Sural SpA v Downer EDI Rail Pty Limited

[2007] NSWSC 1292

CITATION:	Sural SpA & Anor v Downer EDI Rail Pty Limited [2007] NSWSC 1292
HEARING DATE(S):	8/10/07, 9/10/07, 11/10/07, 12/10/07, 15/10/07, 16/10/07
JUDGMENT DATE :	14 November 2007
JURISDICTION:	Equity Division Technology and Construction List
JUDGMENT OF:	Einstein J
DECISION:	Costs ordered on an indemnity basis across a particular period of time.
CATCHWORDS:	Costs - Indemnity costs - Calderbank offers - Principles
LEGISLATION CITED:	Civil Procedure Act 2005 (NSW) Legal Profession Act 2004 (NSW) Uniform Civil Procedure Rules 2005 (NSW)
CASES CITED:	Calderbank v Calderbank (1976) Fam 93 Colgate Palmolive Co & Anor v Cussons Pty Ltd (1993) 46 FCR 225 Crump v Equine Nutrition Systems Pty Limited (No 2) [2007] NSWSC 25 Equity 8 Pty Limited v Shaw Stockbroking Limited [2007] NSWSC 503 Gretton v The Commonwealth of Australia [2007] NSWSC 149 John S Hayes & Associates Pty Ltd v Kimberley-Clarke Australia Pty Ltd (1994) 52 FCR 201 Jones v Bradley (No 2) [2003] NSWCA 258 Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 9177 Leichhardt Municipal Council v Green [2004] NSWCA 341 MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 70 FLR 235 Pollard v Baulderstone Hornibrook Engineering Pty Ltd (No 2) [2007] NSWSC 486 Russell v Edwards (No 2) [2006] NSWCA 52 SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323
PARTIES:	Sural SpA (First Plaintiff) Sural CA (Second Plaintiff) Downer EDI Rail Pty Limited (Defendant)
FILE NUMBER(S):	SC 55058/04
COUNSEL:	Mr W F Lally QC, Mr J P Slattery (Plaintiffs) Mr M J Leeming SC, Mr M A Jones (Defendant)
SOLICITORS:	Clayton Utz (Plaintiffs) Corrs Chambers Westgarth (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
TECHNOLOGY AND CONSTRUCTION LIST

Einstein J

Wednesday 14 November 2007

55058/04 Sural SpA & Anor v Downer EDI Rail Pty Ltd

JUDGMENT

Costs

1 Judgment in these proceedings was delivered on 7 November 2007: [2007] NSWSC 1234]. The remaining issue concerns the proper order as to costs. Sural SpA accepts that the usual party/party order for costs should be made against it. Downer contends that it is entitled to an order for indemnity costs by reason of the failure of Sural SpA to accept one or other of three Calderbank letters sent respectively on 25 August 2005, 9 August 2006 and 8 August 2007.

The principles

2 There is no serious issue as to the principles which are to be applied. As is apparent from the Uniform Civil Procedure Rules 2005 and the authorities which inform the exercise of the discretion, the critical question for the Court is whether it was unreasonable for the plaintiffs not to accept any of the offers of compromise: SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323; Jones v Bradley (No 2) [2003] NSWCA 258 at [8]-[9] and Leichhardt Municipal Council v Green [2004] NSWCA 341.

3 Rule 42.2 of the Uniform Civil Procedure Rules 2005 provides that unless the Court or the rules otherwise provide, costs payable to a person under an order of the Court or the rules are to be assessed on the ordinary basis (party/party). [For the meaning of “ordinary basis” see Civil Procedure Act 2005 sections 98 and 3 and the Legal Profession Act 2004 section 364].

4 In Colgate Palmolive Co and Anor v Cussons Pty Ltd (1993) 46 FCR 225 Sheppard J observed (at 233):

“In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course.”

5 Sheppard J went on to note [at 233] some of the circumstances which have been thought to warrant the exercise of the discretion to award costs other than on a party and party basis, one of which was an “imprudent refusal of an offer of compromise”.

6 However, the cost consequences of a failure to accept an offer of compromise not subsequently bettered by the offeree vary depending upon whether the offer of compromise was made in accordance with the rules of the Court or contained in a Calderbank letter. Santow JA in Leichhardt Municipal Council v Green [2004] NSWCA 341 observed at [19], that while the former gives rise to a prima facie entitlement to have costs awarded on an indemnity basis:

“It is not the case that unaccepted offers of compromise by Calderbank letter should give rise to a prima facie presumption of indemnity costs if the offer is not bettered.”

7 The position is as stated by Giles JA in SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37]:

“The making of an offer of compromise in the form of a Calderbank letter (from Calderbank v Calderbank (1976) Fam 93) where the offeree does not accept the offer but ends up worse off than if the offer had been accepted, is a matter to which the Court may have regard when deciding to otherwise order, but it does not automatically bring a different order as to costs. All the circumstances must be considered, and while the policy informing the regard had to a Calderbank letter is promotion of settlement of disputes an offeree can reasonably fail to accept an offer without suffering in costs. In the end the question is whether the offeree’s failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs, and that the offeree ends up worse off than if the offer had been accepted does not of itself warrant departure : see for example, John S Hayes & Associates Pty Ltd v Kimberley-Clarke Australia Pty Ltd (1994) 52 FCR 201; MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (1996) 70 FLR 235.” [emphasis added]

[Subsequently affirmed in Jones v Bradley (No 2) [2003] NSWCA 258 at [9]; Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19] and Russell v Edwards (No 2) [2006] NSWCA 52 at [6]-[7].]

