New South Wales Supreme Court CITATION : Hunter Business Finance Pty Ltd v Australian Commercial & Equipment Finance Pty Ltd [2009] NSWSC 1032 HEARING DATE(S) : 01 September 2009 JUDGMENT DATE : 30 September 2009 JUDGMENT OF : Gzell J DECISION : Companies substituted for brokers by novation. Companies liable to pay assessed damages and not the brokers. Plaintiff entitled to costs on ordinary basis up to the date of the offer of compromise and brokers and their companies entitled to costs thereafter on an indemnity basis. CATCHWORDS : CONTRACTS - General Contractual Principles - Novation - defendant brokers provided services to plaintiff - change to provide services "through" companies - plaintiff treated companies as the service providers and paid commissions to them - whether companies substituted for brokers by novation - whether dual obligations of brokers and companies and services not provided "by" companies - whether brokers or companies liable to pay assessed damages arising from events after companies substituted for brokers - PROCEDURE - Costs - 13 defendants made offer of compromise - offer expired without being accepted - during trial plaintiffs settled with 6 defendants - whether "severance" rendered the offer of compromise ineffective - whether order or judgment less favourable than offer of compromise - whether Uniform Civil Procedure Rules 2005, Pt 20 r 20.26 is the corresponding provision to Supreme Court Rules 1970, Pt 22 r 1A for the purpose of the Civil Procedure Act 2005, Sch 6, cl 10(b) such that the offer of compromise is deemed to have been done under Pt 20 r 20.26 - whether discretion should be exercised against indemnity costs under the Uniform Civil Procedure Rules, Pt 42 r 42.15(2) Supreme Court Rules 1970 Income Tax Assessment Act 1936 (Cth) LEGISLATION CITED : Uniform Civil Procedure Rules 2005 Civil Procedure Act 2005 Supreme Court Act 1970 Hunter Business Finance v Australian Business and Equipment Finance and Ors [2003] NSWSC 122 Hunter Business Finance P/L v Australian Commercial & Equipment Finance P/L & Ors [2007] NSWSC 1323 Hunter Business Finance Pty Ltd v Australian Commercial & Equipment Finance Pty Ltd & Ors [2008] NSWSC 1165 CASES CITED : Olsson v Dyson (1968-1969) 120 CLR 365 Morgan v Johnson (1998) 44 NSWLR 578 Macquarie Radio Network Pty Ltd v Arthur Dent (No 2) [2007] NSWCA 339 South Eastern Sydney Area Health Service & Anor v King [2006] NSWCA 2 Hunter Business Finance Pty Ltd (Plaintiff) Australian Commercial & Equipment Finance Pty Ltd (First Defendant) Australian Property Finance Pty Ltd (Second Defendant) Garry Francis Ennis (Third Defendant) David John Flanagan (Fourth Defendant) Errol Sky (Fifth Defendant) PARTIES : Belfolex Pty Ltd (Sixth Defendant) Optimal Finance Pty Ltd (Seventh Defendant) Egras Pty Ltd (Eighth Defendant) Gregory Raymond John Sterland (Ninth Defendant) Australian Property Finance (Tenth Defendant) Finance Analysis Services of Australia (Eleventh Defendant) Finance Analysis Services of Australia Pty Ltd (Twelfth Defendant) Hunter Access Finance (Thirteenth Defendant) FILE NUMBER(S) : SC 5022/00 COUNSEL : H Stowe (Plaintiff/Second Cross-Defendant) G Laughton SC (First & Third to Eighth Defendants) Gells lawyers (Plaintiff) SOLICITORS : Mason Lawyers (First & Third to Eighth Defendants) Evans & Co Solicitors (Second and Ninth to Thirteenth Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J WEDNESDAY 30 SEPTEMBER 2009 5022/00 HUNTER BUSINESS FINANCE PTY LTD v AUSTRALIAN COMMERCIAL & EQUIPMENT FINANCE PTY LTD & ORS (NO 2) JUDGMENT Introduction 1 Hunter Business Finance Pty Ltd, conducted a finance broking business. Garry Francis Ennis, David John Flanagan and Errol Sky, the third to fifth defendants, performed broking services from the premises of HBF. From September 1994, Mr Ennis provided the services through his company, Belfolex Pty Ltd, the sixth defendant. From March 1996, Mr Flanagan provided his services through his company, Optimal Finance Pty Ltd, the seventh defendant and from January 1998, Mr Sky provided his services through his company, Egras Pty Ltd, the eighth defendant. 2 Mr Ennis and Mr Flanagan established Australian Commercial & Equipment Finance Pty Ltd, the first defendant, and thereafter they and Mr Sky ceased to operate from the premises of HBF and commenced to operate under the auspices of ACEF. 3 Files and copies of the content of files were removed from the offices of HBF. Information stored on the HBF computer database was downloaded. The files and stored information were helpful in the efficient creation of a new application for finance on behalf of a person for whom previous finance had been arranged. The files and stored information were perused by each of Mr Ennis, Mr Flanagan and Mr Sky after they left HBF. They transferred the information with respect to persons introduced by each of them respectively to HBF to new files in the names of each of them and they utilised that information in the conduct of their activities under the auspices of ACEF. 4 On 7 December 2001, all the defendants, there were 13 of them, made an offer of compromise in accordance with Division 1 of Part 22 of the Supreme Court Rules 1970 of $50,000 plus costs as agreed or assessed. The offer could be accepted up to and including 22 January 2002. HBF did not accept the offer. 