Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd (Costs)
[2014] VSC 107
•17 March 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2011 03809
| PORTBURY DEVELOPMENT CO PTY LTD (ACN 065 713 760) | Plaintiff |
| V | |
| OTTEDIN INVESTMENTS PTY LTD (ACN 119 590 395) & ORS | Defendants |
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JUDGE: | GARDE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 14 March 2014 | |
DATE OF JUDGMENT: | 17 March 2014 | |
CASE MAY BE CITED AS: | Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd (Costs) | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 107 | |
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COSTS – Offer of compromise – Supreme Court (General Civil Procedure) Rules2005 (Vic), Order 26 – Civil Procedure Act2010 (Vic), ss 7, 10 and 22 – Discretion as to costs – Order for indemnity costs.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A R Kirby | Nicholas O’Donohue & Co Lawyers |
| For the Defendants | Mr P J Bick QC and Mr P J Marzella | Russell Kennedy |
HIS HONOUR:
Introduction
In this proceeding,[1] there will be judgment for the plaintiff in the sum of $3,144,498.49 together with interest which has been calculated by respective legal representatives in the sum of $869,259.98. There will be a stay on payment of the judgment debt until 17 April 2014 for the defendants to get their affairs in order as requested by Mr Bick QC. The counterclaim will be dismissed.
[1]See Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 (Garde J).
That leaves the costs order. The defendants submit that the costs order to be made in favour of the plaintiff should be an order that the defendants pay the plaintiff’s costs of the proceeding including reserved costs on a party-party basis until 1 April 2013 and on the standard basis thereafter, to be assessed by the Costs Court.
The plaintiff says that costs should be ordered in its favour on a party-party basis until 10 December 2012 but says that they should be awarded thereafter on an indemnity basis.[2]
[2]The proposed orders submitted by the plaintiff seek costs on a party-party basis until 10 December 2012, and on an indemnity basis after this date.
In submitting that it is entitled to indemnity costs after 10 December 2012, the plaintiff principally relies on the rejection by the defendants of an offer of compromise (‘the offer’) made by the plaintiff on 6 December 2012 in the sum of $1.7 million plus the party-party costs of the plaintiff. The offer was open for 14 days. The offer was forwarded by the plaintiff’s solicitor to the defendants’ solicitor under cover of a letter also dated 6 December 2012 marked “[w]ithout prejudice save as to costs”, and stating, “[a]s you can see, if the offer is accepted both my clients claim and your clients counter-claim will be resolved.”
The defendants’ solicitor responded by email 61 minutes later on the same day. The defendants’ solicitor said, “[t]he offer attached to your email below is not a valid offer in accordance with the rules. Subject to that objection, I acknowledge receipt of the offer. I have been instructed to reject it.”
The offer was in the amount of $1.7 million and party-party costs and very significantly less than the amount of $3,144,498.49 and interest of $869,259.98 ultimately awarded. The level of costs sought in the offer was party-party costs, the level of costs ordinarily awarded in proceedings in the Supreme Court of Victoria at the time when the offer was made.
Order 26
The plaintiff relies on Order 26 of the Supreme Court (General Civil Procedure) Rules2005 (Vic) (‘the Rules’) and on the court’s general discretion to award costs. The offer describes itself as “served in accordance with Order 26 of the Supreme Court (General Civil Procedure) Rules 2005.”[3]
[3]The applicable Rules are the Supreme Court (General Civil Procedure) Rules2005 (Vic) Authorised Version No. 040 incorporating amendments as at 17 September 2012. These Rules were in force when the offer of compromise was made on 6 December 2012. Authorised Version No. 041 of the Supreme Court (General Civil Procedure) Rules2005 (Vic) was effective from 10 December 2012.
The defendants contend that the offer was not in fact made in accordance with Order 26. The offer is directed to the defendant, in the singular, rather than to any specific defendant or the defendants collectively. The accompanying letter and the terms of the offer suggest that this was a typographical error and that the offer of compromise was intended to be directed to all defendants.
