FEDERAL COURT OF AUSTRALIA Sagacious Legal Pty Ltd v Wesfarmers General Insurance Limited (No 5) [2010] FCA 630 Citation: Sagacious Legal Pty Ltd v Wesfarmers General Insurance Limited (No 5) [2010] FCA 630 Parties: SAGACIOUS LEGAL PTY LTD v WESFARMERS GENERAL INSURANCE LIMITED File number: NSD 509 of 2009 Judge: RARES J Date of judgment: 18 June 2010 Corrigendum: 28 June 2010 Date of submissions: 20 May 2010, 28 May 2010 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 26 Counsel for the Applicant: M McCulloch SC Solicitor for the Applicant: Slater & Gordon Counsel for the Respondent: P Braham Solicitor for the Respondent: Hicksons FEDERAL COURT OF AUSTRALIA Sagacious Legal Pty Ltd v Wesfarmers General Insurance Limited (No 5) [2010] FCA 630 CORRIGENDUM 1. On the cover sheet of the judgment, "Westfarmers General Insurance Limited" has been changed to read "Wesfarmers General Insurance Limited". 2. On the orders page of the judgment, "Westfarmers General Insurance Limited" has been changed to read "Wesfarmers General Insurance Limited". 3. On the first page of the Reasons for Judgment, "Westfarmers General Insurance Limited" has been changed to read "Wesfarmers General Insurance Limited". 4. In the Reasons for Judgment wherever "Westfarmers" appears it should read "Wesfarmers". I certify that the preceding four (4) numbered paragraphs are a true copy of the Corrigendum to Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 28 June 2010 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 509 of 2009 BETWEEN: SAGACIOUS LEGAL PTY LTD Applicant AND: WESFARMERS GENERAL INSURANCE LIMITED Respondent JUDGE: RARES J DATE OF ORDER: 18 JUNE 2010 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Order 2 made on 18 May 2010 be varied by adding the following after "costs" namely: "on a party and party basis up to and including 13 August 2009 and thereafter on an indemnity basis (including the costs of the application for costs to be payable on an indemnity basis)" Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 509 of 2009 BETWEEN: SAGACIOUS LEGAL PTY LTD Applicant AND: WESFARMERS GENERAL INSURANCE LIMITED Respondent JUDGE: RARES J DATE: 18 JUNE 2010 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The insurer has applied for its costs to be payable on an indemnity basis. This would vary the order for costs on a party-party basis in its favour that I made when dismissing the insured's proceedings: Sagacious Legal Pty Ltd v Westfarmers General Insurance Ltd (No 4) [2010] FCA 482. The Insurer's Submissions 2 The insurer's application is based on the insured's conduct of the proceedings and on a Calderbank letter (Calderbank v Calderbank [1976] Fam 93) that its solicitors wrote to the insured's solicitors on 30 July 2009. The insurer argued that the insured had conducted the proceedings in a disingenuous manner, with what it said was "careful management of potentially unfavourable information similar to that exhibited by Mr O'Shanassy when taking insurance with the [insurer]". The insurer relied on a number of the findings I had made. It contended that Mr O'Shanassy, as the controlling mind of the insured, had gone to "extraordinary steps to avoid becoming aware of (and so possibly being required to disclose) information as to his wife's sobriety at the critical time, which was readily available to him". As an example, the insurer referred to the insured's answers to interrogatories verified by Mr O'Shanassy on 8 September 2009. In particular, the insurer observed that the following answer to interrogatory 1 was beyond credulity: "1A Did Lana O'Shanassy consume any alcoholic beverage in the 12 hours prior to the motor vehicle accident the subject of these proceedings? 1B Not known." 3 The insured's solicitors asserted in their letter of 30 July 2009 that it would have no difficulty in establishing that Mrs O'Shanassy was under the influence of alcohol when driving the insured's vehicle at the time of the accident. It offered to settle the proceedings on the basis that the insurer would obtain a verdict in its favour and bear its own costs. The offer was expressed to remain open until 13 August 2009. It was not accepted. The Insured's Submissions 4 The insured argued that its failure in the result did not merit a special costs order being made against it. It contended that it had conducted the proceedings appropriately and that the insurer's contrary assertions lacked detail. The insured argued that the insurer's solicitors' 30 July 2009 letter had asserted only that it would succeed on the defence that Mrs O'Shanassy was driving under the influence. The insured argued that the letter amounted to nothing more than a mere assertion of the insured's good prospects of success in the litigation. It contended that