New South Wales Court of Appeal CITATION: Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 HEARING DATE(S): On the papers JUDGMENT DATE: 12 November 2009 JUDGMENT OF: Spigelman CJ at 1; Beazley JA at 1; McColl JA at 1 1 The respondent pay the appellant $807,328.97 plus interest at Schedule 5 rates from 28 July 2008 by way of restitution. DECISION: 2 The appellant's notice of motion of 17 July 2009 is otherwise dismissed. 3 The appellant pay the respondent's costs of the notice of motion. CATCHWORDS: COSTS – offer of compromise – indemnity costs – discretion to "otherwise order" – element of compromise – all or nothing case – where offer is invitation to surrender – relevance of costs consequences to accepting offer – Uniform Civil Procedure Rules 2005 (NSW) rr 20.26, 42.15A - COSTS – exercise of general discretion – offer of compromise – indemnity costs – appeal proceedings where no fresh offer – regard had to offer from court below – Civil Procedure Act 2005 (NSW) s 98 – Uniform Civil Procedure Rules 2005 (NSW) r 51.49 Civil Procedure Act 2005 LEGISLATION CITED: District Court Rules 1973 Uniform Civil Procedure Rules 2005 CATEGORY: Separate question Grace v Thomas Street Café Pty Ltd (No 2) [2008] NSWCA 72 Hancock v Arnold; Dodd v Arnold (No 2) [2009] NSWCA 19 Leichhardt Municipal Council v Green [2004] NSWCA 341 CASES CITED: Robb Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) [2006] NSWCA 120; (2006) 67 NSWLR 706 The Uniting Church v Takacs (No 2) [2008] NSWCA 172 Tickell v Trifleska Pty Ltd (1990) 25 NSWLR 353 PARTIES: Regency Media Pty Ltd (Appellant) AAV Australia Pty Ltd (Respondent) FILE NUMBER(S): CA 40221/08 COUNSEL: P Silver (Appellant) C N Bova (Respondent) SOLICITORS: Norton Gledhill (Appellant) Clayton Utz (Respondent) LOWER COURT JURISDICTION: District Court LOWER COURT FILE NUMBER(S): DC 2577/07 LOWER COURT JUDICIAL OFFICER: Rolfe DCJ LOWER COURT DATE OF DECISION: 19 June 2008; 26 June 2008 LOWER COURT MEDIUM NEUTRAL CITATION: AAV Australia Pty Limited v Regency Media Pty Limited [2008] NSWDC 106 IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40221/08 SPIGELMAN CJ BEAZLEY JA McCOLL JA Thursday 12 November 2009 Regency Media Pty Ltd v AAV Australia Pty Ltd Judgment 1 THE COURT: The Court delivered judgment in this matter on 15 July 2009, allowing Regency Media Pty Ltd's ("the appellant's") appeal against the trial judge's order that it pay $677,328.97 to AAV Australia Pty Ltd ("the respondent"). The appellant now seeks indemnity costs at first instance and of the appeal on the basis of an offer of compromise made on 13 July 2007. The issue in this case is, therefore, whether the Court should award indemnity costs to the appellant. Facts 2 The appellant and the respondent were parties to a Joint Venture, with interests of 49 per cent and 51 per cent respectively. The Joint Venture operated through two enterprises, AAV Regency Management Pty Limited ("the Manager") and AAV Regency Pty Limited ("the Sales Agent"). On 27 February 2006, the parties entered a Share Sale Deed ("the Deed") for the purposes of terminating the Joint Venture. The Deed provided that the purchase price and certain other payments were either to be made on and/or calculated as at the close of business on the day of Completion, which was subsequently agreed to take place on 30 June 2006. 3 On 30 June 2006, prior to completion, the parties entered into an agreement (referred to as the Letter Agreement in the principal judgment) amending cl 3.3(b) of the Deed. Pursuant to cl 3.3(b), the appellant was to distribute "51% of all [monies] held in a financial institution to [the respondent] … on or before Completion". The Letter Agreement provided for the time at which the payment under cl 3.3(b) was to be determined. 4 Also on 30 June, Sony Pictures Home Entertainment Pty Ltd ("Sony") paid its outstanding account with the Joint Venture. The payment did not appear on the "transaction listings" that the Joint Venture's banker forwarded by email to the appellant and which the appellant printed out just after 5 pm on 30 June. The appellant treated the transaction listings as "Bank Statements" for the purposes of the Deed and Letter Agreement, and hence based its calculation of the payment due to the respondent on the transactions appearing in the transaction listings. As the Sony payment did not appear on the transaction listings, the appellant did not include it in the calculation of the amount it owed the respondent under the Deed and the Letter Agreement. There was no suggestion that the appellant knew that the payment had been made. Its omission from the transaction listings was due to interbank accounting practices. The respondent brought proceedings claiming that it was entitled to 51 per cent of the Sony Payment pursuant to the amended cl 3.3(b). 5 At the heart of the dispute between the parties were the meanings of the terms "close of business on the day of completion" and "Bank Statements" in the Letter Agreement. 