Transit Pty Ltd v Arch Underwriting at Lloyd's (Australia) Pty Ltd (No 2)
[2024] VSC 632
•15 October 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
INSURANCE LIST
S ECI 2021 01559
| TRANSIT PTY LTD (ACN 086 515 077) & ANOR (according to the Schedule of Parties) | Plaintiffs |
| v | |
| ARCH UNDERWRITING AT LLOYD’S (AUSTRALIA) PTY LTD (ACN 139 250 605) & ORS (according to the Schedule of Parties) | Defendants |
S ECI 2021 01815
| AMFR HOLDINGS PTY LTD T/AS THE DECK BRIGHTON (ACN 151 810 435) & ORS (according to the Schedule of Parties) | Plaintiffs |
| v | |
| ARCH UNDERWRITING AT LLOYD’S (AUSTRALIA) PTY LTD (ACN 139 250 605) & ORS (according to the Schedule of Parties) | Defendants |
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JUDGE: | Delany J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | On the papers |
DATE OF RULING: | 15 October 2024 |
CASE MAY BE CITED AS: | Transit Pty Ltd & Anor v Arch Underwriting at Lloyd’s (Australia) Pty Ltd & Ors (No 2) |
MEDIUM NEUTRAL CITATION: | [2024] VSC 632 |
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COSTS – Discontinuing party to pay costs of discontinuance and withdrawal – Supreme Court (General Civil Procedure) Rules 2015 r 63.15.
COSTS – Four defendants separately represented – Whether reasonable for unsuccessful plaintiff to bear four sets of costs – Whether potential for conflict sufficient to warrant separate representation – Unsuccessful plaintiffs to pay half of each defendants’ reasonable and proportionate costs in order to achieve substantial justice between parties – Statham v Shephard (No 2) (1974) 23 FLR 244; HP Mercantile Pty Ltd v Harnett [2017] NSWCA 79, applied.
COSTS – Calderbank offers made – ‘Walk away’ offer – Whether rejection of offer unreasonable – Whether offer an invitation to capitulate – Rejection of offer not unreasonable – Unsuccessful plaintiffs’ case arguable at time of offer – Hazeldene’s Chicken Farm v Victorian Workcover Authority (No 2) [2005] VSCA 298; (2005) 13 VR 435, applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Hamish Austin KC with Andrew Cameron and Jessica Apel | Gadens Solicitors |
| For the First Defendant (Arch Underwriting at Lloyd’s (Australia) Pty Ltd) | Peter Murdoch KC with Nicholas Wood SC | Colin Biggers & Paisley Lawyers |
| For the Second Defendant (Chubb Insurance Australia Limited) | Todd Marskell | Wotton Kearney |
| For the Third Defendant (The Underwriting Member of Syndicate 2003 at Lloyd’s of London) | David Collins KC with Hamish Redd SC | Clyde & Co |
| For the Fourth Defendant (Berkshire Hathaway Specialty Insurance Company) | Dean Luxton | Kennedys Law |
TABLE OF CONTENTS
The principles..................................................................................................................................... 3
Berkshire’s discontinuance and withdrawal................................................................................ 6
Plaintiffs’ submissions.................................................................................................................. 7
Berkshire’s submissions............................................................................................................... 7
Consideration................................................................................................................................ 8
Four defendants seeking four separate sets of costs................................................................... 8
Plaintiffs’ submissions.................................................................................................................. 8
Defendants’ submissions........................................................................................................... 10
Consideration.............................................................................................................................. 13
Calderbank offers............................................................................................................................ 15
Defendants’ submissions........................................................................................................... 15
Plaintiffs’ submissions................................................................................................................ 17
Consideration.............................................................................................................................. 18
Disposition........................................................................................................................................ 19
HIS HONOUR:
These reasons relate to costs in proceedings S ECI 2021 01559 (‘Transit proceeding’) and S ECI 2021 01815 (‘AMFR proceeding’), the trial of which was heard by me between 20 March 2024 and 5 April 2024.
The proceedings concerned the entitlement of the plaintiffs to business interruption insurance for periods of lockdown in Melbourne in 2020 due to the COVID-19 pandemic pursuant to an Industrial Special Risks Policy in each proceeding (‘Transit Policy’ and ‘AMFR Policy’ respectively) under which each of the defendants was an insurer, the terms of which, excluding the schedules thereto (‘Schedules’) were relevantly identical (‘Policies’).
The plaintiffs were wholly unsuccessful in the proceeding. On 16 August 2024, I published my reasons for dismissing the proceeding.[1] The reasons foreshadowed an order that the plaintiffs in both proceedings pay the defendants’ costs including reserved costs on a standard basis. The parties were directed to provide short submissions should they contend for a different costs order.
[1]Transit Pty Ltd & Anor v Arch Underwriting at Lloyd’s (Australia) Pty Ltd & Ors [2024] VSC 485 (‘trial reasons’).
On 30 August 2024 both the plaintiffs and the defendants filed submissions.