I have made comprehensive findings concerning the parties and the events which occurred in the judgment, which I will adopt in this decision. I will use similar expressions and terms in these reasons to those used in the judgment.
Ottedin was the original purchaser, Goldcare the party nominated for the transfer of the property and, as I have held, the privy of Ottedin. Mr Ottewell and Mr Kosta were guarantors of the varied contract of sale and were jointly and severally liable for the losses sustained by Portbury.
Mr Bick QC contended that the offer should be taken as having been made to the four defendants jointly and could only be accepted by them jointly. He referred to the decision of Finkelstein J in BHPB Freight Pty Ltd v Cosco Oceania Chartering Pty Ltd (No 4).[4] He highlighted that the offer of compromise was not capable of acceptance by any one defendant. It could only be accepted by all defendants acting together. He submitted that the offer did not comply with Rule 26.02(3) of the Rules. He drew attention to the fact that each of Rules 26.03(2), 26.03(3), 26.03(3.1) and 26.03(4) referred to ‘a party’ and that at the time the offer was served, there were four defendants.
[4](2009) 263 ALR 63, 66 [13].
He submitted that the four defendants represented different interests, namely the purchaser, the nominated purchaser, and the two guarantors. He submitted that if a party wished to make an offer to four parties, at least two of whom had separate and distinct interests, it was necessary to make an offer which any of them could accept. He submitted that the offer required that all of the defendants accept a joint offer and assume a joint liability and it should have been open for either or both of the guarantors to accept the offer separately and for the defaulting purchaser and nominee to accept the offer separately. He contended that the offer was not an offer in accordance with the Rules because it did not address the individual claims made against the separate parties, or at least the two groups of parties.
In the alternative, Mr Bick QC contended that even if the court found that the offer was a complying offer of compromise, it should nonetheless exercise its discretion under Rule 26.08 to ‘otherwise order’ in relation to the offer.
The need for clarity in offers of compromise was upheld by Williams J in Bishop v The Herald and Weekly Times Ltd.[5] In White v Director of Housing, Gillard J stated that the terms of an offer must be “clear, precise, certain and capable of acceptance”.[6]
[5][2010] VSC 471 [34].
[6][2003] VSC 124 [17].
Mr Bick QC also submitted that the offer did not comply with Rule 26.03(7). This was because paragraph 2 of the offer made provision for costs to be paid whereas Rule 26.03(7) already provided for the defendants to pay the plaintiff’s costs in respect of the claim up to and including the day the offer was served.
There are differences of wording, albeit fairly minor, between what is said in paragraph 2 of the offer and what is said in Rule 26.03(7). Rule 26.03(8) takes effect to negative, or limit, the operation of the terms of the offer dealing with payment of costs to that found in Rule 26.03(7).
Mr Kirby resisted Mr Bick QC’s submissions as to the operation and effect of Order 26. He contended that the offer was valid, it was simple in its terms and complied with the Rules. The offer was made to all defendants despite the typographical error in the first line. The defendants’ solicitor was under no apprehension responding in the way he did a short time later on the same day without seeking any clarification.
Mr Kirby referred to the overarching obligation of the defendants under s 22 of the Civil Procedure Act 2010 (Vic) to use reasonable endeavours to resolve a dispute by agreement between the parties in dispute. Mr Kirby submitted on the evidence that Ottedin and Goldcare were $2 companies and that Portbury had, of necessity, to rely on the guarantees. If one of the corporate entity purchasers had said “I will accept” and if, subsequently, there had been a default with judgment against that corporate entity, the cause of action against the other defendants would have merged or might otherwise have been waived.
Mr Kirby relied on Rule 26.09 as it was found in the Rules at the time of the offer. Rule 26.09(a) provided that the consequences as to costs set out in Rule 26.08 did not apply to the offer unless, in the case of an offer made by the plaintiff, the offer was made to all defendants and was an offer of compromise of the claim against all of them. Rule 26.09(a) applied where two or more defendants are alleged to be jointly, or jointly and severally, liable to the plaintiff in respect of damages and rights of contribution appear to exist between the defendants.
