Zandata Pty Ltd v Riley
[2013] NSWSC 49
•19 February 2013
Supreme Court
New South Wales
Medium Neutral Citation: Zandata Pty Ltd v Riley [2013] NSWSC 49 Hearing dates: 29/06/2012 Decision date: 19 February 2013 Jurisdiction: Common Law Before: Garling J Decision: (1) Notice of Motion dated 3 April 2012 dismissed;
(2) Defendants to pay the plaintiff's costs of the proceedings, including the Notice of Motion.
(3) Plaintiff to file and serve by 4pm on 12 March 2013, all further affidavits, if any, that it wishes to rely upon.
(4) Defendants to file and serve by 4pm on 26 March 2013, any affidavits, if any, upon which they wish to rely.
(5) Stand proceedings over to 5 April 2013 at 9.30am before me for directions.
Catchwords: COSTS - general rule costs follow the event - the effect of Rule 42.34 of the Uniform Civil Procedure Rules - Terms of Settlement and Offers of Compromise - reasonable pre-litigation settlement offers - whether proceedings commenced unreasonably - whether all particulars were necessary - methodology of assessment of loss and damage. LEGAL PRACTITIONERS - admission of breach of duty and negligent conduct Legislation Cited: Civil Procedure Act 2005
Uniform Civil Procedure Rules 2005Cases Cited: Beach Petroleum NL v Johnson (No.2) (1975) 57 FCR 119
Hadid v Lenfest Communications Inc [2000] FCA 628
Harrison v Schipp [2002] NSWCA 213; (2002) 54 NSWLR 738
Julien v Secretary, Department of Employment and Workplace Relations (No.2) (2009) FCA 1257
Kiwi Munchies Pty Ltd v Stern [2006] NSWSC 433
Siteberg Pty Ltd v Bruce Maples & Ors [2010] NSWSC 307
Sony Entertainment (Australia) Ltd v Smith [2005] FCA 228; (2005) 215 ALR 788
Sparnon v Apand Pty Ltd (Federal Court of Australia, 4 March 1998, unreported)
We are Here Pty Ltd v Zandata Pty Ltd [2010] NSWSC 262
Wentworth v Wentworth [1996] NSWCA 552Category: Procedural and other rulings Parties: Zandata Pty Ltd (P)
Matthew John Riley (1D)
David Marshall Riley (2D)Representation: H Bevan (P)
M C Dicker (1D and 2D)
Darryl Quigley Partners (P)
Gilchrist Connell (1D and 2D)
File Number(s): 2011/319882
Judgment
Introduction
On 6 October 2011, Zandata Pty Ltd ("Zandata") filed a Statement of Claim in which it sought damages from Matthew John Riley and David Marshall Riley, who were solicitors carrying on a partnership under the name Bondfield Riley ("the solicitors").
The claim for damages related to alleged negligence on the part of the solicitors, when acting for Zandata in August 2007 with respect to the renewal of a lease of the Hi-Way Motel, South Grafton.
Zandata was the registered proprietor of the property and had leased the motel business initially to Rapidale Pty Ltd, which lease was assigned on two occasions, the last of which was in February 2003, to Ronald Boyd and Margaret Boyd.
The Statement of Claim alleged that the solicitors were negligent in two respects, namely:
(a) in failing to check the first Lease to ensure that the option to renew had been validly exercised by the Lessee and failing to advise Zandata that it had not been validly exercised; and
(b) in preparing the renewed lease, failing to ensure which particular provisions of the first Lease were required to be included, and thus failing to omit clause 28 of the first lease, from the renewed lease.
The Statement of Claim was returnable before the Court on 27 January 2012, for directions.
On 15 February 2012, the solicitors filed a defence in which they denied the allegation set forth in 4(a) above, but admitted they were negligent with respect to the second allegation set out in 4(b) above. As well, the solicitors admitted that Zandata had suffered a financial loss:
"... constituted by the difference between the market value of the property and the price of $662,500 at which price the plaintiff was compelled to sell the property".
On 16 March 2012, the parties settled the proceedings and filed Terms of Settlement in Court which were to the following effect:
"By consent and without admission:
1. Verdict for the defendants.
2. The defendants are to pay the plaintiff the sum of $441,500 within 21 days of the date of these Terms.
3. Interest is not to run on the sum specified in paragraph 2 above if payment is made within 21 days of the date of these Terms.
4. The sum of $441,500 does not include any amount in respect of the costs of the proceedings and any order in relation to such costs is as to be determined by the Court.
5. Either party may apply to the Court on 7 days notice to the other party in relation to the Court's determination of any questions of costs.
6. The Court notes that these terms are in full and final settlement of any and all claims that the plaintiff has, or may in the future have, arising out of the matters that are the subject of these proceedings.
7. These Terms are not be disclosed."
On 3 April 2012, the solicitors filed a motion in which they sought the following orders:
"1. Except as provided for in Order 2, there be no order as to costs in the proceedings with the intention that each party is to bear its own costs.
2. The plaintiff pay the defendant's costs of this motion.
3. Such other orders as the Court considers fit."
For the reasons that follow, I have decided to dismiss the motion, and order that the solicitors pay Zandata's costs of the proceedings, and of the motion. As well, I will stand over for further determination the question of the quantum of any gross costs order which ought to be made.
