Toga Pty Ltd v Perpetual Nominees Ltd (No 2) (RLD)

[2013] NSWADTAP 15

Administrative Decisions Tribunal

New South Wales

Medium Neutral Citation:	Toga Pty Ltd v Perpetual Nominees Ltd (No 2) (RLD) [2013] NSWADTAP 15
Hearing dates:	On the papers
Decision date:	10 April 2013
Jurisdiction:	Appeal Panel - Internal
Before:	M Chesterman, Deputy President
Decision:	The Appellant / Cross Respondent is to pay the Respondents / Cross Appellants' costs of the proceedings at first instance and on appeal, as agreed or assessed on a party/party basis, from 30 August 2011 to the date of this decision.
Catchwords:	Costs - retail lease - first instance and appeal proceedings
Legislation Cited:	Administrative Decisions Tribunal Act 1997 Retail Leases Act 1994
Cases Cited:	A & J Verdi Pty Ltd v Uckan (No 2) (RLD) [2011] NSWADTAP 6 Adwell Holdings Pty Ltd v Ull Pty Ltd [2010] NSWADT 166 AT v Commissioner of Police [2010] NSWCA 131 Barsoum v Glebe Administration Board (No 2) [2002] NSWADT 174 Bradley v North Eastern Travelstops Pty Ltd (No 2) [2005] NSWADT 160 Calderbank v Calderbank [1976] Fam 93 Chand v Railcorp of NSW (No 2) [2011] NSWCA 80 De Costi Seafoods (Franchises) Pty Ltd v Broadway Shopping Centre Sydney Pty Ltd [2011] NSWADT 40 Fagerlund v PPS Nominees Pty Ltd (No 2) [2011] NSWADT 52 Profilio v Coogee Bay Village Pty Ltd (No 4) [2011] NSWADT 64 Rolls Royce Industrial Power (Pacific) Ltd v James Hardie and Co Pty Ltd (2001) 53 NSWLR 626; [2001] NSWCA 461 Rucom Pty Ltd and Anor v Multiplex & Ors [2010] NSWADT 1 Salon Today Pty Limited v M.M.I.R. Pty Limited [2009] NSWADT 71 Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124 Toga Pty Limited v Perpetual Nominees Limited and CFS Managed Property Limited [2012] NSWADT 80 Toga Pty Ltd v Perpetual Nominees Ltd (RLD) [2013] NSWADTAP 2 Trad v Jones (No 3) (EOD) [2013] NSWADTAP 13 Tsimbakos v BlackRock Investment Management (Australia) Ltd (No 2) [2010] NSWADT 260 Valentino Franchise Pty Ltd (ACN 114 469 662) v Brookfield Multiplex WS Retail Landowner Pty Ltd (ACN 109 033 794) (No 2) (RLD) [2012] NSWADTAP 40
Category:	Costs
Parties:	Toga Pty Ltd (Appellant / Cross Respondent) Perpetual Nominees Ltd (First Respondent / Cross Appellant) CFS Managed Property Ltd (Second Respondent / Cross Appellant)
Representation:	Corrs Chambers Westgarth (Appellant / Cross Respondent) Minter Ellison Lawyers (Respondents / Cross Appellants)
File Number(s):	129010, 129014
Decision under appeal	Citation: Toga Pty Limited v Perpetual Nominees Limited and CFS Managed Property Limited [2012] NSWADT 80 Date of Decision: 2012-04-30 00:00:00 Before: Retail Leases Division File Number(s): 115048, 115056

decision

Introduction

1. This decision relates to the costs of two sets of proceedings.

1. The first of these comprised an application and a cross application, which were heard on 9 and 10 November 2011 in the Retail Leases Division of the Tribunal and determined in a decision delivered on 30 April 2012 (Toga Pty Limited v Perpetual Nominees Limited and CFS Managed Property Limited [2012] NSWADT 80 - hereafter 'the Primary Decision').

1. The second set of proceedings comprised an appeal and a cross appeal instituted against the Primary Decision. These proceedings were heard on 20 September 2012 and determined in a decision delivered on 15 January 2013 (Toga Pty Ltd v Perpetual Nominees Ltd (RLD) [2013] NSWADTAP 2 - hereafter 'the Appeal Decision').

1. Toga Pty Limited ('Toga') was the Applicant / Cross Respondent in the proceedings at first instance and the Appellant / Cross Respondent in the appeal proceedings. It was the sublessee under registered Sublease No. AA989655B ('the Sublease') relating to retail shop premises near Central Railway Station, Sydney.