The plaintiffs accept costs should follow the event but submit the costs order should be modified so that:
(a) the plaintiffs are not ordered to pay four full sets of costs in circumstances where the four defendants had an identical interest and there was complete overlap in their defences at trial; and
(b) the fourth defendant (‘Berkshire’) should pay the plaintiffs’ costs thrown away on a standard basis by reason of its discontinuance of its counterclaim seeking rectification of the Policy and its withdrawal of its defences alleging estoppel by convention.
As was generally the approach taken during the trial the position of the four defendants aligned for the purpose of their 30 August 2024 initial costs submissions. The initial submissions filed jointly on behalf of the defendants submitted the costs of each of them should be paid on a standard basis up to 18 November 2022 and on an indemnity basis thereafter, in reliance on a Calderbank offer made jointly by them on 18 November 2022 (‘Second Offer’).
The defendants relied on an affidavit of Ms Prowse, the solicitor for the first defendant, made 30 August 2024.
On 6 September 2024, the plaintiffs and the first to third defendants (‘Arch’, ‘Lloyds’ and ‘Chubb’) filed responsive submissions. On the same day Berkshire filed separate responsive submissions. Berkshire relied on an affidavit of Mr Driver made on 6 September 2024.
Arch, Chubb and Lloyds contend for costs orders on a cascading basis, noting that the basis of these costs orders remains to be determined:
(a) the plaintiffs pay the defendants’ costs of the proceeding, including reserved costs, on the ordinary/ indemnity basis as taxed or agreed;
(b) the plaintiffs pay 50% of the defendants’ costs of the proceeding, including reserved costs, on the ordinary/ indemnity basis as taxed or agreed, save in respect of the following costs which are recoverable as taxed or agreed:
(i) 90% of the costs of and incidental to the retainer by the defendants of Mr Carruth of Baker Tilly as an expert witness in the proceedings, including, without limitation, his expert reports and the joint expert reports;
(ii) 100% of the costs of the Honourable Peter Riordan KC acting as mediator in these proceedings; and
(iii) 90% of the costs of all defendants in the preparation of their written submissions for final hearing and presentation of those submissions at the final hearing;
(c) in the alternative to (b), the plaintiffs pay 25% of the defendants’ costs of the proceeding (that is, the plaintiffs’ proposed order), including reserved costs, on the ordinary/ indemnity basis as taxed or agreed, but subject to the same carve-outs referred to above.
The principles
Pursuant to s 24(1) of the Supreme Court Act 1986 (Vic), the Court has the full power to determine by whom and to what extent costs are to be paid. In Chan & Ors v Chen & Ors,[2] the Court of Appeal said: [3]
The Rules of Court permit significant flexibility in determining questions of costs. In particular, the Court is entitled to examine the realities of the case and will attempt to do ‘substantial justice’ as between the parties on matters of costs.
[2]Chan & Ors v Chen & Ors [2009] VSCA 233.
[3]Chan & Ors v Chen & Ors [2009] VSCA 233 [10].
Pursuant to ss 10(1)(a) and 24 of the Civil Procedure Act 2010 (Vic) (‘CPA’) the parties to the proceeding and their legal practitioners are bound by an overarching obligation to ensure that their legal costs are reasonable and proportionate to the complexity or importance of the issues and the amount in dispute.
Section 23 of the CPA obliges the parties and their legal practitioners to use reasonable endeavours to resolve by agreement any issues in dispute which can be resolved in that way and to narrow the scope of the remaining issues 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.
In Statham v Shephard (No 2),[4] Woodward J held that the Court will not normally allow multiple sets of costs of defendants where there is no possible conflict of interest between them in the presentation of their cases.[5] Woodward J added three provisos:[6]
In the first place, if a conflict of interest appears possible but unlikely, the defendant should make any necessary enquiries from the plaintiff as to the way in which his case is to be put if this would resolve the possibility of conflict between the defendants.
Secondly, there could be circumstances in which, although the defendants were united in their opposition to the plaintiff, their relationship to each other might be such that they would be acting reasonably in remaining at arms length during the general course of litigation.
Thirdly, even if defendants are acting reasonably in maintaining separate representation for some time or for some purposes, they may still be deprived of part of their costs if they act unreasonably by duplicating costs on any particular matter or at any particular time.
[4]Statham v Shephard (No 2) (1974) 23 FLR 244 (‘Statham’).
[5]Statham v Shephard (No 2) (1974) 23 FLR 244, 246-247.
[6]Statham v Shephard (No 2) (1974) 23 FLR 244, 246.
In HP Mercantile Pty Ltd v Harnett,[7] Bathurst CJ, Leeming and Payne JJ held:[8]
The starting point is that it is common ground that there was no possibility of conflict on the questions of construction which were the only issues raised on appeal. It was possible and therefore ordinarily appropriate that all respondents be represented by the same legal practitioners. Another way of putting this is that the starting point is that it is reasonable for the unsuccessful appellant to bear only a single set of costs where the issues raised amongst the respondents to the unsuccessful appeal give rise to no possibility of conflict and can therefore be addressed by a single set of practitioners.