Factual background
As I have earlier said, Zandata was the owner of the Hi-Way Motel at South Grafton. At the relevant time, it was leased to Mr and Mrs Boyd. That lease contained two options. The first option, contained in clause 3.2, gave the tenant an option to call for a new lease of five years, with two further option periods each of five years. The clause provided that the lease, once renewed by the exercise of the option, was to be on the same terms and conditions, except as to rent, and except that an option to purchase granted under clause 28, was not to be included in the subsequent lease. Additionally, the option to renew was limited to the total period set out in the first lease.
The second option was an option contained in clause 28 of the lease, which was an option for the tenant to purchase the property for a purchase price of $662,000. That option was subject to a provision that any notice exercising the option was to be served no later than 35 months after the commencement of the lease.
On 13 July 2007, Mr and Mrs Boyd gave Zandata a Notice of Exercise of the option for a new lease. Having done so, Mr and Mrs Boyd offered the motel business for sale, which contract was conditional upon Zandata agreeing to an assignment of the lease, including the renewed lease.
The solicitors drew up the new lease, and on 15 July 2007, sent it to the solicitors acting for Mr and Mrs Boyd on the sale of the business. A copy of the proposed lease was provided as part of the sale process to a director of the purchaser, We Are Here Pty Ltd ("We Are Here").
The execution of the renewed lease was somewhat delayed. It was not finally completed and returned until about November 2007. However, the lease was dated 20 August 2007, which was regarded by all parties as the commencement date.
One of the conditions in the lease (and the renewed lease) was that Zandata retained the right of first refusal with respect to the sale of the motel business by the lessee.
On 3 September 2007, We Are Here made an offer to purchase the motel business for $340,000, subject to some conditions. That offer was accepted on 4 September 2007. The solicitors for Mr and Mrs Boyd enquired of Zandata whether it wished to exercise its right of first refusal, and in due course, were told that it did not.
The purchase of the motel business, which was accompanied by an assignment of the lease, was settled on 15 November 2007. Zandata consented to the assignment of the lease to the incoming lessee, We Are Here Pty Ltd.
Exercise of Option to purchase Land
On 10 March 2009, We Are Here, as the lessee, gave notice to Zandata of the exercise of the option to purchase the property, which was contained in clause 28 of the renewed lease. It sent a cheque for $66,250, being 10 per cent of the purchase price, by way of the deposit for the purchase.
The solicitors for Zandata responded on 14 April 2009, with a letter which asserted that with respect to the option contained in clause 28:
"Plainly, the option to purchase was only effective during the first term of the lease. To construe the lease otherwise would involve imposing a static purchase price determined at 1997 levels for 35 months commencing in each of 2007, 2012, 2017 and 2023. With respect, such a construction is so devoid of commercial reality to be bizarre.
In any event, the renewal of the lease and its assignment, was ineffective to renew and assign the option to purchase. The option to purchase is a separate and distinct arrangement from the lease."
Specific Performance Proceedings
We Are Here and Zandata fell into dispute with respect to the exercise of the option to purchase. The dispute resulted in proceedings being brought in the Equity Division of this Court. Those proceedings were determined by a judgment of 9 April 2010: We are Here Pty Ltd v Zandata Pty Ltd [2010] NSWSC 262, when Windeyer AJ ordered that the plaintiff, We Are Here, was to have specific performance of the option to purchase the land, and that a cross-claim brought by Zandata claiming that the option to purchase was included in the renewed lease by mistake, should be dismissed.
In the course of those proceedings, Mr Matthew Riley, the first defendant, gave evidence during which he said that the inclusion of the option to purchase which was set out in clause 28 of the renewed lease, was a mistake as a result of an oversight by him in the preparation of the lease.
As the result of the principal orders made by Windeyer AJ in the proceedings before him, he also ordered that Zandata pay the legal costs of We Are Here of those proceedings.
In July 2010, the solicitors paid Zandata's legal costs of those proceedings, and in September 2010, the solicitors paid the legal costs of We Are Here.
Present proceedings
On 8 March 2011, the present solicitors for Zandata, sent a letter of demand to the solicitors. That letter of demand, outlined in substance, although in slightly different words, the two bases upon which Zandata claimed that the solicitors had been negligent. It enclosed a valuation report which valued the property at the date of the commencement of the lease, at $1.47M.
It set out Zandata's claim as being for the sum of $992,151 as at 28 February 2011, plus interest and costs. The letter concluded with these paragraphs:
"Prior to Zandata's commencement of litigation against your firm, we invite you to notify us of any basis upon which your liability to Zandata, on the basis set out by us in this letter, is disputed.
Alternatively, if your liability for damages for negligence is conceded, please notify us accordingly.
In the absence of any consensual resolution in this matter, Zandata proposes to institute legal proceedings after the expiration of 21 days from the date of this letter.
A copy of this letter has been provided to Law Cover with whom we have previously been in correspondence in relation to this matter."
That letter was responded to by Gilchrist Connell, Solicitors, on behalf of the solicitors who were the intended defendants in a letter dated 10 May 2011, which was marked "Without Prejudice". They informed Zandata's lawyers that they acted for the solicitors. The terms of the letter made it clear that they also received instructions from Law Cover.
