Supreme Court New South Wales Medium Neutral Citation: In the matter of Beverage Freight Services Pty Ltd [2022] NSWSC 1040 Hearing dates: On the papers Date of orders: 03 August 2022 Decision date: 03 August 2022 Jurisdiction: Equity - Corporations List Before: Williams J Decision: See paragraph [49] Catchwords: COSTS – no issue of principle Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW) rr 20.26, 42.15A Cases Cited: Coffey v Murrumbidgee Local Health District [2020] NSWSC 80 Croghan v Blacktown City Council [2019] NSWCA 248 In the matter of Beverage Freight Services Pty Ltd [2020] NSWSC 509 In the matter of Beverage Freight Services Pty Ltd [2020] NSWSC 797 In the matter of Beverage Freight Services Pty Ltd [2020] NSWSC 861 In the matter of Beverage Freight Services Pty Ltd [2020] NSWSC 973 In the matter of Beverage Freight Services Pty Ltd [2022] NSWSC 874 J & E Vella Pty Ltd v Hobson [2020] NSWCA 188 Perisher Blue Pty Ltd v Nair-Smith (No. 2) [2015] NSWCA 268 Toyota Finance Australia Ltd v Gardiner (No. 2) [2016] NSWCA 181 Vale v Eggins (No. 2) [2007] NSWCA 12 Category: Costs Parties: J and E Vella Pty Ltd (ACN 077 719 049) (First Plaintiff) Joseph Gregory John Vella (Second Plaintiff) Brian Charles Hobson (First Defendant) Hynadam Pty Ltd (ACN 002 478 828) (Second Defendant) Brett Soper (Third Defendant) Mechita Pty Ltd (ACN 063 519 915) (Fourth Defendant) Beverage Freight Services Pty Ltd (ACN 097 919 769) (Fifth Defendant) Beverage Distribution Australia Pty Ltd (ACN 160 140 287) (Sixth Defendant) Hynadam Nominees Pty Ltd (ACN 160 135 900) (Seventh Defendant) McIntyre Holdings NSW Pty Ltd (ACN 160 137 271) (Eighth Defendant) Representation: Counsel: Mr G Sirtes SC with D Birch (Plaintiffs) Ms M Castle (Defendants) Solicitors: Yates Beaggi Lawyers (Plaintiffs) McEvoy Legal (Defendants) File Number(s): 2015/157614 Publication restriction: N/A Judgment Introduction 1. Judgment was delivered in these proceedings on 1 July 2022 dismissing the plaintiffs' claims: In the matter of Beverage Freight Services Pty Ltd [2022] NSWSC 874. These reasons concern the costs of the proceedings, which were reserved [1] for determination on the papers after consideration of written submissions that the parties were given an opportunity to provide. Familiarity with the principal judgment and the defined terms used therein is assumed. Summary of parties' submissions in relation to costs 1. I have now considered the written submissions provided by the plaintiffs and by the defendants on 15 July 2022 and 25 July 2022, further written submissions provided by the plaintiffs on 26 July 2022 and a responsive submission provided by the defendants on 29 July 2022. 2. The plaintiffs accept that costs should follow the event and that there should therefore be an order requiring them to pay the defendants' costs of the proceedings, as agreed or assessed. They submit that the defendants' costs should be paid on the ordinary basis. 3. The defendants submit that the plaintiffs should pay their costs on the ordinary basis up to and including 26 October 2017 and on an indemnity basis thereafter by reason of the plaintiffs' failure to accept a formal offer of compromise, or alternatively a Calderbank offer, made by the defendants on 26 October 2017. 4. The defendants' offer of compromise was for settlement of all claims in the proceedings on terms that there would be judgment against the first to fourth and sixth defendants in the sum of $300,000 in favour of the plaintiffs, the proceedings would be otherwise dismissed and the plaintiffs would release the defendants from the claims in the originating process and statement of claim. 5. The plaintiffs accept that the offer of compromise was a valid offer under r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) and that, in light of the outcome of the proceedings, the defendants are prima facie entitled to an order for their costs on an indemnity basis from 27 October 2017 in accordance with r 42.15A. 6. However, as the plaintiffs submitted, the making of a valid offer of compromise does not guarantee an indemnity costs order and the Court retains a discretion to order otherwise: r 42.15A(2); Toyota Finance Australia Ltd v Gardiner (No. 2) [2016] NSWCA 181 at [14]. 7. The plaintiffs correctly accept that they bear the onus of persuading the Court to exercise that discretion in their favour: Perisher Blue Pty Ltd v Nair-Smith (No. 2) [2015] NSWCA 268 (Perisher Blue) at [28] and the authorities there cited. 8. I proceed on the basis that the discretion is to be exercised having regard to all of the circumstances in which the offer of compromise was not accepted and in a manner that reflects the purpose of r 42.15A, which is to encourage the proper compromise of litigation (in the private interests of individual litigants and in the public interest) and to oblige the offeree to give serious thought to the risk involved in non-acceptance of the offer: Perisher Blue at [32]-[38]; Croghan v Blacktown City Council [2019] NSWCA 248 at [11]-[14] and [20]. 