8 Nor does the non-acceptance of a Calderbank offer which the ultimate result establishes favoured the offeree, itself prima facie demonstrate unreasonableness of the offeree such that the offeree bears the onus of showing why indemnity costs should not be awarded. The applicant for indemnity cost still bears the onus of showing that the non-acceptance was unreasonable: MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 70 FCR 235 at 240A-B.

9 The principles have been conveniently summarised by Hislop J in Pollard v Baulderstone Hornibrook Engineering Pty Ltd (No 2) [2007] NSWSC 486 at [5]-[9] [which was adopted by Barrett J in Equity 8 Pty Limited v Shaw Stockbroking Limited [2007] NSWSC 503 at [33]]:

Rule 42.1 of the Uniform Civil Procedure Rules 2005 (“the rules”) provides ‘Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs’.

Rule 42.15 of the rules provides, relevantly, that where an offer of compromise is made by a defendant pursuant to rule 20.26, and the plaintiff does not accept that offer and recovers a judgment less favourable to him or her than the terms of the offer then, unless the Court orders otherwise, the plaintiff is entitled to an order against the defendant for the plaintiff’s costs until the beginning of the date following the day on which the offer was made from which date the defendant is entitled to its costs assessed on an indemnity basis. In the case of an offer pursuant to rule 20.26 the court’s discretion to ‘order otherwise’ will, in general, be exercised only in an exceptional case — Leichhardt Municipal Council v Green [2004] NSWCA 341 and it is for the plaintiff to prove that the court should ‘order otherwise’ — Gretton v The Commonwealth of Australia [2007] NSWSC 149 at [9].

The court may also make an order that a defendant is entitled to indemnity costs where an offer has been made in a Calderbank letter and the judgment obtained by the plaintiff is less favourable to him or her than the terms of the offer. …

Relevant factors are whether the rejection of the compromise offer was reasonable in the circumstances and the timeframe in which the offeree had to consider the offer — Crump v Equine Nutrition Systems Pty Limited (No 2) [2007] NSWSC 25 at [40]. It is for the defendant to persuade the court that the plaintiff acted unreasonably in rejecting the Calderbank offer — Gretton at [16]. Circumstances to be considered in determining whether the failure to accept the offer was unreasonable or not include the making of an assessment of the strengths and weaknesses of the plaintiff’s case looking at the claim prospectively at the time the offer was made. This task is not to be determined with the benefit of hindsight — Gretton at [24].

Turning to the case at hand

The necessary comparison

10 The Calderbank letters sent by Downer are to be compared against the result of the proceedings in which Downer has been found to be entitled to:

i. $2,165,066.41 plus interest;

ii. a setting off of the security.

11 The three offers of compromise served by Downer have involved cascading amounts. The dates, terms, expiry date and form of each of those offers is summarised in the following table:

Date	Principal commercial terms of offer	Expiry date	Expressed in terms of Calderbank v Calderbank
25.8.2005	* Downer retain security * Sural pay to Downer $2m * each party bear their own costs	22.9.2005	Yes
9.8.2006	* Downer retain security * Sural pay to Downer $1.7m * each party bear their own costs	6.9.2006	Yes
8.8.2007	*main claim dismissed *Sural pay to Downer $1.3m *each party bear their own costs	5.9.2007	Yes

12 As Downer has contended each of these letters identified in summary form the deficiencies in the wooden drums, which is substantially reflected in the judgment of the Court. However the present exercise requires that the Court focus upon whether or not the failure to accept the offer was unreasonable, looking at the claim prospectively as at the time the offer was made. That task is not to be determined with the benefit of hindsight.

13 The critical comparison is between the net cash amount payable by Sural SpA to Downer at each of those points in time.

14 The cash obligation under each of the offers is clear, being $2m (25.8.2005 offer), $1.7m (9.8.2006 offer) and $1.3m (8.8.2007 offer).

15 The cash obligation occasioned by the judgment at each of those points in time [taking into account the interest component on $2,165,066.41 from 10 May 2004, and the set-off of security and interest on the security from 10 May 2006] is as follows:

Date	Principal commercial terms of offer	Cash obligation of offer	Cost of judgment as at time of offer
25.8.2005	*Downer retain security *Sural pay to Downer $2m *each party bear their own costs	$ 2m	$1,975,187.93 plus costs
9.8.2006	* Downer retain security * Sural pay to Downer $1.7m * each party bear their own costs	$ 1.7m	$2,151,467.90 plus costs
8.8.2007	* main claim dismissed *Sural pay to Downer $1.3m *each party bear their own costs	$ 1.3m	$2,373,458.34 plus costs