That letter, amongst other matters, contained the following:
"... For the record, our client denies failing to advise your client that the exercise of the option requiring Zandata's entry into the lease was invalid. That issue was discussed with your client at the time, and instructions were given to nevertheless proceed to issue a new lease.
...
To the extent your client has suffered loss, it would be the difference between the value of the land at the time it was sold, 2 July 2010, and the amount it was sold for, plus interest from 2 July 2010.
...
The only expert valuation that has been carried out on the land rather than the business, was the valuation obtained on behalf of and relied upon by your client in the underlying proceedings. That report valued the land at $940,000 as at 2 November 2009. As the rent did not increase between that date and 2 July 2010, the value as at 2 July 2010 is likely to have remained approximately $940,000.
Assuming that is the correct value of the land, then the loss suffered by your client is only $277,500 plus interest.
Our client does not dispute a breach of duty in relation to the drafting of the lease for the purposes of settlement discussions. Our client is also happy to discuss any reasons why your client considers the approach taken above is not the correct quantification of your client's loss.
However, in the absence of any such explanation, our client considers that the reasonable settlement value of this claim does not exceed $200,000, and our client offers to settle the claim for that amount, inclusive of costs, in return for your client entering into a suitable deed of settlement and release. That amount, is in addition to the payments our client has previously agreed, upon on a without prejudice basis, to make on behalf of your client in respect of the costs of the underlying proceedings.
This offer is open for 28 days from the date of this letter. ..."
On 25 May 2011, the solicitor for Zandata wrote to Gilchrist Connell, noting that the only response they had received to their letter of 8 March 2011 (which was an open letter), was the "Without Prejudice" letter of 10 May 2011, and that they had not received any response "on the record", to any of the contents of that letter.
The letter informed Gilchrist Connell of Zandata's intention to institute legal proceedings, and that they were in the process of obtaining appropriate expert opinion.
On 28 June 2011, Gilchrist Connell responded, referring to that letter. In their letter, Gilchrist Connell said:
"We do not understand why your client requests that our client's response be provided on an open basis rather than a 'without prejudice' one. In any event, we now provide the following response on an open basis.
Our client admits a breach of duty in relation to the inclusion of clause 28 in lease AE 15008U.
Our client denies any breach of duty in relation to the alleged failure to advise that the exercise of the option requiring your client's entry into lease number AE 15008U. (sic)
...
Assuming that this the correct value of the land, then the loss suffered by your client is only $277,500 plus interest.
..."
That letter was responded to on 6 July 2011, by the solicitors for Zandata in a letter which include the following:
"Your letter does not constitute an unequivocal admission of your client's legal liability to Zandata. In any event, we are plainly at issue about the quantum of Zandata's loss due to your client's negligence.
In the circumstances, we will be filing the proceedings in the Professional Negligence List of the Common Law Division of the Supreme Court of NSW as indicated in our earlier correspondence."
It was after that letter had been sent, and some months later, that the proceedings were commenced. The Statement of Claim, having been filed in the Professional Negligence List, the matter was listed for directions on 27 January 2012.
Gilchrist Connell wrote on 17 January 2012, requesting that Zandata file an amended statement of claim prior to their clients filing a defence. In their letter, Gilchrist Connell expressed the reason for this in the following way:
"The inclusion of the above parts of the Statement of Claim unnecessarily increases significantly the costs associated with the proceedings without having any possible bearing on their outcome. That is because the breach of duty referred to in subparagraph 16(b), has already been admitted by our client in open correspondence, and the additional inclusion of the above allegations, which are denied, therefore cannot affect the outcome of the proceedings.
..."
The Statement of Claim pleaded the two allegations of negligence to which I have made reference in [4] above. The reference in this letter to subparagraph 16(b) is to the second allegation of negligence set out in [4] above.
On 23 January 2012, the solicitor for Zandata wrote to Gilchrist Connell in response to their letter, and informed them that they did not intend to amend the statement of claim as was suggested.
On 2 February 2012, Gilchrist Connell served on the solicitor for Zandata, an Offer of Compromise, in which the solicitors offered to compromise the claim made by Zandata by paying the sum of $441,500 exclusive of costs. It was the acceptance of that offer by Zandata which resulted in the terms of settlement being agreed to and ultimately filed.
In the course of a debate in correspondence, on the precise words and provisions of the terms of settlement, by letter dated 12 March 2012, Gilchrist Connell, on behalf of the solicitors, made a without prejudice offer to pay Zandata $30,000 for its costs.
That costs offer was responded to, on 14 March 2012, by the solicitors for Zandata in a letter which was similarly marked "Without Prejudice" in the following terms:
"In relation to costs, you have put forward no persuasive reason why our client will not be entitled to an order for its costs, in accordance with UCPR 42.13A.
Our client's costs as at the date of the defendant's Offer of Compromise, exceed $70,000. The offer of $30,000 for those costs falls well short of the amount which it will be likely that our client would receive under a costs assessment."
It was against this factual background that the motion filed on 3 April 2012 was brought on for hearing before the Court.