6 At trial, Rolfe DCJ ordered judgment in favour of the respondent. The appellant appealed to this Court against his Honour's orders. The Court held that upon its proper construction "close of business" meant 5 pm and that the transaction listings printed out just after 5 pm on 30 June were Bank Statements for the purposes of and within the meaning of that term in the Letter Agreement. (See respectively Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 199 at [60]-[78], [79]-[92].) The Court therefore allowed the appeal and set aside the trial judge's orders. A verdict was entered for the appellant and the Court ordered that the respondent pay the appellant's costs at first instance and of the appeal. 7 On 5 August 2009, the appellant filed submissions seeking indemnity costs in relation to the trial and the appeal on the grounds that it made an offer of compromise to the respondent on 13 July 2007 pursuant to r 20.26 of the Uniform Civil Procedure Rules 2005 ("the UCPR"). The offer was for judgment to be entered for the respondent in the sum of $10,000 plus costs assessed up to the date of the offer. The respondent did not accept the offer. The relevant rule 8 Rule 42.15A of the UCPR specifies the costs rules that apply when an offer of compromise is not accepted by a plaintiff (the respondent in these proceedings) and the defendant (the appellant in these proceedings) obtains a more favourable judgment. It provides: "(1) This rule applies if the offer concerned is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim concerned as favourable to the defendant, or more favourable to the defendant, than the terms of the offer. (2) Unless the court orders otherwise: (a) the defendant is entitled to an order against the plaintiff for the defendant'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." Submissions on costs at first instance 9 The appellant contends that since its offer was made pursuant to the UCPR and because the effect of the Court's order on appeal was that it had obtained a judgment in its favour, it has a prima facie entitlement to indemnity costs in accordance with r 42.15A. In support of the contention that its offer was a "genuine" offer, the appellant advances four propositions. 10 First, it submits that in circumstances where, on its assessment, the respondent's claim would fail, an offer of $10,000 was a compromise, in that it provided for some payment. 11 Second, given the strength of its case, the appellant could have made an offer under the UCPR that there be verdict for it with the parties to bear their own costs. The appellant points out that the offer it made was in fact more generous, notwithstanding that it was for a small percentage of the respondent's claim. 12 Thirdly, the appellant submits that had the respondent accepted the offer, it would not only have been paid $10,000, it would have also been paid its costs up to the date of the offer, thus sparing the costs of the proceedings and the appeal for itself and the appellant (for which it is now liable). The appellant says that these costs are in the order of hundreds of thousands of dollars. 13 Fourth, the appellant submits that the policy underlying the prima facie entitlement to indemnity costs would be undermined if a party with a strong defence was required to make an extravagant and unrealistic offer before it was entitled to the benefit of the rules. 14 The appellant acknowledges that the Court has a discretion to make a different order from that specified in the rules to prevent substantial injustice in an exceptional case, but that the exercise of that discretion would be rare. (See Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19].) The appellant submits this is not an exceptional case, given the strength of the appellant's case and the intractable position adopted by the respondent, as evidenced by the respondent's Calderbank offer made by letter dated 5 September 2007. In that letter, the respondent offered to settle the proceedings on the basis that it be paid a sum which was equivalent to 96 per cent of its claim plus costs. 15 There is a misconception in this submission. Leichhardt Municipal Council involved a Calderbank offer. Nonetheless, Santow JA (Bryson JA and Stein AJA agreeing) considered the guiding rules relating to offers of compromise made under Pt 39A of the District Court Rules 1973. Part 39A, r 25(6) expressly provided that the adverse costs consequences following a failure to accept an offer of settlement applied "[u]nless the Court in an exceptional case and for the avoidance of substantial justice otherwise [ordered]". Rules 42.14, 42.15 and 42.15A are in different terms. They provide that, when the relevant costs rule is engaged, a party is entitled to indemnity costs from a specified time (usually one day after an offer of compromise is made), "unless the court orders otherwise" (emphasis added). The relevant provisions of these rules do not specify that exceptional circumstances or the avoidance of substantial injustice must be established before the court will make a different order to the prima facie order for which the rules provide and, in our opinion, the rule should not be so construed. Rather, the discretion is one that has to be exercised having regard to all the circumstances of the case. 16 The respondent contends that the appellant's offer was not a genuine offer of compromise. Being an offer of only $10,000 in respect of its claim which was in the sum of approximately $600,000, it was "nominal" and "hardly a compromise". The respondent relies upon a line of authority in this Court that an offer of compromise, including an offer made under the UCPR, must involve a "genuine offer of compromise" and not merely be made so as to trigger the costs consequences under the rules. (See Leichhardt Municipal Council supra at [23]; Tickell v Trifleska Pty Ltd (1990) 25 NSWLR 353 at 355.) 