New South Wales Supreme Court CITATION : Jiwunda & Anor v Trustees of the Travel Compensation Fund (No 2) [2006] NSWSC 803 HEARING DATE(S) : 3 August 2006 JUDGMENT DATE : 3 August 2006 JURISDICTION : Equity Division JUDGMENT OF : Palmer J EX TEMPORE JUDGMENT DATE : 08/03/2006 DECISION : Defendants ordered to pay interest at contractual rate; orders as sought by plaintiffs. CATCHWORDS : CONTRACT – Whether oral agreement made varying terms of agreement for lease – whether defendants obliged to pay interest on cost of making good premises at rate stipulated in lease agreement. - COSTS – INDEMNITY – Whether plaintiffs' Calderbank letter of offer was a genuine offer of compromise. Jiwunda Pty Ltd – First Plaintiff PARTIES : Terabu Pty Ltd – Second Plaintiff The Trustees of the Travel Compensation Fund – Defendant FILE NUMBER(S) : SC 2308/04 COUNSEL : S.Y. Reuben – Plaintiffs H. Moss – Defendant SOLICITORS : Pitcher Walton – Plaintiffs McCabe Terrill – Defendant 1 I delivered my reasons for judgment in this matter on 27 July 2006. I directed that the parties bring in Short Minutes of Order to reflect my reasons for judgment. Today, the parties have argued a number of points which have arisen as to the orders which should be made. These reasons should be read with the reasons for judgment published earlier. Interest on rental arrears 2 The first question is whether outstanding arrears of rent fall within Clause 9.4 of either the lease which expired on 31 March 2001 or of an Agreement for Lease which I have held came into existence on 12 March 2001. If the answer is yes, then arrears of rent will carry interest at the rate provided in Clause 9.4. 3 It seems to me to be clear that Clause 9.4, which was a clause of the lease existing as at 12 March 2001, was incorporated as a term of the Agreement for Lease which came into existence at that date. What happened, so I have held, was that there was an agreement between the parties to grant a new lease in the same terms as would have been the case had the option to renew, which had then expired, been validly exercised by the Defendants. Had the option to renew been validly exercised then, of course, the terms of the prior lease would have been incorporated into the new lease. It seems to me, therefore, that it does not really matter when construing Clause 9.4 whether one says that the arrears of rent are payable under the former lease, that is, the lease that expired on 31 March 2001, or under the lease which came into existence on 12 March 2001, because Clause 9.4 is to be found in both the former lease and the Agreement for Lease. 4 It follows that rental which was not paid pursuant to the Agreement for Lease which came into existence on 12 March 2001 is "outstanding arrears due" under Clause 9.4 of the terms of the Agreement for Lease which came into existence on 12 March 2001. Accordingly, arrears of rent carry interest at the rate stipulated in Clause 9.4. Interest on commission paid to leasing agent 5 The next issue is whether commission paid to the leasing agent by the Plaintiffs in order to find a tenant to replace the Defendants when the Defendants, in breach of the lease, vacated the premises, is money payable to the lessee "under the terms of the lease", being a payment falling within Clause 9.5 of the lease. In my opinion, the leasing agent's commission is an amount of money paid "in connection with a breach of the terms hereof" within the meaning of Clause 9.5 of the lease. 6 The commission to the leasing agent was incurred by the Plaintiffs in order to mitigate the loss flowing from the Defendants' breach of the terms of the lease. If a leasing agent had not been engaged and his commission incurred, the Defendants would have been justified in saying that the Plaintiffs had failed to take reasonable steps to mitigate the loss flowing from the Defendants' breach and, therefore, the loss ought not to be recoverable. It seems to me, therefore, that payment of the commission falls within the scope of the wide words "in connection with any breach" in Clause 9.5 of the lease. The Defendants' obligation to pay that money is, therefore, imposed by clause 9.5 and the moneys payable under clause 9.5 are payable "under the terms of the lease" for the purposes of clause 9.4 of the lease. The amount of the commission therefore attracts the rate of interest stipulated in clause 9.4. Interest on cost of making good 7 This issue, as it was first presented to me, is whether the Defendants should pay interest on the costs of making good the premises at the rate of twenty percent per anum, which is the rate fixed by Clause 9.4 of the Agreement for Lease which came into existence on 12 March 2001, or should pay interest at the rates provided in the Rules of Court. The issue was presented as one which was to be determined by construction of the Agreement for Lease alone. 