the letter was devoid of reasoning. It argued that the insurer only served its evidence in the proceedings much later. Thus, the insured contended that, absent being provided with both the insurer's evidence and any reasoning at the time of the offer, the insured could not be expected to have been properly equipped by its opponent to consider its prospects of success. The insured argued that the lay evidence concerning Mrs O'Shanassy's appearance was subjective in nature and not empirically tested by scientific evidence. Consideration - The way in which the Insured conducted the proceedings 5 The principles on which an order for indemnity costs may be awarded will vary depending on the circumstances: Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233 [4] per Sheppard J; Software AG (Australia) Pty Ltd v Racing and Wagering Western Australia (2009) 175 FCR 121 at 138 [85] per Spender, Sundberg and Siopis JJ. One basis for awarding costs on an indemnity basis is that the conduct of the successful party has been so unreasonable as to make it unjust that the other party should be limited in its recovery to party and party costs: Dowling v Fairfax Media Publications Pty Ltd (No 2) [2010] FCAFC 28 at [41] per Graham J, [140] per Logan and Flick JJ. 6 The insured was aware at the time of the offer of the observations of many independent witnesses. Those witnesses' statements were in the prosecution brief that had been prepared for the failed prosecution of Mrs O'Shanassy for driving with more than the prescribed concentration of alcohol in her blood. Some witnesses were cross-examined at the trial on their statements that previously had been contained in the police brief. The prosecution had been dismissed on 19 March 2009: Sagacious Legal Pty Ltd v Westfarmers General Insurance Ltd (No 2) [2010] FCA 275 at [10]. 7 I am satisfied that on and after 16 January 2008 Mr O'Shanassy was fully aware that his wife had consumed alcohol in the 12 hours prior to the accident. First, he attended the scene of the accident. A plethora of independent, reliable witnesses had provided witness statements in the prosecution brief that they had smelt alcohol on Mrs O'Shanassy's breath or emanating from her. Mr O'Shanassy, himself, could not have failed to notice that smell on the evening of 16 January 2008. Secondly, he was present when his wife gave a history to Dr Hampshire during a long interview on 16 March 2009. That interview occurred six months before he answered interrogatory 1 "not known". Mrs O'Shanassy told Dr Hampshire, in her husband's presence, that she had gone to "the local RSL Club and consumed a small amount of alcohol immediately before getting into the car to drive home". Dr Hampshire referred in his report, dated 18 March 2009, to the ambulance officers' notes of "a smell of intoxicating beverage about [Mrs O'Shanassy's] person". The doctor wrote that had been provided with a summary brief of evidence prepared by the New South Wales Police Force. His evidence was tendered in order to exculpate Mrs O'Shanassy from being found to have been affected by alcohol or under its influence. 8 Thirdly, Mrs O'Shanassy's evidence in the proceedings was, as I found, carefully constructed to suggest that she only consumed two double whiskey and coke drinks very shortly before the accident. The purpose of that account was to make it too soon for the alcohol to have been sufficiently absorbed into her blood stream to have affected her or to be probative of her blood alcohol concentration being in excess of the prescribed limit at the time of the accident. That account was significantly and deliberately different in its timing from her account given to the police for the purposes of her prosecution, as I found Sagacious (No 4) [2010] FCA 482 at [102]-[105]. 9 Mrs O'Shanassy may not have revealed to her husband the complete details of when she had first arrived and begun to drink alcohol at Mittagong RSL Club. Interrogatory 3 sought the location of where Mrs O'Shanassy had consumed alcohol on the day. It too was answered "not known". Objective evidence of her earlier arrival at the Club emerged late in the proceedings: Sagacious (No 4) [2010] FCA 482 at [106]-[111]. It is likely that that evidence would have been obtained much earlier, had the insured answered the interrogatories to reflect the way it later conducted the case or consistently with what Mr O'Shanassay knew his wife had told Dr Hampshire in March 2009. Instead, each interrogatory was evasively answered "not known". 10 The insured objected to the tender of the answers to interrogatories after the trial. It asserted that the interrogatories were objectionable. That argument can be rejected immediately since no objection had been taken to "answering" the interrogatories. Thirdly, the insured suggested that use of the answers now, on the question of costs, was "grossly unfair" because Mr O'Shanassy might have been called as a witness had the answers been tendered during the trial. 