1. The First Respondent / Cross Applicant (also the First Respondent / Cross Appellant) was Perpetual Nominees Limited ('Perpetual'), and the Second Respondent / Cross Applicant (also the Second Respondent / Cross Appellant) was CFS Managed Property Limited. They were the sublessors of the premises to which the Sublease related.

1. Perpetual is the trustee of a Managed Investment Scheme called the Colonial Commercial Property Trust. CFS Managed Property Limited is the Responsible Entity and Manager of the Scheme.

1. In line with the terminology of the Primary Decision, I will use the term 'Colonial' to describe both sublessors.

1. Following delivery of the Primary Decision, Colonial applied for the costs of the proceedings at first instance and the parties filed submissions on this matter. But the directions given for the conduct of the appeal proceedings included a direction that the determination of these costs should be deferred and should take place alongside the determination of the costs of the appeal proceedings.

1. In the Appeal Decision, the parties were directed to file their submissions relating to the costs of the appeal proceedings, together with any supplementary submissions relating to the costs at first instance.

1. The successful party, Colonial, has applied for the following costs orders, framed in the alternative:-

(i) Toga is to pay Colonial's costs up to the date of a letter dated 30 August 2011 conveying an offer of settlement ('the Calderbank letter'), as agreed or assessed, on a party/party basis and thereafter on an indemnity basis, up to the date of the Appeal Decision.

(ii) In the alternative, Toga is to pay Colonial's costs of the proceedings at first instance and on appeal, pursuant to clause 3.4 of the Sublease.

(iii) Further and in the alternative, Toga is to pay Colonial's costs of both sets of proceedings, on the ground that an order to this effect would be 'fair'.

1. In support of these three claims, Colonial filed submissions in chief and submissions in reply relating to the costs at first instance on 25 May 2012 and 26 June 2012 respectively. It filed submissions in chief and submissions in reply relating to the costs of the appeal proceedings on 23 January 2013 and 22 February 2013 respectively.

1. Toga's submissions relating to the costs at first instance and the costs of the appeal proceedings were filed on 22 June 2012 and 19 February 2013 respectively.

1. Because the only issue to be decided is that of costs, the Appeal Panel is constituted by a Deputy President sitting alone, pursuant to section 24A(2)(a) of the Administrative Decisions Tribunal Act 1997 ('the ADT Act').

1. Section 77A of the Retail Leases Act 1994 ('the RL Act') provides that costs in Tribunal proceedings brought under this Act may be awarded under section 88 of the ADT Act. Relevant provisions of section 88 are reproduced below.

1. Under section 88, an Appeal Panel hearing an appeal from a decision at first instance has power to award costs in relation to the proceedings that led to this decision. This was confirmed by a ruling of the Court of Appeal in Chand v Railcorp of NSW (No 2) [2011] NSWCA 80 at [25 - 28]. A dictum in a recent Appeal Panel decision (Trad v Jones (No 3) (EOD) [2013] NSWADTAP 13 at [2]) suggesting that this power may be lacking appears to be based on a misreading of the Court of Appeal's ruling.

Background

1. It has been common ground throughout that the Sublease was governed by the RL Act. It had a term of 10 years commencing on 13 November 2000 and terminating on 12 November 2010.

1. Item 14 in the Reference Table of the Sublease stated that the lessee, Toga, was not required to pay the annual rent or the 'Lessee's Contributions' (i.e., the lessee's contribution to outgoings) for the period up to the first anniversary of the Commencing Date of the Sublease. Item 14 was referred to as a 'Special Covenant'.

1. The Sublease also contained an option to renew for a further ten years. It was common ground that Toga validly exercised this option, thereby renewing the Sublease for a further term of 10 years commencing on 13 November 2010.

1. The principal issue in dispute was whether under the Sublease the parties had agreed that the Special Covenant was to be included in the sublease (hereafter 'the Option Lease') that came into existence upon exercise of the option to renew.

1. In its Application, by which these proceedings were instituted, Toga maintained that the Special Covenant was to be included in the Option Lease and that it was therefore not liable to pay the rent and outgoings for the first year of this lease.

1. In its Cross Application, which was amended with leave at the Tribunal hearing, Colonial maintained that it was entitled to be paid this rent and outgoings.

1. In the Primary Decision, the Tribunal held in favour of Colonial. Its principal order was in the following terms:

The Applicant is obliged to pay to the Respondent the Annual Rent and Lessee's Contributions from 13 November 2010 to 12 November 2011 under the Option Lease that came into existence upon exercise of the option in the Sublease.