8 However, the nature of the issue changed in the course of the submission by Mr Moss, who appears for the Defendants. Mr Moss submitted that the rate of the interest stipulated in Clause 9.4 applies only to "moneys payable by the lessee hereunder" and that the lease did not make the costs of making good the premises payable by the Defendants. In that respect, he referred to Clause 9.7 of the Agreement which relevantly provides: "Upon the expiration or sooner termination of the term of the Lease, the lessee will remove all the lessee's plants and equipment, fittings and fixtures and partitions installed in the demised premises by the lessee. Such removal to be at the lessee's own expense and will make good any damage or disfigurement caused to the demised premises thereby." Mr Moss' point was that these words simply conferred a right on the Plaintiffs as lessors: they did not in themselves make any moneys "payable" by the Defendants to the Plaintiffs within the operation of the Clause 9.4. 9 Mr Reuben of Counsel, who appears for the Plaintiffs, responded by relying upon Clause 9.5 of the Agreement for Lease which relevantly provides. "The lessee shall on demand pay all … costs and disbursements incurred by the lessor … in connection with any breach … of any of the terms hereof by the lessee … ." Mr Reuben submitted that: – the Defendants' failure to make good the premises was a breach of Clause 9.7; – the Plaintiffs' expenditure of money in making good was a cost incurred by the Plaintiffs "in connection with" the breach by the Defendants of Clause 9.7; – the Plaintiffs, by commencing these proceedings, had made demand on the Defendants for repayment of the cost of making good, for the purposes of Clause 9.5; – the demand had not been complied with so that the cost of making good was money "payable under the Agreement for Lease" within the terms of the interest provisions in Clause 9.4. 10 Mr Moss rejoined that the Defendants' failure to make good was not a breach of Clause 9.7 at all because the Defendants had agreed with the Plaintiffs prior to Defendants vacating the premises that the Defendants should leave the premises in their existing condition and should not make good. The Plaintiffs had therefore, it was said, elected to waive the relevant provisions of Clause 9.7 or were estopped from claiming damages for its breach. 11 This submission raised a problem. The Defendants had pleaded, in paragraph 17 of their Amended Defence, that the Defendants' omission to make good when they quit the premises was in accordance with an agreement made between the parties on or about 24 July 2002 in a discussion between Mr Wells on behalf of the Defendants and Mr Kong on behalf of the Plaintiffs and again in a conversation between Mr Wells and Mr Kong which occurred within a few days after 29 November 2002. It was alleged that the agreement between the parties made on those two occasions was to the effect that no alterations to the premises were required to be made by the Defendants upon their vacation of the premises and that the Defendants could leave furniture in the premises as well. By virtue of these agreements, it was pleaded, the Plaintiffs waived any obligation on the part of the Defendants pursuant to Clause 9.7, or were estopped from claiming damages in relation to any breach of Clause 9.7. The Plaintiffs denied that any such agreement was made. 12 However, as the case was conducted, this issue disappeared. The focus of the Defendants' case on damages was the Plaintiffs' alleged failure to take reasonable steps to mitigate its loss. Part of the complaint made by the Defendants was that the Plaintiffs had attempted to re-let the premises in the condition in which the Defendants had left them, rather than seeking to obtain the best possible rent as quickly as possible by undertaking work to restore the premises to the condition they would have been in had the Defendants given vacant possession and made good. 13 It seemed to me that, for the purposes of deciding that issue, it was not to the point to decide whether the Defendants, in leaving the premises as they were, had committed a breach of Clause 9.7. The focus of the parties' attention being upon mitigation, it seemed to me that the Plaintiffs' alleged failure to take reasonable steps to mitigate had to be seen in the context of the premises in the condition in which they were in fact left, whether or not the Defendants had committed a breach in leaving them in that condition. 