9. The plaintiffs submitted that the Court should exercise the discretion under r 42.15A(2) in their favour because: 1. they lacked sufficient information at the time of the offer to make a decision about the quantum of their claim and to assess whether the defendants' offer involved a genuine element of compromise; and 2. the case changed significantly after the date of the offer and it would be inappropriate to order indemnity costs having regard to the case at the time that the offer was made and remained open for acceptance. 1. In support of their submission that they lacked sufficient information to make a decision about the quantum of their claim at the time of the offer, the plaintiffs rely on the following matters: 1. the offer of compromise was made some three and a half years prior to the final hearing; 2. the evidence was not complete on either side at the time of the offer. The defendants had served their lay evidence in August 2017 and the plaintiffs did not serve their lay evidence in reply until February 2021. Neither party had served expert evidence; and 3. the plaintiffs did not obtain until about March 2019 discovery of all of the documents relating to BDA that they required for the preparation of an expert report in support of their claim for an account of profits and/or equitable compensation in relation to the alleged diversion of work from BFS to BDA. 1. In support of their submission that the case changed significantly after the date of the offer, the plaintiffs cite: 1. the prayer in their originating process filed on 24 May 2015 for leave to bring proceedings on behalf of and in the name of BFS in respect of alleged breaches of fiduciary duty owed by Mr Brian Hobson and Mr Brett Soper to BFS. The plaintiffs submit that it was not until 29 November 2019 that they were refused leave to bring the derivative claims and that this was an important factor in the ultimate outcome of the proceedings; 2. the defendants' lay evidence served in August 2017 revealed that BDA's contracting arrangements with Schweppes had been replaced by a subcontract between BDA and Toll, which resulted in amendments to the plaintiffs' claims that were made pursuant to leave granted by the Court of Appeal in August 2020; and 3. the state of the evidence and discovery at the time of the offer, as referred to above. 1. The defendants submit that, at the time of the offer, the plaintiffs had sufficient information to value their claim, including financial and business records of BFS that the plaintiffs' accountant had reviewed in September 2013. 2. The defendants dispute that the case changed after October 2017 in any way that is relevant to the exercise of the discretion under r 42.15A(2). Consideration and determination 1. The following relevant matters emerge from the Court file and the material referred to in the parties' submissions. 2. The proceedings were commenced by originating process filed on 27 May 2015. 3. Orders for the filing of a statement of claim and defence were made on 16 June 2015. 4. During the remainder of 2015, several extensions of time were granted to the plaintiffs to serve their lay evidence. The plaintiffs ultimately served an affidavit of Michael Vella sworn on 4 December 2015 that was subsequently read at the final hearing in May and June 2021. The plaintiffs also served an affidavit of their accountant, Mr Peter Donkin, dated 8 December 2015 in relation to the quantum of their claims. It will be necessary to say something further about that affidavit below. 5. There were several extensions of time granted to the defendants to serve their lay evidence, which was ultimately served in about mid-2016. 6. On 27 October 2016, orders were made for the plaintiffs to serve any further lay evidence on which they sought to rely by 9 December 2016 and for the defendants to serve any responsive evidence by 28 February 2017. The plaintiffs' further lay evidence was served late in about February 2017. The defendants were granted several extensions of time and ultimately served most of their responsive lay evidence in August 2017 with two further affidavits served in September and October 2017. The defendants' responsive evidence was not voluminous, comprising six affidavits with a total length of approximately 85 pages (excluding annexures and exhibits in the order of about 150-200 pages). 7. On 19 June 2017, an order was made by consent for the plaintiffs to file and serve by 24 July 2017 any interlocutory process seeking orders for discovery. No such interlocutory process was filed until October 2017. 