Supreme Court New South Wales Medium Neutral Citation: Midcoast Petroleum Pty Ltd v Keldros Pty Ltd (No 2) [2019] NSWSC 1406 Hearing dates: On the papers Date of orders: 17 October 2019 Decision date: 17 October 2019 Jurisdiction: Equity Before: Ward CJ in Eq Decision: 1. Order the plaintiff to pay: (i) 80% of the defendants' costs of the proceedings up to and including 18 October 2017 on the ordinary basis; and (ii) the defendants' costs from 19 October 2017 on the indemnity basis. 2. Order the plaintiff to pay interest to the defendants on the allowed percentage of the costs the subject of Order 1(i) and the costs the subject of Order 1(ii) on the basis that interest be calculated on the amounts actually paid for or on account of costs and disbursements to the defendant's legal advisers in connection with these proceedings, at the rate set out in UCPR r 36.7 from the date of payment of each such amount until the first to occur of such time as the plaintiff has paid the costs due to the defendants under Order 1, or any further order relating to interest on costs in these proceedings. 3. Liberty to apply on seven days' notice for any further order in relation to Order 2. Catchwords: COSTS - Calderbank offer made by defendants pre-trial – offer not accepted by plaintiff – whether warrants a departure from the ordinary rule as to costs – held that the plaintiff's failure to accept the offer was unreasonable – special costs order is warranted Cases Cited: Brymount Pty Ltd v Cummins (No 2) [2005] NSWCA 69 Calderbank v Calderbank [1975] 3 All ER 333; 3 WLR 586 Commonwealth of Australia v Gretton [2008] NSWCA 117 Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 Lahoud v Lahoud [2011] NSWSC 994 Leichhardt Municipal Council v Green [2004] NSWCA 341 Midcoast Petroleum Pty Ltd v Keldros Pty Ltd [2019] NSWSC 970 Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 Category: Costs Parties: Midcoast Petroleum Pty Ltd (Plaintiff) Keldros Pty Ltd (First Defendant) Andrew Robert Plant (Second Defendant) Representation: Counsel: MP Cleary (Plaintiff) R Marshall SC with H Durack (Defendants) Solicitors: McCullough Robertson (Plaintiff) Nash Allen Williams & Wotton (Defendants) File Number(s): 2016/00247579 Publication restriction: Nil Judgment 1. HER HONOUR: In this matter, on 1 August 2019, I published reasons for my decision in relation to various claims made by the plaintiff, Midcoast Petroleum Pty Ltd (Midcoast), the registered proprietor of land in Budgewoi, New South Wales (the Budgewoi Premises), on which for many years a motor vehicle service station had operated, against: the first defendant (the former lessee of the site), Keldros Pty Ltd (Keldros), for alleged breaches of a lease and of a separate fuel supply agreement; and the second defendant (the sole director of Keldros), Mr Andrew Plant (now deceased), in his capacity as guarantor of Keldros' obligations under the relevant lease (though not the fuel supply agreement, to which the deceased was not party) (see Midcoast Petroleum Pty Ltd v Keldros Pty Ltd [2019] NSWSC 970). 2. Midcoast had brought claims for substantial sums and was largely unsuccessful in those claims. In summary, I found for Midcoast against Keldros and the second defendant in relatively small amounts (in respect of Midcoast's past remediation claim: $8,249.75; in respect of Midcoast's make good claim: $150; and in respect of Midcoast's debt claim: $35,000, to be set off in its entirety by the sum of that amount drawn down by Midcoast in or about 2015 on presentation of a bank guarantee that had been provided by Keldros to Midcoast). (I also made orders in favour of Midcoast in respect of its future remediation claim by reference to the cost of provision of certain reports but ultimately it was accepted that Midcoast had not incurred those costs – rather, the reports in question had been obtained as part of a due diligence exercise carried out by a potential purchaser of the site.) I otherwise dismissed Midcoast's claims. 3. At the time I published my reasons, I indicated that I considered that the appropriate costs order would be an order that Midcoast pay 80% of Keldros and the second defendant's costs (and that there should otherwise be no order as to Midcoast's costs) having regard to the limited success that Midcoast had had on its claim (see at [300]). 4. A final determination of the costs issue was delayed because, unbeknownst to me at the time judgment was published (but as I was informed on that occasion) not long before I delivered judgment the second defendant (who had been unwell at the time of the hearing) passed away. Probate has since been obtained in respect of his estate (a grant of probate having issued in favour of his son, Mr Anthony David Plant, who has been appointed as the sole director of Keldros). 5. Directions were in due course made for the filing of submissions in relation to the costs issue and the parties agreed that the question of costs should be determined on the papers. Having considered those submissions I am of the view that the appropriate order as to costs is that Midcoast pay the costs of the defendants of the proceedings on the ordinary basis up to and including 18 October 2017 and from 19 October 2017 on an indemnity basis, for the following reasons. Defendants' submissions 1. The defendants seek a special costs order in their favour, invoking the principles in Calderbank v Calderbank [1975] 3 All ER 333; 3 WLR 586, having regard to an offer made by the defendants on 18 October 2017. In that letter (expressly marked "Without Prejudice Save as to Costs"), the defendants offered to settle all of the claims made in Midcoast's statement of claim on the following terms: 1. Judgment in favour of the Plaintiff against the Defendants for $97,000.00. 2. The Defendants to pay the Plaintiff interest on the amount in order 1 above pursuant to section 100 of the Civil Procedure Act 2005 (NSW) from 31 July 2015. 3. The Defendants to pay the Plaintiff's costs referable to the make good claim pleaded in paragraphs [40] and [49] of the Statement of Claim. 4. In order to resolve the issue of costs on a percentage basis, the Defendants offer, at the Plaintiff's option, instead of order 3 above to accept liability for 15% of the Plaintiff's ordinary costs. 5. The proceedings otherwise be dismissed. 1. The letter set out the basis of the defendants' belief that the offer represented a genuine compromise on the basis that: it was expected that the defendants would shortly serve evidence regarding the claim for land contamination that would enable the Court to conclude that it could not be proven that the defendants were responsible therefor; the make good claim was defective as Midcoast had no evidence of the condition of the premises at the commencement of the lease; and that "our clients have removed make good items" that even on Midcoast's own evidence could not be substantiated and/or for which in the defendants' view they were not responsible having regard to the condition of the premises at the commencement of the lease. 