Mr Kirby submitted that there was no lack of clarity in the present offer and no attempt to obtain different payments from different defendants, or ambiguity as to who had to pay what. He referred to Simonovski v Bendigo Bank Ltd (No 2) where an offer of compromise contained an offer of costs.[7] Ashley J, as His Honour then was, held the offer of compromise to be good after considering the effect of Rule 26.03(7) and (8).[8]
[7][2003] VSC 139 [4].
[8]Ibid [8].
As to the discretion in the court to otherwise order contained in Rule 26.08(3), Mr Kirby again referred to Simonovski v Bendigo Bank Ltd (No 2),[9] submitting that an order otherwise should not likely be made and that the position prima facie established by the rule is a strong one, not easily displaced.
[9]Ibid [17].
In this case the legal duties and responsibilities arising between the parties are multiple, some joint and some several. The sale contract was a several obligation on the part of Ottedin with Mr Ottewell acting as the sole guarantor. The nomination involved joint and several obligations between Ottedin and Goldcare. The varied sale contract was guaranteed by two guarantors who are jointly and severally liable on their guarantees but not jointly and severally liable with Ottedin and Goldcare.
It is clear from the argument that technical issues arise as to the application of Order 26 to the facts and circumstances of this proceeding. In my view, it is far preferable to decide the level of costs that the plaintiff should be awarded, on the basis of general considerations as to costs relating to the proceeding as a whole and the proper administration of justice in the circumstances of this proceeding, rather than by interpreting the technical rules and sub-rules found in Order 26.
Having regard to the opinion that I have come to concerning the proper exercise of the court’s general discretion as to costs, there is no need for me to finally decide the submissions made by counsel as to the proper interpretation of the rules and sub-rules which made up Order 26. This is because I have come to the conclusion that the plaintiff should be awarded indemnity costs for the reasons which follow.
Discretion as to costs
I now turn to the second basis on which the plaintiff seeks costs in the proceeding on an indemnity level rather than party-party costs. In Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority,[10] the Court of Appeal held that the correct approach where a Calderbank offer had been rejected was to treat the offer as a matter to which the court should have regard when considering whether to order indemnity costs.
[10](2005) 13 VR 435, 440 [19] (Warren CJ, Maxwell P and Harper AJA).
The Court of Appeal referred to the seminal contribution made to the law on indemnity costs by Sheppard J in Colgate Palmolive Co v Cussons Pty Ltd,[11] where His Honour considered that “an imprudent refusal of an offer of compromise” was a sufficient circumstance to warrant the exercise of the discretion to award indemnity costs. Ultimately the Court of Appeal concluded that the test should be whether the rejection of an offer of compromise was unreasonable. The court rejected more stringent tests such as ‘manifestly’ or ‘plainly’ unreasonable. The court also accepted what was said by Hayne JA, as His Honour then was, in Grbavac v Hart,[12] as to the policy rationale underlying the availability of special orders for costs where offers of compromise are rejected.
[11](1993) 46 FCR 225, 233.
[12][1997] 1 VR 154, 165.
The decision of the Court of Appeal in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority has been applied in many subsequent cases.[13] In Foster v Galea (No 2), Byrne J said:[14]
There is abundant authority for the proposition that when an offer of compromise fails to satisfy the formal requirements of O 26, it may, nevertheless, be brought to account in the exercise of the court’s general discretion as to costs.
[13]See, eg, BHP Billiton (Olympic Dam) Corporation Pty Ltd v Steuler Industriewerke GmbH (No 3) [2012] VSC 414 [58]–[67] (Habersberger J).
[14][2008] VSC 331 [7].
