must bear a statement to the effect that the offer is made in accordance with these rules, and

(e)    if the offeror has made or been ordered to make an interim payment to the offeree, must state whether or not the offer is in addition to that interim payment, and

(f)    must specify the period of time within which the offer is open for acceptance.

(3)    An offer under this rule may propose:

(a)    a judgment in favour of the defendant:

(i)    with no order as to costs, or

(ii)    despite subrule (2) (c), with a term of the offer that the defendant will pay to the plaintiff a specified sum in respect of the plaintiff’s costs, or

(b)    that the costs as agreed or assessed up to the time the offer was made will be paid by the offeror, or

(c)    that the costs as agreed or assessed on the ordinary basis or on the indemnity basis will be met out of a specified estate, notional estate or fund identified in the offer.

(4)   If the offeror makes an offer before the offeree has been given such particulars of the offeror’s claim, and copies or originals of such documents available to the offeror, as are necessary to enable the offeree to fully consider the offer, the offeree may, within 14 days of receiving the offer, give notice to the offeror that:

(a)    the offeree is unable to assess the reasonableness of the offer because of the lack of particulars or documents, and

(b)    in the event that rule 42.14 applies to the proceedings, the offeree will seek an order of the court under rule 42.14 (2).

(5)    The closing date for acceptance of an offer:

(a)    in the case of an offer made two months or more before the date set down for commencement of the trial-is to be no less than 28 days after the date on which the offer is made, and

(b)    in any other case-is to be such date as is reasonable in the circumstances.

(6), (7)       (Repealed)

(8)     Unless the notice of offer otherwise provides, an offer providing for the payment of money, or the doing of any other act, is taken to provide for the payment of that money, or the doing of that act, within 28 days after acceptance of the offer.

(9)     An offer is taken to have been made without prejudice, unless the notice of offer otherwise provides.

(10)     A party may make more than one offer in relation to the same claim.

(11)     Unless the court orders otherwise, an offer may not be withdrawn during the period of acceptance for the offer.

(12)     A notice of offer that purports to exclude, modify or restrict the operation of rule 42.14 or 42.15 is of no effect for the purposes of this Division.

14. Rule 42.15A has been set out earlier in these reasons.

15. I do not regard Mr Chernih’s service of an earlier offer of compromise as being of any particular relevance. It is apparent that it was served before Oneflare had put on its evidence. It may be regarded as an attempt to get rid of the case before anyone incurred substantial costs.

16. Because the earlier offer was served before Oneflare’s evidence was provided, it follows, I think, that such consideration as may have been given to the earlier offer would not translate automatically, and without further consideration, to the later offer. In those circumstances, Oneflare should have considered the later offer having regard to the evidence in chief on which it proposed to rely. Oneflare must have known, even if its legal advisers did not, of the gaps in the evidence: specifically, of the gaps in the email record. Oneflare could hardly have thought that the emails in question were irrelevant. It is open to infer that they did not find their way into Oneflare’s evidence in chief precisely because Oneflare, through Messrs Dong and Lim, understood all too well that they were inimical to its case.

17. In those circumstances, the failure of Oneflare to re-evaluate the case upon receipt of the second offer of compromise it is a significant factor bearing upon the exercise of the discretion to “order otherwise”.

18. I turn to Oneflare’s earlier offers to settle. Mr Chernih submitted that these offers showed that Oneflare “must have seriously doubted it’s prospects of success in establishing its claim against the defendants” [12] . I do not agree.

    12. Written submissions on costs, [29.3].

19. The most that can be drawn from Oneflare’s two offers – particularly, (the second, and higher, which arguably left costs to be decided by the court) – is that Oneflare had given serious consideration to its case, in the light of its evidence in chief. That evidence was, presumably, in the course of preparation at the date the first of the offers was made, and either served or about to be served at the date the second of those offers was made. If anything, those offers – particularly, the second – show that Oneflare had given serious consideration to its position, and was seeking to promote resolution of its dispute with Mr Chernih.

20. The other matter of significance, in my view, is that when Mr Chernih served his offer of compromise, Oneflare did not know what his evidence would say. Thus, Oneflare had no ability to assess the strength of its case not only by reference to its own evidence but also by reference to Mr Chernih’s evidence.

