FEDERAL COURT OF AUSTRALIA The Administration of Norfolk Island v SMEC Australia Pty Ltd [2006] NFSC 8 THE ADMINISTRATION OF NORFOLK ISLAND v SMEC AUSTRALIA PTY LIMITED SC2 OF 2003 WILCOX J 15 AUGUST 2006 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY SC2 OF 2003 BETWEEN: THE ADMINISTRATION OF NORFOLK ISLAND Plaintiff AND: SMEC AUSTRALIA PTY LIMITED Defendant JUDGE: WILCOX J DATE OF ORDER: 15 AUGUST 2006 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Order 2 made on 3 August 2006 be set aside. 2. In lieu of that order, the defendant pay the costs of the plaintiff incurred up to 10am on 26 April 2006. IN THE SUPREME COURT OF NORFOLK ISLAND SC2 OF 2003 BETWEEN: THE ADMINISTRATION OF NORFOLK ISLAND Plaintiff AND: SMEC AUSTRALIA PTY LIMITED Defendant JUDGE: WILCOX J DATE: 15 AUGUST 2006 PLACE: SYDNEY REASONS FOR JUDGMENT WILCOX J: 1 When I handed down judgment in this matter on 3 August 2006, I made two orders. The first of those orders was that judgment be entered in favour of the plaintiff, the Administration of Norfolk Island, against the defendant, SMEC Australia Pty Ltd, in the sum of $300,000. The second order was that the defendant pay the plaintiff's costs of the proceeding. See The Administration of Norfolk Island v SMEC Australia Pty Ltd [2006] NFSC 7. 2 In making the second order, I was unaware that there was any question in the minds of either of the parties but that costs should follow the event. Nothing had been said to me during the course of the hearing, or in final submissions, to indicate a desire of any party to have the opportunity of addressing the Court concerning orders, after reasons for judgment were available. Had the request been made, I would have acceded to it. 3 After I had handed down judgment, my associate was contacted by a representative of the defendant who asked that the matter be put back in the list so there could be some discussion about costs. I acceded to this request and I have, today, heard submissions about costs from Mr Roberts on behalf of the defendant and Mr White on behalf of the plaintiff. 4 I should say immediately that it is important, if a party has in mind eventually putting to the Court that there should be a departure from the usual form of orders, including an order for costs following the event, that the party advise the judge of this situation before judgment is delivered. It is inefficient, and inherently undesirable, to have the Court revisit orders because of matters that could have been raised earlier but were not. 5 Having said this, I do not think I should refuse to entertain the argument that has been put before me today by Mr Roberts. Mr Roberts provided to me a written submission which annexes an exchange of correspondence between his instructing solicitors and Mr White, on behalf of the plaintiff. 6 The trial of the matter commenced at 10 am on Tuesday, 26 April 2006. During directions hearings earlier in 2006, I raised with Mr White and Mr Roberts the possibility of settlement. I took some trouble to have the parties discuss the issues between them and, in particular, the items of alleged damage, and to prepare a document, similar to a Scott Schedule for a building case, which set out the position of each of the parties in respect of each item of damage. I was not impressed with the specificity of the document that was ultimately produced; nor by the fact that my suggestions about mediation were not taken up. Nonetheless, I have no doubt that the parties did have some settlement discussions; but to no avail. 7 On 18 April 2006, the solicitors for the defendant wrote to Mr White's firm. They referred to prior correspondence and a recent telephone conversation between Mr White and Mr Roberts and went on: 'As advised, we are instructed to offer the sum of $300,000 plus costs in settlement of the matter. This offer is to remain open until 10 am on 26 April 2006.' As I say, that is the time that had been appointed before commencement of the hearing. 8 There was a letter in reply, dated 24 April 2006. It read as follows: 'I refer to my telephone conversation with Mr Roberts on 20 April 2004 in which I made a counter offer for settlement at $1,800,000 plus costs. I am instructed that if this offer is not accepted by 2 pm today it will lapse.' I note the letter did not specifically reject the offer that had been made on behalf of the defendant, although the amount of the counter offer was a long way from the amount of that offer. 9 Neither the offer nor the counter-offer was accepted. The case commenced on 26 April 2006. The taking of evidence occupied some eight days and there was then a further day upon which submissions were made. The hearing finished on 11 May 2006, when I reserved my judgment. 10 It is a matter of great regret to me that the parties got themselves into the situation they did. It seems to me, with respect to those who were running the case on each side, that each party took an unrealistic view about its position. 