UDP Holdings Pty Ltd (subject to deed of company arrangement) (rec and mgr apptd) v Ironshore Corporate Capital Ltd (No 3)
[2019] VSC 708
•30 October 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
INSURANCE LIST
S ECI 2016 00027
| UDP HOLDINGS PTY LTD (ACN 167 100 692) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) | Plaintiff |
| v | |
| IRONSHORE CORPORATE CAPITAL LTD ON ITS OWN BEHALF AND ON BEHALF OF THE UNDERWRITING MEMBERS OF SYNDICATE 4000 FOR THE 2013 UNDERWRITING YEAR | First Defendant |
| and | |
| INTERNATIONAL INSURANCE COMPANY OF HANNOVER SE | Second Defendant |
---
JUDGE: | GARDE J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 17 October 2019 |
DATE OF JUDGMENT: | 30 October 2019 |
CASE MAY BE CITED AS: | UDP Holdings Pty Ltd (subject to deed of company arrangement) (rec and mgr apptd) v Ironshore Corporate Capital Ltd (No 3) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 708 |
---
COSTS – Offer of compromise – All in offer – Whether judgment was no less favourable than the offer – Whether recovered amounts need to be determined – Whether indemnity costs can be awarded after the offer of compromise – Whether special circumstances exist warranting a departure from the ordinary rule – Whether costs should be apportioned - Whether costs should be awarded on the standard basis – Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 26.08.
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Scott QC with Mr C Young | Ashurst |
| For the Defendants | Mr W Thomas | Norton Rose Fulbright |
HIS HONOUR:
Introduction
In this proceeding the plaintiff, UDP Holdings Pty Ltd (ACN 167 100 692) (subject to deed of company arrangement) (receivers and managers appointed) (‘UDP’) was successful on a claim under a buyer warranty and indemnity policy (‘policy’) underwritten by the defendants (‘underwriters’). The policy related to a share sale agreement dated 11 December 2013 for the sale of all of the issued shares in 5 Star Foods Pty Ltd (ACN 005 714 616) (‘Company’) by Esposito Holdings Pty Ltd (ACN 079 763 303) (‘Seller’).[1]
[1]UDP Holdings Pty Ltd (subject to deed of company arrangement) (rec and mgr apptd) v Ironshore Corporate Capital Ltd (No 2) [2019] VSC 645 (‘principal decision’).
On 17 October 2019, judgment was entered for UDP against the underwriters in the amount of $25 million together with interest to that date fixed in the amount of $5,375,855.55.
UDP seeks an order that the underwriters pay its costs of and incidental to the proceeding, including any reserved costs:
(a)from 12 February 2016 to 18 December 2016 on the standard basis; and
(b)from 19 December 2016 to 17 October 2019 on an indemnity basis.
The underwriters submit that the Court should not award indemnity costs, but should order the underwriters to pay 70% of UDP’s costs of the proceeding to be assessed on the standard basis.
The offer of compromise
UDP commenced the proceeding on 12 February 2016. On 16 March 2016, UDP filed an amended statement of claim. On 15 April 2016, the underwriters filed their defence, which was followed by an amended defence on 29 April 2016. On 4 May 2016, UDP filed a reply to the amended defence. On 6 May 2016, the underwriters applied for a temporary stay of the proceeding pending the completion of the arbitration. On 19 July 2016, Hargrave J granted the stay until the conclusion of the arbitration and ordered UDP to pay the underwriters’ costs of the stay application.[2]
[2]UDP Holdings Pty Ltd (rec and mgr appted) v Ironshore Corporate Capital Ltd (2016) 51 VR 60.
On 16 December 2016, UDP sent an offer of compromise (‘offer of compromise’) to the underwriters. This was during the period of the stay, although nothing turns on this. The offer of compromise was in the amount of $27,004,123 and was expressed to be in full and final settlement of all claims and counterclaims in the proceeding. The offer was open for 14 days and was inclusive of costs.[3]
[3]Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 26.02(4)(a) (‘Rules’).
The offer of compromise was made under cover of a letter dated 16 December 2016 (‘letter’) from UDP’s solicitors, Ashurst, to Norton Rose Fulbright Australia, acting for the underwriters. The letter stated that the offer interest was calculated at 9.5% per annum on the amount of $25 million over the period from 12 February 2016 to 16 December 2016, a total of 309 days.[4] This amounted to $2,005,123. A compromise amount of $1,000 was deducted resulting in the all-in offer of $27,004,123.
