FEDERAL COURT OF AUSTRALIA Chowder Bay Pty Ltd v Paganin (No 2) [2017] FCA 892 File number: WAD 461 of 2013 Judge: BARKER J Date of judgment: 4 August 2017 Catchwords: COSTS – application for costs order – whether third and fourth respondents entitled to indemnity costs – where third and fourth respondents made offer of settlement to applicants – whether applicants' rejection of offer unreasonable Legislation: Federal Court Rules 2011 (Cth) R 25.05(3), R 25.14(2) Cases cited: Chowder Bay Pty Ltd v Paganin [2017] FCA 332 Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141 Date of hearing: Determined on the papers Date of last submissions: 12 July 2017 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Category: Catchwords Number of paragraphs: 53 Counsel for the Applicants: Mr GS Clarke QC with Mr PJ Hannan Solicitor for the Applicants: Feinauer Commercial Lawyers Counsel for the First Respondent: Ms PE Cahill SC with Mr DM Fairweather Solicitor for the First Respondent: Cardinal Law Litigation + Dispute Resolution Counsel for the Second Respondent: The Second Respondent appeared in person Counsel for the Third and Fourth Respondents: Mr SM Davies SC with Mr SC Sudweeks Solicitor for the Third and Fourth Respondents: Jackson McDonald ORDERS WAD 461 of 2013 BETWEEN: CHOWDER BAY PTY LTD ACN 008 898 959 First Applicant MARK PATTERSON Second Applicant BADENPORT PTY LTD ACN 008 931 842 (and others named in the Schedule) Third Applicant AND: DAVID ARTHUR PAGANIN First Respondent CHARLES WILLIAM EDWARD ROBERTSON Second Respondent M3PROPERTY (WA) PTY LTD ACN 074 470 563 (and another named in the Schedule) Third Respondent JUDGE: BARKER J DATE OF ORDER: 4 AUGUST 2017 THE COURT ORDERS THAT: 1. The applicants pay the costs of the third and fourth respondents: (a) up to 11am on 17 November 2015, on a party and party basis; and (b) after 11am on 17 November 2015, on an indemnity basis. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT BARKER J: 1 On 3 April 2017, I dismissed the application in this proceeding and ordered that unless a respondent indicated within seven days that it wished to move for a costs orders on some other terms, the applicants do pay the costs of each respondent, to be taxed if not agreed. The third and fourth respondents (together, the valuers) then sought orders that the applicants pay their costs of the proceedings: (1) up to 11am on 17 November 2015, on a party and party basis; and (2) after 11am on 17 November 2015, on an indemnity basis. 2 Relying on R 25.14(2) of the Federal Court Rules 2011 (Cth) and the decision of the Full Court in Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141 at [19], the valuers submit that the applicants unreasonably failed to accept an offer of comprise made to them. 3 In that regard, on 13 November 2015, the valuers made a separate offer to each of the applicants, offering to pay them each $50,000 plus their party and party costs to date. Each offer was capable of acceptance by any one or more of the applicants and was expressed to remain open for 14 days. 4 Each offer was accompanied by a letter that set out the valuers' reasoning as to why the offers represented a reasonable resolution of the claims. 5 It is accepted that the terms of these offers met the technical requirements of R 25.14(2) of the Rules. 6 The only question to be determined is whether, in all of the circumstances, the applicants unreasonably failed to accept the offers. 7 In their submissions concerning costs, the valuers submit that the letter accompanying the offer canvassed some important issues that should now be considered by the Court when determining the appropriate costs order. 8 The letter raised a number of discrete difficulties that the valuers said the applicants would face if they proceeded to trial. The valuers note that two in particular ultimately proved fatal to the applicants' case. Each when considered alone was sufficient to dispose of the applicants' case. 9 The first significant matter raised in the letter and upon which the valuers ultimately succeeded at trial was the fact that neither valuation was misleading when considered in its proper context and with due regard to the disclaimers contained in them (see Chowder Bay Pty Ltd v Paganin [2017] FCA 332 at [234], [235] and [239]) 10 The letter drew the applicants' attention to the fact that both valuations provided by the valuers expressly stated that the valuer was operating on the assumption that the relevant presale contracts had been entered into, at the prices represented to them by the promoter, and that liability would only be assumed by the valuers if St George Bank satisfied itself that the presales were legitimate market transactions with reasonable deposits held. 11 The valuers pointed out that the evidence indicated that the Bank did not satisfy itself. 