17 The respondent also contends that the fact the offer included an offer to pay its costs was irrelevant: first, because such an offer did no more than reflect the outcome up to the point of the offer (see Robb Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 at [19]) and secondly, because the respondent's costs "were no doubt negligible at that time given all that it had done in the proceedings [at the time that the offer was made] was file and serve its initiating process". 18 The respondent submits alternatively that, even if the Court determined that the offer of compromise involved a sufficient element of compromise, the Court should exercise its discretion and "otherwise order" costs on an ordinary basis for two reasons. First, the offer was made only three weeks after the commencement of the proceedings. Second, the respondent again submits that an offer made at such an early stage of proceedings was merely a procedural tactic to trigger costs consequences, rather than being a genuine attempt to reach a negotiated settlement. (See The Uniting Church v Takacs (No 2) [2008] NSWCA 172 at [14] (Hodgson JA, McColl JA agreeing).) Submissions on costs in this Court 19 The appellant did not make a fresh offer or review its existing offer on the appeal. Nonetheless, it claims indemnity costs on the appeal on the basis of its initial offer. 20 The appellant submits that the bringing of an appeal was a reassertion of its belief in the strength of its case. The appellant points out that the construction of the Letter Agreement was the same and there was nothing in the expert banking evidence which undermined its case. Indeed, despite the trial judge's finding to the contrary, the expert evidence supported the appellant's case. 21 The appellant also argues that its offer was made to avoid the costs of litigation. It submits that it was unreasonable to expect the appellant to renew the offer after judgment at first instance had been delivered, as this would have exposed the appellant to the prospect of the offer being accepted and having to pay the respondent's costs up to the date of the renewed offer. 22 The respondent submits that since the appellant did not make a fresh offer of compromise after the lodging the appeal, if the Court finds that the offer did not constitute a relevant offer under the UCPR, it cannot be relied upon for the appeal. Further, it submits that it was reasonable for it to seek to uphold the judgment below. It relies upon Justice Hodgson's statement in Takacs supra at [16]: "As regards the costs of the appeal, even if I had not ordered otherwise in relation to the costs at first instance, I would not have ordered indemnity costs of the appeal. In my opinion, appeal proceedings are properly treated as distinct proceedings for the purpose of UCPR 42.13, although offers of compromise made in first instance proceedings can still be relevant to the Court of Appeal's discretion as to costs. In this case, it was plainly reasonable for the plaintiff to seek to maintain the judgment he obtained at first instance, particularly in circumstances were [sic] no offer was made by the Trust in the appeal proceedings themselves." Costs at first instance 23 In response to the appellant's submission that the respondent would have avoided the costs consequences of the proceedings, if it had accepted the offer, we agree with Justice Basten's comments in Robb Evans at [22]. Justice Basten stated that such a submission was "misconceived": "Whether or not the offer involved a genuine compromise must be assessed by reference to the rule pursuant to which the offer was made. That rule refers to an offer to compromise a claim in proceedings on specified terms. Subject to an exception in the case of judgment for the defendant on the basis that each party bear its own costs, the offer must be exclusive of costs: r 20.26(2). Consistently with that approach, the costs consequences are measured by reference to the order or judgment 'on the claim concerned': r 42.15(1). The fact that a party which failed to accept an offer incurs costs in pursuing litigation to a result which is less favourable to it than the offer, is not a factor which is material to determining whether the offer itself was a genuine offer of compromise for the purposes of r 20.26." 