Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Crossman v Sheahan (No 2) [2016] NSWCA 351 Hearing dates: On the papers Decision date: 13 December 2016 Before: Basten JA; Ward JA; Payne JA Decision: 1. Vary order 1 of the orders made on 23 August 2016 and add a new order 1A as follows: 1. Appeal allowed. 1A. Order the first and second respondents to pay the appellants' costs of the appeal: a. on an ordinary basis until 11 April 2016; and b. on an indemnity basis from 12 April 2016. 2. There be no order as to the costs of the notice of motion filed on 7 September 2016 by the appellants. Catchwords: COSTS – indemnity costs – Calderbank offers – application with respect to trial – whether compromise or capitulation offered – application with respect to appeal – reliance on offers made before trial – further offer before hearing of appeal – whether reasonable time allowed – relevance of ongoing negotiations – whether unreasonable for respondents not to accept offers Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW), rr 20.26, 42.15A, 42.19(2), Pt 42 Cases Cited: Calderbank v Calderbank [1976] Fam 93 Ettingshausen v Australian Consolidated Press Ltd (1995) 38 NSWLR 404 Grace v Thomas Street Café Pty Ltd (No 2) [2008] NSWCA 72 Grbavac v Hart [1997] 1 VR 154 Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 Old v McInnes [2011] NSWCA 410 Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA Category: Costs Parties: Phillip Crossman (First Appellant) Seniors Provident Pty Ltd (Second Appellant) Metro Finance Pty Ltd (Third Appellant) Metro Finance (NZ) Pty Ltd (Fourth Appellant) John Sheahan (First Respondent) Ian Lock (Second Respondent) Valofo Pty Ltd (in liq) (Third Respondent) Ross Seller (Fifth Respondent) Peter Londish (Sixth Respondent) Representation: Counsel: Dr AS Bell SC with DFC Thomas (Appellants) JE Marshall SC with DR Sulan (First and Second Respondents) Solicitors: Corrs Chambers Westgarth (Appellants) Clayton Utz (First, Second and Third Respondents) File Number(s): 2015/221882 Publication restriction: Nil Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity – Commercial List Citation: [2015] NSWSC 535; [2015] NSWSC 871 Date of Decision: 06 May 2015 Before: Rein J File Number(s): 2013/127413 [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Judgment 1. THE COURT: In this matter, on 23 August 2016 the Court allowed with costs the appellants' appeal from a decision in the Equity Division of the Supreme Court. The Court set aside the orders made by the primary judge and in lieu thereof dismissed the further amended commercial list summons filed by the respondents, as plaintiffs, in those proceedings and ordered that the first and second plaintiffs pay the costs of the third, fourth, fifth and ninth defendants in those proceedings. 2. On 7 September 2016, the appellants filed a notice of motion in this Court seeking costs orders on an indemnity basis in respect of the whole of the appeal proceedings and in respect of part of the proceedings in the Equity Division; with alternative orders in the event that the first way in which indemnity costs orders for each set of proceedings are sought does not find favour with the Court. In particular, they seek the following orders: Appeal costs 1. The first and second respondents pay the appellants' costs of the appeal on an indemnity basis. 2. In the alternative to prayer 1, the first and second respondents pay the appellants' costs of the appeal: a. on an ordinary basis until 11 April 2016; b. on an indemnity basis from 12 April 2016. Trial costs 3. The first and second plaintiffs pay the costs of the third, fourth, fifth and ninth defendants: a. on an ordinary basis until 14 September 2012; and b. on an indemnity basis from 15 September 2012. 4. In the alternative to prayer 3, the first and second plaintiffs pay the costs of the third, fourth, fifth and ninth defendants: a. on an ordinary basis until 31 July 2013; and b. on an indemnity basis from 1 August 2013. Other orders 5. Costs. 6. Such other order or orders as the Court sees fit. 1. It is not necessary to repeat the factual background to the proceedings, which is summarised in the judgments handed down by this Court in August this year. For convenience the same abbreviations as used in those judgments will be adopted in these reasons. Costs of the trial * From 15 September 2012 1. The basis on which indemnity costs orders are sought of the proceedings at first instance from as early as 15 September 2012 is that, by letter dated 30 August 2012, the appellants made a Calderbank offer (Calderbank v Calderbank [1976] Fam 93) to the new trustees, including that they would pay the sum of $50,000 to the new trustees, Mr Crossman would withdraw his claim for costs associated with the production of certain documents and each party would bear its own costs. That offer was stated to be open for acceptance until 5pm on 14 September 2012. At the time that offer was served, the Equity Division proceedings had not yet been commenced but the appellants had been served with a detailed draft summons and commercial list statement (on 29 March 2012) and, both in a letter of 20 April 2012 and in the Calderbank offer letter, the appellants had pointed out the reasons why they maintained the claim would not succeed. The 2012 offer also identified the costs likely to be incurred if the offer were not accepted. The offer was not accepted. 