Supreme Court New South Wales Medium Neutral Citation: Lorenzato v Burwood Council (Costs) [2021] NSWSC 266 Hearing dates: On the papers Date of orders: 22 March 2021 Decision date: 22 March 2021 Jurisdiction: Common Law Before: Fagan J Decision: (1) The cross-defendant's costs pursuant to order 6 made on 23 November 2020 are to be assessed on the ordinary basis up to and including 13 March 2018 and on the indemnity basis from and including 14 March 2018. (2) The plaintiff's notice of motion filed 11 December 2020 is dismissed. (3) The plaintiff to pay the defendants' costs of the notice of motion filed 11 December 2020. Catchwords: COSTS – Indemnity basis – whether sufficient element of compromise contained in offer Legislation Cited: Environmental Planning and Assessment Act 1979 (NSW) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Calderbank v Calderbank [1975] 3 All ER 333 Lorenzato v Burwood Council [2020] NSWSC 1659 Regency Media Pty Limited v AAV Australia Pty Limited [2009] NSWCA 368 Robb Evans v European Bank Ltd (No 2) [2009] NSWCA 170 The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No. 2) (2006) 67 NSWLR 706; [2006] NSWCA 120 TX Australia Pty Limited v Broadcast Australia Pty Limited (Costs) [2012] NSWSC 1200 Category: Costs Parties: Elisa Lorenzato (plaintiff) Burwood Council (first defendant) Michael Della-Franca (second defendant) John Lukas (cross-defendant) Representation: Counsel: R Carey (plaintiff) M L Wright SC with D Robertson (first defendant) J A Trebeck (second defendant) J Gooley (cross-defendant) Solicitors: Fraser Clancy (plaintiff) Matthews Folbigg (first defendant) Scarfone & Co (second defendant) Mullane Lindsay (cross-defendant) File Number(s): 2017/83223 Publication restriction: No Judgment 1. Final orders were made in these proceedings on 23 November 2020. Reasons for decision were published at that time: Lorenzato v Burwood Council [2020] NSWSC 1659. That judgment was republished on 8 February 2021 to correct paragraph numbering, cross-referencing and typographical errors. References to the principal judgment in these reasons are to paragraphs as numbered in the republished version. The Court has now to determine an application by the cross-defendant for an order that the costs that were awarded in his favour be assessed on the indemnity basis. Cross-defendant's application for indemnity costs 1. By order 5 made on 23 November 2020 the second defendant's cross-claim against his former solicitor, Mr Lukas, was dismissed. By order 6 the second defendant was directed to pay the cross-defendant's costs of the cross-claim. On 14 December 2020 the cross-defendant filed a notice of motion claiming orders that his costs be assessed on the ordinary basis up to and including 13 March 2018 and on the indemnity basis from and including 14 March 2018. The notice of motion is supported by an affidavit of the cross-defendant's solicitor exhibiting an offer of compromise that was served by email on 13 March 2018 and re-served, again by email, on 19 March 2018. 2. The offer was expressed as "made in accordance with r 20.26 of the Uniform Civil Procedure Rules 2005". It was open for acceptance for 28 days. The terms of the offer were as follows: Judgment for the cross-defendant on the first cross-claim. No order for costs on the first cross-claim. A covering letter from the cross-defendant's solicitor provided reasons for the cross-defendant's view that the cross-claim was unsustainable and that the offer represented a compromise and a genuine attempt to settle the proceedings. 1. The cross-claim was filed on 9 August 2017 and I infer that it was served shortly thereafter. The cross-defendant's defence was filed on 13 November 2017. It is apparent from those dates and from the terms of the letter of 13 March 2018 that accompanied the offer of compromise that by that date the cross-defendant's solicitors had undertaken substantial work to investigate the allegations in the cross-claim and to prepare the cross-defendant's defence. The covering letter included the following: We are now in possession of discovery from Burwood Council and have copies of detailed correspondence between Mr Della-Franca [the cross-claimant] and the Council and between Mr Della-Franca's legal representative at the time and the Council. It is unequivocal that Mr Della-Franca was aware of the existence of a subterranean drainage pipe underneath his property and the Council's desire to register an easement in relation to that pipe. In a letter to the Council dated 21 September 2001 Mr Della-Franca expressed the view that any purchaser of a property would be concerned about the existence of the stormwater pipe under the house. Indeed in that letter he expressly states: "When I purchased this property I had no idea that there was a storm water pipe under my house … Of course I am concerned about the pipe and the possibility that it might burst or leak." [A copy of the letter was attached]. Mr Della-Franca was both (a) aware the pipe was unregistered; and, (b) that it was not discovered when he purchased the property. In light of his own concerns expressed to the Council, the fact that he was on notice of the Council's intention to register an easement and the likelihood of further disruption to the quiet enjoyment of the land for any future purchaser, the existence of the pipe is something that should have been disclosed to Mr Lukas, when directly asked about easements and/or notices from the Council. We consider this information fatal to your client's cross-claim against Mr Lukas. The Offer of Compromise is a genuine attempt to settle these proceedings on the basis that the cross-defendant not ask for a contribution to costs if accepted. Your client will appreciate that the costs of defending the proceedings will be expensive and therefore the offer by Mr Lukas to not seek costs affords your client a significant advantage at this stage of the proceedings. Needless to say, if the offer is not accepted and Mr Lukas obtains judgment against the cross claimant, he will be seeking indemnity costs. 