Thus, the ultimate question is not (as the respondents submit) whether they have acted reasonably, nor whether there has shown to be duplication. The question is whether it is reasonable for the unsuccessful litigant to bear more than one set of costs. [emphasis added]
[7]HP Mercantile Pty Ltd v Harnett [2017] NSWCA 79 (‘HP Mercantile’).
[8]HP Mercantile Pty Ltd v Harnett [2017] NSWCA 79, [13]-[14].
Concerning the costs of discontinuance, r 25.05 of the Supreme Court (General Civil Procedure)Rules 2015 (Vic) (‘Rules’) provides that where a proceeding, counterclaim or claim by a third party notice is discontinued, or where part of a proceeding, counterclaim or third party notice is withdrawn, liability for costs shall be determined in accordance with r 63.15 of the Rules, which imposes costs liability on the discontinuing/withdrawing party ‘[u]nless the Court otherwise orders‘.
Concerning the costs consequences of a Calderbank offer, the critical question is whether the refusal to accept the offer was unreasonable. The party who made the offer must establish that the rejection of the offer was unreasonable. In Secretary to the Department of Transport v Provan’s Timber Pty Ltd (No 2),[9] the Court of Appeal said:[10]
… While there is no need to show that the rejection of a Calderbank offer was ‘highly’ or ‘grossly’ unreasonable, it is not presumed that a refusal is unreasonable simply because the offered sum is higher than the ultimate award. Instead, the onus rests on the offeror to show that the offeree acted unreasonably.
[9]Secretary to the Department of Transport v Provan’s Timber Pty Ltd (No 2) [2020] VSCA 258.
[10]Secretary to the Department of Transport v Provan’s Timber Pty Ltd (No 2) [2020] VSCA 258 [25] (Tate, Kyrou and McLeish JJA) (citations omitted).
In determining whether the rejection was unreasonable the criteria referred to by the Court of Appeal in Hazeldene’s Chicken Farm v Victorian Workcover Authority (No 2)[11] provide guidance:[12]
[11]Hazeldene’s Chicken Farm v Victorian Workcover Authority (No 2) [2005] VSCA 298; (2005) 13 VR 435 [25] (Warren CJ, Maxwell P and Harper AJA) (‘Hazeldene’s Chicken Farm’).
[12]Hazeldene’s Chicken Farm v Victorian Workcover Authority (No 2) [2005] VSCA 298; (2005) 13 VR 435 [25].
The discretion with respect to costs must, like every other discretion, be exercised taking into account all relevant considerations and ignoring all irrelevant considerations. It is neither possible nor desirable to give an exhaustive list of relevant circumstances. At the same time, a court considering a submission that the rejection of a Calderbank offer was unreasonable should ordinarily have regard at least to the following matters:
(a) the stage of the proceeding at which the offer was received;
(b) the time allowed to the offeree to consider the offer;
(c) the extent of the compromise offered;
(d) the offeree’s prospects of success, assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed;
(f)whether the offer foreshadowed an application for an indemnity costs in the event of the offeree’s rejecting it.
The Second Offer upon which the defendants rely was a Calderbank offer to ‘walk away’ made by the defendants jointly. In Commissioner of State Revenue v Challenger Listed Investments Ltd (No 2), the Court of Appeal observed:[13]
[13]There is authority to the effect that where the offer does not involve a genuine compromise, but is in fact either an invitation to capitulate or a derisory or nominal offer, it would not be unreasonable for the losing party to have rejected it.
…
[17]In our opinion and in the circumstances of this case, it was not unreasonable for the Commissioner to reject the offer made on 18 March 2011. The offer, in effect an offer to walk away, in our opinion amounts to a demand to capitulate. A reduction of $5000 from a costs order may realistically be regarded as de minimis in the circumstances. The offer does not represent (in financial terms) a serious endeavour to resolve the proceeding. It was, given the amount involved in the case, no more than a token offer.
[13]Commissioner of State Revenue v Challenger Listed Investments Ltd (No 2) [2011] VSCA 398 [13]-[17] (Buchanan and Tate JJA and Sifris AJA).
As the plaintiffs accept, it is possible for the rejection of a ‘walk away’ offer to ground an order for indemnity costs. This will depend on the facts of the case at hand. In Cargill Australia Ltd v Viterra Malt Pty Ltd (No 32)[14] where the claims against the third parties were found to be hopeless from the outset the unreasonable rejection of the ‘walk away’ offer was an alternative basis for ordering indemnity costs which flowed from the primary conclusion.[15]
[14]Cargill Australia Ltd v Viterra Malt Pty Ltd (No 32) [2022] VSC 299 [46] (Elliott J).
[15]Cargill Australia Ltd v Viterra Malt Pty Ltd (No 32) [2022] VSC 299 [269]-[271], [274]-[282] (Elliott J).
Berkshire’s discontinuance and withdrawal
In its defence and counterclaim filed in each of the proceedings Berkshire pleaded an estoppel by convention defence and made a counterclaim against the plaintiffs seeking rectification of the Policy. The counterclaim seeking rectification largely relied on the same facts alleged in support of the estoppel plea.
Berkshire was the only defendant to make those allegations and to seek rectification. Berkshire maintained that defence and counterclaim until February 2024.