2. The appellants contend that the offer represented a genuine compromise in a not immaterial amount; that a reasonable period of time was given for acceptance of the offer; and that it was not an offer served "too early", since the flaws inherent in the new trustees' case could not have been remedied by the leading of oral evidence or the obtaining of compulsory disclosure after the proceedings had been commenced. 3. They submit that it was unreasonable for the new trustees not to accept the 2012 offer, as the proceedings were always likely to fail because the new trustees chose not to impugn the Main Settlement Deed. The appellants had raised in their correspondence their assertion that the settlements and payments made to the Crossman interests formed one transaction whereby Mr Crossman's claims had been compromised to the benefit of the PILT Trust and its other beneficiaries. In particular, the appellants point out that by their letter of 20 April 2012 they had stated that the settlement deeds, and the releases and covenants not to sue contained in those deeds, were binding on the new trustees. 4. The respondents argue that the 2012 offer did not involve any real compromise, noting that their claim was for $2.2m. They submit that the offer was in substance one calling for capitulation (referring to Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA). The respondents note that there is no suggestion by the appellants that the proceedings had an element of frivolity or vexation such as to support an invitation to capitulate (as considered in Regency Media). 5. The appellants cavil with this. They maintain that the amount of the offer was material in size and far from derisory. They say that the inclusion of costs in the offer was not unreasonable since the proceedings at that stage had yet to be commenced (though accepting that some costs had been incurred in preparing the draft commercial list statement). 6. Further, the respondents say that it was not unreasonable for them not to accept the offer in circumstances where the proceedings had not commenced until after it had expired; the claims involved complex issues of fact and law; and, at that time, they were not in a position to assess the strength or otherwise of many of the assertions made in the 2012 correspondence (noting that evidence was not served by the appellants in the proceedings until some two years after the offer). 7. The respondents also point out that the main defence advanced in the 2012 correspondence was that Valofo had consented to the impugned payments (as to which there was no evidence from which the new trustees could assess this point), which was ultimately rejected by the primary judge. As to the construction issues raised in the proceedings, the respondents submit that those developed during the course of the litigation and the fact that the primary judge's conclusions in relation to those issues were overturned on appeal does not make unreasonable the non-acceptance of the offer at the time it was made. 8. The appellants maintain that it was not necessary for the new trustees to see their defence or their evidence in order properly to assess whether to accept the offer, having regard to the difficulties outlined in their 2012 correspondence (which they say did not depend on the adducing of evidence at the trial but rather on the forensic decisions made by the new trustees, in particular the decision not to seek rescission of the Main Settlement Deed). * From 1 August 2013 1. Alternatively, the appellants seek an order that indemnity costs of the proceedings at first instance be paid on an indemnity basis from 1 August 2013. 2. They do not press their reliance on r 42.15A Uniform Civil Procedure Rules 2005 (NSW) (UCPR) in this regard, accepting that an offer of compromise which they served on the new trustees on 31 July 2013 was open for less than 28 days, contrary to the requirements of r 20.26(5)(a) UCPR, and hence was not a valid offer of compromise under the UCPR. However, they maintain that the 2013 offer of compromise (in which they again offered to pay the sum of $50,000 but did not make any provision in relation to the costs of the proceedings) should be treated as a Calderbank offer. 3. The appellants accept that whether that approach ought be adopted depends on the facts of the case and, in particular, the intention of the offeror (Old v McInnes [2011] NSWCA 410 at [160]). They argue that, assessed in light of the 2012 offer, it is inherently unlikely that they intended the 2013 offer to have no effect if it did not comply with the rules, noting that in Old v McInnes, Beazley JA noted that the court was entitled to look at the conduct of the parties throughout the proceedings, including attempts made at settlement and the terms of the failed offer under the rules. 4. In the present case, the appellants argue that the 2013 offer communicated a genuine compromise some six weeks after they had filed their commercial list response on 14 June 2013, which reiterated the difficulties in the new trustees' case to which they had already adverted in the 2012 correspondence. They argue that it was unreasonable of the respondents not to accept that offer. 