[4]9.5% was the rate of interest under s 60 of the Supreme Court Act 1986 (Vic) (‘SC Act’).
The letter stated that interest had been calculated from 12 February 2016 notwithstanding that s 57 of the Insurance Contracts Act 1984 (Cth) (‘IC Act’) provided for interest to be paid from the date on which it was unreasonable for the underwriters to have withheld payment.
The underwriters did not accept the offer of compromise.
In the principal decision, I held that interest was payable under s 57 of the IC Act,[5] and not under s 60 of the SC Act. I also held that interest ran from 14 September 2015.[6]
[5]Principal decision, [404].
[6]Ibid [437].
The parties have subsequently calculated the amount of interest payable under s 57 of the IC Act over the period from 14 September 2015 to 16 December 2016 in the amount of $1,654,109.40. The total of the judgment amount and interest of $26,654,109.40 is lower than the all-in offer of $27,004,123.
Relevant rules
Order 26 of the Rules deals with offers of compromise. Rule 26.08 deals with the cost consequences of a failure to accept an offer of compromise. Rule 26.08 provides:
(1)This Rule applies to an offer of compromise which has not been accepted at the time of … judgment.
(2)Where an offer of compromise is made by a plaintiff and not accepted by the defendant, and the plaintiff obtains a judgment on the claim to which the offer relates no less favourable to the plaintiff than the terms of the offer, then, unless the Court otherwise orders, the plaintiff shall be entitled—
(a) …
(b)in the case of any other claim of the plaintiff, to an order against the defendant for the plaintiff’s costs in respect of the claim before 11.00 a.m. on the second business day after the offer was served, taxed on the ordinarily applicable basis and for the plaintiff’s costs thereafter taxed on an indemnity basis.
…
(5) Where a plaintiff obtains judgment for the recovery of … damages and—
(a)the amount for which the Court pronounces judgment includes an amount for interest …; or
(b)by or under any Act the Court awards the plaintiff interest …in respect of the judgment amount—
for the purpose of determining the consequences as to costs referred to in paragraphs (2) and (3) the Court shall disregard so much of the amount recovered by or awarded to the plaintiff for interest or damages in the nature of interest as relates to the period after the day the offer of compromise was served.
…
The application of r 26.08 has been considered in previous decisions.[7] Its operation is dependent on the specific facts of the individual case.
[7]PCCEF Pty Ltd v Geelong Football Club Ltd (No 3) [2019] VSCA 191 (Whelan, McLeish and Emerton JJA) (‘PCCEF’); Re Williams; Smith v Thwaites (No 3) [2018] VSC 431 (McMillan J); Nakos v Serdaris [2016] VSC 179 (Zammit J); Hambleton v State Trustees Ltd [2016] VSC 215 (Daly AsJ); Smith v Jovanoska (No 2) [2013] VSC 714 (Zammit AsJ).
If r 26.08(2)(b) is to entitle a plaintiff to indemnity costs, the plaintiff must show that the judgment was ‘no less favourable’ to the plaintiff than the term of the offer. In addition, the Court can ‘otherwise order’ if it considers in the circumstances of the case that it should do so.
In the present case, the offer amount is higher than the judgment amount plus interest as at 16 December 2016 by $350,013.60. The judgment amount and interest will be no less favourable to UDP than the terms of the offer if UDP’s recoverable costs as at 16 December 2016 exceed $350,013.60.
UDP’s evidence as to the costs incurred as at 16 December 2016
UDP relies on the affidavit of its solicitor, Michael Gordon Sloan, sworn 16 October 2019.
Mr Sloan deposes that UDP’s solicitors, Ashurst, had a fee agreement in place with UDP. The agreement was that Ashurst could charge 70% of its normal rates unless there was a successful outcome in the proceeding, in which case Ashurst was entitled to charge 110% of actual costs. He also deposes that prior to the offer of compromise, Ashurst billed fees at the 70% level. As at the date of the offer of compromise, Ashurst’s fees were approximately $375,000, while counsel fees were approximately $90,000. He also deposes that UDP’s ultimate costs and disbursements were many times greater.
The submissions as to ‘no less favourable’
The underwriters submitted that UDP had not shown that the judgment was no less favourable than the offer of compromise for the purposes of r 26.08(2).
They submitted that:
(a)UDP had not adduced evidence as to what was recoverable on a taxation of UDP’s costs at the standard rate as at the date of the offer; and
(b)as a result, the Court was not able to perform the necessary comparison to determine whether the presumption under r 26.08(2) was engaged.