8. Ms Danielle Gleeson, a solicitor who was then responsible for the day to day conduct of the proceedings on behalf of the plaintiffs under the supervision of the solicitor on the record, affirmed an affidavit on 17 October 2017 in relation to the plaintiffs' application for discovery. Ms Gleeson deposed: "The Plaintiffs have served an Affidavit of Peter Donkin dated 8 December 2015 in the proceeding, being an accountant's report on quantum. As Mr Donkin is still acting for the Plaintiffs as their accountant, the Plaintiffs do not intend to rely upon his report at Final Hearing. The Plaintiffs will engage an independent forensic accountant … Mr Donkin's report provides preliminary evidence as to the quantum of the Plaintiffs' claim against the Defendants. He opines that the Vella Interests have lost approximately $1 million for each year they no longer earned income from the Cadbury Schweppes contract because it was diverted from the Company to BDA in September 2012. Between September 2012 and September 2017, that would equate to approximately $5,000,000 in lost income." 1. A copy of Mr Donkin's affidavit sworn on 8 December 2015 was annexed to Ms Gleeson's 17 October 2017 affidavit. Mr Donkin's affidavit annexed his report sent to the plaintiffs' solicitors dated 10 September 2013. It is clear from Mr Donkin's affidavit and that report that he had been asked to address the turnover and losses of any new venture established after 30 June 2012 based on the turnover and losses of BFS in prior years, and to extrapolate from that the income that he considered the plaintiffs were likely to have lost by reason of not participating in a new venture from August 2012. Mr Donkin's opinions about that issue were summarised in Ms Gleeson's affidavit as referred to above. 2. The defendants made the offer of compromise on 26 October 2017. 3. Orders were made by consent on 15 December 2017 requiring the defendants to discover some of the categories of documents sought by the plaintiffs. 4. Various disputes between the parties about the defendants' discovery persisted throughout 2018. The service of the first report of the plaintiffs' expert forensic accountant was delayed until February 2019 and a supplementary report was served in September 2019. 5. As identified in the plaintiffs' costs submissions, the defendants' lay evidence that was served in August 2017 revealed that BDA's contracting arrangements with Schweppes had been replaced in 2015 by a sub-contract between BDA and Toll, with Toll being the freight contractor to Schweppes. More than two years later, the plaintiffs filed an interlocutory process on 30 October 2019 seeking leave to amend their statement of claim, including by introducing a new claim for relief in respect of the alleged expropriation from BFS of the contract with Toll or the opportunity to contract with Toll (the Toll amendments). 6. The plaintiffs' application for leave to amend was heard on 11 November 2019. At the same time, the plaintiffs indicated that they wished to agitate their claim in the originating process filed on 27 May 2015 for leave under s 237 of the Corporations Act 2001 (Cth) to prosecute on behalf of BFS claims against Mr Brian Hobson and Mr Brett Soper for alleged breaches of directors' duties owed to BFS (inter alia) allegedly expropriating from BFS its contract with Schweppes. The relief claimed for BFS included a declaration that benefits derived by the defendants from the alleged breaches were held on constructive trust for BFS, an account of profits and equitable compensation. The plaintiffs had taken no steps to press their application for leave under s 237 since filing their originating process on 27 May 2015 four and a half years earlier. 7. At the hearing on 11 November 2019, Black J delivered an ex tempore judgment granting leave to make the proposed amendments save for the Toll amendments in respect of which leave was refused. 8. Immediately after his Honour delivered that judgment, senior counsel for the plaintiffs successfully applied for their s 237 application to be adjourned to enable him to take instructions about whether the plaintiffs wished to press that application "[b]ecause of what has fallen from your Honour". The transcript does not record any observations having been made by Black J about the substance or merits of the s 237 application. 