On the hearing of the motion, notwithstanding the limited terms of it, a variety of other orders were sought. It is appropriate to set them out. They were:
(a) The solicitors submitted that the Court ought order that Zandata pay their costs of the proceedings. This was their initial submission. They submitted, in the alternative, that each party should pay their own costs of the proceedings as the Notice of Motion sought;
(b) Zandata, in opposing the orders sought by the solicitors, submitted that the Court should order the solicitors to pay its costs of the proceedings;
(c) The solicitors submitted that, if ordered to pay Zandata's costs, then the Court ought to make a gross sum costs order. This was opposed by counsel for Zandata, who submitted that since he did not have any adequate notice of such a submission, he did not have the appropriate evidence to justify an appropriate lump sum;
(d) The solicitors, in the alternative to a gross sum costs order, sought an order from the Court by which a lump sum discount was applied to any assessed costs to reflect what, in their submission, they argued as being the needless and unreasonable incurring of costs by Zandata.
Although it will be necessary to deal with each of these contentions, the principal facts and matters relied upon, were essentially common to all of the orders sought.
Submissions of the solicitors
The first submission was that, having regard to the fact that Zandata recovered an amount of less than $500,000 from the solicitors by way of a judgment, an order for costs would not ordinarily be made unless, as provided for by Uniform Civil Procedure Rule 42.34(2):
"... The Supreme Court is satisfied that the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted."
The second submission was that the proceedings were essentially a dispute about quantum, which was resolved largely as a matter of principle in favour of the solicitors, and hence if the central consideration to the question of what order for costs ought be made, is the success of one or other party, the substance of the matter was that the solicitors had succeeded.
The solicitors accordingly submitted that, having regard to the effect of r 42.1, the rule which provides that subject to any other order, costs would ordinarily follow the event, the solicitors should be awarded their costs, or else the order sought in the motion that each party ought pay their own costs ought to be made.
Finally, the solicitors submitted that having regard to the pre-trial correspondence, that the commencement of the proceedings was unjustified and, accordingly, no order for costs ought be made.
I do not accept any of these submissions.
The effect of UCPR 42.34
Rule 42.34 is in the following terms:
"42.34 Costs order not to be made in proceedings in Supreme Court unless Court satisfied proceedings in appropriate court
(1) This rule applies if:
(a) in proceedings in the Supreme Court, other than defamation proceedings, a plaintiff has obtained a judgment against the defendant or, ... in an amount of less than $500,000, and
(b) the plaintiff would, apart from this rule, be entitled to an order for costs against the defendant ....
(2) An order for costs may be made, but will not ordinarily be made, unless the Supreme Court is satisfied the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted."
It is to be observed that the rule states that it is only to have application in circumstances where:
"... a plaintiff has obtained a judgment against the defendant"
and where the judgment is:
"... in an amount of less than $500,000".
The terms of settlement did not include any judgment in favour of the plaintiff against the defendants, but on the contrary, expressed the agreement of the parties that there be a verdict for the defendants, and that there be, in effect, an order that the defendants were to pay Zandata the sum of $441,500.
The correspondence between the parties prior to agreement upon the terms of settlement, make plain the solicitors' concerns. In a letter from Gilchrist Connell of 12 March 2012, they said:
"We enclose proposed terms of settlement. In relation to Order 1, we propose that there be a verdict for the defendants, rather than simply a dismissal of the proceedings, because there may be some doubt as to whether Order 5 is effective as a release of our clients. However, as an alternative, our client is happy for Order 1 to be merely a dismissal of the proceedings if your client is willing to execute a suitable deed of release".
The ultimate agreement was on terms which provided a verdict for the defendants.
The Offer of Compromise which was dated 1 February 2012, did not include any reference to a judgment in favour of the plaintiff, Zandata, but rather, as indicated earlier, simply stated:
"the defendants offer to compromise the claim made by the plaintiff by paying the sum of $421,500 exclusive of costs."
In those circumstances, the precondition for the application of r 42.34 namely, the existence of a judgment in an amount of less than $500,000 has not been established. The rule relied upon by the solicitors to support their submission does not do so.
Curiously, in the Terms of Settlement, the solicitor for the defendants proposed, and Zandata agreed, to a term which provided for a verdict for the defendants.
Having regard to the fact that the proceedings were settled, and there had been no jury empanelled to hear the proceedings, the use of the term "verdict" was both anomalous and incorrect. A verdict is the consequence of the determination of a jury, after which a court having taken or received the verdict, would order that judgment be entered. Often, such as in cases of a statutory defence, the judgment would be for a lesser sum than the verdict. The two terms were used to differentiate that which a jury did, that is, return a verdict, and that which a court orders, namely, a judgment.
Where a case is to be determined by a Judge alone, without a jury, the Judge does not return a verdict but rather, having reached a conclusion, makes orders consistent with the conclusion which has been reached and the reasons which support the conclusion. Those orders may or may not include a judgment in a monetary sum for a plaintiff, or alternatively, a judgment in favour of defendants. The entry of a verdict has no role to play in any such determination by a Judge who conducts a civil trial without a jury.