5 The proceedings commenced before me on 17 February 2003. On the third day of the hearing before me, the proceedings against the second and ninth to thirteenth defendants were settled. It was agreed that the second and ninth to thirteenth defendants would contribute to HBF's costs in the amount of $75,000. They would allow access to their computer server to identify HBF files, copy them to a CD-Rom and delete them from the server. By consent the proceedings as between HBF and the second and ninth to thirteenth defendants was dismissed; the second cross-claim by the second and ninth to thirteenth defendants against the first and third to eighth defendants was dismissed; no order as to costs of the proceedings as between HBF and the second and ninth to thirteenth defendants was made; and no order as to costs of the second cross-claim was made. 6 In Hunter Business Finance v Australian Business and Equipment Finance and Ors [2003] NSWSC 122, I found, contrary to the assertions of Mr Ennis, Mr Flanagan and Mr Sky, that the persons to whom they provided services were not their clients or the clients of their companies but were clients of HBF. 7 I found that Mr Ennis, Mr Flanagan and Mr Sky were in breach of their contracts with HBF by reason of the removal of client files and the downloading and use of information on the HBF computer databases. I found that Mr Flanagan was in breach of his contract with HBF by reason of his placing certain mortgage transactions otherwise than with HBF. I found HBF in breach of its contracts with the brokers in failing to pay them commissions. 8 Subsequently, I ordered that there be an inquiry before a Master as to the assessment of damages against the brokers both before and after their company's involvement. I ordered that there be an inquiry as to the assessment of damages against Mr Flanagan before and after the involvement of Optimal and I ordered that there be an inquiry as to the assessment of damages against HBF in the periods before and after the involvement of the companies of the brokers. 9 On that occasion the question was raised whether orders should be made against the brokers or their companies. I deferred that question until after the determination of damages. I stood over the question of costs of the hearing before me and the question whether any further relief should be granted. 10 The inquiry before a Master was subsequently changed to a hearing before Bryson AJ. In November 2007, in Hunter Business Finance P/L v Australian Commercial & Equipment Finance P/L & Ors [2007] NSWSC 1323, his Honour assessed damages against the brokers or their companies at $10,000 and with interest to 29 November 2007 at $16,681.44; damages against Mr Flanagan or Optimal at $661.56 and with interest at $1,370.46 and damages against HBF at $16,500 and with interest at $16,848.08. 11 In November 2008, in Hunter Business Finance Pty Ltd v Australian Commercial & Equipment Finance Pty Ltd & Ors [2008] NSWSC 1165, Bryson AJ ordered HBF to pay the costs of the hearing before him with respect to the first and second orders on an indemnity basis and that each party pay its own costs of the third order. The current proceedings 12 The matter returned to me to determine which defendants were liable under the first and second assessments of damages and to determine the costs of the hearing before me. 13 ACEF, the brokers and their companies submitted that there was a novation of the brokers' contracts with HBF and the brokers' companies were substituted for them. Novation 14 As Windeyer J said in Olsson v Dyson (1968-1969) 120 CLR 365 at 388: "Novation is the making of a new contract between a creditor and his debtor in consideration of the extinguishment of the obligations of the old contract: if the new contract is to be fully effective to give enforceable rights or obligations to a third person he, the third person, must be a party to the novated contract." 15 It was submitted that the evidence merely established that the brokers would provide their services "through" their respective companies and that did not release the brokers personally from their obligations. There were dual obligations when the companies became involved: the obligations of the brokers continued and new obligations were assumed by the companies. It was submitted this was not a case of the services being provided "by" the brokers' companies. 16 I find it difficult to see that there is any difference between the provision of services through a company and the provision of services by a company. When a person is said to provide services through a company, that common expression conveys the meaning that a company has been interposed between the natural person providing the services and the entity to which those services are provided. 