5. It was a term of the 2013 offer of compromise that, within three days of payment of the sum of $50,000, the new trustees were required to file a notice of discontinuance. Although the new trustees argue that this made the offer incapable of acceptance (because under the rules such a notice can only be filed with the consent of each active party or with the leave of the Court), the appellants argue that this requirement merely made acceptance of the offer subject to a condition subsequent in the form of court approval. 6. As to the related submissions of the respondents, first, that, on its proper construction, the offer was inclusive of costs (since, on the respondents' argument acceptance of the offer would not have entitled them to recover costs because it did not provide for a monetary judgment) and, second, that the effect of acceptance of the offer would have been to require them to pay the appellants' costs (pursuant to UCPR r 42.19(2), which applies on the filing of a discontinuance without the consent of all active parties or leave of the Court, unless the Court otherwise orders), the appellants argue that the covering letter unambiguously noted that the offer of compromise did not include an amount of costs. The appellants note that the offer of compromise itself stated that it was made exclusive of costs and that there is nothing in UCPR r 20.26 or Pt 42 to prohibit a situation in which acceptance of an offer of compromise leads to the defendant becoming entitled to costs. 7. The respondents maintain that the 2013 offer was confusing given the statements referred to in it and the covering letter as to costs. They argue that the offer was not a real and genuine compromise because it was inclusive of costs and required them to pay the appellants' unquantified costs (which they were not in a position to assess at the time). They further argue that rejection of the offer was not unreasonable because the timing of it meant that the issues in dispute had not yet narrowed or crystallised and there was at that stage no evidence as to the Valofo consent point. Determination 1. It is not necessary to set out the principles applicable when considering whether an order for indemnity costs should be made in circumstances where a Calderbank offer has been made and not accepted. They have been articulated in various cases and are well-known. 2. In the present case, there is force to the submission by the new trustees that the offers made in 2012 and 2013 did not constitute a real and genuine element of compromise given the very small sum offered by way of compromise of a claim which was considerably larger in quantum, even more so in the case of the former since it was expressed to be inclusive of costs. However, even accepting that those two offers did represent more than an invitation for the new trustees to capitulate or surrender their claim, and even accepting (which is by no means beyond doubt) that the 2013 invalid offer of compromise can be said to have disclosed an intention that it operate, if an invalid offer of compromise under the rules, as a Calderbank offer, the appellants have not established that it was unreasonable for the new trustees not to accept those offers at the respective times that they were made. 3. The proceedings in the Equity Division raised complex issues of fact and law. In particular, the issues of construction were ones on which reasonable minds might (and in the event did) differ. In those circumstances, and taking into account the relatively small amount offered by way of compromise, it was not unreasonable for the new trustees to pursue their claim in the interests of the ultimate beneficiaries of the trust. The application for indemnity costs for part of the proceedings at first instance (whether from 15 September 2012 or from 1 August 2013) should be dismissed. Costs of the appeal 1. The appellants seek indemnity costs of the appeal on two bases. First, they rely on the making of the offers that were made in 2012 and 2013. They argue that the latter was not exhausted once the trial came to an end (citing Ettingshausen v Australian Consolidated Press Ltd (1995) 38 NSWLR 404 at 409-410). 2. Alternatively, they rely on a Calderbank offer made on 5 April 2016 to pay the new trustees the sum of $2m, inclusive of costs at first instance and the costs on appeal. That offer was open until 6pm Monday, 11 April 2016 (i.e., for four clear business days but six calendar days). The appeal was listed for hearing on 27 April 2016. The appellants argue that it was unreasonable for the new trustees not to accept that offer in circumstances where the fundamental deficiencies in the case remained; they were squarely identified in the notice of appeal and they were the subject of detailed written appeal submissions from the appellants that had been served on 9 September 2015. 3. The respondents reiterate the arguments made in relation to the 2012 and 2013 offers as precluding those offers from forming the basis of an award of indemnity costs of the appeal. 4. As to the 2016 offer, the respondents argue that the appellants have not discharged their burden of establishing that its non-acceptance was unreasonable, noting: the limited period of time in which it was open; the requirement that there be settlement deeds in order to trigger any payment obligation and the failure to identify the proposed terms of those deeds; the requirement that the appeal be dismissed within three days of the offer (which it is said might well have been prior to the execution of the settlement deeds, that being required to trigger the payment obligation); and that the payment terms provided for payment in two instalments (the second within 12 months of the execution of settlement deeds), creating a significant enforcement risk to the respondents. 