UDP submitted that:
(a) the Court does not require a bill in taxable form to be satisfied that costs had been incurred;
(b) there was no evidence from the underwriters as to how they considered the offer of compromise;
(c) the underwriters did not adduce evidence to contest the quantum of UDP’s costs as deposed in Mr Sloan’s affidavit;
(d) the underwriters did not require Mr Sloan for cross-examination; and
(e) when $375,000 of solicitor’s fees and $90,000 of counsel’s fees were added to the judgment of $25 million and the agreed interest of $1,654,109.40, the total sum of $27,119,109.40 exceeded the amount of the offer of compromise.
Is UDP’s evidence sufficient to satisfy r 26.08(2)(b)?
There are significant deficiencies in the material relied on by UDP to show that the judgment was no less favourable to UDP than the offer of compromise:
(a) the fee agreement is not produced, and as a result there is no transparency as to the fees actually charged, whether at 70%, or 110% if this level now applies because of the successful outcome of the proceeding;
(b) Mr Sloan (or a costs consultant) does not advance any opinion as to the recoverable value of the legal work completed for UDP in the proceeding as at 16 December 2016 if assessed on the standard basis;
(c) the arbitration commenced on 30 October 2014, well prior to the proceeding and continued throughout 2016. The cost figures provided do not clearly distinguish between costs incurred in the proceeding and costs incurred in the arbitration;
(d) the most substantial work in the proceeding prior to 16 December 2016 was the contested stay application decided by Hargrave J on 19 July 2016;
(e) as Hargrave J ordered that UDP pay the underwriters’ costs of the stay application, UDP’s costs of the stay application must be excluded from the assessment of its costs of the proceeding prior to 16 December 2016; and
(f) it is likely that less legal work was undertaken in the proceeding between July and December 2016 as the proceeding was stayed until further order.
Was the judgment no less favourable to UDP than the offer of compromise?
In response to UDP’s submissions, I note that:
(a) it is not necessary for a party to submit a bill in taxable form for the Court to be satisfied that a judgment is no less favourable than an all-in offer of compromise. However, the Court must be satisfied on the evidence that this threshold test is met if the presumption in r 26.08(2) is to be relied on;
(b) the onus of proof under r 26.08(2) that the judgment is no less favourable to the plaintiff than the offer of compromise is on the plaintiff. The defendants do not have to lead any evidence or prove the converse;
(c) in disputed cases where there is an all-in offer, global estimates of fees rendered and disbursements incurred need to be accompanied by evidence as to the likely amount recoverable at the standard rate if the Court is to draw the factual inference in r 26.08(2); and
(d) this is especially the case where there are complicating factors, such as the simultaneous conduct of an arbitration, and a significant costs order against the plaintiff within the period in question which resulted from a contested application in which two counsel appeared for each party.
As a result, I accept the underwriters’ submissions that UDP has not shown that the judgment was ‘no less favourable’ to it than the offer of compromise. The Court has no clear or accurate idea of what the recoverable costs of UDP were at the date of the offer of compromise if assessed at the standard rate.
Consequently, I am not satisfied on the evidence that UDP’s recoverable costs, if assessed at the standard rate, exceeded $350,013.60 as at the date of the offer of compromise.
Were there special circumstances?
If the Court were to find that the judgment was no less favourable to the plaintiff than the offer of compromise, the underwriters nevertheless submitted that there were special circumstances that would warrant departure from the presumption in r 26.08(2).[8] The underwriters relied on what they described as material changes in UDP’s case after the offer of compromise was served. The circumstances relied on were:
[8]See Simply Irresistible Pty Ltd v Couper [2011] VSC 33 (Kyrou J).
(a) the expert accounting reports of Ms Dawna Wright dated 11 January 2018, and Mr Tony Samuel dated 1 February 2018;
(b) the interim and final awards in the arbitration made on 21 September 2018 and 1 October 2018 respectively;
(c) the filing by UDP of a further amended statement of claim on 1 November 2018, and a summary of costs on 29 April 2019;
(d) the filing of the affidavit of Craig Peter Shepard, a receiver and manager of UDP, as to recovered amounts on 15 May 2019; and
(e) the filing by UDP of a reply to the second amended defence on 31 May 2019 making various claims of estoppel and abuse of process.
