Polley v Zollo (No 2) - [2019] SADC 164

District Court of South Australia
(Civil)
POLLEY & ANOR v ZOLLO & ORS (No 2)
[2019] SADC 164
Judgment of His Honour Judge Slattery (ex tempore)
23 September 2019
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - COSTS - INDEMNITY COSTS
The plaintiffs seek costs against the defendants on an elevated scale following a trial in which the plaintiffs were successful.
Prior to the trial of the action, the plaintiffs made a "without prejudice save as to costs" offer of settlement to the defendants. This was delivered pursuant to 6DCCR 33 of the Court Rules. This offer was not accepted by the defendants and no counter offer had been made.
At trial, the plaintiffs succeeded for an amount significantly greater than the offer expressed in their without prejudice offer of settlement.
Whether the court may take into account an offer delivered pursuant to 6DCCR 33 when considering the application of 6DCCR 188G of the Court Rules when determining the award of costs. If so, whether the offer was a genuine compromise.
Held:
1. In these circumstances, an offer for settlement made under 6DCCR 33 constitutes an offer sufficient to satisfy the requirements of 6DCCR 188G. It was a genuine compromise which must be assessed in the whole of the background circumstances of the action.
2. The offer of settlement for 6DCCR 33 was, for 6DCCR 188G, unreasonably rejected.
3. The plaintiffs are entitled to a complete indemnity for reasonable costs reasonably incurred on a solicitor and client basis, such an assessment to commence 14 days after the date of the letter of offer.
District Court (Civil) Rules 6DCCR 3(b) and (d), 6DCCR 33, 6DCCR 186G, 6DCCR 187, 6DCCR 188F(3), referred to.
Calderbank v Calderbank [1975] 3 All ER 333; Neil Polley and Anor v Alessandro Zoll and Ors [2019] SADC 76; Brine v Carter (No 2) [2016] SASCFC 37, considered.

POLLEY & ANOR v ZOLLO & ORS (No 2)
[2019] SADC 164

By application dated 15 August 2019,[1] the plaintiffs as applicants seek orders for costs of the action on an elevated basis, namely on a solicitor and client basis. The defendants resist that application and contend that the plaintiffs are only entitled to an order for costs on the usual party and party basis.
[1] FDN 64.
After hearing argument and considering all of the parties’ oral and written submissions, I announced on 23 September 2019 that I acceded to the plaintiffs’ application and that the plaintiffs were entitled to an elevated order for costs on a solicitor and client basis. I said then that I would publish my reasons. These are those reasons.
The plaintiffs’ application dated 15 August 2019 seek the following orders:-
Application
The First Plaintiff, Neil Polley and the Second Plaintiff, Neil Polley Holdings Pty Ltd seek the following orders or directions:
1.   That this application be made specially returnable in chambers before his Honour Judge Slattery pursuant to leave given on 18 July 2019;
2.   That the following directions be given:
2.1   That the defendants file any responding affidavits within 14 days.
2.2   That this application be dealt with on affidavits.
3.   That the plaintiffs have their costs of this application and the action on the basis of an indemnity.
4.   Such further or other orders as to the Court deems fit.
The application was supported by the eighth affidavit of Amanda Forsyth, sworn 15 August 2019.[2] Before turning to that affidavit, it is appropriate to briefly summarise the findings that I made in my judgment of 13 June 2019. In summary, the defendants were found to be in breach of their obligations as joint venturers, to have breached their fiduciary duties by knowingly misleading the plaintiffs who relied upon their conduct, to have breached their fiduciary duty of loyalty owed to the plaintiffs, to have breached their obligations under the Australian Consumer Law, that the plaintiffs were entitled to orders for conveyance to them of portion of what was described as the Muller Road land, that the plaintiffs were entitled to an award of damages to compensate them for loss suffered as a result of the defendants’ breaches of fiduciary duties and also for breach of the Australia Consumer Law. I also made findings that an amount of 24% of the Muller Road land, of which the third defendant was the registered proprietor, was legally held by the third defendant on a constructive trust for the plaintiffs as the beneficial owners.
[2] FDN 65.
At a number of levels, I rejected the evidence of the first defendant Mr Zollo as having no credibility. Irrespective of my views, it was not necessary for me to make findings of dishonesty of Mr Zollo including in relation to his evidence about dealing with the sum of $130,000 described in my judgment. It is sufficient to say that I entertained very serious doubts about the honesty, truthfulness and reliability of Mr Zollo and therefore of the defendants generally.
In this application, the defendants were represented by Mr Bellman, solicitor and he has filed written submissions but no answering material. I have taken into account Mr Bellman’s oral submissions and these written submissions.
I earlier mentioned that the plaintiffs read and rely upon the affidavit of Ms Forsyth. There was no opposition or any application to cross examine Ms Forsyth. The affidavit discloses the following:
1.   On 11 August 2016, the plaintiffs delivered to the defendants a pre-action offer pursuant to 6DCCR 33. That letter was marked “without prejudice save as to costs”. The plaintiffs rely upon the content of that letter as the basis for their application for an elevated order for costs.