If one was to leave aside the words used in r 42.34, and examine the underlying substance, a similar conclusion would be reached. It seems to me that in seeking to ascertain the real effect of the Terms of Settlement, and the intention of the parties, it was that, albeit on a basis curiously expressed as being "without admissions", the proceedings would be formally terminated in favour of the defendants. The purpose of the first order in the Terms of Settlement was to thereby achieve an issue estoppel and prevent Zandata from bringing any further proceedings. This was thought necessary because there existed some doubt, at least in the minds of Gilchrist Connell, that the provisions of order 6 with respect to the breadth of the settlement, may not be completely effective.
Accordingly, as a matter of substantive effect, I would interpret the first term of the Terms of Settlement to mean that the parties intended as a matter of form and technical effect, there be judgment or else a final determination, in favour of the defendants.
Whether or not that was so, what is plain is that the plaintiff did not obtain a judgment against the defendants, let alone in a specified sum of money. The Terms of Settlement were constructed on the basis that the proceedings were terminated in favour of the defendants, but the defendants agreed to an order that they pay a specified sum of money.
Thus, the condition precedent for the operation of r 42.34 does not exist, and its provisions are irrelevant. I reject the submission of the solicitors based upon this rule.
Which party was the successful party?
The second basis upon which the solicitors rely in seeking an order that they should have their costs and that they should not have to pay Zandata's costs of the proceedings is that, as a matter of substance, the defendants have been successful and, since the ordinary rule, encapsulated by r 42.1 of the UCPR, is that "costs follow the event", they should have their costs of the proceedings, or at least should not have to pay Zandata's costs.
This, it must be said, is a brave submission. It ignores the reality of what occurred. Simply stated, the solicitors were negligent. They accepted, ultimately, that this was so. They accepted that they were obliged to pay damages. The proceedings were finalised on the basis that Zandata was paid the sum of $441,500. As well, it was agreed that it had the right to seek an order for costs.
As a matter of form and substance, Zandata was the successful party. It cannot be rationally thought that the defendants were successful, unless the measure of success is that they paid out less than Zandata was claiming in correspondence before the action commenced.
But Zandata can also call the same proposition in aid against the solicitors' position, namely that they paid out more than they offered to pay in the correspondence before the proceedings commenced.
These arguments are largely beside the point. In these proceedings, the outcome, or as the UCPR refers to it, "the event", was the substantive finalisation of the proceedings by the making of the orders in the Terms of Settlement. Viewed objectively, Zandata was the successful party, and there is no rational basis to conclude that the solicitors were successful.
I reject the solicitors' submissions that r 42.1 provides any basis for making the orders that they sought, and the orders set out in the Notice of Motion.
Unreasonable incurring of costs
The solicitors submit that by commencing the proceedings, and by including a particular of negligence, which was not admitted, when there had been a sufficient admission of negligence, Zandata acted unreasonably, and as a consequence they have incurred an unreasonable sum for costs, which properly ought to have been avoided. Hence, they submit that the interests of justice require that the Court order that each party should pay their own costs of the proceedings.
Alternatively, the solicitors submit that the finding of unreasonable conduct on the part of Zandata would support a wholesale reduction by a specified percentage of the claimed costs.
The submission that the proceedings were commenced unreasonably, is based upon the proposition that the solicitors had admitted that they were liable to Zandata, then had set out, correctly, the proper basis for calculation of damages and had made a reasonable offer to settle which, had negotiations ensued, would on the probabilities have resulted in a settlement.
It was further submitted that the commencement of the proceedings was unreasonable because Zandata claimed far more in damages than it was reasonably entitled to claim, and hence it ought not have commenced proceedings to advance an unsustainable claim.
Prior to the commencement of proceedings, the solicitors identified the maximum sum of damages that they were obliged to pay as $277,000. As well, they accepted that, at least to an unquantified extent, Zandata would have incurred legal costs for the purpose of, at least, obtaining advice about its entitlement to damages, which were properly recoverable.
But all they did prior to a commencement of proceedings was to offer to pay Zandata the sum of $200,000 inclusive of its legal costs. The simplest calculation would suggest that this was somewhere about two thirds of what the defendants themselves assessed as the proper measure of the financial loss and damage including legal costs incurred as a consequence of their negligence.
This was not a reasonable offer. It did not represent either proper or fair compensation for the damages caused by the defendants' negligence. In those circumstances, it was hardly surprising that Zandata commenced proceedings.
Another way to test the submission that the proceedings were commenced unreasonably, and hence costs were incurred unnecessarily, is to examine how the proceedings were finalised. The proceedings have terminated in Zandata's favour, with an order for the payment of $441,500 to it and the right to apply to have its costs paid as well.
On any view, this is well over twice what was offered before the commencement of proceedings. Viewed in this way, it was clearly reasonable in Zandata's interests to have commenced the proceedings. By so doing, Zandata considerably improved its position.
The defendant solicitors submitted that even if Zandata had a measure of success, then an order should be made that each party bear its own costs because Zandata made no real effort to avoid the commencement of proceedings because they did not engage in any negotiation and on the other hand, the solicitors did all they reasonably could to avoid the need for commencement of proceedings.
The solicitors submit that since Zandata made no counter offer to the "opening offer" made by the solicitors, and made no attempt to explain why the methodology for the calculation of damages proposed by them was incorrect, they ought not have their costs of the proceedings. The solicitors submit that they did all that they could to avoid the proceedings by paying the costs of the proceedings before Windeyer AJ, admitting a breach of duty in correspondence which was both without prejudice and open, and setting out the methodology which they considered correct for the making of a proper calculation of damages. They also submit that they made a reasonable opening offer.
