New South Wales Supreme Court CITATION : Walter Construction v Walker Corporation [2001] NSWSC 359 CURRENT JURISDICTION: Equity Division Commercial Lisr FILE NUMBER(S) : SC 55028/98 HEARING DATE(S) : 27.4.01 JUDGMENT DATE : 4 May 2001 PARTIES : Walter Construction Group Ltd -v- Walker Corporation Ltd JUDGMENT OF : Hunter J COUNSEL : Plaintiff: M A Pembroke SC, P Liney Defendant: L G Foster SC, K Williams SOLICITORS : Plaintiff: Corrs Chambers Westgarth Defendant : Baker & McKenzie CATCHWORDS : Practice and Procedure - costs - Calderbank offer to several defendants - application for indemnity costs - offer only capable of joint acceptance - time for acceptance limited - highly complex issues in proceedings. Archer v Archer (No.2) [2000] NSWCA 315 (9 November 2000, unreported) Clarke v Beverstock (Handley JA, 4 February 2000, unreported) CASES CITED : MGICA (1992) Ltd v Kenny & Good Pty Ltd (No2) (1996) 70 FCR 236 Oxlade v Gosbridge Pty Ltd (No2) [1999] NSWCA 165 Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No2) [1999] NSWCA 133 (21 May 1999, unreported) DECISION : Application for indemnity costs rejected. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST HUNTER J FRIDAY 4 MAY 2001 55028/98 WALTER CONSTRUCTION GROUP LIMITED -v- WALKER CORPORATION LIMITED & ORS REASONS FOR JUDGMENT 1 In these reasons I have used the terminology adopted in the principal judgment. 2 On 20 April 2001 judgment was given in this matter in favour of CCG against WCL in the sum of $17,514,521 inclusive of interest up to and including 19 April 2001. The judgment was based on the referee's finding that CCG was entitled to be compensated as on a quantum meruit in the sum of $13,970,177, a sum which was calculated after making allowance for defect rectification costs of $3,086,311. 3 In the calculation of the judgment sum, allowance was also made for unliquidated damages amounting to $294,034, in accordance with the findings in the report. The damages were largely made up of stock losses and business interruption suffered by retailers in the shopping centre arising out of water damage for which CCG was held responsible. On that basis, the first cross-claim was dismissed with costs as recommended by the referee. 4 In brief, CCG succeeded in respect of the major part of its claim, namely its quantum meruit claim arising out of the repudiation of the agreement by WCL. There is no reason why WCL should not pay CCG's costs of the proceedings. 5 However, CCG seeks an order that those costs be assessed on an indemnity basis from 3 December 1999, that being the date of a Calderbank offer made by it to the first, second, third and fifth defendants (the Walker defendants). The offer was made by facsimile to the solicitors for the Walker defendants in the following terms: " WITHOUT PREJUDICE SAVE AS TO COSTS … We are instructed that our client is prepared to settle proceedings No 55028 of 1998 on the following terms and conditions: 1. Payment by the First, Second, Third and Fifth Defendants to the Plaintiff of the sum of $15 million inclusive of interest. 2. Payment by the First, Second, Third and Fifth Defendants to the Plaintiff of the Plaintiff's costs of the proceedings to be assessed if not agreed. 3. Immediate return by the First Defendant of the Plaintiff's four bank guarantees. 4. All cross-claims to be dismissed. This offer shall remain open for a period of seven (7) days from the date of this letter." 6 That offer was not accepted. However, on 8 December 1999, the solicitors for the Walker defendants made the following offer by facsimile to CCG's solicitors: " Without prejudice except as to costs … We are instructed by the First, Second, Third and Fifth Defendants ("the Defendants") to make the following offer in full and final settlement of all claims made in the Third Further Amended Summons and Further Amended First Cross Claim. (a) the First Defendant pay the Plaintiff the sum of $6,300,000 (inclusive of interest); (b) the First Defendant pay the Plaintiff's agreed or assessed legal costs on a party/party basis up to and including the date of this letter; (c) the First Defendant will release the Plaintiff's four bank guarantees; and (d) dismissal of the First Defendant's Further Amended First Cross-Claim. This offer is open for acceptance only until 5.00pm on Wednesday, 15 December 1999 and will lapse thereafter. This settlement offer is made without prejudice except as to costs. If the Plaintiff does not accept this settlement offer, the Defendants reserve the right to rely on this letter in any argument in relation to the costs of this proceeding." 7 I think it is unrealistic to view those offers in isolation. To begin with, the Walker defendants were represented throughout the proceedings by the one set of legal representatives. Further, it is admitted on behalf of those defendants that the second, third and fifth defendants enjoyed the benefit of an indemnity by WCL in relation to their liability, if any, to CCG in the proceedings. 