14 Accordingly, I did not decide as a matter of fact whether or not there had been an oral agreement between the Plaintiffs and the Defendants in the terms which had been alleged by the Defendants and as to which Mr Wells had deposed in his affidavit. It now seems to me that the question of interest on the cost of making good which has been contested this morning depends for its resolution on a finding as to whether the agreement as to making good which the Defendants allege was made between Mr Wells and Mr Kong was, in fact, made. 15 I have asked Counsel for the parties whether, in order to resolve the factual issue, either of them wishes to re-open his case or seeks to recall any witness for further cross examination. In this regard, of course, it is important to note that this issue of fact involves a finding as to whether Mr Kong's evidence ought to be accepted, or Mr Wells' evidence ought to be accepted, as to whether the disputed conversations occurred. This is a finding which involves credit assessment. However, both Counsel stated to me that they did not wish to re-open their cases nor did they wish to have any witness recalled. They were content that any finding of fact that I have to make be made on the basis of the evidence as it now stands. Both Counsel have taken me to various pieces of the evidence already admitted in support of their respective submissions. 16 In those circumstances, I will decide the questions of fact involved in this issue upon the basis the parties have agreed that I should. 17 The first question, then, is whether the conversations with Mr Kong which Mr Wells says he had, in fact, occurred. The first conversation, said to have occurred on or about 24 July 2002, is recounted in paragraph 9 of Mr Wells' affidavit of 18 August 2005. 18 Mr Wells says that in about mid-July 2002 he had a meeting with Mr Kong in which he told Mr Kong that, in the Defendants' view, there were many problems with the premises and the Defendants were looking at relocating. Mr Wells says that he told Mr Kong that the Defendants only had a monthly tenancy and that they would therefore probably be relocating. 19 Mr Wells says that he then said to Mr Kong, "One thing I have to factor into my costing is the cost of making good these premises. What do you require?" According to Mr Wells the following exchange then occurred. Mr Kong said, "It's okay" . Mr Wells said, "Well, do you require me to paint, clean or remove walls and recarpet or what?" Mr Kong said, "No, it's all okay" . Mr Wells said, "Thanks. See you later" . 20 Mr Wells says that a few days later he wrote Mr Kong a letter dated 24 July 2002. That letter states as follows: "As discussed today with Mr Desmond Kong, the Board of Trustees of the Travel Compensation Fund (TCF) is currently reviewing the option of the TCF either remaining at the current premises of Level 4, 303 Pitt street, Sydney or relocating to commercial premises within the CBD. In order to apprise the Trustees of their obligations under the terms of the lease; noting that the TCF is currently on a month-by-month lease; we would appreciate a written outline of what would need to be undertaken by the TCF to make-good the current premises, should the decision be made to vacate Level 4, 303 Pitt Street. Your assistance in this regard would be appreciated." 21 I should observe at the outset that if a conversation between Mr Kong and Mr Wells in the terms which Mr Wells recounts had occurred a few days before the sending of this letter, then it would have been rather odd for Mr Wells to have written it. Mr Wells' evidence is that he asked Mr Kong what was required on the part of the Defendants to make good and was told, in effect, that nothing at all was required. However, in the letter of 24 July 2002, Mr Wells says that he wants "… a written outline of what would need to be undertaken by the TCF to make-good the current premises, should the decision be made to vacate …" . This enquiry seems to be predicated on the absence of any previous statement to Mr Wells by Mr Kong that nothing at all was required. The letter, in other words, is inconsistent with the conversation between Mr Kong and Mr Wells, as Mr Wells would have it. Mr Kong, of course, denies that any such conversation took place. 22 The second conversation upon which the Defendants rely is set out in paragraph 28 of Mr Wells' affidavit of 18 August 2005. Mr Wells says that he had instructed his solicitors to draft a letter to the Plaintiffs giving them one month's notice of TCF's intention to vacate the premises. That letter was sent on 29 November 2002. In paragraph 28 of his affidavit, Mr Wells then says that within a day or two of sending that letter on 29 November 2002, he had a conversation with Mr Kong in TCF's premises. He said that Mr Kong was attending the premises for the purpose of carrying out some maintenance. Mr Wells says that he had a conversation with Mr Kong to the following effect: "Wells: 'Hello Desmond. As you know, we have to be out by 29 December as we have given you one month's notice to vacate. How would you like us to leave these premises?' Kong: 'It's all okay, leave the building as it is and if you want to leave any furniture, you can leave that furniture as well.' Wells: 'Okay.'" 23 Mr Kong denies that any such conversation occurred. Indeed, he says that it was impossible for any such conversation to have occurred