Byrne J held that even if an offer falls outside the Order 26 regime it is available for use by the parties unless it was made in terms or in circumstances which confer on it common law privilege. Moreover, as His Honour pointed out, it leaves the fairly mechanical regime of Rule 26.08 and enters the more flexible one of discretion as to costs.
Section 10 of the Civil Procedure Act2010 (Vic) has imposed overarching obligations on parties and practitioners alike. Section 7 provides that the overarching purpose of the Act and of the rules of court in relation to civil proceedings is “to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute”. Under s 22, a person to whom the overarching obligations apply must use reasonable endeavours to resolve a dispute by agreement between the persons in dispute, unless it is not in the interests of justice to do so, or the dispute is of such a nature that only judicial determination is appropriate.
It is clear in the present case that it was in the interests of justice for the dispute to be resolved by agreement if at all possible. It is equally clear that the dispute in this case is not of such a nature that only judicial determination was appropriate. In considering how the general discretion of the court should be exercised, having regard to the rejection of the offer of compromise of $1.7 million, plus costs, in resolution of the plaintiff’s claim and the defendants’ counter-claim, I note that there are a number of important circumstances that need to be taken into account.
The first is that the parties had already had the benefit of the decision of Dixon J in Ottedin Investments Pty Ltd v Portbury Developments Co Pty Ltd[15] handed down on 27 May 2011 as to the meaning and relevant effect of the varied sale contract. Dixon J held that Portbury had properly rescinded the varied sale contract. True it is that only Ottedin was a party to this proceeding and that, as I held, Mr Ottewell and Mr Kosta were not bound personally by this decision as a matter of issue estoppel. Nevertheless, the judgment of the court was not subject to appeal and was expressed in strong and definitive language. The judgment made it clear that Ottedin was not entitled to avoid the varied sale contract or recover the deposit.
[15](2011) 35 VR 1.
The effect of the judgment of Dixon J was that Portbury was entitled to act under general condition 28.4(c)(ii) to resell the property and recover any deficiency in the price on the resale and any resulting expenses by way of liquidated damages.
A second important circumstance is that the defendants, through Mr Ottewell, closely followed the progress of events, having a number of conversations with Mr Portbury, Mr Smirk and others. As I have found, Mr Ottewell said in evidence, and Mr Portbury agreed, that in or about early March 2011 Mr Portbury had rung him and told him that the bank was pushing him hard and that Mr Ottewell better come up with the money and settle this.[16] Mr Ottewell knew that Portbury was under financial pressure from the bank to achieve a sale of the property and generally.
[16]Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 [53].
Mr Ottewell attended the auction of the property on 29 June 2011 and expressed concern about the level of bidding, claiming the property was worth considerably more. He was well aware that the property had sold after auction for $2.1 million.
While dissatisfied as to the price achieved, he was fully informed of the loss on resale actually suffered by Portbury. This was not a case where an ambit claim for loss or damage was being advanced expressed in large numbers. Rather, the loss was real and Mr Ottewell and the defendants had seen the events which caused the loss to unfold before them.
The certainty associated with the loss and damage on resale actually suffered by Portbury is, in my view, the third important circumstance. The loss on resale was real and known. The costs associated with the agent’s commission, marketing and advertising expenses, and interest were all calculable or relatively predictable. There were no surprises in the expenses or interest payable under general condition 26 or under the Penalty Interest Rates Act 1983 (Vic).
The fourth important circumstance is that the defendants had retained and had the benefit of a valuation advice of Mr Les Brown, which is the valuation I accepted in the judgment.[17] They had advice from a leading valuer that the property had fallen in value from a purchase price of $6.5 million to $4 million. Mr Les Brown’s advice was dated August 2012. The effect of the global financial crisis on the englobo property market is evident enough from that valuation and was in the public domain.
[17]Ibid [343]-[351] and [379]-[383].
Mr Bick QC submitted that it was reasonable in the circumstances to view Portbury’s alleged loss as $1,175,000 made up of the purchase price of $6,500,000 less the sum paid of $1,325,000 and the value of $4 million. However, in addition to the sum of $1,175,000 there would be agent’s commission, marketing and advertising expenses of the resale, which Portbury was entitled to recover under general condition 28.4 by way of liquidated damages.