This submission carries an air of unreality about it.
It is apparent from the correspondence, that the admission of negligence made by the solicitors in correspondence was a partial one in the sense that it admitted one, but not the other, allegation of negligence.
Secondly, the offer which the solicitors now describe as an "opening offer" was not so couched, nor was it a reasonable offer in the sense that it represented only two thirds of the solicitors' own assessment of what they were liable for, and did not include any component which attempted to compromise the larger claim which Zandata was advancing. It was not reasonable in my assessment.
If the solicitors had truly wished to avoid litigation, and the costs associated with it, they ought to have made a reasonable offer. In the circumstances of this case, a reasonable offer would at a minimum have included the following elements:
(a) the total sum for which the defendants assessed that they were liable, including any accrued interest; and
(b) an offer to pay reasonable legal costs.
Ordinarily, a reasonable pre-litigation offer would also have included some additional, perhaps small, component that represented a true compromise of the assessed risks of Zandata receiving a larger sum than that assessed by the solicitors. However, in the particular circumstances of this case, it is unnecessary for me to reach a final conclusion on that question because the offer did not satisfy the two criteria outlined above.
It is only by the making of such an offer that the solicitors would have done all that they reasonably could to have avoided litigation. This they did not do.
As well, in the conduct of the litigation, the solicitors did not make an offer of settlement by way of an offer of compromise (or otherwise) until some many months had passed from the time the Statement of Claim had been filed. Whilst the solicitors were properly entitled to have sufficient time to make a proper assessment of their exposure, the fact was that this was a case in which they had known well before the commencement of proceedings that they were liable, and had obviously given careful consideration to the proper assessment of damages. They had agreed to pay and had paid the costs associated with the proceedings before Windeyer AJ. An offer of compromise was not forthcoming for some many months after the proceedings were commenced.
In all of those circumstances, I do not think that the commencement of proceedings by Zandata was unreasonable, nor do I think that the solicitors did all that they reasonably could to avoid the litigation by making a proper offer of settlement.
I am not persuaded that there should be no order for costs.
On the contrary, I am persuaded by the submissions of Zandata, that the proper order is that it should have its costs of the proceedings as is conventional, and as is provided for by r 42.1.
Fixed amount of costs
The solicitors submit that even if the Court was to make an order for the Zandata's costs to be paid by them, then this is an appropriate case for the Court to fix an amount of the plaintiff's costs.
Section 98 of the Civil Procedure Act 2005, gives the Court the power to make a costs order in a specified gross sum. It is in the following relevant terms:
"98. Courts powers as to costs
(1) Subject to rules of court and to this or any other Act:
(a) costs are in the discretion of the court, and
(b) the court has full power to determine by when, to whom and to what extent costs are to be paid, and
(c) ...
...
(4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to:
(a) ...
(b)a specified proportion of the assessed costs, or
(c)a specified gross sum instead of assessed costs
..."
In considering whether a specified gross sum costs order is to be made, the following principles apply:
(a) The first issue to be considered is whether it is appropriate for a gross sum order to be made: Siteberg Pty Ltd v Bruce Maples & Ors [2010] NSWSC 307 at [19] per Ball J;
(b) The second issue is whether the court has sufficient materials available to it to make an order: Siteberg at [19];
(c) Any order which is made is one which is:
(i) ' ... fair and just between the parties ...': Wentworth v Wentworth [1996] NSWCA 552 per Clarke JA; or
(ii) '... logical, fair and reasonable ...' : Beach Petroleum NL v Johnson (No.2) (19975) 57 FCR 119 at 123 per von Doussa J;
(d) Factors to which courts have had regard in determining whether to make a gross sum costs order have included:
(i) the conduct of the defendant in connection with the proceedings: Sony Entertainment (Australia) Ltd v Smith [2005] FCA 228; (2005) 215 ALR 788 at [192] per Jacobson J;
(ii) whether the costs of the assessment process are likely to be disproportionate to the amount recoverable: Julien v Secretary, Department of Employment and Workplace Relations (No.2) (2009) FCA 1257 at [12] per Spencer J;
(iii) whether the costs of the proceedings are disproportionate to the amount claimed: Kiwi Munchies Pty Ltd v Stern [2006] NSWSC 433 at [17] per McClellan J;
(iv) whether the party obliged to pay the costs order is likely to be able to meet any liability for the costs of the assessment process: Sparnon v Apand Pty Ltd (Federal Court of Australia, 4 March 1998, unreported) per von Doussa J; Beach Petroleum at 123.
(e) The process for making a gross sum costs order is of its nature, different from an assessment of costs by a costs assessor, because it involves a broad brush exercise on the available materials: Hadid v Lenfest Communications Inc [2000] FCA 628 at [27]; Harrison v Schipp [2002] NSWCA 213; (2002) 54 NSWLR 738 at [22] per Giles JA; Siteberg at [25].
I turn then to the resolution of the first issue, namely, whether it is appropriate in this case to make a gross sum costs order. Put another way, the issue is with reference to the Court's power, whether "... the circumstances warrant its exercise": Harrison at [21] per Giles JA.