11 I reject those objections and admit the answers on the present question. The "answer" given to each of the four interrogatories was "not known". If Mr O'Shanassy were to say that he disbelieved his wife's evidence as the explanation of the answers, "not known", that would make the insured's decision to reject the offer and conduct the proceedings in the way they were, the more unreasonable. 12 The answer "not known" was evasive and unhelpful. Mr O'Shanassy answered "not known" to interrogatory 1 as the person verifying the insured's answers. In Sharpe v Smail (1975) 5 ALR 377 at 380 Gibbs J explained the principle applicable to a deponent of an affidavit verifying an answer to interrogatories under provisions such as O 16 rr 6, 7 and Form 24 of the Federal Court Rules. A deponent verifying a corporation's answers to interrogatories must state which answers are true to his or her own knowledge and which are true to the best of his or her knowledge, information and belief based on his or her inquiries of officers of the company and others and on his or her own investigations. Gibbs J said: "Belief is not the same as knowledge and a party cannot truthfully swear that he has no belief based on information in his possession simply because he does not know that the information is true. Although he is not bound to say that he believes what he does not, he is not entitled to treat any information that he may receive with baseless suspicion, refusing to entertain belief unless it has ripened into certain knowledge. He cannot, by refusing to believe information when there is no reason to doubt its truth, escape from his obligation to answer to the best of his knowledge, information and belief. Moreover, the fact that information comes from a suspect source will not always be enough to render it worthy of disbelief; for example, it may be supported by other credible material." (emphasis added) 13 Mr O'Shanassy had personal knowledge that his wife had been drinking from being with her at the scene and afterwards at Bowral Hospital. However, he may not have been aware of the length of time that his wife had been drinking on the afternoon of 16 January 2008. But he knew what she had said in his presence to Dr Hampshire. I am unable to accept as truthful the verified answer "not known" given by the insured, through Mr O'Shanassy, to interrogatory 1. It is inconceivable that he did not actually know that his wife had consumed alcohol in the 12 hours before the accident. He must have smelt it on her breath. He also had seen her apparently drunken behaviour at the scene of the accident and in hospital. 14 Additionally, the insured conducted its case in a very technical manner that put the insurer to strict proof. I found that the insured's conduct towards the insurer in proposing for insurance, through Mr O'Shanassy, was disingenuous and lacking in integrity. And, I found that it had made a misrepresentation of Mrs O'Shanassy's 1999 conviction and licence cancellation in its own proposal for insurance. I also found that Fukura and both Mr and Mrs O'Shanassy had made earlier misrepresentations to the insurer in connection with the provision of cover for Mrs O'Shanassy as a driver: Sagacious (No 4) [2010] FCA 482 at [34], [36]-[37], [52], [54]. 15 Although the cross-examination of the emergency services and hospital witnesses was economical, their evidence was consistent with their written notes or statements. It was apparent from an objective assessment of that written material that Mrs O'Shanassy smelt of alcohol and was behaving consistently with being under its influence at the scene and at the hospital. Once that fact was established, the insured's case was unsustainable, whatever it may have thought of the other bases of the insurer's declinature. The insured was unreasonable to require Dr Chan, Ms Henning, four police officers and an ambulance officer among others to give up a day of their time to be cross-examined about what was obvious either from their contemporaneous notes or their later written evidence in the police brief. Most tellingly, once the further evidence subpoenaed from the Club after the first five days of the hearing was tendered by the insurer on 15 April 2010, I granted the insured leave to file further evidence in relation to it. It filed no evidence. The insured made no attempt to explain how Mrs O'Shanassy was gambling at the Club and collecting her winnings at least one and a half hours before she had sworn she had arrived there. 