1. The offer of compromise was compliant with r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) in formal respects. On 19 March 2018 the cross-claimant's solicitor informed the cross-defendant's solicitor that he had "just come across" the email of 13 March 2018 by which the offer and covering letter had been sent. He said that the original email had gone "to my junk mail" and that his "security software appears to have deleted/disabled the attachment, which I assume was a letter, so I do not know what the contents were". The cross-claimant's solicitor requested that the original email and attachments be re-sent, which was done within three minutes of the request being made. These events make no difference to the timing of the offer or the running of the 28 days allowed for acceptance. Notwithstanding that the offer had initially been mislaid, electronically, at the cross-claimant's end, it was made on 13 March 2018 and the time for acceptance expired 28 days later. 2. The offer of compromise was not accepted and orders 5 and 6 obtained by the cross-defendant on 23 November 2020 are no less favourable to the cross-defendant than the terms of his offer. It follows, by force of r 42.15A(2), that the cross-defendant is prima facie entitled to the orders he now seeks, unless the Court should order otherwise. The rules that bring about this consequence refer only to offers by either a "defendant" or a "plaintiff" to compromise a claim by a "plaintiff". There does not appear to be a rule that explicitly expands the application of the relevant provisions to offers in settlement of cross-claims. However, I interpret the rules as having that expanded reach. Judges of the Court have on other occasions applied the rules to cross claims upon that understanding. 3. The cross-claimant submits that the offer of 13 March 2018 contained no real or substantive element of compromise and on that ground he opposes Mr Lukas' claim for indemnity costs. It has been recognised in the authorities that if an offer lacks a real element of compromise then the requirements of r 20.26 may not be satisfied and the prima facie entitlement to indemnity costs may not arise: see The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No. 2) (2006) 67 NSWLR 706; [2006] NSWCA 120 at [8] and earlier decisions cited there. It is also established that if the offer lacks an element of substantive compromise that may, alternatively, be approached as a factor tending strongly towards exercise of the Court's discretion under r 42.15A(2) not to order indemnity costs, even on the assumption that the offer satisfies r 20.26: Robb Evans v European Bank Ltd (No 2) [2009] NSWCA 170 at [23]-[24]; Regency Media Pty Limited v AAV Australia Pty Limited [2009] NSWCA 368 at [27]-[28]. 4. As an alternative to his reliance upon the UCPR, Mr Lukas invokes the principles in Calderbank v Calderbank [1975] 3 All ER 333. However, in applying those principles the question of whether the cross-defendant's offer contained a real element of compromise would still be a significant discretionary factor in determining whether indemnity costs should be ordered. It follows that, on whatever basis the cross-defendant's claim to indemnity costs is now advanced, the Court must assess the extent of compromise contained in the offer and the weight that should be attributed to that factor in exercising the discretion to order or to refuse indemnity costs. 5. No direct evidence has been tendered to establish the quantum of the cross-defendant's costs incurred in respect of interlocutory and investigatory work between the service of the cross-claim on 9 August 2017 and the making of the offer on 13 March 2018. The terms of the cross-defendant's covering letter show that inspection of Burwood Council's discovery had been undertaken. From the evidence given in the trial I am aware that this discovery was extensive. The part of it that most significantly affected the cross-defendant's position was the correspondence, file notes, reports and records of Council deliberations dating from about 15 years prior to these proceedings; namely, from early 2001 to mid-2005. Documents from that period covered the cross-claimant's dealings with Council concerning the stormwater pipe under the house on No 13 Appian Way and concerning Council's desire to acquire an easement adjacent to the western boundary of the property. Prior to the present litigation the cross-defendant had no knowledge of these dealings because when he had received instructions from the cross claimant to complete the conveyance of the property in 2011 the cross-claimant had given no instructions about the existence of the pipe or about his concern that it might "burst or leak" or about Council's claims over the pipe or its desire to acquire an easement. 