On 16 February 2024 I granted leave to Berkshire to discontinue its counterclaim. I ordered that the plaintiffs’ costs thrown away by reason of and incidental to Berkshire’s discontinuance of its counterclaims and the withdrawal of certain paragraphs in its defences be reserved.
On 20 February 2024, Berkshire filed a notice of discontinuance in respect of its counterclaim in each proceeding.
Plaintiffs’ submissions
The plaintiffs submit there should be no departure from the effect of r 63.15. Berkshire did not discontinue/withdraw because matters arose outside its control nor due to any change of circumstance. The plaintiffs submit the estoppel by convention defence and counterclaim were likely to fail and, accordingly, Berkshire capitulated on this aspect of its defence and counterclaim prior to the commencement of the trial.
On 9 February 2024 in response to advice from Berkshire that it proposed to withdraw the estoppel part of its defence and to discontinue its counterclaim in each proceeding, the plaintiffs wrote that they were entitled to their costs. The plaintiffs identified that significant costs had been incurred preparing responsive pleadings, reviewing three witness statements and three witness outlines filed in the Transit proceeding and two witness statements and two witness outlines filed in the AMFR proceeding, filing witness outlines, preparing a list of issues which addressed those allegations, preparing a draft Court Book and preparing objections to evidence.
Berkshire’s submissions
Berkshire resist the proposition that it should pay the plaintiffs’ costs thrown away by reason of its withdrawal of its estoppel defence and the discontinuance of its counterclaim.
Referring to Soteriadis v Nillumbik Shire Council[16] Berkshire submits that r 63.15 creates a starting point, but not a presumption, that costs will be ordered against the discontinuing party. Generally, there must be some proper justification for departing from the starting position. It submits the plaintiffs’ reliance upon rr 25.05 and 63.15 is at least partly misplaced because those rules do not apply to costs caused by reason of the withdrawal of the estoppel defence. It submits the r 63.15 ‘starting point’ should not apply to the discontinuance of the counterclaim because the counterclaim is essentially defensive in nature, sought only rectification of the policy and contained no claim for damages.
[16]Soteriadis v Nillumbik Shire Council [2015] VSC 363 [12] (Derham AsJ).
In reply the defendants submitted the cross-claim met the description of ’reasonable difference of opinion about the conduct of the defence‘ referred to by Blackburn CJ in Verduci v Catanzarita[17] where the presence of a reasonable difference saw the costs of separate representation allowed.[18]
[17]Verduci v Catanzarita (1981) 53 FLR 156.
[18]Verduci v Catanzarita (1981) 53 FLR 156, 159.
Consideration
From 2021 when the defence and counterclaim was first pleaded until those allegations were withdrawn the plaintiffs were required to incur costs to meet and deal with those allegations. The burden of those costs must be borne by the party responsible for those costs being incurred. In circumstances where the defence and counterclaim were so closely linked, this is not a case where it is appropriate to distinguish between the costs of discontinuance of the counterclaim which fall to be paid by the discontinuing party unless the Court otherwise orders in accordance with r 63.15 of the Rules, and the costs of withdrawing the defence, and it would be artificial to do so.
There were discrete costs incurred relating to the Berkshire defence and counterclaim. I have no doubt those costs were substantial. The appropriate order is to require Berkshire, the party who raised and then withdrew and discontinued the allegations, to pay costs relating to the issue raised by its defence and counterclaim later withdrawn and discontinued.
I will order that Berkshire pay the plaintiffs’ costs thrown away on a standard basis by reason of its discontinuance of its counterclaim seeking rectification of the Policy and its withdrawal of its defences alleging estoppel.
Four defendants seeking four separate sets of costs
Plaintiffs’ submissions
The plaintiffs submit the Court should exercise its discretion to order that the plaintiffs are not required to pay the full costs of the defendants. This can be achieved by disallowing costs of the additional defendants or, alternatively, reducing the costs payable by the plaintiffs in respect of each defendant.
The plaintiffs submit the defendants’ recoverable costs should be limited to a quarter of each of their costs on a standard basis. They submit there was no conflict between the defendants in either of the proceedings and there was no reasonable prospect of conflict arising in relation to indemnification under the Policies. The interests of the four defendants were identical.
The defendants were under an obligation, pursuant to s 10(1)(a) of the Civil Procedure Act 2010 (Vic) (‘CPA’), to ensure that their legal costs were reasonable and proportionate to the complexity or importance of the issues in dispute. To make an order that provides for each of the four defendants to recover all of their individual costs fails to give recognition to that statutory obligation.
The two proceedings involved common questions of construction of the respective Policies, there was complete overlap between the defences raised by the four defendants at trial and each defendant underwrote a 25% participation in those Policies. The absence of conflict between the defendants was demonstrated by their decision to divide up the presentation of submissions concerning issues in dispute at trial. The division of the workload may have almost entirely prevented duplication at trial but that is not the ultimate question as framed by the Court in HP Mercantile.
There was no reason the defendants would reasonably or properly wish to remain at arm’s length during the litigation by having separate representation. It appears from the division of submissions that they did not do so during the trial.