12 The second significant matter raised in the letter was the lack of evidence that the Bank had been misled or had relied on the valuations. I ultimately found that the applicants had not established either matter (see Chowder Bay v Paganin at [232] and [235]). 13 The letter also raised issues regarding the sufficiency of the applicants' evidence of loss, including the lack of evidence: (1) to support a finding that the transaction would not have proceeded but for the respondents' valuations; and (2) to substantiate the quantum of the legal costs claims. 14 I accepted the respondents' submissions on these points in Chowder Bay v Paganin at [417]-[420], [453]-[457] and [479], save in relation to the legal costs claim of the 497 proceeding. In relation to the latter, I discounted the amount claimed by 50% on account of the paucity of evidence. 15 The valuers submit that this is not a case where the offers were made at an early stage before the applicants had an opportunity to appreciate what evidence they had to prove their claims. The offers were made well after discovery had been completed, and after the applicants had served their witness statements. 16 By the time of the offers, forensic decisions had been made as to what evidence was to be relied upon. Relevantly, a forensic decision was taken not to call a witness from the Bank in circumstances where it was incumbent on the applicants to prove reliance and the fact that the Bank had been misled. 17 The applicants therefore had available to them all the evidence (and presumably forensic advice) that they would ultimately lead at trial, and were well placed to assess their prospects of success knowing, in light of the letter, why their claims might fail. 18 The offers were made some four months before trial. Hence, the applicants had more than adequate time to take legal advice and consider their position prior to trial. 19 The applicants did not respond to the offers in any way. There was no attempt on their part to explore settlement with the respondents after the offers were made. 20 The valuers submit the offers contained a genuine element of compromise. At the time that the offers were made, the proceeding had been on foot since 2013 and trial dates had been set. It can be inferred that by that time the applicants had incurred considerable costs. The fact that the offers incorporated an offer to pay the applicants' party and party costs was significant. So too was the respondents' willingness to bear its own costs of the proceeding to date. 21 The offers provided each applicant with the opportunity to extricate itself from costly and risky litigation with little or no out of pocket expenses. 22 In all the circumstances, the valuers submit the applicants' failure to accept the offers was unreasonable and they are entitled to an award of indemnity costs unless the Court is satisfied that the applicants have discharged their onus that each one of them did not act unreasonably in not accepting the offer. 23 As to the contentions of reasonableness contained in the affidavit of Mr Oliver Dirk Feinauer, the applicant's solicitor, made 16 June 2017 in opposition to the application for indemnity costs, the valuers say it contains factual inaccuracies and inadmissible hearsay, as well as submissions. In particular, it is submitted that: (1) Paragraph [7.1] is factually inaccurate as the 1 June 2008 valuation was not provided on the basis of presales provided by a third party. The valuation expressly stated that the valuer was operating on the assumption that the relevant presale contracts had been entered into, at the prices represented to them by the promoter and that liability would only be assumed by the valuers if the Bank satisfied itself that the presales were legitimate market transactions with reasonable deposits held. (2) Paragraph [7.3] is factually inaccurate as the 1 June 2008 valuation did not unconditionally say the property was worth $67m plus GST. The valuation was expressed to be conditional on the Bank sighting the contracts. (3) Paragraph [8] does not provide evidence of the decision-making processes of any of the individual applicants or what matters any of them took into account at the time that they considered whether to accept the offer made to them. (4) Paragraphs [7], [8] and [9] make submissions rather than proffering evidence. (5) Moreover, the source of hearsay evidence at [7.2] and [8] has not been identified; (6) Paragraph [10] is irrelevant to the determination of whether the applicants acted unreasonably at the time the offers were made; (7) Leaving to one side these admissibility issues, Mr Feinauer gives evidence at [8] and [9]: (a) that the 1 June 2008 valuation was of the most relevance to the Bank's decision to lend and that the qualification regarding the existence of the presales was not in that report, but was only in the later report; and (b) in any event, the qualification did not qualify the opinion as to the market value of the property. 