6. The cross claim alleged that the cross-defendant was negligent in failing to elicit instructions about the pipe and about Council's claims over it. It was common ground throughout the proceedings that the cross-claimant never told Mr Lukas that there was a stormwater pipe under the house or that there was a possibility it would burst or leak or that it was possible the Council would take an easement over the land. In his evidence in the trial the cross-claimant did not dispute that he knew, at the time of instructing Mr Lukas in 2011, all of these matters: see [333], [334], [345] and [436]-[437] of the principal judgment. During the first nine months after being served with the cross-claim, prior to the service of witness statements, the cross-defendant had to inspect Council's discovery in order to ascertain what had been the cross-claimant's state of knowledge in 2011. 7. At [72]-[131] of the principal judgment I summarised the evidence of dealings between the cross-claimant and Council from early 2001 to mid-2005. That evidence discloses the cross-claimant's knowledge of the problem posed by the stormwater pipe, his awareness of Council's claims and his experience of the difficulties of dealing with Council concerning the pipe. I infer that the legal costs of investigating that evidence, primarily by review of Council's extensive discovered records, would have been in the tens of thousands of dollars, more likely than not at least $40,000. Up to the point of making the offer of compromise, the cross-defendant's solicitors would also have had to examine the cross-defendant's file, take instructions from him and make some assessment of the strength of the plaintiff's case against the cross-claimant. Those additional aspects of interlocutory work up to the date of the offer would likely have taken the total outlay above $40,000. The assessable party and party proportion of that figure, probably an amount of approximately $30,000, is the measure of compromise that was incorporated in the offer of 13 March 2018. 8. The cross-claim was unquantified. It was for indemnity in respect of whatever damage the plaintiff might recover on her cause of action against the second defendant/cross-claimant for his negligent answers to the requisitions furnished shortly before completion of the sale of No 13. The cross-claim may be characterised as an "all or nothing" claim, in the sense that, on the assumption the plaintiff would prove her case against the cross-claimant, he would recover from the cross-defendant either full indemnity or nothing. This did not preclude the cross-defendant from compromising to a greater extent than would result from forgoing his assessable costs. It would have been open to the cross-defendant to offer a fixed contribution towards any judgment the plaintiff might recover against the cross-claimant or a fixed percentage of any such judgment. The unquantified and "all or nothing" nature of the cross-claim is therefore not a reason for the Court to disregard the modest degree of compromise in the offer of 13 March 2018, when exercising the discretion whether or not to order that costs be on the indemnity basis. 9. The Court of Appeal has held that, at least in a commercial case, an offer by a defendant or a respondent to pay a very small proportion of the amount claimed by the plaintiff or appellant may be regarded as involving such a slight element of compromise as to be contemptuous or derisory, thereby warranting a refusal by the Court to order indemnity costs. 10. In Robb Evans v European Bank Ltd (No 2) Basten JA (with the agreement of Campbell JA) said this: [20] […] The offer of less than $2,000 in respect of a claim of $800,000, even if the claim had limited prospects of success, cannot be treated as a genuine offer of compromise. If the offer were based on a legal assessment of the likelihood of success in an amount in excess of $800,000, the claim should have been struck out as frivolous and vexatious. It ultimately failed in this Court, but could not, on any view, be so categorized. It is implausible that the appellant so categorized it in quantifying his offer. [21] If the appellant had carried out a commercial evaluation, rather than a pure legal assessment of the likelihood of success, he would undoubtedly have concluded that, even if ultimately successful, he would be unlikely to recover many thousands of dollars of costs incurred if the litigation proceeded. A commercially based offer would have taken that matter into account. This offer clearly did not. […] [23] The offer of 6 March 2006 did not constitute a genuine offer of compromise of the respondent's claim. The amount offered, beyond that amount which was not in dispute [namely $2,000], is properly characterized as trivial or contemptuous. It does not engage the costs consequences provided by r 42.15. [24] If it were thought that the rule was, in its terms, engaged, for the reasons set out above, the proper exercise of the Court's discretion would be to otherwise order, thus limiting the appellant's costs of the trial to those assessed on the ordinary basis. […] 1. Regency Media Pty Limited v AAV Australia Pty Limited concerned a commercial dispute of an "all or nothing" nature, turning upon an issue of contractual