21. I accept of course that a prime purpose of r 20.26 is to achieve early settlement of disputes, and thus to avoid expenditure on costs. In those circumstances, it is easy to understand why a party may choose to serve an offer of compromise before going to the expense of preparing and serving its evidence. The benefit of that approach is that if the offer does lead to a settlement, then costs are saved. The downside is that making an offer in those circumstances deprives the offeree of the opportunity of considering it in the light of the offeror’s evidence.

14. In this case, for whatever it is worth, Mr Chernih’s affidavit was extremely lengthy, and extremely detailed in its approach to all the relevant conversations, meetings and other relevant events, and in relation to performance of the retainer.

15. Consideration of the discretion conferred by r 43.15A(2) requires at least two things:

1. an understanding of the language and purpose of the rule (understanding of purpose being informed by relevant authority); and

2. attention to the particular facts of the particular case, by reference to which facts the discretion is to be exercised.

24. In this case, although I am prepared to infer that the time taken for consideration of Mr Chernih’s offer was minimal, the key point is that nothing, in terms of evidence, had changed since Oneflare made its second offer on 14 November 2014. As I have said, the obvious inference is that when Oneflare made that second offer, it did so having regard to its analysis of its case, by reference to its evidence which by then had been served or was about to be served. It had had no opportunity, either by reference to Mr Chernih’s evidence or (so far as the material put before the court in relation to costs shows) any other relevant consideration, to re-evaluate its position.

25. In those circumstances, I do not consider the apparent brief duration of such consideration as Oneflare gave to Mr Chernih’s offer to have any real significance.

26. What is left, then, is Mr Chernih’s relevantly unexplained rejection (or non-acceptance) of Oneflare’s second offer, and Oneflare’s equally unexplained rejection of Mr Chernih’s offer. Whilst Oneflare has not given any evidence of the reasons for its rejection of Mr Chernih’s offer, it can I think be inferred with reasonable certainty that there was nothing put to it in support of the offer, nor any other material put before it, to require it to reappraise, so as to lead to some revision of, the analysis that by inference underpinned its offer of 14 November 2014.

27. The relatively small compromise inherent in Mr Chernih’s offer is of some significance. By the time he made his offer, there had been one directions hearing; Mr Chernih had prepared and filed his list response; and Mr Chernih, presumably, had considered Oneflare’s evidence and perhaps had commenced preparation of his own. Of course, in all those tasks, he had had the benefit of his solicitors’ legal advice. There can be no doubt that he had incurred costs. But whether those costs were “substantial”, particularly having regard to the amount of Oneflare’s claim and the very much reduced amount for which it had offered to settle, is unilluminated by evidence.

28. It is correct (and the submissions for Mr Chernih accept this) that Oneflare’s offers – even the second, higher, offer – indicate a very substantial degree of compromise compared to its estimated claim. Taking the latter at full value, the element of compromise was of the order of $1.7 million, or four times the offer that was put. There is no evidence of the amount, or value, of the compromise embodied in Mr Chernih’s offer.

29. In all the circumstances, and accepting as I do that it is the offeree – Oneflare – that must persuade the court to order otherwise, I am of the view that this is not a case where it is appropriate that indemnity costs should follow rejection of Mr Chernih’s offer. The key matters underpinning that conclusion are:

1. the fact that the litigious landscape had not changed in any relevant way between 14 November 2014 and 3 February 2015; and

2. although Oneflare had demonstrated willingness to offer, at least on the face of things, a very substantial compromise, there is no measure of the value of Mr Chernih’s compromise.

30. On that analysis, there is no point in considering Mr Chernih’s offer in its alternative characterisation as a Calderbank offer.

Conclusion and orders

31. It follows that the application for a special costs order should be dismissed with costs.

32. I make the following orders:

1. order the plaintiff to pay the defendants’ costs up until and including 13 September 2016.

2. Order the defendants to pay the plaintiff’s costs of the defendants’ application for a special costs order.

3. Costs to be set off.

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Endnotes

Decision last updated: 31 March 2017