16 I am satisfied that the insured conducted the proceedings unreasonably so that it would be unjust to limit the insurer's recovery of its costs to party and party costs. Consideration – Calderbank offer 17 I reject the insured's arguments that the insurer could not rely on the 30 July 2009 offer. The lay evidence consisted of a compelling body of independent witnesses. While more, or some different, witnesses may have emerged in the course of these proceedings, many of those who gave evidence at the hearing had given proofs beforehand that were in the prosecution brief of Mrs O'Shanassy. Mr O'Shanassy and the insured were aware of the prosecution case – that was the reason why Dr Hampshire's opinion had been sought in March 2009 (before these proceedings were commenced on 1 June 2009); namely to explain what appeared to be obviously drunken behaviour by Mrs O'Shanassy as something else – a post traumatic stress syndrome reaction that was unrelated to any affect of alcohol. 18 The insured was in a realistic position, after receipt of the letter of 30 July 2009, to assess its prospects in the litigation. It ran a technical case putting the insurer to proof. It had initially intended to use Dr Hampshire's report as evidence of the truth of the history it contained as taken from Mrs O'Shanassy: Sagacious Legal Pty Ltd v Westfarmers General Insurance Ltd [2010] FCA 274. In that judgment I described the circumstances in which the insured's tactic, initially, was to use Dr Hampshire's report without calling Mrs O'Shanassy as a witness, or giving proper notice of its intention to use the report as expert evidence to explain her apparently drunken behaviour. This tactic exposed a lack of confidence, that was justified in the event, in the merits of the insured's case and of its fundamental basis: ie. Mrs O'Shanassy's substantive sobriety at the time of the accident. 19 In the case of a Calderbank offer, Moore, Finn and Jessup JJ recently said in CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd [2008] FCAFC 173 at [75]: "75 From the tenor of claims which have come before the court in recent years, there appears to be a view abroad that the failure of a party who has rejected a Calderbank offer ultimately to achieve a better outcome than provided for in the offer leads to a presumptive entitlement to indemnity costs with respect to the period subsequent to the offer. Such a view would be mistaken. Where a moving party (including a cross-claimant) offers to settle for a sum which is less than he or she eventually achieves at trial, there is a presumptive entitlement to indemnity costs under O 23 r 11(4) of the Federal Court Rules. However, where recourse is not had to the O 23, but reliance is placed upon the court's general discretion, it is necessary for the party seeking indemnity costs to demonstrate that the other party's refusal of the Calderbank offer was unreasonable: Black v Lipovac (1998) 217 ALR 386, 432; Maniotis v JH Lever & Co Pty Ltd (No 2) [2006] FCAFC 28. It is not sufficient that the offer was a reasonable one: Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121, 128 [35]; Dais Studio Pty Ltd v Bullet Creative Pty Ltd [2008] FCA 42, [11]. In considering this question in a particular case, the matter of unreasonableness will be judged by reference to the circumstances facing the offeree at the time of the offer. While the eventual outcome in the case may go part of the way in this regard, there is no presumption that ultimate success in the proceeding for the offeror necessarily renders the offeree's rejection unreasonable." (emphasis added) 20 The insured argued that it was wrong in principle to consider that a Calderbank letter, offering no more than that the offeror would bear its own costs, amounted to a genuine attempt to settle proceedings. It contended that the Court of Appeal of the Supreme Court of New South Wales had held this in Uniting Church in Australia Property Trust (NSW) v Takas (No 2) [2008] NSWCA 172 at [14] where Hodgson JA (with whom McColl JA agreed) said: "[14] I do not make any adverse findings as to the bona fides of the Trust; but the offer in this case does have the appearance more of a procedural move to trigger costs consequences than of a genuine attempt to reach a negotiated settlement: cf Leichhardt Municipal Council v Green [2004] NSWCA 341 at [39]; Commonwealth of Australia v Gretton [2008] NSWCA 117 at [104]-[105]." 