The division of the case between the defendants only became apparent to the plaintiffs and to the Court when the defendants’ written opening submissions were filed and served on 15 March 2024.
The defendants were represented by four separate counsel teams and four sets of solicitors. Arch was represented by King’s Counsel and Senior Counsel; Syndicate 2003 also represented by King’s Counsel and Senior Counsel; Berkshire, until at least September 2023, was represented by King’s Counsel and experienced junior counsel; and Chubb was represented by experienced junior counsel. All of the defendants’ solicitors were specialised insurance law firms. The plaintiffs submit all of those practitioners were present in Court as ‘mere spectators’ while aspects of the defence for which they were not responsible were argued.
The trial reasons included a finding that if the plaintiffs were entitled to indemnity, they were in the case of the Transit Proceeding entitled to between $3,667,798 — $3,888,582 and in the AMFR Proceeding between $1,250,859 - $1,371,964. Whilst the litigation was no doubt of great importance to the parties, and no criticism is made of any of the legal practitioners, there is no reason why a single legal team could not have presented the defence.
The plaintiffs submit the fact that for a time Berkshire pursued its counterclaim does not alter the analysis. It gave rise to no conflict of any kind. The hypothetical single legal team could have presented this additional limb to Berkshire’s defence. In any event, that counterclaim had fallen away prior to the trial.
Defendants’ submissions
Arch, Chubb and Lloyds generally agree with the legal principles set out by the plaintiffs concerning conflicts and costs where there are multiple defendants.
Regarding the first proviso outlined by Woodward J in Statham, the defendants submit the issue of conflict should not be approached with the benefit of hindsight where no conflict ultimately emerged. The issue is the existence of the potential for conflicts between the defendants and Berkshire throughout the course of the litigation that could not be readily foreseen or managed by the defendants, including by consultation with the plaintiffs. It is potential for conflict which cannot be reasonably foreseen which is the relevant consideration regardless of whether any actual conflict ultimately manifests. The defendants submit their respective defences of these proceedings were such that unforeseeable potential conflicts existed throughout the life of the proceedings. This is best exemplified by Chubb seeking to take a different position in respect of the COGS issue with its stance on the issue only emerging during the final hearing.
The defendants note the following upon which they rely regarding the second proviso in Statham:
(a) each of them and Berkshire subscribed for 25% of the risk on a several basis with the Policies containing no clause as to which of them had the conduct of the defence of the two proceedings. Nor was there any basis for one of the defendants or Berkshire to act as the lead for the following market by reason of the identical percentages of the risk subscribed for; and
(b) each of the defendants and Berkshire were free to argue the issues as they saw fit and this was a particularly important consideration as the policy wording was Modified Mark IV, subject to endorsements. This form of wording is commonly used in the market and the Basis of Settlement in that form of wording is the subject of little, if any, authority as to its construction and application. As such, each of the defendants and Berkshire were able to adopt different positions on the Basis of Settlement. This occurred with Chubb indicating it intended to approach the issue of COGS quite differently to the other defendants and Berkshire before this issue was resolved, such that Chubb ultimately adopted only a subtly different position.
The defendants submit it is wrong to say, as the plaintiffs do, that there was no conflict between any of them and Berkshire. If, contrary to the defendants’ primary submission an actual conflict is required to engage the first Statham proviso, this existed for the majority of the proceedings by reason of Berkshire’s rectification cross-claim. There were no similar cross-claims brought by Arch, Chubb or Lloyds. It may be inferred that those defendants considered that such a cross-claim, on the grounds advanced by Berkshire, lacked sufficient prospects.
Given the cross-claim was abandoned by Berkshire close to the final hearing, it is unreasonable and unrealistic to say that the four defendants should have reverted to the one hypothetical legal team including Berkshire as referred to in the plaintiffs’ submissions.
Arch, Chubb and Lloyds contend that acceptance of the submissions regarding Berkshire’s cross-claim would see the plaintiffs exposed to two sets of costs, rather than four. The defendants submit this can be reflected by a 50% reduction of the costs recoverable by each of the defendants in the manner earlier outlined in the orders for which they contend.
Arch, Chubb and Lloyds submit the matters raised by the plaintiffs concerning the reasonableness and proportionality of their costs is a matter for taxation rather than the defendants’ entitlement to the costs orders they seek.
Berkshire joins with the submissions of Arch, Chubb and Lloyds regarding the issue of overlap between the defendants’ defences. It further submits that by reason of the plaintiffs’ late provision of sizeable quantities of materials in the lead up to trial, in the absence of multiple legal teams allowing for the division of labour, Berkshire’s trial preparation would have been affected. Specifically:
(a) Between 28 August 2023 and 31 January 2024, the plaintiffs issued 36 subpoenas which yielded extensive materials, most of which was produced in February 2024. Berkshire’s lawyers were required to review this material prior to trial (requiring approximately 38 hours).
(b) On 27 and 28 February 2024, the plaintiffs served their summaries of evidence. These were extensive documents, that had apparently taken considerable time to create. Again, Berkshire’s lawyers were required to review this material prior to trial (requiring approximately 28 hours).