Ultimately these were proven in the amounts of $17,325 for agent’s commission, and $11,057.97 and $14,531.52 for marketing and advertising expenses for the tender closing on 13 May 2011 and the auction sale of the property on 29 June 2011 respectively.
Even though these amounts were unknown to the defendants, in giving consideration to their position, it was appropriate for allowance to be made for these costs which they knew Portbury must have incurred.
The defendants also knew that interest was payable on the unpaid settlement amount under general condition 26 of the varied sale contract on the amount awarded and under the Penalty Interest Rates Act 1983 (Vic). These amounts were also calculable by the defendants and their advisers.
Mr Bick QC referred to the calculation of interest provided by Portbury’s solicitor and agreed by the defendants’ solicitor. It calculated penalty interest on the amount of $3,144,488.48 at $454,100.03 as at the date of the offer of compromise.
Calculation of the amount of interest on the amount of $1,175,000 over the sale period, being a little over 37.3% of the amount recovered of $3,144,488.18, gives the figure of $169,683.37 which may be rounded to $170,000. There is also penalty interest payable on the amount of agent’s commission, marketing and advertising expenses.
Given these figures as at the date of the offer of compromise, the defendants faced in round terms, a minimum exposure of:
· losses suffered by Portbury of $1,175,000;
· selling commission and expenses of the resale, of which they did not know the precise amount but might reasonably have allowed $40,000;
· interest under general condition 26, which was calculable at, at least $26,000, although it would have been significantly more if the second rescission notice was held to be the effective rescission notice; and
· penalty interest of $170,000.
The total was in all $1,411,000. This left a difference of $289,000 between the amount the defendants knew they were likely to be liable for as an absolute minimum and the amount of the offer of $1.7 million made in the offer of compromise.
Mr Bick QC submitted that the defendants’ exposure was no more than $1,629,000, a figure higher than the minimum exposure of $1,411,000 that I will adopt, and submitted that this supported their rejection of the offer of $1.7 million plus costs that the defendants were being asked to pay.
By summons dated 10 November 2011, Portbury sought summary judgment against the defendants. In June 2012, Gardiner AsJ gave judgment and made orders in favour of Portbury in the sum of $3,683,382.07 with interest of $378,837.05. The defendants appealed against the summary judgment and their appeal was allowed by Pagone J in Portbury Development Pty Ltd v Ottedin Investments Pty Ltd.[18]
[18][2012] VSC 490.
His Honour held that the proceeding should not be disposed of by way of summary judgment but should proceed to trial. The application before Pagone J involved a rehearsal of many of the issues that stood to be determined before me.
I conclude that as a result of the proceedings before Pagone J over two days in August 2012 and the earlier hearing before Gardiner AsJ in June 2012 the parties and their legal representatives had a high level of understanding of the risks of the litigation.
Quite apart from their minimum exposure of $1,411,000 on my calculations, the defendants faced a further claim of $1.9 million and additional interest knowing as they did that the $1.9 million was a loss on resale which had actually been incurred by Portbury. They were aware of the magnitude of the risk they faced with the previous summary judgment from an Associate Justice of this court, of $3,683,382.07 together with interest of $378,837.05 and costs, albeit that the summary judgment had later been set aside by Pagone J.
It was obvious that the defendants faced very considerable risk from the ongoing litigation, quite apart from the minimum exposure they had already, as has proven to be the case in the event. The offer represented a very substantial discount. The defendants would have been very well advised to have accepted the offer of $1.7 million plus party-party costs, which was, at least, $1.3 million plus additional interest less than the maximum level of exposure that they actually faced.
I now turn to the factors relevant to the test of unreasonable rejection adopted by the Court of Appeal in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority.[19] Some of these factors have been addressed already. The list of factors is non-
prescriptive.[20]
[19](2005) 13 VR 435, 441-3 [23]-[29].