at the time specified because he was absent overseas from 7 November 2002 until 11 December 2002. Mr Kong produced his airline tickets and boarding pass which show that this was, indeed, the case. 24 Mr Wells was quite definite in his affidavit that the conversation which he recounted in paragraph 28 occurred between 29 November 2002 at the earliest and 5 December 2002 at the latest. He says that the conversation must have occurred before 5 December 2002 because he was surprised when he received a letter from the Plaintiffs' solicitors dated 5 September 2002 alleging breach of the Agreement for Lease. He says that he was surprised to receive that letter in view of the conversation with Mr Kong which he has recounted in paragraph 28 of his affidavit. 25 Mr Wells' evidence, therefore, is very specific that this conversation with Mr Kong occurred in a certain time slot and not otherwise. It has been demonstrated – conclusively in my view – that the conversation could not possibly have occurred at that time. 26 This circumstance casts doubt on the reliability of Mr Wells' evidence. If he had said that the conversation could have occurred either at the time he specifies in paragraph 28 or at some other time, one could have made some allowance for the fact that recollection as to time may be faulty even though recollection as to the substance of the conversation may be accurate enough. But Mr Wells not only gives a time frame for the conversation, he gives a particular reason for fixing it within that time frame. This suggests that his evidence must have been a matter of reconstruction and that the process of reconstruction was, in itself, suspect. 27 Mr Kong denies that the two conversations alleged by Mr Wells took place. He says that a conversation about making good did, in fact, occur between himself and Mr Wells but at a different time and in different terms. 28 Mr Kong says that he had a conversation with Mr Wells on 24 September 2002. Mr Kong says that he took a contemporaneous diary note of that conversation. The diary note has been tendered in evidence; it has not been challenged. On its face, it appears to be part of a running record of daily occurrences which Mr Kong was in the habit of keeping. The diary note of 24 September 2002 states as follows: "TCF told me that they are (sic) intended to move out and asked for my opinion. I told them they have to either sublease his office or come to settlement with us. I told him to try couple of months before we talk again. He also mentioned about the make good clause. I told them it is too early as the prospective tenants may like the existing fit-out or it can be built into the settlement amount." 29 The Plaintiffs say that what Mr Kong said to Mr Wells in this discussion made it clear that the Plaintiffs did not accept that the Defendants were entitled to move out of the premises upon one month's notice, that the Defendants could leave the premises as they were for the time being in case a new tenant wished to take the premises in that condition but, if not, then there would have to be a settlement between the parties which took account of the Defendants' obligation to pay the costs of making good. 30 There is no contemporaneous diary note of Mr Wells in support of either of the two conversations which he recounts with Mr Kong. As I have noted, the letter of 24 July 2002 which Mr Wells wrote to Mr Kong is inconsistent with the terms of the conversation which he says occurred with Mr Kong only a few days earlier. As I have noted, it is impossible, that the conversation which Mr Wells alleged he had with Mr Kong in November or early December 2002 could have occurred. 31 On the other hand, Mr Kong has a contemporaneous diary note which makes it clear that, although the question of fit-out was raised, there was no waiver by Mr Kong of the Defendants' obligations to make good. 32 Mr Moss has drawn my attention to a passage of transcript in the cross examination of Mr Kong which, he says, supports Mr Wells' version of events. The passage is at T57-T61. I have read that passage carefully but I do not think it goes anywhere near an admission by Mr Kong that he agreed with Mr Wells that the premises need not be the subject of any making good by the Defendants at any time. The evidence is rather diffuse, to say the least, but the passage at T61.5-.28 upon which Mr Moss places particular emphasis really is quite consistent with Mr Kong's position that he was content to leave the question of whether or not the premises should be made good in the first instance to the judgment of the Plaintiffs' leasing agent. 