UDP submitted that there was no basis for the court to ‘otherwise order’ in the terms of r 26.08(2). The defendants bore the onus of showing that the presumptive position in the rule should not apply. There was nothing unusual about the way the trial was conducted. The nature and scope of UDP’s case relevantly remained unchanged throughout.
Relevant authority
In PCCEF, the Court of Appeal held:
The party seeking to displace the prima facie rule in r 26.08 bears the onus. The onus is not readily discharged. In Gamboni, Tate JA and Kyrou AJA stated:
In Simonovski, Ashley J stated that while the Court retains a discretion under r 26.08(2)(b) of the ... Rules, an ‘order otherwise’ should not be lightly made, and that the prima facie position established by the rule ‘is a strong one, not easily displaced’.
In Saric, McMillan J referred to the language used in the authorities to describe the kinds of case where the prima facie rule has been displaced:
The Court must exercise caution in departing from the prima face [sic] rule and only do so in cases that warrant such a departure, invariably expressed in terms such as ‘compelling and exceptional circumstances’, ‘for proper reasons which, in general, only arise in an exceptional case’ and ‘special circumstances’.
Whether the Court will ‘otherwise order’ depends on whether doing so advances the purpose of O 26. That purpose, broadly speaking, is to encourage the compromise of litigation and the saving of the private and public costs associated with it. The reasonableness of the rejection or non-acceptance of an offer is one matter that may be taken into account, but is not of itself determinative.[9]
[9]PCCEF (n 7) [23]–[25] (McLeish and Emerton JJA), citing Gamboni v Bendigo and Adelaide Bank Ltd (No 2) [2013] VSCA 282, [51] (Tate JA and Kyrou AJA); Simonovski and Anor v Bendigo Bank (No 2) [2003] VSC 139, [17] (Ashley J); Re Saric; Saric v Vukasovic (No 2) [2018] VSC 254, [17] (McMillan J) .
Findings in the principal decision
In the principal decision, I considered the conduct of UDP and the underwriters at some length concluding:
While UDP updated the policy claim on 23 December 2015 in accordance with the final PPB report, the substance of the claim and the breaches alleged were unchanged. On 5 February 2016, the underwriters’ response remained substantially the same and failed to indemnify UDP.
…
By 1 July 2015, the underwriters had a very detailed loss assessment prepared by PPB, and most or all of the large number of documents that they had previously requested. It is reasonable to conclude that they had all necessary information by this date to decide whether or not to accept the claim. They could also readily obtain their own legal advice and expert loss accounting assistance.
The underwriters could have agreed to indemnify UDP under the policy, with only Defence Costs and Recovered Amounts remaining to be resolved. However, at the time when they could have been deciding whether liability on the policy claim should be admitted, and what payment should be made, they embarked on a quest for large numbers of documents.
Given that the underwriters had advanced notification of the claim on 2 March 2015, and the benefit of the comprehensive PPB report including a detailed loss assessment on 14 May 2015, and numerous supporting documents, it was in my view unreasonable for the underwriters to elect to withhold payment on and from 14 September 2015 - or four months after the policy claim was made. This was also two and a half months after UDP had responded to multiple requests for documents, and over six months after the notification of circumstances.[10]
[10]Principal decision, [432]–]435].
I remain of the same view.
Should the Court otherwise order?
As to the matters relied on by the underwriters, I note:
(a) from the outset, UDP’s claim remained a claim for indemnity under the policy to the limit of liability of $25 million. The claim was successful in that amount;
(b) the reports of Ms Wright and Mr Samuel were expert accounting reports. Likewise, the underwriters relied on expert reports by Mr Meredith. It was to be expected that both parties would rely on expert accounting reports;
(c) UDP provided an expert report by PPB Advisory with the claim. While the reports of Ms Wright and Mr Samuel superseded the PPB Advisory report, all reports were concerned with the assessment of UDP’s loss. Both Mr Samuel and PPB Advisory determined that UDP’s loss significantly exceeded the $25 million policy limit;
(d) the commencement of the arbitration preceded UDP’s claim on the policy. The interim and final awards were the natural result of the determination of the arbitration;
(e) the further amended statement of claim and the summary of costs filed by UDP updated the previous pleading but did not fundamentally change its substance. The proceeding remained a claim on the policy by UDP for the Seller’s breach of warranties of truth and accuracy as to the accounts of the Company when it was sold;
(f) the affidavit of Craig Peter Shepard in fact verified that no amounts had been recovered from the Seller or related entities; and
(g) while the plaintiff filed a reply to the second further amended defence on 31 May 2019, raising new contentions of estoppel and abuse of process, these contentions failed at the trial and had no effect on the outcome.