8 Those offers followed by a special sitting of the reference, attended by the principal officers of CCG and WCL, held for the purpose of outlining to them, in some detail, the nature and relationship of each of the several disputes and the quantum in issue. It was an informal exercise in preparing the ground for settlement of what was, undoubtedly, an extraordinarily complex set of issues, both of fact and of law. 9 The referee's outline was a careful and useful description of the disputes, without expressing any views as to the likely outcome of any of them. 10 For example, in relation to the quantum meruit claim the referee expressed the matter thus: "One way in which the plaintiff puts the case is to say, "We have a claim under the contract. The contract sum is $83m." We know that's right. They say, "We want variations to which we're entitled of another $7m, making a total of $90m. We have been paid $75m. Therefore, the plaintiff says we want $15m." In addition, they say, "We want interest" and that would be in the order, I imagine, of $2m to $3m by now. They have fairly unspecified acceleration costs and time related costs. In the order of magnitude, it is a claim for some $18m-odd plus the cost of the litigation. Those costs must now be several million dollars. The only uncertainty on that claim, assuming it is legally sound, which it may or may not be, I haven't heard argument about it, the only uncertainty in those figures is the question of how much the variations are. … The variations resolve into three segments: the first I shall call general variations, which are variations increasing or decreasing the contract price. We've had a team of people working on those. They are agreed. I think I'll be told the figure today or tomorrow, but it is in the order of $1m or slightly more in favour of the plaintiff. The second aspect of variations are what I've called the electrical variations, and the amount in dispute there is in the order of $1m, perhaps a little more. That has not been resolved. It is in the process of being resolved. I hope it will be resolved next week. If it is not, I will endeavour to resolve it before Christmas, or at least hear all the evidence and then go away and write about all that. The third variation is the so-called Hoyts variation, the change from the eight complex to the 12 complex of theatres. Both sides have engaged quality surveyors. The difference between the quantity surveyors is the plaintiff's quantity surveyor says the figure is about $3.4m, Walker's quantity surveyor says the figure is about $500,00. So there is about a $3m swing in that. In relation to that, we all know that at some point of time a deal was done in relation to the Hoyts variation at $2.225m, but that was to include an acceleration claim of some $400,000 and what are called the electrical variations. That came unstuck because the underlying assumption of agreement about the electrical variations proved not to be so. In the order of things, there is a $1m general variations, $1m electrical variations, and that is an uncertain figure, and there's somewhere between a half and $3.5m. So we're talking in the order of somewhere between $1m and $5 million for variations is likely to be the outcome. That, you might think, resolved the first equation that I put to you. But then the defendant says, "You're not entitled to that 15 or adjusted for variations for a number of reasons." Principally, they are two. The first is that the defendant says the works were both incomplete and defective and it particularises claims for rectification of the works. The figures that have been given to me show a claim for rectification of defective works of about $9m, and a claim for responding to retailer's claims and damages due to the leakages that occurred in the building of another $3m; a total of some $12m. Secondly, because they say, "You're not entitled to that sum because we are entitled to liquidated damages." Practical completion was certified, I think on 9 October 1998 and the claim is that the developer is entitled to liquidated damages at about $54,000 a day from mid-March to mid-October, a figure in the order of $9m. They say $9m rectification costs, $9m liquidated damages, $3m tenancy claims, a round figure of $21m. If those claims all succeeded by way of defence or set-off or cross-claim, however they are pleaded, you would then have rather than the plaintiff succeeding with a claim in the order of $18m, the defendant succeeding with a claim in the order of $3m, and whoever succeeds will be likely to have an order for costs in their favour. You have a swing of about $21m. That's the area at which both parties are at risk." (T 2299:6- T 2299:21, T 2299:29- T 2300:57) 11 That is only a portion of the fairly extensive explanation of the