Since the order for costs, in whatever sum is ordered, will be met by the solicitors with the benefit of support from their indemnity insurer Law Cover, no question arises in these proceedings as to the capacity of the solicitors to pay the sum for costs.
Without any objection from the parties, the Court has before it in evidence the letter of 12 March 2012, from Gilchrist Connell in which it offered to pay Zandata the sum of $30,000 for its costs. Accordingly, the Court has before it the broad extremes of the range for which the parties, in advance of this hearing, advocated their position, that is, from $10,000 to an amount exceeding $70,000. It is this broad range which lends support to a conclusion that this issue is an appropriate one for the making of a gross sum costs order.
There are a number of factors in these proceedings which are clear, and the identification of which will assist in the undertaking by the Court of the broad-brush exercise of determining the amount of a gross sum costs order. They are:
(a) the costs of both sides in the proceedings before Windeyer AJ have been paid by Lawcover, on behalf of the solicitors, with the need for them to be the subject of any further assessment;
(b) the steps taken in the existing proceedings were few, and the proceedings were settled at an early stage;
(c) the two principal issues in dispute which affect the quantum of the costs relate to matters which can be easily determined on the basis of the evidence and material presently before the Court;
(d) the evidence of Mr Riley in the proceedings before Windeyer AJ had a significant role to play in identifying an acceptance by him, at least, of his negligence;
(e) the exchange of correspondence between the parties prior to the trial provides a significant amount of material which encapsulates their approach to, and their perception of, the issues in the proceedings;
(f) all of the debate in correspondence, and in the submissions before the Court would, I anticipate, replicate much of the debate which would take place in any costs assessment process.
In an overall sense, the case is a relatively straight forward one, lasting only a relatively short time span, and one in which the Court can be expected to be able to apply its own knowledge of what would be a fair and reasonable sum for costs, provided that the parties have an opportunity to adduce appropriate evidence which supports the quantum of the claim.
Since these proceedings did not result in a defended hearing, nor did they result in extensive evidence being filed, but were resolved by agreed Terms of Settlement prior to many of the usual interlocutory steps being taken, it seems to me that this is a suitable case in which the Court ought, assuming it has sufficient evidence and material, exercise its discretion to make a gross sum costs order. In so doing, the Court will save the parties the time and expense of the assessment process, and will bring the whole litigation to an end, which having regard to all that has occurred, is a most desirable thing.
As well, having regard to the range of costs being sought, the Court cannot overlook the fact that the costs of a formal assessment being undertaken would, in comparison to the sums of money being sought, be relatively significant.
It is in the interests of the parties in this case, and in the interests of justice generally, if those costs can be avoided, and the litigation between these parties finally brought to an end.
It is necessary now, to consider the issue of whether there is sufficient material available to the Court to make an order that is fair and just between the parties. Alternatively expressed, as Ball J points out in Siteberg at [19], the question is whether there is material sufficient to enable the determination of a sum for costs which is logical, fair and reasonable.
Zandata submits that a gross costs order ought not to be made and that the Court ought simply to allow the matter to proceed to the usual assessment process. In particular, counsel for Zandata submits that because of inadequate notification of the intention of the solicitors to seek a gross costs order, Zandata has not had an adequate opportunity to adduce the evidence that it would wish to rely upon.
Counsel for Zandata submits that, notwithstanding the contents of the letter of 14 March 2012, which said that Zandata's costs "... exceed $70,000", he would wish to provide evidence that the costs exceeded that sum.
In circumstances where the Notice of Motion did not clearly articulate, as an alternative, that the solicitors would seek a gross sum costs order, and where counsel, without contradiction, submits that there is a lack of evidence because of that lack of notice, I am persuaded that it would be inappropriate for the Court to, in this judgment, fix that gross sum. But nevertheless, as I have indicated, this case is an appropriate one for the Court to exercise its power to make a gross sum costs order, when it receives the relevant evidence which will enable it so to do.
The principal issue which separates the parties in their approach to the assessment of the reasonable sum for costs is whether, in light of the evidence of Mr. Riley, the solicitor, in the proceedings before Windeyer AJ, and in light of the admission in open correspondence that the solicitor accepted that they were in breach of their retainer and duty, by failing to omit clause 28 of the original lease, when supplying the new lease to Mr and Mrs Boyd, it was unreasonable for Zandata to include in its Statement of Claim a second particular of negligence dealing with the question of whether the option to renew the lease had been validly exercised, and unreasonable to obtain and serve evidence in support of that particular.
The solicitors submit that, given that Zandata knew that they contested this allegation, and that for the purposes of the damages claim, there was no different assessment of damages as between the two allegations of negligence, one of which was admitted, it was entirely unnecessary to include the disputed particulars which only had the effect of incurring additional and unnecessary costs.
In particular, the solicitors point to the fact that a report was obtained before the commencement of the proceedings from Mr Neville Moses, in his capacity as an expert solicitor with respect to the negligence of the solicitors. They submit that obtaining such a report was wholly unnecessary.
