District Court New South Wales Medium Neutral Citation: ISS Facility Management Pty Ltd & Anor v Quality Bakers Australia Pty Ltd & Ors (No. 2) [2020] NSWDC 513 Hearing dates: On the papers Date of orders: 07 September 2020 Decision date: 07 September 2020 Jurisdiction: Civil Before: Abadee DCJ Decision: See paragraph 34 Catchwords: COSTS – application for indemnity offer – offer made prior to commencement of proceeding – whether offeree's rejection of offer was unreasonable – offer of compromise – whether offer amounted to a real and genuine compromise Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW), rr 20.26, 42.14 Cases Cited: Commonwealth of Australia v Gretton [2008] NSWCA 117 Crump & Ors v Equine Nutrition Systems Pty Limited trading as Horsepower & Anor (No 2) [2007] NSWSC 25 ISS Facility Management Pty Ltd & Anor v Quality Bakers Australia Pty Ltd & Ors [2020] NSWDC 447 Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 Robb Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124 Category: Principal judgment Parties: ISS Facility Management Pty Ltd ABN 70 108 821 576 (First Plaintiff) ISS Facility Services Limited NZBN 942904064321 (Second Defendant) Quality Bakers Australia Pty Ltd ABN 45 004 205 449 (First Defendant) Goodman Fielder Consumer Foods Pty Limited (Second Defendant) Goodman Fielder New Zealand Limited (Third Defendant) Representation: Counsel: Mr A Vincent for the plaintiffs Mr J Hutton for the defendants Solicitors: HWL Ebsworth Lawyers for the plaintiffs Corrs Chambers Westgarth for the defendants File Number(s): 2019/269070 Publication restriction: Nil Judgment BACKGROUND 1. On 14 August 2020, I delivered reasons in this matter [1] and provided opportunity to the parties to agree to dispositive orders. 2. The parties agree on the size of the monetary verdict for the plaintiffs ('ISS'), including the component for interest. They also agree that the defendants ('Goodman Fielder') should pay the plaintiffs' costs. They disagree on the basis upon which the costs should be agreed or assessed. 3. ISS seeks an order that Goodman Fielder pay their costs on an indemnity basis, either from the commencement of the proceeding, or from 8 November 2019. The first alternative is predicated upon ISS' service of an informal offer of settlement, made prior to the commencement of the proceeding on 7 June 2019 (the 'Informal Offer'). The second alternative is predicated upon the service of an offer of compromise served 8 November 2019. Given that there is no suggestion that the latter did not comply with the formal requirements of r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) ('UCPR'), I will refer to the latter as the 'Rules Offer'. 4. These reasons are to be read with the Earlier Reasons and it is not necessary to refer at length to the latter. It suffices to say that the subject matter of the proceeding involved a dispute about the proper construction and application of some provisions in a commercial contract between two substantial enterprises; with that contract governing the circumstances in which ISS could undertake a due diligence, as the prelude to the parties' anticipated entry into a long term arrangement for the supply, by ISS, of facilities management services to Goodman Fielder. The provisions in question concerned the circumstances in which ISS, as the prospective service provider, might recover costs of conducting that due diligence after issuing an invoice to Goodman Fielder in the event, which later materialized, that no long term contract was entered into between the parties. More specifically, Goodman Fielder invoked a provision which set out exceptional circumstances in which ISS would not be entitled to receive their 'Due Diligence Costs' after they had issued an invoice to Goodman Fielder for the sum of $600,000. I found that, properly construed, Goodman Fielder had not made out their case that those exceptional circumstances identified in the contract had arisen. In reaching that conclusion, as noted in the Earlier Reasons (at [13]), many of the primary facts were not contentious. It was, putting the matter very broadly, the inferences to be drawn from the primary facts and the proper characterisation of them which were in issue. 5. Stated less abstractly, there were contentious questions whether, for example, an update supplied by the plaintiffs to the defendants on 11 May 2018 constituted a 'revised offer' less financially favourable to Goodman Fielder interests than 'Key Terms' which set out the baseline for negotiations at the commencement of the Due Diligence Agreement. Another factual question was whether the plaintiffs had, by their conduct more generally, "insisted" upon entering into the longer term contract on terms less financially advantageous. THE PLAINTIFFS' OFFERS The Informal Offer 1. This offer was contained in a letter from Mr Scanlon, of the ISS companies, to Mr Tully, for the Goodman Fielder group of companies, on 7 June 2019. It was expressed as being "without prejudice save as to costs", although, as Goodman Fielder's Counsel noted, it did not contain a warning of the kind usually seen in 'Calderbank' offers that the offer might be relied upon on seeking any costs of proceedings which might subsequently be commenced and the offerors obtained a no less favourable outcome in the event that the dispute culminated in an adjudication by a court. 