24 The offer must be considered according to its terms, having regard to the claim which is made. The rules expressly state that an offer under the UCPR (other than under r 20.26(2)) must be made "exclusive of costs". The costs consequences of either accepting or rejecting the offer are then contained in rr 42.14, 42.14 or 42.15A of the UCPR. 25 There is a considerable body of authority in this Court that an offer of compromise under r 20.26 of the UCPR must be a real and genuine offer, if an order for indemnity costs is to be made pursuant to rr 42.14, 42.15 or 42.15A. (See The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) [2006] NSWCA 120; (2006) 67 NSWLR 706 at [8] and references therein. See also Leichhardt Municipal Council supra at [23]–[24].) The terminology is not entirely apposite, but it is serviceable. (See also Hancock v Arnold; Dodd v Arnold (No 2) [2009] NSWCA 19 at [23].) 26 In Robb Evans, the appellant had made an offer of compromise of $2,000 plus costs. The offer was made under r 20.26 of the UCPR. The respondent's claim, for a sum in excess of $800,000, failed. The appellant claimed indemnity costs in accordance with r 42.15. The Court concluded that the offer could not be treated as a "genuine offer of compromise", even if the respondent's claim had limited prospects of success. The Court considered that the respondent's claim was not frivolous or vexatious and it described the appellant's offer as "trivial and contemptuous" and not a genuine offer of compromise. Justice Basten (Campbell JA agreeing) held that in those circumstances the offer did not engage the costs consequences provided for in r 42.15. 27 There will be situations in which a purported offer does not answer the description of "an offer of compromise" referred to in r 42.13, being "an offer … to compromise any claim in the proceedings" within r 20.26. A two judge bench of this Court determined that that was the situation in Robb Evans supra at [23]. Justice Basten went on, however, at [24] to determine, in the alternative, that if the rule was engaged, then the proper exercise of the Court's discretion would be to "otherwise order", in accordance with r 42.15. 28 It will rarely be the case that a decision needs to be made as to whether or not an "offer" answers the description of an "offer of compromise" within the rules. To the extent that the element of compromise is absent, the Court will be more likely to "otherwise order". In the present case, we are content to proceed on the basis of exercising the discretion to "otherwise order". 29 As is usually the case in proceedings turning on an issue of contractual interpretation, this was an all or nothing case. The claims did not involve a process of evaluation or assessment in which the end result could vary over a range. Either one party or the other party was correct. Whilst a marginal difference between the offer and the result may constitute a real and genuine offer of compromise in a personal injury context, that is not generally true in an all or nothing case. (See The Anderson Group supra at [9]; Robb Evans supra at [18].) 30 The offer of $10,000 made at an early stage of these proceedings – indeed, before a defence had been filed – was an invitation to surrender, rather than any form of commercial compromise. Clearly, the offer reflected the strength of the appellant's belief in its interpretation of the contract. This belief has been fully vindicated in this Court. Nevertheless, it is difficult to characterise the offer as one of "compromise". Any such element of compromise was, at best, "of limited significance". (Hancock v Arnold supra at [15].) The offer can be accurately described as derisory. The Court should adopt the approach in Robb Evans. 31 An offer which is in substance an invitation to surrender can result in the successful triggering of the indemnity costs mechanisms under the rules. (See r 20.26(2); Leichhardt Municipal Council supra at [36]-[37], [40].) However, as Basten JA suggests in Robb Evans supra at [20], the claim or defence would have to approach something of the character of being frivolous or vexatious for that to be the case. (See also Hancock v Arnold supra at [17].) If it were otherwise, the public policy to encourage settlement would rarely be served, in an all or nothing case. These proceedings were not of that character, as indicated by the success which the respondent had at first instance. 32 The normal order for costs, even in a clear case, is that each party bears its own costs without full indemnity. If a derisory offer, of the kind made in these proceedings, could result in an order for indemnity costs, then it is likely that many, perhaps most, contract interpretation disputes would result in an indemnity costs order, if the formality of an offer in accordance with the rules had been made at an early stage. If the appellant were to succeed in the present case, it is quite likely that such an offer would accompany most statements of claim as a matter of commercial practice. The purpose of the special order – to encourage settlement – would no longer be served. An order for indemnity costs could, in our opinion, become the normal order in many commercial disputes. 33 It is often the case that the result of an interpretation issue appears quite clear in retrospect. However, an offer of compromise must be assessed, in large part, at the time it was made. (See most recently Hancock v Arnold supra at [23].) Whether what was offered was a relevant compromise, and whether its rejection was reasonable should not be assessed with the benefit of 20:20 hindsight. 