17 The evidence was that Mr Ennis approached Ian Rodney Ball. He and his wife, Karen Ball, were the shareholders and directors of HBF. Mr Ennis said he had decided to become a company so he could income split with his wife and that way reduce tax. Mr Ball said the structure did not change so he saw no problem with it. Mr Ennis incorporated a company called Belfolas Pty Ltd which HBF treated as the entity providing the services and to which commissions were paid. Subsequently, Mr Ennis incorporated Belfolex and it was substituted for Belfolas. It was treated by HBF as providing the services and it received the commissions. 18 Mr Ball suggested that Mr Flanagan incorporate a company. There had been some amendments to Income Tax Assessment Act 1936 (Cth) that meant that HBF would have to treat Mr Flanagan as an employee and pay him superannuation which would mean that his commission structure would have to change to cover costs. Mr Flanagan accepted the advice and incorporated Optimal, which HBF thereafter regarded as the service provider and paid commissions to it. 19 Mr Ball told Mr Sky that he wanted him to become a company as soon as possible as he was deemed to be an employee. Mr Sky accepted that advice and formed Egras. Thereafter HBF regarded Egras as the service provider and it was paid the commissions. 20 If the services were not provided by the companies through the activities of their employees, the brokers, the purpose of establishing the companies would not have been achieved. Mr Ennis would not have achieved an income splitting with his wife and Mr Flanagan and Mr Sky would not have ceased to be employees of HBF. The clear intention of the parties, to be inferred from the circumstances, was that a corporate service provider was to be interposed between HBF and the brokers. Once their companies were to be recognised as the service providers, the intention was that the obligations of the brokers were to be extinguished and those obligations assumed by their companies. Consideration for the assumption of obligations by the companies would flow to them from HBF in the form of the commissions. The consideration for the extinguishment of the brokers' obligations would be the brokers' release of HBF from its obligation to pay them commission. 21 All the elements of novation by tripartite contracts were present in this case. The effect was to substitute the companies for the individual brokers as the providers of services to HBF. 22 Since all the damages assessed by Bryson AJ with respect to the first order related to the period after the substitution of the companies, it is the companies and not the brokers that are liable for the damages. 23 The amount assessed under order 2 was by agreement of the parties from a schedule to the defence listing a number of transactions and income earned. All of those transactions occurred after the companies were substituted for the brokers and, in consequence, it is the companies that are liable for those damages. Costs 24 So far as the question of costs is concerned, it was submitted on behalf of HBF that the offer of compromise ceased to have effect when the claims against the second and ninth to thirteenth defendants were settled. It was submitted that the offer of compromise was a joint offer of thirteen defendants which was severed when the action was settled against six of them. There was no longer a joint offer by thirteen defendants. 25 It was submitted that the offer having ceased to have effect, the ordinary rule in Pt 52A r 11 of the Supreme Court Rules should apply and the Court should order that the costs follow the event. 26 It was submitted that HBF succeeded at trial because the central issue, whether the parties served by the brokers and their companies were their clients or the clients of HBF had been determined in favour of HBF and the brokers or the brokers' companies had been found to be in breach of their contracts with HBF. 27 The offer of compromise was made on 7 December 2001. It expired on 22 January 2002. The settlement against the second and ninth to thirteenth defendants occurred on 19 February 2003. 28 There was no severance, whatever that might mean in this context, on or before 22 January 2002 when HBF's failure to accept the offer was established. In the settlement of 19 February 2003 there was no attempt to exonerate HBF from the effect of its failure to accept the offer of compromise if it obtained an order or judgment as favourable or less favourable than the offer. 29 It would be an extraordinary result if, after failing to accept an offer of compromise, the sanction of the payment of indemnity costs upon an order or judgment in a lower amount being awarded could be avoided by a plaintiff settling with one of several defendants. 30 I see no reason why a partial settlement after a failure to accept an offer of compromise should have any effect upon the operation of the Supreme Court Rules or the Uniform Civil Procedure Rules 2005 and the imposition of their sanction should the judgment or order of the Court be as favourable or less favourable than the offer. 