2.   The outcome of the trial was significantly more favourable to the plaintiffs than the offer contained in the letter.
3.   The plaintiffs sought cooperation from the defendants in order to preserve the status quo concerning the Muller Road land prior to trial however it was necessary for interlocutory applications to be taken and orders made by the court in order to secure by mandatory orders the cooperation of the defendants.
4.   By their actions, the defendants actively resisted preservation of the status quo pending trial and so increased the cost of the action. There were three hearing days in relation to that interlocutory application, 19 June 2017, 13 July 2017 and 4 August 2017.
5.   The conduct of the defendants in this action was egregious, amounted to dishonesty, unconscionability and breaches of fiduciary duties. These matters are discussed in the judgment[3] at [267], [268] and [287] and at [10], [85], [141], [254] and [259].
6.   By virtue of the refusal by the defendants of the plaintiffs’ offer, the plaintiffs have incurred substantial costs at trial and have succeeded at trial for an amount significantly greater than the offer.
7.   On one aspect of the exercise of the court’s discretion, the plaintiffs contend and this is not contested by the defendants, that the prospects of the plaintiffs recovering monetary amounts from the defendants as ordered by the court are nugatory.
[3] [2019] SADC 76.
The plaintiffs rely upon the letter of offer of 11 August 2016, Exhibit AF-1 to the affidavit of Ms Forsyth. There was no challenge to the receipt of this by the court from the defendants. It is marked “without prejudice save as to costs” and may colloquially be described as a form of a Calderbank[4] letter of offer made outside of the Rules of Court. In argument, the plaintiffs conceded that the offer could have been formulated as a Rules of Court offer under 6DCCR 187.
[4] Calderbank v Calderbank [1975] 3 All ER 333.
That offer was in the following terms:
Offer
37. Our clients make the following offer:
37.1 You will repay the sum of $130,000.00 to Neil Polley Holdings Pty Ltd within 21 days of the date of this letter;
37.2 You will execute within 21 days of the date of this letter all necessary transfer paperwork to return to our client the 24 per cent share you hold as legal but not beneficial owner in the Third property;
37.3 You will agree to remove all your personal property from the Third property within 21 days on terms that our client will then allow a reasonable time to physically remove the property.
In return:
37.4 Our client Mr Polley will not seek interest in respect of the sum of $130,000;
37.5 Our clients will not seek other costs associated with the Deeds such as stamp duty;
37.6 Our clients will not seek an account in respect of income received by you from the Third property;
37.7 Our client Neil Polley Holdings Pty Ltd will pay any stamp duty in respect of the conveyance of the Third property;
37.8 Our clients shall bear their own costs.
38. The parties will enter into a deed to give effect to the terms of any settlement. Each party will bear their own costs of and incidental to the preparation of the deed.
The letter ends with the following paragraph:
Should this matter proceed to litigation, our clients rely on this letter as fulfilment of their obligations under Rule 33 of the District Court (Civil) Rules 2006 (SA).
Although this letter is delivered pursuant to the requirements of 6DCCR 33, that Rule does not establish some mutually exclusive code. When regard is had to the content of 6DCCR 3(b) and (d), this court should be very slow to create some artificial construct which prevents what is demonstrably an offer of settlement from operating as such because of a reference to 6DCCR 33. Such a postulated approach is inconsistent with the objects described in 6DCCR 3(b) and (d). It also challenges ordinary common sense.
Although the offer is described as a notice under 6DCCR 33 of the District Court Rules, I consider that it may be considered as an offer for the operation of Part 11 of the Rules of Court. I also consider that it is an offer to be considered under the operation of 6DCCR 188G.
The question of the content of the offer is to be considered under the guidance given in 6DCCR 187, such that it must describe the claim and express the offer in terms of a judgment as if under a contract binding on the parties or one which is to come into existence. A second requirement, at common law, is that the offer itself must be a genuine compromise. It must disclose a sufficient concession by the offeror.
I am satisfied that the letter of offer of 11 August 2016 satisfies the first requirement. It describes every aspect of the claim, the relationship between the parties and the disabilities suffered by the plaintiff Mr Polley. Then it describes the whole of the background of each of the property transactions; the breaches of fiduciary duty committed by the defendants; the breaches of trust and of the Australian Consumer Law committed by the defendants; the facts sufficient to substantiate a finding that a property at Muller Road, Greenacres was held on a constructive trust for the benefit of the plaintiffs; sufficient detail to identify the obligation of the defendants to account in relation to the receipt of the sum of $130,000 purportedly paid as an assignment fee; and finally a failure of the defendants to account as a trustee for income received from the Muller Road property.
The second question to be addressed is whether there is an identifiable compromise (see Brine v Carter (No 2) [2016] SASCFC 37 at [52]).