11 In relation to the plaintiff's position, it was always acknowledged by Mr White that clause 4.2 of the Performance Management Agreement ('the PMA') imposed a cap of $300,000 on the amount recoverable by his client against the defendant for breach of that agreement. Mr White acknowledged this at the opening of the trial. He sought to overcome this problem by advancing causes of action that would not have been affected by the cap, notably contravention of the Fair Trading Act 1995 (NI) and breach of fiduciary duty. For reasons that I set out in my principal judgment, these causes of action demonstrably lacked merit. A more realistic view of the plaintiff's position would have led it advisers to conclude that it was highly unlikely the plaintiff could recover more than the capped sum available for breach of the PMA. 12 There was also a lack of realism on the defendant's side. In order to escape a judgment against it for $300,000, the defendant had to defeat the claimed breach of the PMA. It sought to do this over the course of the eight day trial by cross examining the plaintiff's witnesses, many of them at some length, and by calling several witnesses, most of whom gave a considerable amount of highly detailed evidence. 13 A realistic assessment of the defendant's position would have caused its advisors to conclude that the chances of successfully arguing there was no breach of the PMA were minimal. The evidence of what happened in the excavation of Unit 1 was overwhelming. I set out my findings about it, in some detail, in my principal judgment. There is no need for me to repeat what I said. It is sufficient to note that it is apparent from the evidence of Mr Reeve, the senior officer of the defendant involved in the case, that he himself should have realised the defence was futile. One only has to look at some of the admissions that he made, in cross examination to Mr White. Similarly, with some of the defendant's expert witnesses, notably Mr Wilson and Dr Burman. The evidence concerning Middlegate clearly indicated that the chance of avoiding a finding that there was unacceptable intermingling of hard durable rock and OTR was minimal. 14 A realistic assessment by the defendant's advisors would have caused them to conclude that the sensible course was to indicate at the beginning of the trial that the defendant would not contest the factual issues raised in the breach of contract claim, but would contend its liability was limited to $300,000 and argue against the availability to the plaintiff of the other causes of action. Had that course been taken, the hearing would have occupied no more than a day. 15 Sadly, there was a lack of realism on both sides, with the result that considerable unnecessary costs have been incurred. I am placed in the unenviable position of determining where the burden of those costs should lie. 16 I think it is helpful to divide the costs into three categories. The first category concerns those that were incurred before any offer of settlement was made; that is, up to and including 18 April 2006. There can be no quarrel with the proposition that the plaintiffs should recover these costs. There is no evidence of any earlier settlement offer. 17 There is then a period between 18 and 26 April, during which time the settlement offer was open. It seems that, by 20 April, Mr White had obtained instructions about a counter-offer. Although the counter-offer considerably exceeded the offer, it does not necessarily follow that Mr White had received final instructions to refuse the defendant's offer. So I am inclined to think the appropriate course is to allow the plaintiff to recover its costs incurred up till the expiry of the original offer, namely 10 am on 26 April. The real problem arises is what should happen in relation to the costs subsequently incurred. 18 Mr Roberts has argued that, from that time on, costs were being incurred in a proceeding in which the plaintiff was destined not to do better than the unaccepted offer it had already received. He points to the case law on Calderbank offers. He rightly says that law is not embedded in the rules of this Court. Nonetheless, it is clear that the making and non-acceptance of an offer of settlement are discretionary matters which the Court can, and should, take into account in determining what costs orders should be made. 19 On the other hand, Mr White points to the fact that he has been successful in respect of the factual issues that were raised by the defendant, and vigorously fought over many days. He says it would be unfair if his client had to pay the costs of what turned out to be a successful conduct of a hearing on liability for breach of the PMA. 20 I think there is fault on both sides, as I have indicated. I have reached the view that the appropriate course is that there should be no order in respect of the costs incurred after 10 am on 26 April 2006. This will leave each party to bear its own costs of what, from each party's point of view, was litigation prolonged by its own lack of realism. 21 I set aside order 2 made by me on 3 August 2006. In lieu of that order, I order that the defendant pay the plaintiff's costs of the proceeding incurred up to 10 am on 26 April 2006. There will be no order in respect of costs after that date. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox. Associate: Dated: 30 August 2006 Solicitor for the Plaintiff: Mr P D White of White & McDonald Counsel for the Defendant: Mr I G B Roberts Solicitor for the Defendant: Phillips Fox Date of Hearing: 15 August 2006 Date of Judgment: 15 August 2006