1. The Appeal Panel's decision was also in Colonial's favour, but was based on very different reasoning. It granted a declaration in substantially the same terms to those of the Tribunal's order. It also ordered that the relevant amount of Annual Rent and Lessee's Contributions, which had been held in escrow in a controlled money account pending the disposal of the proceedings, should be paid to Colonial. As at 31 December 2012, the balance in this account was $369,999.88, with interest continuing to accrue.

1. The different lines of reasoning whereby the Tribunal and the Appeal Panel reached the same overall result are set out in their respective decisions and will not be reproduced here, except to the extent necessary to explain my determinations regarding costs.

Section 88 of the ADT Act

1. So far as relevant to these determinations, section 88 states:-

88 Costs

(1) Each party to proceedings before the Tribunal is to bear the party's own costs in the proceedings, except as provided by this section.

(1A) Subject to the rules of the Tribunal and any other Act or law, the Tribunal may award costs in relation to proceedings before it, but only if it is satisfied that it is fair to do so having regard to the following:

(a) ...

(b) whether a party has been responsible for prolonging unreasonably the time taken to complete the proceedings,

(c) the relative strengths of the claims made by each of the parties, including whether a party has made a claim that has no tenable basis in fact or law,

(d) the nature and complexity of the proceedings,

(e) any other matter that the Tribunal considers relevant.

The parties' correspondence regarding costs

1. The first item of this correspondence was the letter referred to above (at [10]) as 'the Calderbank letter'. The first and most strongly pressed of Colonial's three claims for a costs order was based on this letter.

1. The Calderbank letter was sent by Colonial's solicitors to Toga's solicitors on 30 August 2011. This was about ten weeks before the commencement of the hearing at first instance.

1. The letter was headed 'Without prejudice save as to costs'. It commenced by stating that Toga's claim was without merit, as was apparent from (a) Colonial's documentary evidence, (b) material that Colonial had produced in response to a summons issued on Toga's application and (c) the terms of the Sublease. It then identified 14 specific aspects of the evidence as factors supporting this statement. Most of these related to the negotiations leading up to the execution of the Sublease.

1. The letter then conveyed the following offer on behalf of Colonial:-

Accordingly, in the interests of settling this matter expediently and cost effectively for our respective clients, we are instructed by the Respondents that, without any admission of liability, the Respondents are prepared to settle these Proceedings on the basis that the Applicant pay the Respondents:

(a) $300,000, being, the total rent (net rent plus outgoings) payable in the first year of the Option Lease $359,526.30 (excluding GST) less 16.5% ($59,526.30); and

(b) Each party pay its own legal costs incurred in connection with the proceedings.

1. After observing that Colonial reserved all its rights to recover costs under clause 3.4 of the Sublease (this clause is set out below), the letter stated (a) that the offer of settlement was open for acceptance until 5 p.m. on Tuesday 13 September 2011 and (b) that if it was rejected, Colonial would produce the letter, if the circumstances so justified, in support of an application for costs to be assessed 'on a scale in excess of the usual party/party costs including, but not limited to, indemnity costs'.

1. In a 'Without prejudice' letter to Colonial's solicitors dated 19 October 2011, Toga's solicitors stated that their client did not accept the offer contained in the Calderbank letter. Having disputed a number of the arguments made in that letter in support of Toga's case, they conveyed a counter-offer. Its terms were that Toga would pay to Colonial the sum of $143,810.52, representing 40% of the net rent and outgoings due under the Option Lease, and that each party would pay its own costs. Colonial did not accept this counter-offer.

Relevant clauses of the Sublease

1. The second of Colonial's three claims for costs was based on clause 3.4 of the Sublease. So far as relevant, this clause stated:-

3.4 Payment of Lessor's costs

The Lessee will pay to the Lessor the Lessor's reasonable legal and other Liabilities of or incidental to:...

(d) any breach or default by the Lessee under the Lease, and the exercise or attempted exercise of any right, power or remedy of the Lessor under the Lease, in law or in equity:

(e) the occurrence of any Event of Default...

1. In clause 11.1, the non-payment of rent, or of moneys other than rent payable under the Sublease, was stated to be an 'Event of Default'.

Colonial's submissions

1. A number of broad contentions set out in Colonial's submissions were relevant to both of its costs applications. Its submissions relating to the costs of the appeal proceedings were principally devoted to elaborating on arguments already made with reference to the costs at first instance.