In summary, the matters relied on by the underwriters reflect the ordinary progression and evolution of the proceeding. They do not represent any special or extraordinary circumstances which might cause the Court to otherwise order.
As a result, I reject the underwriters’ submission that there are special circumstances which warrant departure from the presumption in r 26.08(2).
As UDP has not shown that the judgment was no less favourable to it than the offer of compromise, the question of whether there were special circumstances which should lead the Court to ‘otherwise order’ for the purpose of r 26.08(2) does not arise. If it were necessary to decide this question, I would be of the view that the Court should not exercise its discretion to otherwise order.
Apportionment
The underwriters submitted that the Court should only award UDP 70% of its costs of the proceeding when taxed at the standard rate. They pointed to the issues addressed in the principal decision, submitting that they were successful as to:
(a) UDP’s estoppel and abuse of process claims;
(b) Mr Meredith’s purchaser’s methodology, and his evidence as to the Lion overcharges,[11] and as to the acquired liability loss; and
(c) UDP’s claim for breach of duty of utmost good faith.
[11]Principal decision, [11]–[17].
Against these issues, the underwriters acknowledged that they had been unsuccessful as to:
(a) Mr Samuel’s discounts for marketability, size and unaudited financial results, and for the additional risks of renegotiating the Lion agreement;
(b) whether ‘Loss’ could be determined; and
(c) the award of interest.
UDP resisted these submissions, contending that it was wholly successful on its claim, save for breach of the duty of utmost good faith claim. UDP succeeded on its claim for damages assessed at the policy limit, and for interest. It also submitted that the fact that the underwriters succeeded on some issues was not material as UDP succeeded by a considerable margin.
UDP contended that apportionment was inappropriate. It would undermine the offer of compromise regime and would be inconsistent with the Court’s finding that it was unreasonable for the underwriters to have withheld payment after 14 September 2015.
Guiding principles
The Court has a broad discretionary power to make orders as to costs.[12] The Court’s discretion is absolute and unfettered but is exercised judicially upon the facts connected with, and leading up to, the litigation and not by reference to irrelevant or extraneous considerations.[13] Although costs are in the discretion of the Court, the ordinary rule is that, in the absence of sound reasons to the contrary, a successful litigant should receive his or her costs.[14] The purpose of an order for costs is to indemnify or compensate the person in whose favour it is made, and not to punish the unsuccessful party.[15]
[12]SC Act s 24; Civil Procedure Act 2010 (Vic) s 65C.
[13]Latoudis v Casey (1990) 170 CLR 534, 557 (Dawson J) (‘Latoudis’); Oshlack v Richmond River Council (1998) 193 CLR 72, 86 [34] (Gaudron and Gummow JJ), citing Latoudis (‘Oshlack’).
[14]Milne v Attorney-General for the State of Tasmania (1956) 95 CLR 460, 477 (Dixon CJ, McTiernan, Williams, Fullagar and Taylor JJ).
[15]Latoudis (n 13) 563 (Toohey J), 567 (McHugh J).
In Oshlack, McHugh J explained that the principle that a successful party in litigation is entitled to an award of costs is grounded in reasons of fairness and policy. If the litigation had not been brought or defended by the unsuccessful party, the successful party would not have incurred the expense which it did. As between the parties, McHugh J observed that fairness dictates that the unsuccessful party typically bears the costs of the unsuccessful litigation.[16]
[16]Oshlack (n 13) 97 [67].
Exercise of discretion
I am satisfied that in the exercise of my discretion UDP should have its costs of the proceeding (except for the costs previously ordered against it) on the standard basis for the following reasons:
(a) while the underwriters were successful on a number of issues contested in the proceeding, UDP was ultimately successful obtaining a judgment in the amount of $25 million;
(b) the underwriters were found liable to UDP on the policy in circumstances where they had previously denied liability and resisted UDP’s claim;
(c) UDP was also successful in its claim for interest; and
(d) it is fair and just that UDP be compensated for its costs of the proceeding on the standard basis.
Conclusion
For the reasons given, the Court will order that the plaintiff’s costs of the proceeding including reserved costs (but excluding its costs of the defendants’ summons dated 6 May 2016) are to be taxed by the Costs Court on the standard basis, and when taxed paid by the defendants.
0
12
0