9. On 29 November 2019, the Court made orders by consent dismissing the plaintiffs' application for leave under s 237 of the Corporations Act to prosecute the proceedings on behalf of BFS. 10. The plaintiffs submitted that the decision not to press the s 237 application was made as a consequence of the Court's refusal to grant leave to amend in respect of the Toll amendments. The plaintiffs did not articulate the connection between refusal to grant leave in respect of the Toll amendments and the plaintiffs' decision not to pursue their s 237 application. The connection is not apparent to me from the transcript of the hearing on 11 November 2019 or from the reasons for judgment delivered by Black J on that day. I note that the plaintiff pressed the Toll amendments in an appeal, yet abandoned their s 237 application. The plaintiffs succeeded in the appeal on 24 August 2020 but did not seek to make any fresh application under s 237 thereafter: J & E Vella Pty Ltd v Hobson [2020] NSWCA 188. 11. Disputes about the plaintiffs' discovery had emerged by early 2020. There were a series of hearings during March, April and May 2020 concerning whether the proceedings should be summarily dismissed by reason of the plaintiffs' non-compliance with orders and directions of the Court in relation to the plaintiffs' discovery, which had in turn delayed the defendants' preparation of their expert evidence. That became a drawn out process due to the Court acceding to several requests by the plaintiffs to adjourn the summary dismissal hearing. The proceedings were not summarily dismissed in circumstances where the plaintiffs rectified their non-compliance during the course of those adjournments. The plaintiffs were ordered to pay the defendants' wasted costs of and incidental to the plaintiffs' non-compliance with the discovery orders on an indemnity basis forthwith: see In the matter of Beverage Freight Services Pty Ltd [2020] NSWSC 509. The Court made a gross sum costs order in respect of those costs on 3 July 2020 following contested hearings about that matter: In the matter of Beverage Freight Services Pty Ltd [2020] NSWSC 797; In the matter of Beverage Freight Services Pty Ltd [2020] NSWSC 861. 12. The proceedings were stayed from 27 July 2020 until 15 December 2020 for the plaintiffs' failure to pay the defendants' costs in accordance with the gross sum costs order referred to above: In the matter of Beverage Freight Services Pty Ltd [2020] NSWSC 973; In the matter of Beverage Freight Services Pty Ltd, unreported, Supreme Court of New South Wales, Black J, 15 December 2020. 13. The stay of the proceedings at first instance was discharged on 15 December 2020 and orders were made for the plaintiffs to file and serve a further amended statement of claim in accordance with the leave that had been granted by the Court of Appeal in respect of the Toll amendments on 24 August 2020: J & E Vella Pty Ltd v Hobson [2020] NSWCA 188. 14. After a series of further interlocutory hearings during the period from January to April 2021, the final hearing commenced on 4 May 2021. 15. I reject the plaintiffs' submissions that the discretion to depart from the ordinary consequences under r 42.15A(2) should be exercised in their favour on the basis that they lacked sufficient information to make a decision about the quantum of their claim at the time of the defendants' offer of compromise made on 26 October 2017 and/or that the case changed significantly after that date in a manner that would render it "inappropriate" for the plaintiffs to be required to pay the defendants' costs on an indemnity basis from 27 October 2017. 16. The plaintiffs emphasised that the offer of compromise was made some three and a half years prior to the commencement of the final hearing. As the chronology set out above demonstrates, that is largely reflective of the parties' delays in preparing the matter for trial rather than indicative of a complexity that might have hindered the plaintiffs' ability to assess the defendants' offer as at 26 October 2017. 17. The defendants completed the bulk of their lay evidence in August 2017, which I accept is not a long period of time prior to the offer. However, as I have already mentioned, that lay evidence was not voluminous. It supplemented lay evidence served by the defendants in about mid-2016 and responded to the plaintiffs' further lay evidence in chief served in February 2017. 18. It is not clear from the plaintiffs' submissions precisely what they seek to make of the fact that they did not serve their lay evidence in reply in February 2021. I do not regard that delay as relevant to the exercise of the discretion under UCPR r 42.15(2A). The substance of the evidence of Mr Michael Vella, Mr Joseph Vella and Mrs Elizabeth Vella that the plaintiffs ultimately served in reply in February 2021 must have been known to the plaintiffs in October 2017. 