1. The following passage in the Appeal Panel's decision in Valentino Franchise Pty Ltd (ACN 114 469 662) v Brookfield Multiplex WS Retail Landowner Pty Ltd (ACN 109 033 794) (No 2) (RLD) [2012] NSWADTAP 40 at [18] summarises some of these broad contentions advanced by Colonial:-

(1) The criterion established in this subsection is a 'relatively low hurdle for an applicant seeking an order', since 'the criterion of "fairness" will take into account the compensatory purpose of an award of costs, which will generally favour the successful party': AT v Commissioner of Police [2010] NSWCA 131 at [33].

(2) When proceedings in the Tribunal are commercial in nature, involving two parties who are acting in trade and commerce, one significant effect of the amendment to section 88 introducing the notion of 'fairness' (this took effect on 1 January 2009) is to 'broaden the basis upon which costs might be awarded': Adwell Holdings Pty Ltd v Ull Pty Ltd [2010] NSWADT 166 at [22]...

1. Colonial relied also on the following frequently-cited passage in Rucom Pty Ltd and Anor v Multiplex & Ors [2010] NSWADT 1 at [37]:-

37 So, it is plain to me that, not only is this Division a commercial division dealing with commercial issues between lessors and lessees in a retail lease environment, but, and in addition, proceedings should only be commenced in this Tribunal after very careful consideration of the merits of the case: see Trust Company of Australia Ltd v. Craig [2005] NSWADT 65 at [44]. After all, commencing proceedings without such consideration inevitably results in considerable expense being incurred by the other party and one might not unreasonably ask: "why should the other party have to bear those expenses when the proceedings should not have been commenced in the first place?"

1. With specific reference to its primary claim for costs, based on the sending of the Calderbank letter, Colonial cited various cases establishing that the unreasonable rejection by an unsuccessful party of an offer of settlement on terms more favourable than the order or orders ultimately made in the proceedings may be treated as a relevant consideration under paragraph (e) of section 88(1A). These cases included Barsoum v Glebe Administration Board (No 2) [2002] NSWADT 174 (decided under an earlier version of section 88), Fagerlund v PPS Nominees Pty Ltd (No 2) [2011] NSWADT 52 and Profilio v Coogee Bay Village Pty Ltd (No 4) [2011] NSWADT 64.

1. In Barsoum, the Tribunal, in the course of determining that the unsuccessful party in a retail lease case should pay costs on an indemnity basis as from the date of rejection of a favourable offer of settlement, observed at [32] that it held 'a strong view that offers made ought to be properly considered and when rejected the rejecting party must understand that a costs order may follow if the rejecting party does not obtain a more favourable verdict'.

1. In Fagerlund, the successful respondent in retail lease proceedings made two offers of settlement. In the first of them, it offered to accept $50,000 inclusive of costs in full and final settlement of its dispute with the applicants. In the second offer, made two days later, it offered to settle on the basis that the parties should 'walk away and pay their own costs'. The applicants rejected both offers. Having heard the matter, the Tribunal ordered the applicants to pay $88,830.90 plus interest to the respondent. On an application for costs subsequently filed by the respondent, it ordered that the parties should bear their own costs up to the date of the second offer, but that the applicants should pay the respondent's costs thereafter on an indemnity basis. At [16 - 18], it gave the following explanation for these orders:-

16 But for the offers of compromise which were made by the Respondent, there would not seem to be present in this case any factors which would warrant a departure from the usual order as to costs, that is, that each party bear their own costs. However, on two occasions, the Respondent outlined to the Applicants many of the deficiencies in the Applicants' case and did so with some precision. The replies to those offers did no more than reject them; the Applicants did not traverse the assertions made therein, nor did they proffer any reason -either then or now- as to why it would have been reasonable to reject the offers.

17 The Tribunal is mindful of the fact that the decisions cited herein relating to the interpretation of s.88 of the Act were handed down at the same time or later than the date of the offers made in this case. However the common usage and consequences of offers of compromise or 'Calderbank' offers is such that parties ignore or reject them at their peril. In the circumstances of the present case, both offers were in terms that were substantially more favourable to the Applicants than the Tribunal's orders.

18 The deficiencies of the Applicants' case were plainly communicated and at a time when the discovery process had occurred and after the evidence had been served. In other words, both parties were, at that time, seized of sufficient information about the other's case that they were able to make a realistic assessment of the prospects of success of their own case.