2. The letter expressly referred to ISS' claim for the costs of its due diligence after their invoice for those costs had been only very recently served (30 May 2019). 3. The gist of the letter was to provide an analytical framework to explain why, in the view of the ISS companies, Goodman Fielder's principal contentions – which were ultimately litigated and rejected – that it was not required to pay ISS' Due Diligence Costs, were erroneous. Those first two contentions were, firstly, that ISS' costs were not actually or reasonably incurred. That contention was ultimately not pursued by Goodman Fielder in their final submissions (even though it had been pleaded). The second contention was, as indicated in the background to these reasons, that exceptional circumstances had arisen justifying Goodman Fielder's refusal to pay the Due Diligence Costs. 4. For the purpose of these reasons, it is unnecessary to work through this analytical framework. But after providing that framework, ISS gave notice that they would be terminating the provision of the 'New Zealand services' with effect from 5:00pm (New Zealand time) 30 calendar days from the date of the letter. 5. ISS then wrote as follows: "Commercial offer 31. In the interests of resolving this matter amicably and quickly, ISS offers to reduce its claim for DD Costs to AUD$500,000, to be paid by 5:00pm on the date that is 7 calendar days from the date of this letter. 32. If GF agrees to the above, ISS will commit to providing longer than ISS assesses as reasonable notice to allow transition out of the New Zealand services of a total of 90 calendar days and extend the termination date the same for this period (including any transition period). This is provided GF agrees to pay 15% margin on the New Zealand services (cleaning and other) with effect from the date of this letter and pays all outstanding accounts payable to ISS by 5:00pm, Sydney time, on the date that is seven calendar days from the date of this letter." 1. This offer was expressed as expiring at 5:00pm, Sydney time, on 12 June 2019. ISS' submissions 1. ISS submits that the parties were aware, prior to the commencement of the proceeding, that their Due Diligence Costs were capped at $600,000 (plus GST). 2. To avert the circumstance that the Goodman Fielder would be ordered by a Court to pay that amount, plus interest, ISS says that the sum offered to settle was a 17% discount on its claim. Moreover, the offer was made more attractive since Goodman Fielder was offered the 'sweetener' that ISS would supply their 'New Zealand services' for a longer period than that which was contractually necessary. 3. ISS submits that it was unreasonable for Goodman Fielder to refuse the offer. They had effectively been given a period of two weeks from the date ISS had issued their invoice until the date the offer expired. Though the offer was in terms only limited to a week, there was no complex calculation that Goodman Fielder had to evaluate in this period, having regard to the contractual cap on costs. Although Goodman Fielder had formally raised a contention about the reasonableness of the costs, the letter (at paragraph 9) referred to Goodman Fielder's acknowledgement that the costs were not unreasonable. That meant that Goodman Fielder's refusal to accept the offer could only be legitimated by its contentions that exceptional circumstances justifying withholding payment existed. Those contentions were raised in a court proceeding, Goodman Fielder took the chance that they may be rejected, and they were ultimately rejected, by the Court. As I interpreted ISS' submissions, ISS effectively suggested that it was inevitable that Goodman Fielder's central contentions would be rejected. Consideration of the Informal Offer 1. ISS' submissions correctly acknowledge at least two propositions. First, an important discretionary consideration, when the Court is asked to assess an application for indemnity costs on the basis of the rejection of an informal settlement offer, is whether the offeree acted unreasonably in rejecting an offer. For informal offers, there is no presumption that an offeree who does not accept an offer and does not obtain a more favourable judgment will necessarily pay indemnity costs from the date of the offer: Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124 at [9]; Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [8]. 