33 The evidence is simply along the lines that sometimes incoming tenants prefer to have the premises partitioned and furnished, so that there would be no need to spend money on making good after the Defendants' departure, and sometimes new tenants prefer completely vacant premises. That general attitude is perfectly consistent with the attitude which Mr Kong expressed in September 2002 in the conversation which is the subject of his diary note of that date. 34 For those reasons, I prefer the evidence of Mr Kong to the evidence of Mr Wells. I am not satisfied that either conversation with Mr Kong which Mr Wells alleges in paragraphs 9 and 28 of his affidavit occurred. It follows that there was no agreement between the parties as alleged and that the Defendants were never released from their obligation under Clause 9.7 of the Agreement for Lease to pay for the cost of making good the premises upon their departure. The Defendants' failure to make good, or to pay for the cost of making good, was, therefore, a breach of Clause 9.7 and the expenditure by the Plaintiffs in making good the premises was an expenditure incurred "in connection with" that breach within the meaning and for the purpose of Clauses 9.5 and 9.4 of the lease, so that the amount due to the Plaintiffs by the Defendants for the cost of making good must carry interest at the contractual rates stipulated in Clause 9.4. Costs 35 The final matter to be disposed of is an application by the Plaintiffs that the Defendants pay the costs of the proceedings on an indemnity basis. 36 The application, which is resisted, is founded upon a Calderbank letter sent by the Plaintiffs' solicitors to the Defendants' solicitors on 12 May 2006. That letter sets out the grounds of the Plaintiffs' case and why it was that the Plaintiffs said that the Defendants would fail. The essence of the letter was that it was clear enough that the letter of 12 March 2001 which had been sent by the Defendants to the Plaintiffs brought about a binding agreement for lease. 37 The letter enclosed a calculation of the Plaintiffs' claim, showing a total of some $397,000. The Plaintiffs offered to compromise their claims on the following basis: "(a) judgment be entered for our client in the substantive proceedings in the amount of $300,000; (b) the cross-claim instituted by your client against our clients be dismissed; (c) as to the costs of the proceedings, the trustees of the Travel Compensation Fund to pay our clients' costs up to the date of acceptance of this offer as agreed or, failing agreement, as assessed." The offer was left open for acceptance for a period of twenty-eight days from the date of the letter. The letter was sent, as I have said, on 12 May 2006. The hearing commenced on 27 June 2006. 38 Mr Moss, who appears for the Defendants, opposes the making of an indemnity costs order upon only one basis, that is, that the compromise offered by the Plaintiffs was not a genuine offer of compromise. The amount which the Plaintiffs have been found entitled to recover, after deducting the security bond, is some $382,000, including interest. Mr Moss says that an offer of compromise of $300,000, a discount of some $82,000 from the amount recovered, or $97,000 from the amount claimed, was not such as to make it unreasonable for the Defendants to refuse the offer. He draws attention to the complexity of the issues in the proceedings. 39 It is well recognised that an offer of compromise may, in truth, be nothing more than a demand for capitulation because, in the context of the amounts involved in the litigation, the amount which a plaintiff says it will sacrifice for the sake of a compromise is so small as to be derisory. 40 In the present case, the Plaintiffs' offer of compromise has turned out to be some $82,000 less than the amount which they have been held entitled to receive. Whether an offer is so small, having regard to the amount claimed in total, as not to amount to genuine offer of compromise is essentially a matter of impression and value judgment. Where the Plaintiffs are entitled to recover a total amount of $382,000 from the Defendants, I find it difficult to categorise a discount by the Plaintiffs of $82,000 from that figure as derisory or as amounting to nothing more than a demand to capitulate. It seems to me that a discount of $97,000 from the amount claimed or $82,000 from the amount recovered was a substantial discount and represented a genuine offer of compromise. I bear in mind in this regard that, in my view, the Plaintiffs' case was a strong one in light of the clear terms of the letter of 12 March 2001. 41 For those reasons, in my opinion the Plaintiffs' Calderbank offer was unreasonably declined by the Defendants so that they should be ordered to pay the costs of the proceedings on an indemnity basis after 12 May 2006. 42 The parties have agreed on the quantification of the Plaintiffs claims, the figures now appear in Short Minutes of Order which have been propounded by the parties. Accordingly, I will make orders finally disposing of the proceedings in accordance with Short Minutes of Order dated today, initialled by me and placed with the papers. ~ oOo ~ 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.