Dealing with the first Calderbank letter

16 In my view the failure of Sural SpA to accept the first of the Calderbank letters cannot be said [in the then circumstances] to have been unreasonable. This is for the following reasons:

i. There is as close as may be a parity as between the cash obligation for payment by Sural SpA stipulated in this Calderbank letter and the judgment sum, taking into account interest [the differences are not to be measured in coffee spoons: TS Eliot cf Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 9177 at 9186 per Glass JA].

ii. It was not unreasonable for this first Calderbank offer to be rejected because as at the time of the making of the offer and through the duration of the period whilst the offer remained extant, Downer had not provided the Sural parties with sufficient information to enable a proper assessment of the likelihood of Downer successfully establishing the quantum of its claim for damages.

iii. The facts are as follows:


a) As at 25 August 2005, the only particulars that Downer had provided as to the quantum of its claim for damages were those set out in the particulars to paragraph 18 of the Amended Cross-claim dated 17 December 2004.

b) These particulars were the same as those provided in the original Cross-claim dated 23 September 2004 and included, among other things, a claim of AU$1,450,768.22 on account of “ Increase Actual Running-out Costs: Labour and Plant – Pinjar - Cataby T/L ” and AU$880,745.24 on account of “ Increase Running-out Costs: Labour and Plant – Cataby – Eneabba T/L ”.

c) The particulars to paragraph 18 of the Amended Cross-claim stated that further particulars would be supplied in due course.

d) The solicitors for the Sural Parties requested further and better particulars in respect of paragraph 18 of the Cross-claim on 8 October 2004.

e) The response from the solicitors for Downer was that the particulars provided were sufficient.

f) Further, as at 25 August 2005, Downer had not served any evidence that purported to support the quantification of its claim for damages as set out in the particulars to paragraph 18 of the Amended Cross-claim. The Sural Parties did not receive any evidence in this regard until served with the first affidavit of Mr Masters on 27 July 2006.

Dealing with the second Calderbank letter

17 I accept however that by the time of the second Calderbank offer it could no longer be said that it remained unreasonable for the Sural parties to accept this offer. The state of affairs had significantly changed and each of the matters referred to in the previous paragraph had by this time been sufficiently treated with by Downer.

18 I do not regard Sural's contention that deficiencies in the admissibility of segments of the first affidavit of Mr Masters [which were ultimately ruled upon during the hearing] could be taken into account as justifying the proposition that following service of that affidavit, Sural acting reasonably, could proceed to reject the second Calderbank offer. It has to be remembered that the affidavit of Mr Masters of 26 July 2006 was served together with two volumes of material containing detailed schedules and business records.

19 Of course it is true that as the differential between the terms of each of the cascading Calderbank offers and the likely result increased, the entitlement of the Sural parties to rely upon matters of less significance diminished. These admissibility issues fall into that category.

20 As the table shows, in terms of money, the offers of the two later dates were far more beneficial to the plaintiffs than judgments calculated with reference to the same times. At the time of the 9 August 2006 offer, the plaintiffs would have not only saved a substantial cash exposure on judgment and interest but also entirely avoided a substantial costs exposure.

21 By the time of the 9 August 2006 offer, the plaintiffs were not only well advised of the nature of the defendant’s case, but had also received substantially all of the principal evidence going to its cross-claim, in particular, all of the lay evidence from the engineers on-site who explained in detail the effects being suffered by the use of the wooden drums in the run-out. At that stage, the evidence that had been served was:

1	Affidavit of Mimmo Antoniazzi	10.06.05
2	Affidavit of Alfredo (Fred) Chigioni	23.06.05
3	Affidavit of Darren Moy	24.06.05
4	Affidavit of Carl Hendrick	01.07.05
5	Affidavit of Simplicio (Sam) Rantucci	01.07.05
6	Affidavit of Alfredo (Fred) Chigioni	23.06.06
7	Affidavit of Simplicio (Sam) Rantucci	23.06.06
8	Affidavit of Sandro Barona	26.06.06
9	Affidavit of Bruno Guazzelli	03.07.06
10	Affidavit of Darren Moy	04.07.06
11	Affidavit of Mimmo Antoniazzi	14.07.06
12	Affidavit of Sandro Barona	21.07.06
13	Affidavit of Franz Ritky	24.07.06
14	Affidavit of Mark Andrew Bradford	24.07.06
15	Affidavit of Merric John Masters	26.07.06

22 By the time of the 9 August 2006 offer, that evidence had been in the plaintiffs’ possession for at least some weeks.

Finding

23 In all of the circumstances the finding is that it was unreasonable for SpA to reject the terms of the 9 August 2006 Calderbank offer.

24 It is unnecessary for these reasons to treat with the final Calderbank offer.

25 The principled exercise of the relevant discretion is to order that Sural SpA pay Downer's costs on a party/party basis up to 6 September 2006 [being the last day on which the 9 August 2006 Calderbank offer could have been accepted] and on an indemnity basis thereafter.

Order

26 The Court orders that the first plaintiff pay the defendant/cross-claimant’s costs of the proceedings on a party/party basis up to 6 September 2006 and on an indemnity basis thereafter.