19. I accept that the information available to the plaintiffs to quantify their claim as at October 2017 was limited to financial information concerning BFS and that there were some gaps in that information. However, notwithstanding those gaps, Mr Donkin expressed the opinions that I have referred to above. In circumstances where the plaintiffs were alleging that substantially the whole of the business BFS had been "expropriated" from BFS and BDA, the financial records of BFS provided a rational basis for estimating the likely financial performance of BDA and the likely value of the plaintiffs' claim. That presumably explains why the plaintiffs were content to serve Mr Donkin's affidavit on the defendants in December 2015 in support of their contention that their claims had a value of approximately $1,000,000 per annum after the formation of the new venture in August 2012. 20. It was possible at the time of the offer for the plaintiffs to assess the risk that, irrespective of whether they subsequently obtained leave to prosecute the claims pleaded on behalf of BFS, their claims would fail on the basis of the Ingleburn meeting. It was plain at the time of the offer that the Ingleburn meeting was a critical issue in the proceedings. The risk of the plaintiffs' claims failing if the defendants' contentions about the outcome of the meeting were ultimately accepted was expressly identified in the defendants' covering letter serving the offer of compromise. All of the evidence concerning the Ingleburn meeting had been served by October 2017, save for any reply to the defendants' evidence to be made by Mr Michael Vella and Mr Joseph Vella who were present at the meeting. The substance of the further evidence that they would give about the meeting was known to the plaintiffs as at October 2017. 21. For those reasons, I consider that the plaintiffs had sufficient information as at October 2017 to assess the defendants' offer, to determine that the offer did involve a genuine compromise by the defendants in circumstances where they denied any liability to the plaintiffs on the basis of (inter alia) the Ingleburn meeting, and to make a decision whether to accept the offer having regard to the plaintiffs' assessment at that time of their prospects of success and of the likely value of their claims if they did succeed. The stage at which the defendants' offer was made, (two and half years after the commencement of the proceedings at a time when the parties had served their lay evidence and the plaintiffs had served some evidence as to quantum) did not require the plaintiffs to engage in an unacceptable degree of speculation in considering the offer. The possibility that the plaintiffs' view of the quantum of their claim would change following discovery and expert evidence does not warrant a departure from the prima facie position under r 42.15A(2), in my opinion. The facts of this case distinguish it from Coffey v Murrumbidgee Local Health District [2020] NSWSC 80, which was cited by the plaintiffs but which turned on its own very different facts. 22. I do not consider that changes to the case after October 2017 warrant the exercise of the discretion to depart from the prima facie position under r 42.15A(2). 23. As at October 2017, the plaintiffs had taken no steps to obtain the necessary leave to prosecute the derivative claims set out in their originating process filed almost two and half years earlier in May 2015. In would be inconsistent with the purpose of r 42.15A if the plaintiffs' own decision in November 2019 not to pursue that application for leave were to result in an exercise of the discretion under sub-rule (2) in the plaintiffs' favour. 24. For the reasons already explained at [41] above, the Toll amendments made after October 2017 to reflect the fact that BDA's Schweppes delivery work after 2015 was conducted as a sub-contractor to Toll which held the freight contract with Schweppes. This case is distinguishable from Vale v Eggins (No. 2) [2007] NSWCA 12, which was cited by the plaintiffs and which concerned a significant change to the offeror's expert evidence on liability shortly before the trial and after the expiry of the period for acceptance of the offer of compromise. Conclusion and orders 1. For all of the foregoing reasons, the matters relied on by the plaintiffs do not warrant an exercise of the Court's discretion to depart from the ordinary consequences under r 42.15A(2) of non-acceptance of an offer of compromise. 2. It is not necessary to address the parties' submissions in relation to the alternative Calderbank offer. 3. The orders of the Court are as follows: 1. Subject to order (2) below, order the plaintiffs to pay the defendants costs of the proceedings: 1. on the ordinary basis up to and including 26 October 2017; and 2. on an indemnity basis on and from 27 October 2017, in such amount as may be agreed or assessed. 1. Order 1 does not apply to those costs in respect of which the Court has previously made specific costs orders. ********** Endnote 1. To the extent not covered by specific orders made previously. 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