interpretation. The appellant/defendant made an offer of compromise at an early stage of the proceedings in the District Court, in the sum of $10,000 plus costs as assessed up to the date of the offer. The respondent/plaintiff was claiming $600,000. That claim succeeded at first instance but in the Court of Appeal the construction of the relevant contract contended for by the respondent/plaintiff was found to be "clearly wrong" and the judgment in its favour was set aside. The Court held as follows: [30] The offer of $10,000 made at an early stage of these proceedings – indeed, before a defence had been filed – was an invitation to surrender, rather than any form of commercial compromise. Clearly, the offer reflected the strength of the appellant's belief in its interpretation of the contract. This belief has been fully vindicated in this Court. Nevertheless, it is difficult to characterise the offer as one of "compromise". Any such element of compromise was, at best, "of limited significance". (Hancock v Arnold (No 2) [2009] NSWCA 19 at [15]). The offer can be accurately described as derisory. The Court should adopt the approach in Robb Evans v European Bank Ltd (No 2). [31] An offer which is in substance an invitation to surrender can result in the successful triggering of the indemnity costs mechanisms under the rules. (See r 20.26(2); Leichhardt Municipal Council v Green [2004] NSWCA 341 at [36]-[37], [40]). However, as Basten JA suggests in Robb Evans v European Bank Ltd (No 2) supra at [20], the claim or defence would have to approach something of the character of being frivolous or vexatious for that to be the case. (See also Hancock v Arnold (No2) supra at [17]). If it were otherwise, the public policy to encourage settlement would rarely be served, in an all or nothing case. These proceedings were not of that character, as indicated by the success which the respondent had at first instance. [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. [33] 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. (See most recently Hancock v Arnold (No2) supra at [23]). 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. [34] The rival contentions on interpretation are set out in the Court's first judgment. […] The respondent's submissions were regarded by this Court as clearly wrong. However, these proceedings did not have the degree of hopelessness, nor did they have any element of frivolity or vexation, of a character which would support an invitation to surrender being accepted as a real and genuine offer of compromise. [35] This is a case to which, with an adjustment by reference to the $10,000 offered, the observations of Bryson JA in Leichhardt Municipal Council supra at [59] apply: "The respondent's case did not succeed, but it was not a case which could not reasonably be argued and it succeeded at first instance. The only element of compromise in the offer was as to costs: otherwise it was a call on the respondent to capitulate and give up: the element of compromise was slight, and the respondent's ultimate lack of success does not to my mind demonstrate that the reasonable course for the respondent was to capitulate, nor does anything show that the respondent was delinquent in going on with the trial or in resisting the appeal." (See also The Uniting Church v Takacs (No 2) [2008] NSWCA 172 at [13]-[15].) [36] The appellant's motion for indemnity costs at first instance is rejected. 1. These two Court of Appeal decisions were applied in TX Australia Pty Limited v Broadcast Australia Pty Limited (Costs) [2012] NSWSC 1200, where the plaintiff sought a declaration that an expert determination concerning fees for the use of broadcast transmission towers was affected by legal error and was not binding. Within four months after the commencement of proceedings the issues had been refined by the filing of a Commercial List Response and evidence had been exchanged. The defendant then made an offer of compromise to the effect that the proceedings be dismissed with no order as to costs. This was not accepted by the plaintiff but the claim was subsequently dismissed after a final hearing. In refusing an order for indemnity costs Brereton J (as his Honour then was) held as follows: [11] While it is true that there was an element of compromise in [the defendant's] offer to "walk away" without a costs order, in substance the offer called for [the plaintiff's] capitulation, but offered not to press for a costs order. As it turns out, this would have been more favourable to [the plaintiff] than the result. But the offer did not involve any substantial measure of compromise in [the defendant's] position to justify its being rewarded by a special costs order. To do so would be to use the relevant rules to reward a party who made an offer, admittedly more favourable to the other than the outcome, but not objectively calculated to achieve a compromise. [12] In my view the offer in this case was not such as to justify [the defendant] being compensated for the difference between its ordinary party/party and indemnity costs. 