litigation provided by the referee. The referee rounded up his description of the issues with the following : "The issue of rectification of defects and the cost is significant. Unless it is resolved commercially I would foresee that I will be sitting here in March hearing it. That will involve the parties in very significant cost. Whoever loses the litigation, somewhere in that swing of $21m that I referred to initially, will be picking up several million dollars in a costs order as well. That is the future ahead of you if you reach a decision that it cannot be resolved commercially. I have been engaged in construction litigation now, as a junior counsel, a Silk for 14 years and a judge for 10, for about 40 years and I can say to you that I've learnt at least four things: one is that sensible commercial people seek to avoid or minimise unnecessary risk. Risk is always involved but unnecessary risk. You have to consider whether you are at a stage, each of you, where unnecessary risk is imposing itself on you. The second thing is that I've learnt is litigation is a most uncertain, expensive, disruptive and unproductive activity from a commercial point of view. The third thing I have learnt is that many matters which are capable of commercial resolution are not resolved because of an unwillingness by one party or the other, because it is thought to be a sign of weakness, to open discussions. When I was a judge it was my function, I thought, which I implemented, to make sure there was an opportunity created where, or indeed an obligation imposed almost, whereby people were brought together to try and discuss it. … The fourth thing that I have learnt is that in litigation of this dimension it is necessary for the ultimate decision makers to become involved to produce a resolution. There may be matters of detail which can be passed down the line, but at the end of the day it is the senior executives who have to make the decision, and they have to be heavily involved in it. … I will decide this case, but before I do so I want to be sure that, firstly, there is a full appreciation of the risks involved in the litigation and, secondly, that a conscious decision has been made by each of you that you see it as being in your interests to have the litigation continue to a conclusion rather than to resolve it commercially. … If you think there is merit I would suggest that you try and lay down some fairly concrete timetable to try and put an end time on it and then perhaps come back and either personally or through your advisers let me know what the outcome of that is." (T 2307:13-T 2307: 53, T 2308:4 -T 2308:12, T 2308:23- T 2308:30, T 2309:6 -T 2309:11) 12 That sitting took place on 2 December. I think it is clear that CCG's offer of 3 December 1999 was one setting its parameter for settlement discussions and probably, made in anticipation of a mediation which, eventually, was arranged for 15 December 1999. 13 I think the offer of the Walker defendants of 8 December should be viewed in a similar light. I think that much is demonstrated by the content of the facsimile of the Walker defendants' solicitors to the solicitors for CCG of 10 December 1999 which was in the following terms: "I confirm our agreement this afternoon in relation to Wednesday's mediation meeting. The mediation will take place at your offices commencing 5.45pm. You will arrange for three rooms to be available, one mediation room and then one retiring room for each party. Your clients will be represented at the mediation by Mr Liney, Mr Perkins and Mr Finlay. Our clients will be presented by Mr Walker, Mr Hughes and Mr Rudge. We have forwarded a copy of pages 2298 to 2372 of the transcript of 2 December 1999 to Mr Morling, the mediator, this afternoon." 14 The pages of transcript referred to in that facsimile were the transcript of the special sitting of the referee on 2 December 1999 to which I have earlier referred. In brief, there was a fairly determined exercise undertaken by the referee on 2 December 1999 aimed at bringing the parties together to settle their disputes. That is followed immediately after by CCG's offer of 3 December, the Walker defendants' offer of 8 December and, two days later, the parties finalised the arrangement for a mediation on 15 December 1999. 15 In the absence of an indemnity in favour of the second, third and fifth defendants I would have no hesitation in rejecting the application of CCG on the basis that the offer was not capable of acceptance by any one of the defendants, a matter made more significant by the fact that the proceedings against the second, third and fifth defendants were dismissed (see Archer v Archer (No.2) [2000] NSWCA 315 (9 November 2000, unreported)). 16 My initial reaction to ascertaining the existence of an indemnity was that it counter-balanced the difficulty reflected by the joint nature of the offer. On further consideration, I do not think that approach is correct. 