Polacsek v Patek (No. 2) - [2018] VCC 156

IN THE COUNTY COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL DIVISION

Revised
Not Restricted
Suitable for Publication

GENERAL LIST

Case No. CI-16-02991

EMMA ELIZABETH POLACSEK (by her litigation guardian)	Plaintiff
v
GEORG PATEK	Defendant

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JUDGE:	Her Honour Judge Marks
WHERE HELD:	Melbourne
DATE OF HEARING:	1 March 2018
DATE OF RULING:	1 March 2018
CASE MAY BE CITED AS:	Polacsek v Patek (No. 2)
MEDIUM NEUTRAL CITATION:	[2018] VCC 156

REASONS FOR RULING

INTEREST – Judgment for ‘sum certain’ under s58 Supreme Court Act 1986 (Vic) – Whether interest should be calculated from the date the debt was due or the date of issue of proceedings – Whether interest rate should be under the rate prescribed by Penalty Interest Rate Act 1983 (Vic) or at the contract rate of 5% per annum – Interest ordered at contract rate from date debt due.

COSTS – OFFER OF COMPROMISE – Plaintiff had more favourable judgment than she offered to accept in an Offer of Compromise under Order 26 of the County Court Civil Procedure Rules 2008 (Vic) – Whether Court should order indemnity costs from two days after the date the Offer of Compromise was served, or ‘order otherwise’ – Whether offer genuine – Indemnity costs ordered.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Ms L Barrett	McKean Park Lawyers
For the Defendant	Mr B Gillies	Direct brief by defendant

HER HONOUR:

BACKGROUND

I handed down reasons for judgment in this matter on 1 February 2018: Polacsek v Patek [2018] VCC 24, indicating I would give judgment for Mrs Polacsek for $160,000 due under a loan agreement made in August 2005, plus interest.
Counsel for both sides then provided written submissions as to the appropriate amount of interest, and costs. A hearing on these matters was held today.
The parties disagree as to the relevant periods that interest owing from the loan accrued, as well as the rate of interest that should be applied.
What amount of interest is ordered affects the order to be made for costs in circumstances where an offer of compromise was made by Mrs Polacsek to Mr Patek on 15 June 2017, agreeing to accept $195,000 (exclusive of costs and disbursements).

INTEREST

On the basis of the written submissions filed for the parties, it appeared there would be an argument as to whether or not any part of the interest claimed was for a period of time which is statute barred. Mention was made of a letter of acknowledgement from Mr Patek, thereby ‘restarting’ the limitations period. However, Counsel for Mrs Polacsek did not press that argument today, because the letter from Mr Patek was unsigned. An acknowledgement of indebtedness only has the legal effect of starting the limitations period running again when it is signed by the debtor: see s24(3) and s25(1) of the Limitation of Actions Act 1958 (Vic).
Counsel for Mr Patek submits that interest should only be paid from the date the Writ was issued, as he says that constituted the demand for the loan to be repaid.
In written submissions, he said interest should be ordered at the rate of 2%, which he says is the appropriate restitutionary rate. He referred to MLC Nominees Pty Ltd & Anor v Daffy (No 2) (2018) VSCA 10 (‘MLC Nominees’) at [8]:
The second appellant did not adduce any evidence as to an appropriate restitutionary rate of interest on this application. It is, however, notorious, that interest rates over the period of the second appellant’s claim were (and remain) at historically low levels. In the absence of evidence we are prepared to accept an appropriate restitution be made in the case at two percent per annum.
However, in the hearing before me Counsel for Mr Patek conceded that the appropriate rate was the 5% rate agreed between the parties in the loan agreement. He did not pursue a claim for a lesser amount of interest.
Counsel for Mrs Polacsek claims interest should be calculated from the date it was due to be repaid (August 2010) under s58 of the Supreme Court Act 1986, either:
(1) At the rate for the time being fixed under s2 of the Penalty Interest Rates Act 1983 (Vic) (‘the penalty interest rate’), in accordance with s58; or
(2) At 5% per annum in accordance with the loan agreement.
Section 58 of the Supreme Court Act provides:
(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.

...