2. Secondly, ISS acknowledge that this was an 'all or nothing' case, in the context of a case that significantly turned on points of contractual interpretation. In Robb Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170, Basten JA (with whom Campbell JA agreed) said (at [18]): "Generally, damages claims for personal injury are likely to involve evaluative judgments both in respect of liability and quantum. Cases turning upon what a reasonable person would do in particular circumstances and whether there is a sufficient causal connection between a breach of duty and an injury suffered are likely to involve evaluative judgments. The same will be true of an assessment of loss. By contrast, the outcome of a contract case may well depend upon a point of construction of a contract, the outcome of which may be uncertain, but which results in one party winning and the other losing; success or failure in such a case will not involve the selection of a point within a range of possible outcomes. This point of distinction is illustrated by the present case... In practical terms, there was no range of possible outcomes." 1. This was also a case where practically there was no range of possible outcomes. I accept, for present purposes, that a discount on the primary claim of 17% (i.e. from $600,000 to $500,000) amounted to a genuine offer of settlement. Further, I do not accept that there was an insufficiency in time for Goodman Fielder to consider the offer. If it was concerned about the adequacy of time to consider the offer, it could have sought an extension for the period in which the offer was open, but as it was, there was no indication in the correspondence that it complained about the sufficiency of time to consider it. 2. I do not, however, accept that it was unreasonable for Goodman Fielder to seek to vindicate its position in any court proceeding, should one follow consequentially from rejection of ISS' offer. 3. Although they were made in the context of considering the reasonableness of offerees rejecting 'derisory' offers by an ultimately successful offeror, and although also made in the context of consideration of 'rules offers', the following observations of the Court of Appeal in Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 (citations omitted) at [33] are still apposite to consideration of informal costs offers: "It is often the case that the result of an interpretation issue appears quite clear in retrospect. However, an offer of compromise must be assessed, in large part, at the time it was made… Whether what was offered was a relevant compromise, and whether its rejection was reasonable should not be assessed with the benefit of 20:20 hindsight." 1. Contrary to the submissions of ISS, the end result of the litigation was far from a foregone conclusion. A cursory review of the Earlier Reasons indicates that plausible arguments were raised on the defendants' behalf to support their construction argument. That cursory review also indicated (from paragraph [204] to [215]) that if I was wrong in rejecting Goodman Fielder's construction argument on the question of whether a 'revised offer' was made on 11 May 2018, I would have found on the facts that it was less financially favourable than the Key Terms. 2. It was, in short, not unreasonable for Goodman Fielder to take the view that it had reasonably arguable prospects on its construction arguments which, if the arguments succeeded, would have spared it of the need to pay any of ISS' Due Diligence Costs. 3. Further, in my view, whilst pre-litigation offers can found applications for costs in proceedings, this is a relatively rare event; generally because parties are not taken to know all of the issues that are disputed until the (litigation) starter's gun has been fired and before evidence has been served. In this case, although the offer was made in the context of an analysis of ISS' Due Diligence Costs, reference was also made to the 'New Zealand services' and ISS' assertion of rights in relation to those services. Although the inclusion of other terms that may not be able to be obtained by a court order does not necessarily invalidate an offer [2] , for ISS to add what might be described as extraneous matters into the offeree's consideration of an offer may have served to deflect Goodman Fielder from a pure focus upon the merits of the arguments against it and the risks of prospective litigation. In other words, other commercial issues affecting the parties' then relationship were being intermingled with argument about the rights associated with the dispute about Due Diligence Costs at hand. 4. Also, although ISS concluded its letter with an express reservation of rights, it did not, in terms, threaten legal proceedings and it certainly did not foreshadow that the letter would be relied upon, in accordance with Calderbank principles, if Goodman Fielder did not obtain a more favourable result than that which was offered. This was so even if there was indication that the letter might be relied upon on the question of costs in any proceeding which ensued [3] . There was no indication that it would be relied upon to found an application for indemnity costs. Fairness ordinarily requires that a party seeking to rely upon an informal offer to later ground an application for indemnity costs should notify the offeree of that circumstance. 