1. Paragraphs [51] and [53] of the Tribunal's decision in Profilio were quoted in Colonial's submissions. It is preferable in the present context to reproduce the intervening paragraph as well:-

51 Rejection of a favourable offer of compromise. It is well recognised in Tribunal decisions applying section 88(1A) to proceedings within the Retail Leases Division that if a party unreasonably rejects an offer to compromise the proceedings that turns out to be more favourable to that party than the terms of the order or orders that the Tribunal subsequently makes, the opposing party may rely on this rejection when costs are being determined under section 88 of the ADT Act. It is a matter that the Tribunal may treat as relevant under paragraph (e) of section 88(1A).

52 The principles on which these decisions are based stem from a well-known family law case decided in England, Calderbank v Calderbank [1976] Fam 93. In numerous court cases decided subsequently in England and Australia, the approach taken in Calderbank has been followed, albeit with modifications. But in De Costi Seafoods (Franchises) Pty Ltd v Broadway Shopping Centre Sydney Pty Ltd [2011] NSWADT 40 at [64], the Tribunal pointed out that when awarding costs under section 88 of the ADT Act, it does not simply follow the precedents established by these court cases. The Tribunal said:-

The underlying proposition is that the unreasonable rejection by the losing party of an offer to bring the proceedings to an end without further costs being incurred should always be brought into consideration when determining a costs application. However, the specific principles that were stated and applied by the court in Calderbank should not be applied mechanically to applications made to the Tribunal under section 88 of the ADT Act. They should operate by analogy only. The reason for this is simple. The line of authority stemming from Calderbank governs costs awards in jurisdictions where, prima facie, costs 'follow the event'. Under section 88, the starting point is that the parties pay their own costs, and the Tribunal should only make a costs order when it is 'fair' to do so.

53 It has been held in recent decisions in the Retail Leases Division that if the party unreasonably rejecting the offer was the unsuccessful party, the rejection may provide grounds for a costs order against that party where otherwise it might not be considered to be 'fair' to make such an order: see e.g. Tsimbakos v BlackRock Investment Management (Australia) Ltd (No 2) [2010] NSWADT 260. Alternatively, if the Tribunal has determined that on other grounds it would be 'fair' to make a costs order, evidence of the unreasonable rejection may provide grounds for ordering that the costs incurred by the successful party following the making of the offer should be paid on an indemnity basis: see e.g. De Costi Seafoods (Franchises) Pty Ltd v Broadway Shopping Centre Sydney Pty Ltd.

1. Relying on the authorities just outlined, Colonial argued that its primary claim for costs should be granted for the following reasons. At the time when the Calderbank letter was sent, Toga had received copies of all the documentary evidence on which Colonial would rely at the hearing. In the letter itself, Colonial drew attention to all the serious deficiencies in Toga's case. The amount ultimately ordered to be paid to Colonial, $369,999.88, exceeded by a substantial sum - i.e., $70,000 - the amount that Toga would have paid if it had accepted the offer. Toga's rejection of the offer of settlement was accordingly unreasonable. It followed that Toga should be ordered to pay Colonial's costs up to the date of the Calderbank letter (30 August 2011) as assessed or agreed, on a party/party basis, and thereafter, up to the date of the Appeal Decision, on an indemnity basis.

1. In support of its second claim for costs, based on clause 3.4 of the Sublease, Colonial's submission was simply that Toga had failed to pay the rent due for the first year of the Option Lease, i.e., for the period from 13 November 2010 to 12 November 2011.

1. Colonial's third claim, to the effect that it would be 'fair' to make a costs order in its favour, appeared chiefly to be based on the proposition that Toga, by refusing to acknowledge that its case was defective, was 'responsible for prolonging unreasonably the time taken to complete the proceedings' within the meaning of paragraph (b) of section 88(1A).

1. Colonial developed this argument principally with reference to the appeal proceedings. It maintained that because Toga had not appealed against a factual finding that was central to the Primary Decision - namely, that the 'common intention' of the parties was that Toga should be required to pay rent and outgoings during the first year of the Option Lease - it had put Colonial to 'the additional, significant and unnecessary time and expense of an appeal'.

1. Finally, Colonial's submissions included passages seeking to rebut an argument by Toga (outlined below at [51 - 52]) based on its abandonment of a claim in its cross application for rectification of the Sublease. Colonial's response was as follows: (a) its evidence and arguments relating to this claim were relevant to its associated claim for a declaration that, if in fact the Tribunal had power to order rectification, it would do so; and (b) the order made by the Tribunal, although based on its discernment of an implied term in the Sublease, had in substance the same effect as a declaration of this nature.

Toga's submissions

1. Each of the two submissions on costs filed by Toga, like those of Colonial, contained arguments relevant to the two separate applications for costs with which I am now dealing.