Counsel for Zandata contests this submission. He submits that the report of Mr Moses was relevant, and reasonable to obtain, because the report supported Zandata's position on the contested allegation of negligence. He further submits that this allegation was reasonable because it went to whether damages were to be assessed on the basis that the valuation of the market sale price of the Hi-Way Motel was as an unencumbered property, or else as a property encumbered by a lease.
It seems clear that if the proper measure of damages was the difference between the market value of the property at the date of sale, and the price that Zandata was obliged to sell it for, then it was relevant to determine what the integers were, which went to make up the market value of the property. There is no doubt that one relevant integer is whether the property was unencumbered, or whether it is subject to a lease and, if so, what the terms of that lease were, including in particular, the length of the lease and the rental to be obtained from it.
The report of the expert valuer, Mr Potter of Herron Todd White, prepared in December 2010, demonstrates that there is a substantial difference between the value of the property on an unencumbered basis and on the basis that a lease existed which was in the order of $400,000 to $500,000 depending on the date upon which the value is assessed.
Thus, viewed from the perspective of Zandata, the inclusion of a particular of negligence which may have resulted in such a significant increase in damages, was, if able to be supported by a reasonably arguable view of the law, and property admissible evidence, an entirely reasonable one.
Against this, counsel for the solicitors submitted that:
"(d) most of the costs claimed by the plaintiff were needlessly incurred. Prior to the close of pleadings the plaintiff has apparently incurred substantial costs in preparing two affidavits and an expert's solicitor's report, none of which were relevant to any fact in issue. In addition, the claimant apparently claims the costs of obtaining a new valuation of the property, even though the new valuation was obtained well prior to the commencement of proceedings in support of the letter of demand, and its only apparent relevance was to propose without any attempt at justification a capitalisation rate of 8.5% rather than 9.5% as the plaintiff's original valuation had used (and had justified); "
Counsel expanded upon this submission in the course of oral submissions. He made it clear, as did the evidence before me, that there was a factual dispute about whether there was any failure to provide advice about the validity of the exercise of the option to renew the lease.
In response to these oral submissions, counsel for Zandata accepted that there may be a factual dispute, but pointed out that the solicitors' file contained no contemporaneous note or memorandum referring to the giving of any such advice, or any other contemporaneous document supporting the solicitors' factual contentions. Hence, he submitted, it was reasonable to maintain the particular of negligence, at the least, until evidence was filed by the solicitors supporting the defence. At the time of the settlement of the proceedings, no such evidence had been filed.
Ultimately, I am being asked to rule on whether this additional material was reasonably and properly obtained in support of the particular of negligence alleged, and therefore whether it should be included in any calculation of a gross sum costs order.
I am satisfied that it was reasonably obtained. All parties were agreed that the relevant damages measure was the difference between the market value of the property and the sale price. The contents of the evidence put before me, by way of Mr Moses' report, and the expert valuation report, satisfy me that it was reasonable for Zandata to advance the case that it did. I am certainly not satisfied that any costs incurred in obtaining the expert reports were needlessly incurred as the solicitors submit. I am not satisfied that the only apparent relevance of the expert valuation report was as submitted by the solicitors, to do with a different capitalisation rate.
Whilst there may have been a question as to the relevance of some of the dates chosen to be markers of the valuation, I am not satisfied, applying a broad-brush approach, that I should find that the report itself, and the entire cost of it, was unreasonably incurred.
Although, it is clear that some additional cost must have been incurred in the preparation of the valuer's report, on the material presently available, I am not in a position to reach a conclusion on what sum, if any, ought to be deducted.
Summary
In conclusion, I am satisfied that this is a matter in which Zandata should have its costs of the proceedings and its costs of this motion and that it is appropriate for the Court to make a gross sum costs order.
However, I am not satisfied that I should, without giving the parties an opportunity to adduce such evidence as they wish, proceed to make an assessment of the amount of that gross sum.
I am not persuaded that I should allow the usual costs assessment process to occur. The just, quick and cheap method of proceeding is to undertake the assessment of the gross sum after further evidence is adduced.
I am satisfied that I should make appropriate orders to allow for further evidence, but evidence which has regard to the findings as to reasonableness which I have made, and to the rejection of the submissions of the solicitors that the proceedings were needlessly or unreasonably commenced, and that the evidence contained in the expert reports of Mr Moses and Mr Potter, the valuer, were also needlessly obtained, irrelevant to any issue, and that the costs incurred in obtaining the reports were unreasonable.
However, I leave open for further submissions whether the whole of the cost of Mr Potter's report was unreasonable, having regard to the date range which he used for the assessment of the relevant market value.
I should, however, express my hope that with common sense and goodwill, having regard to my findings, that the parties are able to resolve their remaining differences by negotiation, and compromise.
Orders
I make the following orders:
(1) Notice of Motion dated 3 April 2012 dismissed;
(2) Defendants to pay the plaintiff's costs of the proceedings, including the Notice of Motion.
(3) Plaintiff to file and serve by 4pm on 12 March 2013, all further affidavits, if any, that it wishes to rely upon.
(4) Defendants to file and serve by 4pm on 26 March 2013, any affidavits, if any, upon which they wish to rely.
(5) Stand proceedings over to 5 April 2013 at 9.30am before me for directions.
**********
Decision last updated: 19 February 2013
2