34 The rival contentions on interpretation are set out in the Court's first judgment. (See Regency Media Pty Ltd supra esp at [60]-[92].) The respondent's submissions were regarded by this Court as clearly wrong. However, these proceedings did not have the degree of hopelessness, nor did they have any element of frivolity or vexation, of a character which would support an invitation to surrender being accepted as a real and genuine offer of compromise. 35 This is a case to which, with an adjustment by reference to the $10,000 offered, the observations of Bryson JA in Leichhardt Municipal Council supra at [59] apply: "The respondent's case did not succeed, but it was not a case which could not reasonably be argued and it succeeded at first instance. The only element of compromise in the offer was as to costs: otherwise it was a call on the respondent to capitulate and give up: the element of compromise was slight, and the respondent's ultimate lack of success does not to my mind demonstrate that the reasonable course for the respondent was to capitulate, nor does anything show that the respondent was delinquent in going on with the trial or in resisting the appeal." (See also Takacs supra at [13]-[15].) 36 The appellant's motion for indemnity costs at first instance is rejected. Costs in this Court 37 The above conclusion would lead to the same result with respect to the application for indemnity costs of the appeal. However, even if we had been of a different opinion with respect to an order for indemnity costs at trial, we would reject the application that an order of that character should be made with respect to the proceedings in this Court. 38 No offer of compromise was made in this Court pursuant to rr 51.47 and 51.48 of the UCPR. We note that r 51.49 permits this Court to have regard to any offer of compromise made in the court below; however, that rule operates to inform the discretion which must be exercised pursuant to r 51.48, insofar as it picks up and applies in this Court Div 3 of Pt 42 of the UCPR. We do not understand the appellant to invoke r 51.48. 39 In view of the inapplicability of Div 8 of Pt 51, in the present proceedings the Court is concerned with the exercise of the general discretion to award costs pursuant to s 98 of the Civil Procedure Act 2005. A pre-trial offer is relevant in the exercise of that discretion. (See Grace v Thomas Street Café Pty Ltd (No 2) [2008] NSWCA 72 at [33].) The original offer has cost consequences, in the sense that it is a relevant consideration, but it is not an offer under the rule applicable in this Court. The proceedings in this Court are distinct proceedings. 40 One of the reasons underlying the practice of the Court referred to in Grace v Thomas Street Café is that on appeal, parties are in a different position from that which they were in prior to or at trial. Prior to trial, the facts are still to be determined. There may be questions as to the credibility of witnesses or as to the weight of evidence that are in issue. By the time of the appeal, facts have been found, credibility issues resolved and the weight of evidence determined. Although there may be a challenge to such findings, the parties are nonetheless in a different position from that prior to trial and should assess their cases accordingly, if they intend to seek indemnity costs based upon an offer of compromise. 41 Furthermore, the presumptive quality of the rule, leading to a situation in which the Court has to "otherwise order", does not apply in a case in which no offer of compromise has been made in this Court. The original offer was not open to be accepted at any time after judgment below. 42 The respondent was successful at first instance. It was reasonable to support the reasoning of the trial judge. (See Takacs supra at [16].) The discretion to make special costs orders will not generally be exercised in favour of a successful party who has not invoked Div 8 of Pt 51. (Grace v Thomas Street Café supra at [33].) The public policy to encourage settlement is equally applicable in this Court. The fact that one party has won at first instance does not mean that efforts to compromise should cease. 43 Something special is required to vary the usual order as to costs in this Court. We can see no basis for making a special order for the costs of the appeal. Conclusion 44 The Court was informed that after the judgment of Rolfe DCJ the appellant paid the respondent $807,328.97. The repayment is secured by bank guarantee. The appellant seeks an order that this amount be repaid with interest. That is not opposed. 45 We make the following orders: 1 The respondent pay the appellant $807,328.97 plus interest at Schedule 5 rates from 28 July 2008 by way of restitution. 2 The appellant's notice of motion of 17 July 2009 is otherwise dismissed. 3 The appellant pay the respondent's costs of the notice of motion. ********** 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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