1. On the broad issue of how section 88 of the ADT Act should be interpreted and applied, Toga cited a passage in the Tribunal's decision in Salon Today Pty Limited v M.M.I.R. Pty Limited [2009] NSWADT 71 (a retail lease case). In this decision at [69], the Tribunal outlined the implications of recent important amendments to section 88. Toga relied in particular on the first sentence of this passage:-

69... [The] new Section 88 does indeed start from the proposition that each party is to bear their own costs in proceedings before this Tribunal. However, that is not the be all and end all of the matter. What the Parliament has done is take away the requirement for "special circumstances", which has been interpreted (in my view) too restrictively throughout the various Divisions of this Tribunal (but rather less restrictively in this Division), and has introduced a concept of fairness such that the Tribunal "may award costs in relation to proceedings before it, but only if it is satisfied that it is fair to do so having regard to" a number of specified parameters/factors. But the importance is this: the two-step approach of "special circumstances warranting an order for costs" is now replaced by a fairness test having regard to a number of parameters/factors. A fairness test is a much more just test.

1. In opposing Colonial's primary claim for costs, based on the Calderbank letter, Toga relied on paragraph [64] of the Tribunal's decision in De Costi Seafoods (Franchises) Pty Ltd v Broadway Shopping Centre Sydney Pty Ltd [2011] NSWADT 40. This paragraph is reproduced in the passage quoted above (at [40]) from Profilio v Coogee Bay Village Pty Ltd (No 4) [2011] NSWADT 64.

1. Toga argued that a principle emphasised in this paragraph of the decision in De Costi - namely, that if costs are to be awarded under section 88 on the ground of rejection of a favourable Calderbank offer, the rejection must have been unreasonable - was not satisfied in the present case. It maintained that its rejection of Colonial's offer of only a 'modest' compromise (amounting to only 16.5% of the amount claimed) was not unreasonable for at least three reasons.

1. These reasons were as follows: (a) the 'deficiencies' in Toga's case that Colonial claimed to have identified in the Calderbank letter were not accepted by the Tribunal at first instance; (b) the letter dealt only with Toga's application to the Tribunal, not with Colonial's cross application; and (c) Colonial succeeded at first instance on a ground not advanced by it (namely, breach of a term that the Tribunal held to have arisen by implication in the Sublease) and, in the appeal proceedings, on only one of the grounds that it had originally advanced (involving the construction of relevant provisions of the Sublease).

1. A further contention raised by Toga, relating both to Colonial's claim for costs based on the Calderbank letter and its claim that an award of costs would be 'fair', was that an important component of the case advanced by Colonial at first instance was abandoned in counsel's closing address. Colonial had sought in its cross application an order rectifying the Sublease so as to accord with what its claimed to be the 'common intention' of the parties that rent and outgoings should be payable by Toga during the first year of the Option Lease. But its counsel acknowledged towards the end of the Tribunal hearing that in the absence of consent to such an order by Toga the Tribunal could not order rectification.

1. Toga submitted that this should have been acknowledged at the outset, because section 72(1)(e) of the RL Act contained an express provision requiring the consent of all relevant parties to any order for rectification. It further submitted that because a substantial proportion of the evidence and the submissions, both at first instance and in the appeal proceedings, had been concerned with this claim for rectification, an order that it should pay Colonial's costs was not justified, either on the ground of its rejection of Colonial's offer of settlement, or on the ground that such an order would be 'fair'.

1. In response to Colonial's observation that Toga had not appealed against the Tribunal's findings as to 'common intention', Toga pointed out that the Appeal Decision contained a statement (at [126]) that its 'criticisms' of the Tribunal's approach to this question were 'not without merit'.

1. In seeking specifically to rebut Colonial's assertion that an order for the payment of indemnity costs was warranted, Toga relied on a statement by the Tribunal (in Rucom Pty Ltd and Anor v Multiplex & Ors [2010] NSWADT 1 at [59]) that 'in order to support an award of indemnity costs the Tribunal needs to be satisfied that there is "a sufficient or unusual feature", or some "relevant delinquency" bearing a relevant relation to the conduct of the case'. Toga argued that there was no 'unusual feature' in this case, and no 'relevant delinquency'.

1. Toga's submission in opposition to Colonial's claim based on clause 3.4 of the Sublease was that any such contractual claim could not be brought in the context of proceedings for an award of costs, but should be heard and determined 'like any other contractual claim'.

Discussion and conclusions

1. In my judgment, a costs order in Colonial's favour is warranted, relating both to the proceedings at first instance and the appeal proceedings, by virtue of Toga's rejection of the offer of settlement contained in the Calderbank letter.