17 Nothing was said in the application for indemnity costs about the financial position of WCL, whether the indemnity was an effective umbrella for the second, third and fifth defendants. CCG's offer called for an acceptance by all the Walker defendants. Nothing was said in CCG's offer, nor in any of the other evidence before me, as to how that offer, if accepted, would be enforced; for example, by judgment or order of the Court. Undoubtedly, some obligatory form of payment of the offered sum would have been required. 18 I think something has to be drawn from the fact that CCG saw some value in imposing an obligation to pay the settlement sum on each of the Walker defendants. If it is correct to dismiss criticism of the offer as one only capable of joint acceptance in light of the indemnity, one would have to ask why CCG saw some value in imposing obligations upon the second, third and fifth defendants to pay the settlement sum. 19 While the Walker defendants did not respond directly to CCG's offer in terms and sought no clarification as to how the offer, if accepted, would be implemented, one does not know what was in contemplation by CCG, and, in particular, whether it required a judgment or order of the court against each of the Walker defendants. 20 I have come to the conclusion that, if the offer was only capable of acceptance jointly, it was done for a purpose and that purpose was presumably to provide CCG with the added security of having enforceable rights against each of those defendants. I think that reasoning represents a significant factor against acceding to CCG's application. 21 Moreover, I think fair criticism may be made of the time for which the offer was open, having regard to the extraordinary complexity of the litigation, the uncertainty attaching to the outcome of numerous issues and the amount in dispute, referred to by the referee as a "swing" of $21,000,000. Seven days I think was seriously inadequate, notwithstanding the absence of any request by the Walker defendants to have further time to consider. I think those criticisms of the offer hold good notwithstanding the adoption of a similar time frame in the Walker defendants' offer of 8 December. 22 The reality I think is this that, following the special meeting with the referee, the parties did fall in with his strong encouragement that they should investigate settlement and each responded by setting up the parameters upon which a mediation would take place. 23 While it is true to say that the amount to which CCG was adjudged entitled, after adjustment for interest, exceeded by approximately $500,000 the amount of the 3 December offer, I think that sum should be looked at in the context of the offer figure of $15,000,000. While the amount is not insignificant, I do not regard the exercise of the discretion as to costs in considering the effect of a Calderbank offer as one calling for some automatic imposition of indemnity costs where the amount of the judgment sum is greater than the settlement offer. I do not understand the remarks of Handley JA in Clarke v Beverstock (unreported, 4 February 2000) to require a different approach. 24 I am satisfied that there is no sufficient reason to depart from the usual order for costs. The offer was not one capable of acceptance by any one of the Walker defendants. It was an offer made in respect of a highly complex set of issues, the outcome of which was clouded with uncertainty. The time within which the offer was required to be accepted was inordinately inadequate. I think CCG's offer and the Walker defendants' offer were, essentially, first steps towards a mediation, evidenced by the fact that neither party responded directly to the other's offer. 25 I do not think one should lose sight of the fact that the outcome of the proceedings for CCG was quite favourable and rather imparts to the offer the characteristic of one which represented a settlement at the upper end of the range of what the plaintiff may have regarded as a good settlement. 26 While the desirability of a reasonable settlement should never be underestimated I would not regard the conduct of the Walker defendants in these proceedings as unreasonable in failing to accept CCG's offer. Had it been accepted, it would have been, for practical purposes, a capitulation by the Walker defendants, bearing in mind the magnitude of WCL's cross claim. As it happened the proceedings were dismissed against the Walker defendants other than WCL. 27 In MGICA (1992) Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236, I note that Lingren J, while acknowledging that the offer represented a "not insignificant concession of $542,692.20 as against total success", made a realistic appreciation of the offer as one that "must have been seen to offer virtually no compromise and to seek a virtual capitulation" (at 242). 