21 I am of opinion that Hodgson JA was not expressing a principle, but making a finding as to the reasonableness of the offer in the circumstances of that case. All Calderbank offers and offers under O 23 of this Court's Rules and their analogues are capable, depending on the ultimate result, of triggering costs consequences in litigation. One reason why offers are sometimes made is because a party believes that his or her opponent will cause unmeritorious litigation to drag out, at considerable cost to the offeror, as a means of bringing pressure on the offeror to increase what might otherwise be put on the table. If litigants were inflexibly constrained by a principle that deprived them of an entitlement to be awarded costs on an indemnity basis, regardless of the circumstances, merely because they offered at an early stage to "walk away" and not seek costs, unmeritorious and unreasonable litigants would be given a powerful weapon to use in forcing their chosen opponent to offer more in order to settle a worthless case. The law should not encourage such behaviour. In evaluating the genuineness of any offer, a court must make a careful assessment of all the circumstances, including, where appropriate, the merit of the case to which the offer is directed. 22 In Clark v Commissioner of Taxation [2010] FCA 415 at [90]-[92] Greenwood J discussed the authorities in which judges of this Court have held that Calderbank offers by one party to "walk away" or to bear their own costs are capable of being characterised as a genuine attempt to resolve litigation and so in providing a foundation for the Court to order the unsuccessful party to pay costs on an indemnity basis. I am of opinion that Greenwood J's analysis and reasoning were correct. Of course, each offer will have to be assessed in all of the circumstances. In general that will involve the Court having regard to whether, at the time it was made, the offeree acted unreasonably in failing to accept it: CGU [2008] FCAFC 173 [75]. 23 Moreover, the insured's argument is wrong in principle. In today's world, costs and litigation are not regarded as they once were. Unnecessary litigation imposes its own strains on the parties, their resources, witnesses and their employers, families, or businesses, as well as the public resource of the Courts. The primary purpose of an order for costs is to compensate the successful party. However, this does not compel the exercise of the discretion to order costs in favour of a party under s 43(2) of the Federal Court of Australia Act 1976 in all cases: cf Probiotec Ltd v University of Melbourne (2008) 166 FCR 30 at 43 [48] and see too at 42 [45]-44 [52] where I discussed the principles with the agreement of Finn J at 31 [1] and Besanko J at 51 [82]. Costs awarded, even on an indemnity basis, do not always compensate a party: cf the considerations discussed in AON Risk Services Ltd v Australian National University (2009) 239 CLR 175 at 213-215 [97]-[103] esp at 214 [100] per Gummow, Hayne, Crennan, Kiefel and Bell JJ. 24 I am of opinion that the insurer's offer of 30 July 2009 was reasonable and proposed a genuine compromise of a case brought without a realistic prospect of success. Its acceptance would have saved very considerable time, money and resources of the insurer. At the time it received the offer, it would have been apparent to the insured that any trial would last a number of days and involve the insurer calling many independent witnesses who saw and heard Mrs O'Shanassy on 16 January 2008. It would also possibly have been apparent to the insured, that were proper and timely disclosure made by it, the insurer would need to investigate the circumstances on which the insured was going to rely. That may have involved it seeking an order to obtain a psychiatric expert to examine Mrs O'Shanassy. The insured should have appreciated this need since, as I infer, it intended throughout this litigation to use Dr Hampshire's report in the way that it revealed earlier this year, as described in Sagacious [2010] FCA 274. 25 The insured was aware when it received the offer that the evidence of many independent witnesses strongly suggested that Mrs O'Shanassy was under the influence of intoxicating liquor. More importantly, Mr O'Shanassy was aware that his wife smelt of alcohol and was behaving as if she were drunk when he arrived at the scene of the accident and afterwards. He was also aware that her blood alcohol analysis of 0.124 strongly supported this conclusion, albeit that there may have been difficulties for the insurer being able to rely on the analyst's certificate in evidence. Conclusion 26 I am of opinion, for the reasons I have given, that the insured acted unreasonably both in its conduct of the proceedings and in rejecting the offer. It had a case without any real prospects of success because Mrs O'Shanassy had been under the influence of intoxicating liquor at the time of the accident. Mr O'Shanassy knew, or ought reasonably to have appreciated, this decisive fact. It follows that the insurer is entitled to an order for costs on an indemnity basis from 13 August 2009. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 18 June 2010