1. I have summarised above (at [36 - 40]) some Tribunal decisions on the circumstances in which rejection of a settlement offer can provide the foundation for a costs order under section 88 of the ADT Act. The criteria suggested in these and other relevant decisions of the Tribunal have, in my opinion, been satisfied in this case, for the following reasons.

1. On 30 August 2011, being the date when the Calderbank letter was sent, Toga had received copies of all the documentary evidence on which Colonial would rely at the forthcoming hearing. While the letter did not set out the specific reasoning on which either the Tribunal or the Appeal Panel based their decisions in Colonial's favour, it did assert, in line with the Appeal Panel's view of the matter, that the construction of relevant terms of the Sublease was an issue of significance. This was not a case, like Rolls Royce Industrial Power (Pacific) Ltd v James Hardie and Co Pty Ltd (2001) 53 NSWLR 626; [2001] NSWCA 461, in which the nature of the proceedings between the parties changed materially between the making and rejection of a Calderbank offer and the trial of the matter. The discrepancies between the reasons on which Colonial, in the Calderbank letter, based its claim of entitlement to succeed and the reasons why it ultimately did succeed related only to matters of law, about which Toga was in a position to obtain advice from its legal representatives.

1. The offer contained in the Calderbank letter amounted to a 'genuine' or ''true' compromise of Colonial's claim for the unpaid rent and outgoings due under the Option Lease. It indicated that Colonial was prepared to forego $59,526.30 - roughly 16.5% - of a claim then standing at $359,526.30.

1. In Tribunal decisions awarding costs in retail lease cases on the basis of a Calderbank offer, offers to forego similar proportions of the successful party's claim have been held sufficient. In Bradley v North Eastern Travelstops Pty Ltd (No 2) [2005] NSWADT 160, for instance, the applicants claimed and were awarded $17,982 plus interest. They also obtained a costs order, on the ground that the respondent had rejected their Calderbank offer to accept $16,000.

1. The Tribunal upheld Colonial's claim to be entitled to unpaid rent and outgoings, but did not quantify the amount owing. It was not suggested in Toga's submissions on costs that, at the time of the Primary Decision, this amount was less than the figure of $359,526.30 quoted in the Calderbank letter. By the time of the Appeal Decision, this figure, according to Colonial's submissions, had increased to $369,999.88. The terms of Colonial's offer, therefore, were significantly more favourable to Toga than the orders made both at first instance and on appeal.

1. Having regard to the prior communications between the parties and the extent to which Toga could reasonably be expected to have prepared for the forthcoming hearing, the period of time allowed for consideration of the offer, being 14 days (or possibly a day or two less), was sufficient. It was obvious at this stage that if the parties did not settle their dispute, the costs of the hearing, which at that stage was estimated to require three days, would be substantial.

1. A factor suggesting that Toga's rejection of the offer should not be characterised as unreasonable is that despite Colonial's allegation to the contrary in the Calderbank letter, Toga's case was not devoid of merit. The relevance of this issue is evident from a number of decisions relating to Calderbank offers: see for example Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124 at [12]. Determination of the present proceedings called in fact for the resolution of difficult questions relating to the interpretation of the Sublease, the admissibility of evidence of 'surrounding circumstances' to assist in the interpretation of leases and the scope of the Tribunal's powers to grant relief under the RL Act. On all of these matters, the arguments advanced by Toga required careful consideration and were in some instances successful.

1. Consistently with this view of the merits of Toga's case, Colonial's submissions in support of its costs applications did not seek to rely on paragraph (c) of section 88(1A). This paragraph provides that a matter to be taken into account in determining whether it would be 'fair' to award costs is 'the relative strengths of the claims made by each of the parties, including whether a party has made a claim that has no tenable basis in fact or law'.

1. This assessment of the merits of Toga's case is undoubtedly a factor weighing against a finding that its rejection of Colonial's offer was unreasonable. I do not think, however, that it is sufficient to outweigh the countervailing factors that I have identified. I would add that if the rejection of a Calderbank offer in Tribunal proceedings could not be held unreasonable unless the offeree's case was characterised as 'weak' or 'unmeritorious', the successful party would not have to rely on the decisions applying Calderbank principles in order to sustain a claim for costs under subsection (1A) of section 88. It would simply argue that costs should be awarded pursuant to paragraph (c) of this subsection. A further likely outcome would be that parties would not consider it worthwhile to make Calderbank offers.