The defendants submit that in these circumstances the plaintiffs’ complaint that there were multiple defence legal teams does not withstand scrutiny. It is also relevant that there is no evidence that the plaintiffs objected to the presence of multiple defence teams, or that they gave notice that the issue would be relied upon on the question of costs.
Consideration
Applying the decision of the New South Wales Court of Appeal in HP Mercantile, the question concerning the defendants’ costs is whether it is reasonable for the unsuccessful litigant to be required to bear more than one set of these costs including, in the Victorian context, having regard to the obligation on parties and practitioners to ensure costs are reasonable and proportionate as provided for in s 24 of the CPA.
While each of the defendants subscribed to 25% of the risk on several basis with the Policies containing no clauses as to which of them should have the conduct of the defence of any proceedings, that does not mean the plaintiff, if unsuccessful, should be burdened with four sets of costs (where apart from the separate issues raised by Berkshire there was no possibility of conflict or lack of coincidence of interest in defending the claims) and the defence could have been conducted by a single set of practitioners. Not only did s 24 of the CPA bind the parties and their legal counsel advising, to ensure costs were reasonable and proportionate, s 23 of the CPA required the defendants and their legal advisors to use reasonable endeavours to resolve by agreement any issues in dispute which can be resolved in that way. Agreement to common representation amongst defendants sharing a common interest falls within the section.
While I consider the parties and their legal advisors are bound by the obligation in s 23, I accept that the issues raised then later abandoned in the Berkshire defence and counterclaim meant that it was reasonable for Berkshire to have separate representation, at least up until 16 February 2024. If it was reasonable for Berkshire to do so, it was reasonable for there to be at least two sets of representation on behalf of the defendants until that time. However I do not accept that it is reasonable to impose the burden on the plaintiffs of three further sets of costs of the defendants, in addition to Berkshire’s separate costs until 16 February 2024.
From the time each defendant filed its initial defence through to the trial, apart from the separate issues raised by Berkshire, the pleaded cases of the four defendants did not differ materially. I do not accept that there was a realistic possibility of conflict between the three defendants other than Berkshire in respect of its estoppel case in the period until 16 February 2024. To approach the defendants’ costs on the basis of two sets of costs overall relating to this period both accords with the realities of the case and achieves substantial justice as between the defendants and the unsuccessful plaintiffs. The defendants knew on 16 February 2024 that Berkshire was no longer relying on its estoppel defence and counterclaim. On 27 and 28 February 2024 the plaintiffs served their summaries of evidence. Opening submissions for the defendants were filed on 15 March 2024, responding to the plaintiffs’ submissions filed on 4 March 2024. The trial commenced on 20 March 2024.
Although the defendants cooperated efficiently in preparing their submissions, until the end of the trial there remained differences between Chubb and the other defendants. In light of those differences and the late subpoenaing of large amounts of documents by the plaintiffs, even though there was approximately one month for the defendants to join together and combine representation from 16 February 2024, I consider it reasonable in order to do substantial justice between the parties to also award two sets of defendants’ costs from 16 February 2024 until the end of the trial.
I agree with the defendants’ alternative submission that the appropriate costs order in those circumstances requires the plaintiffs to pay 50% of each defendant’s costs of and incidental to the proceeding (excluding Berkshire’s costs of the estoppel defence and counterclaim dealt with separately) and 90% of the costs of the defendants’ written submissions for and at the hearing.
Leaving the defendants’ reliance on the Second Offer to one side, these costs are to be paid on a standard basis leaving for agreement, or in default of agreement taxation, the quantification of those costs. When quantifying the costs, s 24 of the CPA requires that the costs be reasonable and proportionate. My intention is that 50% of the reasonable and proportionate costs of the defendants be paid by the plaintiffs. As a starting point, it will be necessary to determine either by agreement or on taxation whether it is reasonable and proportionate for some of the defendants to have engaged multiple members of counsel throughout the trial.
I make that order and those observations concerning counsel notwithstanding the defendants’ submission that the plaintiffs did not object earlier to the presence of multiple defence teams or give notice this issue would be raised on the question of costs. The fact the issue was not raised earlier does not displace the principles discussed in Statham and in HP Mercantile and nor does it displace the obligation in s 23 of the CPA.
There are two aspects of the defendants’ costs that require consideration. The first concerns the costs of Mr Carruth, the second the costs of mediation.
I accept the defendants’ submission that the 50% reduction in costs should not be applied to the costs of and incidental to the retainer by them of Mr Carruth as an expert witness in the proceeding. Mr Carruth was jointly retained on behalf all defendants and the costs of his work and expert reports were shared equally between them. It is appropriate to order 90% of the costs of each of the defendants of and incidental to the retainer of Mr Carruth be paid by the plaintiff.
The position concerning the costs of Mr Riordan KC acting as mediator is similar. Paragraph 23 of the Order made on 15 February 2023 provided that in the first instance the cost of the mediator would be shared equally between the parties. The position that applied in the first instance is appropriately reflected in an order that requires the plaintiff to pay 100% of those costs.