31 The offer of compromise was made under Pt 22 r 1A of the Supreme Court Rules. So far is as material, it was in the following terms: "(1) An offer of compromise is made to a party under this Division by serving a notice of the offer on the party. (2) A notice of offer shall: (a) be prepared in accordance with Part 65 rules 1-4, (b) bear a statement to the effect that the offer is made in accordance with this Division, and (c) …." 32 The Supreme Court Rules, Pt 65 r 1-4 contained administrative requirements. They required the first page of the document to have a prescribed heading, the document to be of a specified size and shape, to be written in specified manner, to be securely fastened and to contain dates, sums and other numbers expressed in figures and not in words. 33 The Uniform Civil Procedure Rules, Pt 20 r 20.26, so far as is material, is in the following terms: "(1) In any proceedings, any party may, by notice in writing, make an offer to any other party to compromise any claim in the proceedings, either in whole or in part, on specified terms. (2) … (3) A notice of offer: (a) must bear a statement to the effect that the offer is made in accordance with these rules, and (b) …." 34 The Civil Procedure Act 2005, Sch 6, cl 10 is in the following terms: "Subject to this Schedule and the regulations: (a) anything begun before the commencement of this Act under a provision of the old legislation for which there is a corresponding provision in this Act or the uniform rules may be continued and completed under the old legislation as if this Act had not been enacted, and (b) subject to paragraph (a), anything done under a provision of the old legislation for which there is a corresponding provision in this Act or the uniform rules (including anything arising under paragraph (a)) is taken to have been done under the corresponding provision of this Act or the uniform rules, as the case requires." 35 Cl 2 defines the old legislation as including the Supreme Court Act 1970 and the Supreme Court Rules made under that Act. 36 The brokers and their companies submit that the offer of compromise was "done" under the Supreme Court Rules, Pt 22 r 1A for which the Uniform Civil Procedure Rules, Pt 20 r 20.26 is a corresponding provision and the offer of compromise is taken to have been "done" under that rule. 37 There is no reason to doubt that the service of an offer of compromise was something done for the purposes of the Civil Procedure Act, Sch 6, cl 10. 38 The Civil Procedure Act, Sch 6, cl 10 does not require a provision of the Uniform Civil Procedure Rules to be identical with a provision of the Supreme Court Rules. If identity was required the clause would have been so framed. That something less than identity is required is evident by the choice of the language. Correspondence connotes similarity, or analogy, or equivalence in function. 39 There is a sufficient correspondence between the Supreme Court Rules, Pt 22 r 1A and the Uniform Civil Procedure Rules, Pt 20 r 20.26 40 HBF submits that there is no corresponding provision to the Supreme Court Rules, Pt 22 r 1A because there is a difference in the costs sanction prescribed for a failure by a plaintiff to accept a defendant's offer. The Supreme Court Rules Pt 52A r 22(6) provided for the payment of the defendant's costs on a party and party basis. It was in the following terms: "Where an offer is made by a defendant and not accepted by the plaintiff, and the plaintiff obtains an order or judgment on the claim to which the offer relates not more favourable to him than the terms of the offer, then, unless the Court otherwise orders, the plaintiff shall, subject to rule 33, be entitled to an order against the defendant for the plaintiff's costs in respect of the claim up to and including the day the offer was made, assessed on a party and party basis, and the defendant shall be entitled to an order against the plaintiff for the defendant's costs in respect of the claim thereafter assessed on a party and party basis." 41 On the other hand, the Uniform Civil Procedure Rules provide for the defendant's costs on an indemnity basis. Pt 42 r 42.15(2) is in the following terms: "Unless the court orders otherwise: (a) the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and (b) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, assessed on an indemnity basis: (i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and (ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made." 42 But the Civil Procedure Act, Sch 6, cl 10(b) does not require the sanction for what is done under the old legislation to have a corresponding provision in the Uniform Civil Procedure Rules. The correspondence is with respect to what is done and in this case what was done was the making of an offer of compromise under the Supreme Court Rules, Pt 22 r 1A for which the Uniform Civil Procedure Rules, Pt 20 r 20.26 was a corresponding provision. 43 The offer of compromise in this case is taken to have been done under the Uniform Civil Procedure Rules, Pt 20 r 20.26. 44 For the Uniform Civil Procedure Rules, Pt 42 r 42.15(2) to be enlivened, HBF must have obtained an order or judgment as favourable or less favourable to it than the terms of the offer of compromise. 