1. In Toga's submissions, emphasis was placed on Colonial's late abandonment of its claim for rectification. It followed, Toga maintained, that a significant proportion of the time spent in preparing for and conducting the hearings was devoted to issues that Colonial itself conceded to be irrelevant.

1. This submission does not, however, withstand close scrutiny. The question relating to rectification that received significant attention in the arguments put at both hearings was not whether the Tribunal could order rectification in the absence of consent by Toga. It was whether, and if so in what form, the Tribunal could grant a declaration that would, to put it loosely, operate as a substitute for rectification. An order of this nature was sought, as Order 5, in Colonial's Amended Cross Application (see the Primary Decision at [21] and the Appeal Decision at [34]).

1. The Tribunal considered these arguments and, indeed, granted relief along the lines of Order 5 in the Amended Cross Claim (see the Primary Decision at [95 - 114]). The Appeal Panel held, however, that it did not need to consider them. Its reasons, stated at [136] and [141], were as follows: (a) it had held that there was 'no conflict' between the terms of the significant provisions of the Sublease (the 'contentious provisions', as it called them), when properly construed, and the Tribunal's finding as to the common intention of the parties; and (b) for this and other reasons, the remedy of rectification was not 'apposite' in these proceedings. If the Appeal Panel had reached the opposite conclusion regarding the 'contentious provisions', it would have had to give close consideration, as the Tribunal did, to the parties' arguments regarding Order 5 in the Amended Cross Claim.

1. For these reasons, Toga's contention in its submissions on costs that Colonial's abandonment of its claim for an order of rectification rendered many of its arguments irrelevant must be rejected.

1. Colonial's second claim for costs, based on clause 3.4 of the Sublease, can be quickly disposed of. In a series of Tribunal decisions, of which A & J Verdi Pty Ltd v Uckan (No 2) (RLD) [2011] NSWADTAP 6 provides a recent example, it has been held that the combined operation of sections 7 and 77A of the RL Act and section 88 of the ADT Act precludes a party to a retail shop lease from relying on a provision in the lease to recover the costs of proceedings relating to the lease that have been instituted in the Tribunal.

1. Likewise, I am not persuaded that the conduct of Toga in these proceedings had the effect of 'prolonging unreasonably the time taken to complete' them, within the meaning of section 88A(1A)(b) of the ADT Act. For this reason, Colonial's third claim must be dismissed.

The order to be made

1. Because the only ground that Colonial has established for making a costs order in its favour is Toga's rejection of the offer contained in the Calderbank letter, the costs embraced by the order should be confined to those arising after 30 August 2011, the date of the letter.

1. Although Colonial, in its submissions, sought costs only up to the date of the Appeal Decision, I consider that, in accordance with normal practice, they should be awarded up to the date of the present decision, which endorses in large measure Colonial's claim for costs.

1. The costs should, however, be assessed on a party/party basis only. As Toga submitted (see above at [54]), indemnity costs should not be awarded, generally speaking, unless some 'sufficient or unusual feature' or 'relevant delinquency' has been established. This has not occurred here.

1. My conclusion that an order for party/party costs is appropriate receives support from paragraph [53] of the Tribunal's decision in Profilio v Coogee Bay Village Pty Ltd (No 4) [2011] NSWADT 64. This paragraph, which is quoted above at [40], is as follows:-

53 It has been held in recent decisions in the Retail Leases Division that if the party unreasonably rejecting the offer was the unsuccessful party, the rejection may provide grounds for a costs order against that party where otherwise it might not be considered to be 'fair' to make such an order: see e.g. Tsimbakos v BlackRock Investment Management (Australia) Ltd (No 2) [2010] NSWADT 260. Alternatively, if the Tribunal has determined that on other grounds it would be 'fair' to make a costs order, evidence of the unreasonable rejection may provide grounds for ordering that the costs incurred by the successful party following the making of the offer should be paid on an indemnity basis: see e.g. De Costi Seafoods (Franchises) Pty Ltd v Broadway Shopping Centre Sydney Pty Ltd.

1. It is pertinent to add that in the case cited at the end of the first sentence, Tsimbakos v BlackRock Investment Management (Australia) Ltd (No 2), the Tribunal ordered costs to be paid on a party/party basis, on the ground of the unsuccessful party's unreasonable rejection of a Calderbank offer. At [37], it expressly rejected the successful party's claim that this ground was sufficient in itself to support an order for indemnity costs.

1. For the foregoing reasons, my order is that Toga should pay Colonial's costs of the proceedings at first instance and on appeal, as agreed or assessed on a party/party basis, from 30 August 2011 to the date of this decision.

**********

Decision last updated: 10 April 2013