Calderbank offers
Defendants’ submissions
The defendants submit that the Second Offer made on 18 November 2022 was a genuine offer of compromise. They rely on Dal Pont’s statement that the trend of recent authority is that a ‘walk away’ offer can exhibit the requisite element of compromise so as to amount to a Calderbank offer.[19] They submit that proceedings commenced about 18 months before the Second Offer, there had been multiple rounds of pleadings in both proceedings, and considerable costs had been incurred by them. By making the Second Offer, the defendants were offering to give something away, being their claim for considerable costs incurred to date.
[19]Gino Dal Pont, Law of Costs (LexisNexis, 5th ed., 2021), [13.80].
The defendants submit that the plaintiffs’ rejection of the Second Offer was unreasonable, that the plaintiffs bear a persuasive burden to show their rejection of the offer was not unreasonable and that burden has not been discharged, including for the following reasons.
(a) First, when the Second Offer is compared to the previous offer made by the defendants on 1 March 2022 (‘First Offer’), the First Offer was made relatively early in the proceeding when the plaintiffs had not yet amended their pleadings to rely on the CLOSEXB4 clause. The First Offer was rejected in circumstances where the time within which a special leave application could be brought from the Full Federal Court’s decision in LCA Marrickville Pty Ltd v Swiss Re International SE[20] had not yet expired. The Second Offer was made after the plaintiffs had amended their pleadings to rely on CLOSEXB4, after the defendants had incurred considerably greater costs, and after the High Court had dismissed applications for special leave from the Full Court’s judgment. Accordingly, while it may have been reasonable for the plaintiffs to reject the First Offer the scales had tilted by the time that the Second Offer was made.
[20]LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435.
(b) Second, one basis upon which the Court may conclude that the rejection of an offer is unreasonable is that ‘the rejection was not supported by any process of reasoning whatsoever’.[21] That was the case here. Though the plaintiffs gave an explanation for not accepting the First Offer, they gave no reason for rejecting the Second Offer notwithstanding that they sought and were granted an extension to respond to the Second Offer.
[21]Rickard Hails Moretti Pty Ltd [2005] NSWSC 481 [30] (McDougall J).
(c) Third, while an offeree’s errant prediction of its prospect of success in the litigation does not, of itself, entail that its rejection of a Calderbank offer was unreasonable, ‘so too it is not sufficient for it to avoid the consequence of its erroneous prediction that it says only that the outcome was uncertain’; ‘[t]he outcome of all litigation is uncertain’.[22] It ought to have been apparent to the plaintiffs that their case was weak given:
[22]Premier Building & Consulting Pty Ltd v Spotless Group Ltd (No 13) [2007] VSC 516 [13] (Byrne J).
(iv) the plaintiffs ultimately abandoned reliance on both REPELXB4 and DZONEXS4, apparently reflecting a recognition that those cases were untenable; and
(v) the plaintiffs ‘ought to have realised [that they] had a very weak case’[23] with regard to CLOSEXB4 when the Second Offer was made.
(vi) the defendants submit, relying on the trial reasons, that the plaintiffs’ case depended on the Court accepting both: (a) a construction of the clause that was not available and that was never clearly articulated; and (b) a ‘jurisdictional’ conception of the term ‘vicinity’ in the clause that was not supported by anything in the text of the policy and that was affected by ‘fundamental’ problems. The flaws in the plaintiffs’ attempt to rely on CLOSEXB4 ought to have been apparent to them from the outset. Nothing in the evidence that was ultimately adduced, including what was obtained later by the plaintiffs by subpoenas issued to the Victorian Government, could have overcome these flaws with their own case.
[23]Premier Building & Consulting Pty Ltd v Spotless Group Ltd (No 13) [2007] VSC 516 [44] (Byrne J).
Plaintiffs’ submissions
The plaintiffs submit the defendants cannot establish that it was unreasonable for them to reject the Second Offer.
The Second Offer did not involve a genuine compromise of the dispute between the parties. It was merely an invitation for the plaintiffs to capitulate. The proportionate amount of the defendants’ costs to the date of the Second Offer (which they offered to forego as part of the Second Offer) was not a powerful incentive to settle.
The plaintiffs submit their prospects of success at the date of the Second Offer were not hopeless or weak, such that the Second Offer could represent a genuine attempt to settle the proceedings. The proceedings concerned nuanced matters of contractual construction and disputed questions of fact and law in their application. The decisions in the LCA litigation[24] and Star litigation[25] were not determinative as to the proper construction of CLOSEXB4 or its application.
[24]Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; (2021) 394 ALR 461; LCA Marrickville Pty Ltd v Swiss Re International SE [2022] FCAFC 17; (2022) 290 FCR 435.
[25]Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2021] FCA 907; (2021) 396 ALR 590; Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25.
Consideration
I do not consider the rejection by the plaintiffs of the Second Offer was unreasonable with the consequence they must pay the defendants’ costs on an indemnity basis from 18 November 2022.
I agree with the plaintiffs that the proceedings concerned nuanced matters of contractual construction and disputed questions of fact and law in their application. The decisions in the LCA litigation and Star litigation were not determinative. At the time the offer was made, subpoenas had not been issued to the State of Victoria and many of the documents later relied on at trial and in the evidence summaries concerning factual issues were not available to the plaintiffs.