45 It was submitted that it was possible that HBF obtained overall a better result than the offer when the $75,000 payable by the second and ninth to thirteenth defendants under the settlement is taken into account. 46 I reject that submission. The $75,000 was clearly identified as a contribution towards HBF's costs and it obtained by way of damages assessed by Bryson AJ $18,051.90 including interest to 29 November 2007. It was offered $50,000 plus costs. If $75,000 was a contribution towards costs on the third day of the trial, an assessment of HBF's costs of an eight day hearing would be considerably more. 47 Even assuming in HBF's favour that the comparison should include a consideration of costs, the order or judgment to which HBF is entitled is less favourable than the offer of compromise. 48 The consequence is that unless the Court orders otherwise, the Uniform Civil Procedure Rules, Pt 42 r 42.15(2) applies, HBF is entitled to its costs up to 7 December 2001 on the ordinary basis and the brokers and their companies are entitled to costs from 8 December 2001 on an indemnity basis. 49 HBF submits that I should exercise my discretion against this result. It submits that the order for indemnity costs made by Bryson AJ is sufficient to indemnify the defendants. But the damages hearing was distinct from the liability hearing and the order made by Bryson AJ related solely to the damages hearing. 50 It was submitted that the settlement between the second and ninth to thirteenth defendants must be considered in the proper exercise of the Court's discretion as to costs. How it is relevant was not explained. 51 It was submitted that the Court should take into consideration its preference for the evidence of Mr Ball over that of Mr Ennis, Mr Flanagan and Mr Sky; that central to the determination of the Court was the finding that the persons introduced to HBF by the brokers became clients of HBF; that that finding was made in part on the basis of the Court's preference for the evidence of Mr Ball to that of Mr Ennis, Mr Flanagan and Mr Sky. 52 It was submitted that HBF succeeded in establishing the existence of a contract between Mr Ennis, Mr Flanagan and Mr Sky or their respective companies and HBF. It was submitted that considerable time was taken during the hearing in dealing with the terms of the contract between the parties and to which entity the clients belonged. It was submitted that HBF succeeded on both of those issues and succeeded in establishing a breach of contract. 53 Those matters go to HBF's success in the liability proceedings. They do not establish a basis for departing from the sanction for HBF's failure to accept an offer of compromise more favourable than the order or judgment to which it is entitled. 54 There was no explanation of HBF's rejection of the offer. There was no evidence of due consideration of the offer of compromise, serious consideration to the risk of non-acceptance, or a proper assessment of the cases of the brokers and their companies. 55 In Morgan v Johnson (1998) 44 NSWLR 578, Mason P derived a number of principles from his analysis of the leading cases on this topic. The first principle was that the purpose of the rule is to encourage the proper compromise of litigation, in the private interests of individual litigants and the public interest of the prompt and economical disposal of litigation. 56 In Macquarie Radio Network Pty Ltd v Arthur Dent (No 2) [2007] NSWCA 339, Beazley JA at [15], in considering the obverse situation where a plaintiff makes an offer not accepted by a defendant to which the Uniform Civil Procedure Rules, Pt 42 r 42.14 applies, said that the Court would only deviate from the general rule and make a different order if it found that there were exceptional circumstances for doing so. Her Honour referred to what Hunt AJA had said in South Eastern Sydney Area Health Service & Anor v King [2006] NSWCA 2 at [83]: "The onus is on the defendant to persuade the Court that indemnity costs should not be ordered. He must demonstrate the basis on which an order should be made denying the plaintiff's entitlement to indemnity costs. He must establish that he had given serious thought to the risk involved in non-acceptance of the offer, and that he had assessed the plaintiff's case properly and in the context of the rule and the achievement of its purpose - to encourage the proper compromise of litigation, in the private interests of the litigants and in the public interest of the prompt and economical disposition of litigation. Generally, exceptional circumstances are required to justify such an order denying the plaintiff's entitlement." 57 HBF has failed to persuade me that I should exercise my discretion against the operation of the Uniform Civil Procedure Rules, Pt 42 r 42.15(2). 58 I will hear the parties on the terms of appropriate orders to finalize this matter. I direct the parties to bring in short minutes of order reflecting these reasons. ********** 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.