1. The cross-defendant's offer in the present case, to forgo party/party costs incurred up to 13 March 2018, cannot be characterised as contemptuous or derisory. For the cross-defendant, who had not previously been aware of the second defendant's dealings with Council over the stormwater pipe, evaluation of the plaintiff's claim against the second defendant and of the latter's cross-claim against the cross-defendant depended in large part upon inspection and analysis of extensive discovered documents. The case faced by the cross-defendant was factually dense. Unlike what occurred in Regency Media Pty Limited v AAV Australia Pty Limited, the cross-defendant's offer to forgo his costs was not made until after his defence had been filed and inspection of discovered documents had taken place. By that date facts previously unknown to the cross-defendant had been ascertained and the issues had been crystallised, with the incurrence of costs that I infer would have been significant. Unlike the circumstances of TX Australia Pty Limited v Broadcast Australia Pty Limited (Costs), the issues in the present case were not confined to legal argument and construction of a contract. The factual density of the case and the volume and antiquity of the discovered records contributed to the costs incurred up to 13 March 2018. 2. In contrast with the two Court of Appeal decisions considered above, the cross-defendant's claim in the present case was quite hopeless by reason of facts that were known to the cross claimant from the outset. Pursuit of the cross-claim bordered upon being vexatious and irresponsible. When the cross-claimant purchased No 13 Appian Way the stormwater pipe under the house was not disclosed to him either in a certificate under s 149 of the Environmental Planning and Assessment Act 1979 (NSW) or otherwise. Contemporaneous records considered in the principal judgment show that the cross-claimant was dismayed and gravely concerned upon being informed of the pipe. He clearly regarded it as a significant impairment to the property, as would any rational homeowner. Council's claims of right over the pipe, its notifications of intention to come on the land to repair the pipe and its stated resolve to acquire a western boundary easement were also matters that caused the cross-claimant serious concern about their impact upon the property. 3. In par 10 of the defence to the cross-claim, which was filed four months before the offer of compromise, the cross-defendant pleaded that he had sought the cross-claimant's instructions as to the existence of any easements or any notices from Council that affected the property and that in response he had not been informed of the pipe or of Council's claims over it. In evidence at trial the cross claimant did not deny that a phone conference with the cross-claimant concerning requisitions had taken place. Rather, he claimed not to recollect the terms of the conference: see [430]-[436] of the principal judgment. Not being in a position to deny that the cross-defendant had sought instructions upon which to answer the requisitions and knowing full well, as he admitted at trial, that he had told Mr Lukas nothing of the pipe or of Council's claims over it, the cross claimant could not conceivably sustain his allegation of professional negligence. The position described by the cross-claimant in his evidence at trial was that he expected Mr Lukas to tell him "what my obligations to disclose are", while not informing the solicitor of features of the property that were self-evidently significant impairments and that the cross-claimant himself regarded as such. The claim that the solicitor was negligent in failing to advise the cross-claimant to disclose to the purchaser matters upon which the solicitor was not instructed was unsustainable from the outset. In effect, that is what was pointed out to the cross-claimant in the letter covering the offer of compromise. 4. For such a conspicuously unmeritorious cross-claim, the offer of 13 March 2018 to forgo party/party costs to that date, with a value in the order of $40,000, was, objectively, calculated to achieve a compromise. I find no sufficient reason to deny the cross-defendant his prima facie entitlement to indemnity costs in accordance with r 42.15A(2) of the UCPR. Plaintiff's application for indemnity costs 1. The plaintiff filed a notice of motion on 11 December 2020 seeking that her costs, payable by the first and second defendants pursuant to orders 2 and 3 made on 23 November 2020, be assessed on the indemnity basis. The first defendant responded with written submissions and an affidavit, both: 22 February 2021. The second defendant filed submissions on 19 February 2021 in opposition to the plaintiff's claim for indemnity. On 10 March 2021, by email to my associate and to the other parties, the plaintiff advised that she would not press her application. The defendants have asked for orders that the notice of motion filed 11 December 2020 be dismissed and that the plaintiff pay their costs of the motion. The plaintiff does not oppose an order against her with respect to those costs and orders will therefore be made as the defendants ask. Orders 1. The following orders will be entered: 1. The cross-defendant's costs pursuant to order 6 made on 23 November 2020 are to be assessed on the ordinary basis up to and including 13 March 2018 and on the indemnity basis from and including 14 March 2018. 2. The plaintiff's notice of motion filed 11 December 2020 is dismissed. 3. The plaintiff to pay the defendants' costs of the notice of motion filed 11 December 2020. ********** 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: 22 March 2021