The following may be said about the refusal by the plaintiffs to accept the Second Offer by reference to the criteria listed by the Court of Appeal in Hazeldene’s Chicken Farm:
(a) The offer was received before much of the factual evidence later relied on by the plaintiffs at trial was known or available to the plaintiffs to evaluate.
(b) No issue arises as to the time to consider the offer.
(c) The extent of the compromise, if not a capitulation, was a very modest compromise only on the part of the defendants. The costs of the defendants at the time of the offer are not known, but I have found 50% of those costs only should be paid by the unsuccessful plaintiffs and that Berkshire should pay the plaintiffs’ costs of the estoppel defence and counterclaim. These facts demonstrate that the extent of the compromise was not at all significant and if not equivalent to a capitulation amounted to little more than a capitulation.
(d) The construction issues were nuanced and involved complexities. The plaintiffs clearly had better than an arguable case on those issues. Their case on the factual issues was relatively uncertain and unknown until the later subpoenaed documents became available.
No issues arise concerning aspects (e) and (f) of the offer.
When regard is had to the Hazeldene Chicken Farms criteria it is clear the rejection of the Second Offer by the plaintiffs was not unreasonable. No costs consequences flow from the refusal by the plaintiffs to accept the offer.
Disposition
I will authenticate a form of order in each of the Transit proceeding and AMFR proceeding giving effect to these reasons. Specifically, I will make the following orders.
(a) The plaintiffs are to pay the defendants’ costs of the proceeding, including reserved costs, limited to one half of each of the defendant’s respective costs on a standard basis, to be taxed in default of agreement, with the exceptions in paragraphs (b) and (c).
(b) The plaintiffs are to pay those aspects of the defendants’ costs listed in sub-paragraphs (i)–(iii) in the proportions set out in those sub-paragraphs on a standard basis, such costs to be taxed in default of agreement:
(vii) 90% of the costs of and incidental to the defendants’ retainer of Mr Carruth of Baker Tilly as an expert witness in the proceedings, including, without limitation, Mr Carruth’s expert reports and the joint expert reports;
(viii) 100% of the costs of the Honourable Peter Riordan KC acting as mediator in these proceedings; and
(ix)90% of the costs of all defendants in the preparation of their written submissions for final hearing and presentation of those submissions at trial.
(c) The fourth defendant is to pay the plaintiffs’ costs thrown away by reason of and incidental to the following events on a standard basis, such costs to be taxed in default of agreement:
(i) the withdrawal of paragraphs 57 to 70 of the fourth defendant’s defence in each of the Transit proceeding and AMFR proceeding; and
(ii) the discontinuance of the fourth defendant’s counterclaims in each of the Transit proceeding and AMFR proceeding pursuant to the notice of discontinuance filed in each of the Transit proceeding and AMFR proceeding on 20 February 2024.
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SCHEDULE OF PARTIES (S ECI 202101559)
TRANSIT PTY LTD (ACN 086 515 077)
First Plaintiff
NOTTING HILL TAVERN PTY LTD (ACN 161 638 606)
Second Plaintiff
ARCH UNDERWRITING AT LLOYD’S (AUSTRALIA) PTY LTD (ACN 139 250 605)
First Defendant
CHUBB INSURANCE AUSTRALIA LIMITED (ACN 001 642 020)
Second Defendant
CATLIN AUSTRALIA PTY LTD (ACN 108 319 786)
Third Defendant
BERKSHIRE HATHAWAY SPECIALTY INSURANCE COMPANY (ACN 600 643 034)
Fourth Defendant
SCHEDULE OF PARTIES (S ECI 2021 01815)
AMFR HOLDINGS PTY LTD T/AS THE DECK BRIGHTON (ACN 151 810 436)
First Plaintiff
EXCH PTY LTD T/AS THE KING HOTEL (ACN 601 471 390)
Second Plaintiff
NIHO PTY LTD T/AS THE NIXON HOTEL (ACN 610 928 339)
Third Plaintiff
TSBR PTY LTD T/AS TRUE SOUTH (ACN 608 681 170)
Fourth Plaintiff
JSAL PTY LTD ATF JSAL INVESTMENT TRUST (ABN 90 326 084 500)
Fifth Plaintiff
HBBS PTY LTD ATF HBBS INVESTMENT TRUST (ABN 16 448 102 201)
Sixth Plaintiff
MCLI PTY LTD T/AS MELBOURNE CENTRAL LION (ACN 633 282 603)
Seventh Plaintiff
BONC PTY LTD T/AS BANK ON COLLINS (ACN 633 167 183)
Eighth Plaintiff
ARCH UNDERWRITING AT LLOYD’S (AUSTRALIA) PTY LTD (ACN 139 250 605)
First Defendant
XL INSURANCE COMPANY SE (ACN 083 570 441)
Second Defendant
CHUBB INSURANCE AUSTRALIA LIMITED (ACN 001 642 020)
Third Defendant
BERKSHIRE HATHAWAY SPECIALTY INSURANCE COMPANY (ACN 600 643 034)
Fourth Defendant
0