5. It is unnecessary for me to address other arguments raised by Goodman Fielder in opposition to this part of the application. 6. I am not persuaded by ISS that I should exercise the Court's discretion to order that Goodman Fielder pay costs of the proceedings on an indemnity basis, to the extent that such application is based on the Informal Offer. The Rules Offer 1. On 8 November 2019, less than 3 months after the proceeding had commenced (26 August 2019) ISS served an offer of compromise. As previously noted, Goodman Fielder did not suggest that it was invalid for non-compliance with the Court rules. 2. Its terms were relevantly as follows: "1. Judgment for the plaintiff in the amount of $630,000. 2. The offer is open for acceptance for a period of 28 days after the date on which the offer is served on you." 1. ISS submitted that the amount claimed in the offer of compromise is less than what Goodman Fielder are obliged to pay for the debt (inclusive of interest). That being so, by the operation of r 42.14(2)(b)(i) of the UCPR, it is entitled to receive an order for costs on the ordinary basis up to 8 November 2019 and on an indemnity basis from 8 November 2019. That is, unless the Court "orders otherwise". 2. Goodman Fielder referred the Court to the Court of Appeal's judgment in Regency Media Pty Ltd as authority for the proposition that even for valid rule offers, a circumstance in which the court may exercise its discretion to otherwise order is that there is not a real and genuine offer. In that case, the Court said (at [32]): "The normal order for costs, even in a clear case, is that each party bears its own costs without full indemnity. If a derisory offer, of the kind made in these proceedings, could result in an order for indemnity costs, then it is likely that many, perhaps most, contract interpretation disputes would result in an indemnity costs order, if the formality of an offer in accordance with the rules had been made at an early stage. If the appellant were to succeed in the present case, it is quite likely that such an offer would accompany most statements of claim as a matter of commercial practice. The purpose of the special order – to encourage settlement – would no longer be served. An order for indemnity costs could, in our opinion, become the normal order in many commercial disputes." 1. Where, in an "all or nothing" case there is only a marginal difference between the offer as a result, the offer of compromise is not to be taken to be genuine. Offers of compromise are not to be used as a vehicle to attempt to trigger an entitlement for indemnity costs. 2. Goodman Fielder pointed out that the difference between the result achieved and that which was offered was a mere 0.77% (excluding GST). This particular offer verged upon an invitation to surrender. This is in a context where, as I have indicated, I regarded Goodman Fielder's arguments at trial as being far from frivolous or vexatious; such as may have justified ISS in making a derisory offer to compromise. 3. Goodman Fielder also raised a point as to the timing of the Rules Offer, being before the service of evidence. I do not consider that this point is material: as I have indicated, the parties had well-entrenched arguments and positions on the issues of this case even before the proceeding had commenced. 4. I do, however, accept that the little difference between the actual outcome and that which was offered on ISS' behalf does not warrant a partial order for indemnity costs as sought. Goodman Fielder have persuaded me that the Court should 'otherwise order', for the purposes or r 42.14 of the UCPR. ORDERS 1. The Court orders that: 1. Verdict and Judgment for the plaintiffs for the sum of $634,904.64, which sum is inclusive of pre-judgment interest. 2. The defendants are to pay the plaintiffs' costs of the proceeding as agreed or assessed. ********** Endnotes 1. ISS Facility Management Pty Ltd & Anor v Quality Bakers Australia Pty Ltd & Ors [2020] NSWDC 447 (the 'Earlier Reasons'). 2. Commonwealth of Australia v Gretton [2008] NSWCA 117 at [10]. 3. Crump & Ors v Equine Nutrition Systems Pty Limited trading as Horsepower & Anor (No 2) [2007] NSWSC 25 at [66]-[67]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 September 2020