24 The valuers further submit in relation to Mr Feinauer's affidavit at [8] and [9] as follows: The "evidence" he refers to clearly overlooks cll 12 and 13 of the 1 June 2008 valuation, which do just that. Clause 12 expressly states that the valuer had assumed that the 25 existing investors had entered into pre-sale contracts for the purchase of vacant survey strata lots and construction of the proposed beach houses. Clause 13 stated: Liability for the valuation is extended to St George Bank Limited for lending purposes subject to the bank sighting the additional contracts and being satisfied that the 25 presales are legitimate market transactions with reasonable deposits or investment funds forwarded to and held by the developer. Hence, contrary to what is submitted in the affidavit, the qualification in cl 13 did in fact qualify the valuation in its entirety, including the market value of the property. 25 The valuers submit that if each of the applicants did in fact hold the belief that the 1 June 2008 valuation contained no qualification regarding the existence of the presales (and there is no evidence on this – only the evidence of what their lawyer (incorrectly) considers the position to be in Mr Feinauer's affidavit), the applicants appear to have acted unreasonably in that they did not appear to appreciate the contents of the key document in this action, despite the fact that these clauses were expressly drawn to their attention in the letter. 26 Alternatively, if the applicants did not hold beliefs consistent with [8] and [9] of Mr Feinauer's affidavit, the only factual basis for their decision to reject the offers appears to be their understanding that there were no presales and that the valuers had not indicated that they would lead independent expert evidence in relation to the market value of the property (see [7] of Mr Feinauer's affidavit). 27 The valuers say neither of these matters overcomes the existence of cll 12 and 13 of the 1 June valuation. 28 At [11] of the affidavit, Mr Feinauer swears that the litigation was not protracted due to the applicants' rejection of the offer. The valuers observe it goes without saying that had the offers been accepted, the costs of the majority of the getting up for trial and the trial itself would have been avoided. 29 The applicants submit that while some of the criteria ordinarily considered, as to whether or not an offer was unreasonably refused are satisfied, others are not and the Court should not conclude that the failure of the applicants to accept the offers was unreasonable. 30 The applicants acknowledge that the offers were made at an appropriate stage of the proceedings. 31 Rule 25.05(3) of the Rules provides "An offer may be limited in time for which it is open to be accepted, however the time must not be less than 14 days after the offer is made". 32 Accordingly, the time allowed to consider the offers was the minimum period required under the Rules. 33 The applicants submit that the minimum time, being 14 days, should be applied to matters that are simple and small in nature. Given the size and nature of the action, it is submitted that a longer period than 14 days would have been reasonable in the circumstances of this case. 34 The applicants contend the offers made a compromise of $50,000 and an "unspecified amount" for costs on a party and party basis. 35 Given that each applicant claimed substantial damages, the applicants submit that the extent of the compromise was relatively small. 36 As outlined at [7] to [9] inclusive of Mr Feinauer's affidavit, they say, Mr Feinauer was of the view that the applicants had good prospects of success at the time the offers were made. At the time the offers were made, there was a considerable chance that the applicants could obtain judgment for a higher quantum because: (1) the valuers provided its valuation (in respect of which the fourth respondent was involved in the preparation), being the 1 June 2008 valuation, on the basis of presales provided by a third-party and the valuers did not sight the presales; (2) the applicants knew at the time of the offers that there were no such presales; (3) the 1 June 2008 valuation was wrong, in that the property "As If Complete" was not worth $67 million (or thereabouts) plus GST; and (4) at the time of the offers, the valuers had not adduced any independent expert evidence to contradict the applicant's expert evidence. 37 They contend that the prospect of success on a number of points were well perceived by the applicants at the time of the offers, as the dispute in the case rested on a reasonably narrow point, being that the valuers asserted that a qualification to the valuation rendered the valuers no longer liable. However, the qualification: was not contained in the 1 June 2008 valuation, which was the operative document; and was made in November 2008, when the valuers were asked to affirm the 1 June 2008 valuation. 