5. The respondents point out that by the time of the 2016 offer, they had the benefit of a judgment for $3,177,256.16 plus interest accruing from the date of the orders, as well as an order for costs. They also note that the sum offered was inclusive of costs at first instance (of a five day trial) as well as of the appeal proceedings. 6. The appellants argue that six calendar days was more than sufficient time to assess the offer (since all issues in the dispute had been canvassed in the written submissions by then). They also point out that they asked the solicitors for the new trustees on 12 April 2016 whether they needed further time to consider the offer and that the latter did not reject further settlement negotiations until 21 April 2016. In that way they argue that the 2016 offer was "put back on the table" by them on 12 April and open for a further nine days. 7. They maintain that none of the matters referred to at [25] above rendered the 2016 offer incapable of acceptance and that, given its very substantial amount, its non-acceptance was unreasonable. Determination 1. To submit that the earlier offer, or at least the second offer made before the trial, was not exhausted once the trial came to an end does not indicate how it should be taken into account following a successful appeal. The following observations of Basten JA in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [22] are apposite: This Court was not referred to any case where an informal offer, made prior to the judgment under appeal and reasonably rejected by the successful party in the trial court, has been successfully relied upon by the offeror in respect of the costs of its successful appeal to obtain indemnity costs. There are three significant reasons why that is not surprising. First, where the offer has expired and not been renewed, the offeree is entitled to say that its success at trial would be a significant event, rendering reasonable the hypothetical rejection of a renewed offer. Secondly, the failure of the offeror to renew the offer prevents that possibility being tested. Thirdly, the offer in the court below to settle 'the proceedings' may reasonably be treated as referring to the proceedings then on foot, and not to the possibility of an appeal." 1. The offer made on 5 April 2016 falls into a different category. The issues in dispute had been fully agitated at a trial; an appeal had been lodged and written submissions served well in advance of the offer; and the offer was open for four clear business days (plus a weekend). Lest the time was considered to be unreasonable, by letter dated 12 April 2016, the solicitor for the appellants inquired whether more time was required. Further, confirmation was sought that the offer was in fact rejected. On 21 April a response was received indicating that "our clients are of the view that the parties remain too far apart for there to be merit in the continuation of settlement discussions". The offer, which was to pay $2 million, involved a genuine compromise of the appellants' claims. No doubt there was an element of uncertainty flowing from the condition that the parties enter into settlement deeds. However, there was no suggestion that the content of the deeds would be complex or controversial. 2. The principles to be applied were identified by this Court in Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 in relation to the then rules of court, but in terms which were subsequently accepted by Hayne JA as relevant to informal offers of compromise in Grbavac v Hart [1997] 1 VR 154 at 165: 1. To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff's real claim which can be placed before its opponent without risk that its 'bottom line' will be revealed to the court; 2. To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and 3. To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation. 1. Given the proffered extension, the temporal element cannot be treated as fatal. The fact of ongoing settlement negotiations may itself be relevant to the exercise of the discretion to award costs: Grace v Thomas Street Café Pty Ltd (No 2) [2008] NSWCA 72 at [33]. There was no reason to suppose that in rejecting the offer the respondents should not have been conscious of the fact that they would thereafter be at risk of paying indemnity costs if they failed to achieve a better outcome than that offered by the appellants. Viewed against the ultimate result, the offer was reasonable from the perspective of both parties; it should have been so perceived at the time of the offer. In these circumstances, the appellants should have their costs of the appeal, to be assessed on the ordinary basis up to and including 11 April 2016 and thereafter to be assessed on the indemnity basis. 2. Each party has been partly successful on the motion. Accordingly there should be no order as to the costs of the motion. ********** Amendments 13 December 2016 - Typographical amendments to [2], [11], [16] and [31] 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. Decision last updated: 13 December 2016