I am satisfied that the offer contains a genuine compromise. The plaintiffs do not claim interest (or for that matter, any other amount for equitable damages to which they were entitled) connected with the payment of the sum of $130,000 in the purchase of land at Hillcrest. Using the rate of interest of 5%, the amount forgone since 24 March 2015 (up to the date of the letter of offer) in round figures amounts to in excess of $6,500.
The cost associated with the retransfer of 24% of the interest held in the Muller Road land amounts to not less than $8,020. This is only a figure for stamp duty. Other associated costs and disbursements incurred in relation to the lodgement of the transfer and other steps would be considerably in excess of that figure. The waiver of the entitlement of income from the same land would amount to the sum of not less than $6,000. The cost forgone are estimated by the plaintiffs in the amount of $5,000. On any view, that seems to be a very conservative estimate as at 11 August 2016. However, that is a matter for the plaintiffs.
In total, the separate sums amount to not less than $20,120 as at 11 August 2016. On my assessment, they may be calculated at well in excess of that figure. However, I will content myself with the figure of not less than $20,120 in making my assessment. Of course, if the assessment was to be done later, that figure would be exponentially greater. I further consider that the question of a compromise is not just to be assessed on a monetary basis although that (basis) is very important. An offer of settlement must be assessed in the whole of the background of the facts then known. In this case, that background assists only the plaintiffs and acutely emphasises the reasonableness of the whole approach of the plaintiffs. I am therefore satisfied that the offer of compromise is a genuine offer of compromise.
I am satisfied, that if an offer under 6DCCR 33 is unreasonably rejected, then the powers available to the court under 6DCCR 188G will come into operation.
In all of the circumstances, I consider that the letter of offer of the plaintiffs was unreasonably rejected. It was a genuine offer. The issues identified by the plaintiffs were pertinent because they summarised various deficiencies in the position of the defendants. In large part, the actions of the defendants were indefensible and disclosed very serious breaches of duty in equity, at common law and under statute. The defendants were aware of these breaches. I was also informed that the letter of offer followed an unsuccessful mediation before Mr Walsh QC.
These are some of the matters that sit in the background of this offer. Paramount amongst them is what was demonstrably the breaches of trust, fiduciary duties, contract and statutory prohibitions committed by or on behalf of the defendants against the plaintiffs. On any assessment, the failure to accept the offer and therefore its refusal, was unreasonable. This is because, for 6DCCR 188G(1) and (2), I am satisfied that the plaintiffs made the offer, the offer was not accepted and my judgment is on terms less favourable to the defendants than the terms of the offer.
In that regard, [304] of my judgment reads as follows:
Orders
[304] I make the following orders.
1.   Mr Zollo pay to the second plaintiff the sum of $130,000.
2.   A declaration that the defendants procured the transfer to AZ Holdings of an interest in 24/100^th on the whole of the land comprised in Certificate of Title Register Book Volume 6433 Folio 472 (the Muller Road land) as a result of the reliance by the plaintiffs upon the misleading conduct of the defendants in trade or commerce or alternatively as a result of the breaches of fiduciary duty committed by Mr Zollo.
3.   A declaration that the defendant AZ Holdings holds 24/100^th of the Muller Road land on a constructive trust for the second plaintiff.
4.   An order under s 243(a)(ii) ACL declaring that the agreement for the transfer to AZ Holdings of 24/100 of the Muller Road land is void ab initio.
5.   An order that AZ Holdings Pty Ltd forthwith do all things necessary and appropriate and execute all such documents as are necessary to bring about the transfer of the interest that it legally owns in the 24/100^th of the Muller Road land to the second plaintiff for no consideration and free from any costs or expense to the plaintiffs associated with such transfer.
6.   Mr Zollo pay to the second plaintiff interest on the sum of $130,000 calculated from 24 March 2015; the Court will hear the plaintiffs further on the appropriate rate of interest.
7.   Damages in favour of the first plaintiff Mr Polley for breach of fiduciary duties to be assessed or agreed.
8.   Damages under s 236 of the ACL to be assessed or agreed.
9.   The defendants forthwith account for the whole of the benefits received by them as a result of the third defendant being registered as the proprietor of 24/100^th of the Muller Road land and an order for payment to the second plaintiff of the benefits received upon taking such an account.
As the refusal of the defendants was unreasonable, I am then clothed with a residual discretion about the costs orders that may be made in this case. That decision here is, in large part, influenced by the content of my judgment. The defendants committed extraordinarily egregious breaches of fiduciary duty, of trust and of statute in their dealings with the plaintiffs. I consider that the plaintiffs are entitled to a complete indemnity for costs from the defendants on a solicitor and client basis. The usual order is that such costs are to be both reasonable in amount and reasonably incurred and consistently with the operation of the rules, such an assessment to commence 14 days after the date of the letter of offer.[5]
[5] cf. 6DCCR 188F(3).
I so order.