38 Accordingly, it was reasonable to press on with the case, on the basis that: the 1 June 2008 valuation was relevant to the decision of the Bank; the qualification did not qualify the central part of the valuers' opinion, being the valuation of the market value of the property as if complete at $67 million or thereabouts plus GST; and the applicants regarded the qualification as meaningless, as it did not retract or modify the amount of the valuation which was actually affirmed. 39 The Bank's 10 November 2008 Facility approval letter, which was in existence at all times during the litigation, referred to the 1 June 2008 valuation and is evidence of the Bank's reliance on the valuation at the amount of $69 million. The $69 million dollar valuation amount was clearly key to determining the Bank's lending and the lending ratios as per the Bank's own records. 40 In light of the points raised at [17] to [19] above, the applicants submit that the rejection of offers was not unreasonable. 41 The offers provided "The amount of the offer in respect of the claims is $50,000 inclusive of interest but exclusive of costs, which the Third and Fourth respondents offer to pay on a party and party basis as taxed, if not agreed". 42 The applicants submit that the offers were not expressed with clarity, as they provided that the valuers would pay the applicants' costs "as taxed if not agreed". In the absence of a precise figure, it was not clear to the applicants what amount they would receive in payment of their costs. 43 Having regard to each of the factors, it is submitted that the applicants' rejection of the offers was reasonable and prudent in the circumstances and that it was appropriate for the applicants to test their case by proceeding to trial. 44 In my view, essentially for the reasons advanced on behalf of the valuers, the failure of each of the applicants to accept the offer made by the valuers was unreasonable at the time it was made and the applicants have not met the onus they assume to demonstrate otherwise. 45 The offers were made at an appropriate time in the course of the litigation when the issues to be determined at a trial were well understood by the parties. 46 The letter each applicant received identified the primary question whether in proper context the valuation was misleading. The real possibility that the Court would find that it was not was open to the applicants to see. The question concerning the need for the Bank to satisfy itself that the presales were legitimate market transactions with reasonable deposits held was an important statement and not one that the applicants could reasonably ignore in assessing their prospects of success in the proceeding. 47 Ultimately, no party, and particularly the applicants, sought to lead any evidence from the Bank as to whether or not the Bank relied on the valuations. 48 They were the crucial issues upon which the applicants failed in the proceeding before me. 49 When one has regard to the terms of the offer, to pay each applicant $50,000 plus their party and party costs to date in the proceeding, I consider the offer itself was reasonable and in the circumstances it was unreasonable for each applicant to decline it. 50 The suggestion made that it was not unreasonable to decline the offers because only a 14 day offer period applied, is not, in the circumstances of this case, to the point. The parties knew exactly what the issues for trial were at that time, and being asked to respond to the offer within 14 days was not at all realistic. 51 Nor do I consider that the way the offer covered party and party costs should be construed as ambiguous. If there had been any concern on the part of the applicants as to what the terms of the costs offer meant, they could have easily raised that question with the valuers' solicitors and had it clarified. However, no steps were taken to clarify the terms of the settlement offers. 52 In all the circumstances, I consider that the failure of the applicants to accept the valuers' offer was unreasonable and the applicants have failed to discharge the onus to establish otherwise. It follows that the valuers are entitled to the costs orders that they seek. 53 There will be orders that: (1) The applicants pay the costs of the third and fourth respondents: (a) up to 11am on 17 November 2015, on a party and party basis; and (b) after 11am on 17 November 2015, on an indemnity basis. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker. Associate: Dated: 4 August 2017 SCHEDULE OF PARTIES WAD 461 of 2013 Applicants Fourth Applicant: LESEUR PTY LTD ACN 052 291 639 Fifth Applicant: TEDDORO DEL BORELLO Sixth Applicant: ARREDO PTY LTD ACN 009 256 606 Respondents Fourth Respondent: BLAKE WILLIAM SMITH