(3) A debt or sum payable or a date or time is to be taken to be certain if it has become certain.
$160,000 is a ‘sum certain’ that was payable under the loan agreement on 1 August 2010. In applying s58, it is that date that is relevant, not the date demand for payment was made.
Unless I am satisfied there is ‘good cause shown to the contrary’ I must allow interest at the penalty interest rate. Whether or not there is ‘good cause shown to the contrary’ is a discretionary matter, which depends on the circumstances of the case: see Clarke v Foodland Stores Pty Ltd [1993] 2 VR 382 at 394. I am satisfied that there is a good reason not to apply the penalty interest rate here. That is because the parties agreed to an interest rate of 5% in the loan agreement. The loan agreement provided:
A. An Amount of $150,000 (“Loan”) is to be advanced by the Lender to the Borrower for the period from 2 August, 2005 to 1 August 2010.
B. The Loan will then be due and owing by the Borrower.
C. The Lender and the Borrower wish to formalise the arrangements between them by the execution of this agreement.
IT IS AGREED THAT in consideration of the money to be loaned by the Lender to the Borrower and of the forbearance of the Lender from suing for same in writing.
1. The Borrower will pay simple interest at the interest Rate shown in the Schedule, quarterly in arrears on the balance of the Loan outstanding as at the relevant date of payment, adjusted for any advances or repayments made by the Borrower.
2 If requested by the Lender in writing, the Borrower will execute such documents as the Lender may require for securing the repayment of the Loan.
3 The provisions of the Schedule form part of this agreement and words defined in the Schedule have that meaning in this agreement.
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SCHEDULE
Interest rate: 5 percent per annum
FINAL REPAYMENT DATE: 1 August, 2010 or as agreed by the Lender and Borrower.
I take the loan agreement between the parties as to interest rate of 5% per annum into account in deciding there is ‘good cause to the contrary’ to order a different rate to the penalty interest rate which is the maximum prescribed by s58 of the Supreme Court Act.
Interest is payable on $160,000 from 1 August 2010 calculated at 5% per annum. This is $60,666 as at today.