28 The Court of Appeal considered a Calderbank offer in Oxlade v Gosbridge Pty Ltd (No 2) [1999] NSWCA 165. In that case Mason P considered the complexity of the subject issues in examining the failure of the offerees to accept the offer of compromise as follows: "Alternatively, the respondents submit that they were not unreasonable in failing to accept the offer of compromise because the case was not an easy one. They refer to the remarks of Sheppard AJA referring to the "paucity of the evidence led by the Appellant in relation to the question of breach of duty and causation". Bearing in mind that lying behind the rule is the common knowledge that "litigation is inescapably chancy" ( Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721 at 725), I do not think that the difficulty of the case provides a basis for rebuffing the rule in circumstances where continued stony silence was the response of the respondents to the appellant's overture." 29 I should not be seen to express different views from those of the President in Oxlade. The nature of the issues in that case pale into insignificance in comparison with the issues confronting the parties in these proceedings. 30 Rolfe J in Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 at 437- 452, dealt extensively with the authorities in which the discretion to order indemnity costs was considered. In concluding the analysis of those decisions His Honour expressed the proper approach to the exercise of the discretion in the following terms: "The Approach I endorse In my opinion the proper approach to take to an offer of compromise, whether made under the Rules or pursuant to a Calderbank letter, is that there should be a prima facie presumption in the event of the offer not being accepted and in the event of the recipient of the offer not receiving a result more favourable than the offer, that the party rejecting the offer should pay the costs of the other party on an indemnity basis from the date of the making of the offer. I proceed on the basis that the unreasonableness was the failure by the offeree to accept the offer, which unreasonableness is demonstrated, prima facie, by the ultimate result. This approach is consistent with the decisions to which I have referred, the policy evidenced by the Act and the Rules and the widely accepted philosophy that settlements should be encouraged. The relevant Rules provide that costs will be paid on the basis set out therein "unless the Court otherwise orders". My understanding is that the Court is required to proceed on the basis that it should make the order provided for by the Rules, unless the party rejecting the offer is able to establish good reason for having done so". (at 451) 31 Although I think the effect is the same, I prefer to express the exercise of the discretion as one in which the onus is on the applicant to show why, in all of the circumstances, the ordinary costs rule should not apply and why the court should "otherwise order". It may be that in some, if not most cases, the rejection of a Calderbank offer in proceedings in which the outcome to the offeree is less advantageous will be sufficient evidence to show why indemnity costs should be awarded. However, in my view, that exercise of discretion will always be dependent upon the circumstances of the case, with the onus resting upon the applicant to show why the court should depart from the usual order by imposing indemnity costs. 32 Whether that involves departure from conventional wisdom as revealed in the authorities is of no consequence in this case for the reason that I am satisfied that the Walker defendants were neither unreasonable nor imprudent in rejecting CCG's Calderbank offer. Further, I think the way I have approached the factual considerations in the exercise of this discretion, is in keeping with that adopted by the Court of Appeal in Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No 2) [1999] NSWCA 133 (21 May 1999, Unreported) 33 In referring to Nobrega I do not intend to adopt the proposition that it must be shown that the rejection of the subject offer was clearly or plainly unreasonable. The question is whether, in all of the circumstances, the rejection of the offer was unreasonable or imprudent, so as to call for the imposition of indemnity costs. 34 There is no justification in my view for requiring anything other than the ordinary standard of proof as to reasonableness or prudence in relation to the offeree's conduct, particularly when regard is had to the policy considerations underpinning the exercise of the Court's discretion. 35 For those reasons I decline to make any further order as to costs of the proceedings. The plaintiff is to pay the first defendant's costs of the hearing of 27 April 2001. ************ Last Modified: 05/10/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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