[20]Boulton v Hy-Line Australia Pty Ltd(Costs) [2013] VSC 147 [11] (Williams J); Luxmore Pty Ltd v Hydedale Pty Ltd (2008) 20 VR 481, 484 [11] (Maxwell P and Kellam JA).
The first factor is the stage of the proceeding at which the offer was received. Here, the offer was made shortly after the decision of Pagone J. All of the affidavits and exhibits relied on before Pagone J were available to the defendants. The financial pressure from the bank is noted by Pagone J in his judgment.[21]
[21]See, eg, Portbury Development Pty Ltd v Ottedin Investments Pty Ltd [2012] VSC 490 [21]-[22].
The defendants also had the benefit of the affidavits and exhibits before Dixon J in the earlier proceeding. There had already been decisions, or discussion, by two judges of this court of many of the issues in dispute in the proceeding. Although witness statements, expert witness statements, discovery and subpoenas were yet to be served, the defendants had the affidavits and a considerable amount of information derived from the court proceedings and from their own involvement in the events that had transpired. They were well placed to assess risks and reach a sensible compromise.
The second factor is the time allowed to the offeree to consider the decision. The offer was open to be accepted by the defendants for a period of 14 days following service of the offer. In fact, the defendants’ solicitor did not need the 14 days. He was able to respond very quickly after the offer was made, rejecting the offer on the very day that it was made.
The third factor is the extent of the compromise offered. The extent of the compromise offered was very considerable. It reflected a reduction in liability of over $1.3 million plus additional interest from that ultimately awarded. It was a most substantial discount.
The fourth factor is the offerees’ prospects of success as at the date of the offer. Of the offer amount of $1.7 million the defendants had a minimum exposure which I have calculated at $1,411,000. They also had to meet a claim of $1.9 million added to which there would be additional penalty interest if the claim for $1.9 million was successful in whole or part. Pagone J had held that there was a serious issue to be tried. Effectively the defendants could have settled the additional claim of $1.9 million and additional penalty interest for an amount not exceeding $289,000 – a very good outcome for them.
The fifth factor is the clarity with which the terms of the offer were expressed. From the offer and the accompanying email of 6 December 2012, it is clear that the offer was intended to resolve Portbury’s claim and the defendants’ counter-claim. It was intended to end the litigation between the parties. The quantum was in a fixed sum and the defendants were to pay Portbury’s party-party costs.
The final factor is whether the offer foreshadowed an application for indemnity costs in the event of the offerees rejecting it. The offer was made in the form of an offer of compromise under Order 26. It was plain that in the event of rejection an application for indemnity costs would result. The contrary was not suggested by senior counsel for the defendants.
In my view the rejection by the defendants of Portbury’s offer made on 6 December 2012 was unreasonable. The offer made by Portbury on 6 December 2012 was fair and sensible, and even generous, providing a large discount. It represented a realistic resolution of the proceeding without the need for a trial or the occurrence of further interest or costs.
In conclusion, in the exercise of my discretion as to costs, I will allow Portbury costs of the proceeding on a party-party basis until 10 December 2012, and thereafter on an indemnity basis.
Costs retainer
There is one final matter to be determined. Portbury has sought costs in accordance with the terms of its retainer with its legal representatives. There is no evidence of the retainer before me and no evidence from a costs consultant of the appropriateness of the retainer. The claim by the plaintiff for costs in accordance with the retainer is a matter appropriate for determination by the Costs Court.
Orders
The order of the court will be:
(1) Judgment for the plaintiff on the claim in the sum of $3,144,498.49 together with interest in the sum of $869,259.98 with a stay on payment until 17 April 2014.
(2) The counter-claim is dismissed.
(3) The defendants pay the plaintiff’s cost of the proceeding, including reserved costs, on a party-party basis until 10 December 2012 and thereafter on an indemnity basis to be assessed by the Costs Court.
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