COSTS

The next issue is whether an offer of compromise has the effect that Mrs Polacsek should be paid indemnity costs for some period of this proceeding. Has Mrs Polacsek achieved a judgment which is more favourable than the offer? Is there any other reason Mr Patek should not pay indemnity costs.
The offer of compromise was made in accordance with Order 26 of the County Court Civil Procedure Rules 2008 (Vic) (‘the County Court Rules’). It is dated 15 June 2017.
Rule 26.08 of the County Court Rules provides:
26.08 Costs consequences of failure to accept
(1) This Rule applies to an offer of compromise which has not been accepted at the time of verdict or judgment.
(2) 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.
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(5) Where a plaintiff obtains judgment for the recovery of a debt or damages and—
(a) the amount for which the Court pronounces judgment includes an amount for interest or damages in the nature of interest; or
(b) by or under any Act the Court awards the plaintiff interest or damages in the nature of interest in respect of the judgment amount—
for the purpose of determining the consequences as to costs referred to in paragraph (2) and (3) the Court shall disregard so much of the amount recovered by or awarded to the plaintiff for interest or damages in the nature of interest as relates to the period after the day the offer of compromise was served.
…
Where a plaintiff obtains judgment for a debt where an offer of compromise has been served, in comparing the judgment with the terms of the offer for the purposes of Rule 26.08(2), any interest awarded by the Court is taken to be part of the judgment amount.
However, in deciding if Mrs Polacsek did better at judgment than if the offer of compromise had been accepted, only the amount of interest relating to the period before the offer of compromise was served is taken into account: see Rule 26.08(5).
As at 15 June 2017, Mr Patek owed Mrs Polacsek $160,000 as the principal claim, plus $54,666 being interest at 5% per annum from 1 August 2010. In total, he owed $214,666.
By the offer of compromise Mrs Polacsek offered to accept from Mr Patek $195,000 in settlement of her claims (exclusive of costs and disbursements). This is $19,334 less than the amount then due of $214,666 or a discount of about 9%.
Mrs Polacsek has obtained a judgment which is more favourable to her than the terms of the offer of compromise. So unless the Court otherwise orders, she is entitled to indemnity costs from 11 a.m. on the second business day after the offer was served: see Rule 26.08(2)(b).
Counsel for Mr Patek submits that I should ‘otherwise order’ costs.
The party on whom an offer of compromise is served carries a heavy burden. The presumption as to liability for costs which arises under the rules is not easily displaced: see for example Simonovski and Anor v Bendigo Bank (No 2) [2003] VSC 139.
As stated in Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 725, in relation to an equivalent rule in the then Supreme Court Rules 1970 (NSW):
Litigation is inescapably chancy. The purpose of the rule is to put a premium on realistic assessment of cases. It is not to demand perfect foresight which is denied even to the judges. That is why a discretion is retained, under the rule, for the court to order otherwise than as the rule provides. But the ordinary provision is expected to apply in the ordinary case. It has added a new duty to the functions of legal practitioners advising litigants. It is a duty which is both protective of the interests of litigants and of the public interest in the prompt and economical disposal of litigation. It is the duty of courts, allowing for exceptions in particular cases, to give effect to the purpose of the rule.
Counsel for Mr Patek said that indemnity costs are not appropriate, and costs should be calculated on the standard basis.
He submitted that this matter should be considered on the basis that at the time of the offer of compromise, the only claim was the failure to repay the sum of $160,000 plus interest, and that the defence admitted the sum of $160,000 had been advanced, but said it had been forgiven.
However, the case was about whether the loan was forgiven and I have found that it was not. Having a defence does not mean an offer of compromise does not take effect if that defence is ultimately not successful.
In written submissions at [9] Counsel for Mr Patek stated that:
At the commencement of proceedings it was said by the Plaintiff the issue in dispute was a legitimacy of diary entry. Whether or not it was signed by Mrs Polacsek at all and then, if it was effective to discharge the loan. That found favour in Her Honour’s judgment, an issue that was not pleaded was ultimately successful.
I do not understand what this submission goes towards. If it is suggested that judgment was given as a result of an issue that was not pleaded at the time the offer of compromise was made, I reject that submission. This case was always about whether or not a loan was made and was repayable. The defence was it was forgiven. That defence was not made out at trial.
In oral submissions, Counsel for Mr Patek put three further reasons that indemnity costs should not be ordered.
Counsel submitted that the discount offered in the offer of compromise was not a genuine discount.
I disagree. It was an offer to accept nearly $20,000 less than the amount I have found that Mrs Polacsek would have been entitled to as at the date of the offer of compromise, or about 9% less than the full claim. It was a genuine discount.
Counsel then said that the offer was made at a time there was no next friend appointed for Mrs Polacsek in this litigation, to give instructions. He said if there had been they might have put a more generous offer of compromise. I do not consider the fact that there was no litigation guardian appointed at the time relevant. Orders were made at the outset of the trial appointing a litigation guardian for the proceeding nunc pro tunc (on the basis that the order was effective from the commencement of the proceeding). That has the effect that whatever steps were taken before hand were regularised. Whatever instructions some other hypothetical person might have given about the amount to put in an offer of compromise is irrelevant. I need to consider the actual offer made, and decide if I should ‘order otherwise’ than the process set out in Rule 28.02 of the County Court Rules.
Finally, Counsel for Mr Patek said that this was an ‘unhappy claim’ and I should not order indemnity costs for that reason.
I agree it is an unhappy claim, in that it is between a stepmother and a stepson who are both elderly, and have been in that relationship for decades. Mr Patek may have believed he would not ever in fact have to repay the loan his stepmother made him despite the legal obligation to do so. His stepmother did not press him for repayment over some years whilst she had legal capacity. It was not until mid 2016 that the claim was pressed by her enduring financial guardians, in her name, in this proceeding. However, none of these are reasons that I should ‘order otherwise’. The fact is that the loan made was agreed to be repaid in August 2010, and interest at 5% per annum was also agreed. Any feelings of sympathy I may have for Mr Patek are not relevant to the exercise of my discretion: Falkner v Bourke (1990) 18 NSWLR 575 at 575 per Samuels JA.
Mr Patek has not satisfied me there is any reason that I should make an order other than that which gives effect to the offer of compromise.

ORDERS

Accordingly, I will order:
1. The defendant pay the plaintiff the sum of $160,000 together with interest in the sum of $60,666.
2.The defendant pay the plaintiff’s costs of the proceeding from 12 July 2016 to 19 June 2017 on a standard basis, and thereafter on an indemnity basis. All such costs are to be assessed by the Costs Court in default of agreement.

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Certificate

I certify that these 8 pages are a true copy of the reasons for decision of her Honour Judge Marks, delivered on 1 March 2018.
Dated 1 March 2018
Liz Main
Associate to Her Honour Judge Marks