2. The defendants note that on 2 November 2017, at a time when the Calderbank offer still remained open for acceptance by Midcoast, they served their evidence in chief: an expert report dated 31 October 2017 of Ms Salmon (going to the land contamination issue); and an affidavit dated 1 November 2017 of the deceased (going to the make good issue). 3. On 15 November 2017, the Calderbank offer expired (though the defendants note that it included an express invitation (if Midcoast required an extension before the 28 days had expired) for Midcoast to provide an explanation as to why an extension was sought and the defendants' solicitors would obtain instructions in relation thereto). 4. The defendants say that the offer was open at a time when the defendants' evidence in the proceedings had been served and thus Midcoast was fully aware of the issues in dispute (noting that the evidence served on 2 November 2017 was the principal evidence relied upon by the defendants to defend the claim for failure to make good the above and below ground improvements); and that Midcoast had the defendants' evidence in chief for 13 days before the Calderbank offer expired. 5. The defendants thus submit that Midcoast was fully aware of the issues in dispute at the relevant time and plainly had no doubt about the risk it was running in continuing to prosecute its case; and hence that a special costs order should be made in the circumstances. A form of consent order was forwarded to Midcoast's solicitors putting forward a proposed costs regime in that regard, but was not accepted by Midcoast. That form of consent order included provision for the payment of interest on the costs to be ordered. Midcoast's submissions 1. Midcoast accepts that it succeeded in recovering only a small amount in respect of its claims against the defendants; and does not cavil with the proposed order that it pay 80% of the defendants' costs (and that there be no order as to Midcoast's costs). Midcoast made no submission as to the application by the defendants for interest on their costs. 2. Midcoast submits that the Calderbank offer should not be taken into account in the exercise of the costs discretion, noting that in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 (Miwa (No 2)), Basten JA (at [8]) pointed to the approach frequently adopted in assessing Calderbank offers and their costs consequences as being to ask two questions: whether there was a genuine offer of compromise, and whether it was unreasonable for the offeree not to accept it. 3. Midcoast submits, contrary to what the defendants have submitted, that by the date of the offer not all of the defendants' evidence had been served (nor had all of Midcoast's evidence been served). Midcoast submits that it was too early (in October 2017) for Midcoast to have made a reasonable assessment of the defences being made to its claim (given that not all the evidence had been served at that time) and therefore it cannot be said that it was unreasonable for Midcoast not to accept the offer. Determination 1. The quantum of Midcoast's claim, as ultimately put, was the aggregate of the following sums: $8,249.75 paid by Midcoast in respect of an invoice issued to it by Wyong Shire Council (the Council) in September 2011, following the issue by the Council to Keldros of a clean-up notice dated 31 January 2011 (the clean-up notice) in relation to the Budgewoi Premises (said by Midcoast to relate to remediation works carried out by the Council at the Budgewoi Premises after a pollution incident in January 2011) (referred to in my earlier reasons as the Past Remediation Claim); $639,561 for future remediation of the service station site arising from contamination that is alleged to have occurred to the Budgewoi Premises during Keldros' occupation of the site (said by Midcoast's experts most likely to have been caused by the failure of three underground storage tanks and/or associated fuel lines at some time between commencement of Keldros' lease and up to and including the January 2011 pollution incident) (referred to in my earlier reasons as the Future Remediation Claim and, as at the time of the Calderbank offer, having been the subject of an expert report quantifying the cost of such remediation as somewhere in the order of approximately $1.5 million); $59,895.44 by way of loss and damage said to have arisen from Keldros' alleged failure, during its occupation of the Budgewoi Premises, to take the necessary steps to comply with environmental regulations which were introduced in 2008 and 2010 (referred to in my earlier reasons as the Regulatory Claims); an amount (variously quantified at either $87,188.75 or $38,019.60) for Keldros' alleged failure to comply with its make good obligations on the determination of the relevant lease (referred to in my earlier reasons as the Make Good Claim); and the sum of $35,000 (plus a claimed service charge) in respect of a debt allegedly owing by Keldros for petroleum products supplied to it by Midcoast during the term of the lease (the Debt Claim). 2. The amount offered in settlement of those claims in the Calderbank offer was $97,000 plus interest from 31 July 2015 and the costs referable to the make good claim (or for 15% of Midcoast f's ordinary costs). Although such an amount was a long way from the amount that was being claimed at that stage (and even from the reduced amount ultimately claimed by the conclusion of the hearing), there is no doubt that the offer contained a genuine element of compromise. In essence, it provided a not insubstantial sum towards the make good claim and included a component for interest and costs. The judgment obtained by the plaintiff in these proceedings is far less favourable to it than the offer of settlement made in October 2017 by the defendants. 3. As a Calderbank offer is here relied upon, the onus lies on the defendants to satisfy the Court that the costs discretion should be exercised in their favour on the basis that the failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs (see SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37]; Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 at [26]). There is no presumption in favour of indemnity costs notwithstanding that the ultimate judgment may be more favourable to the offering party than the terms of the offer. 4. The rationale and public policy underlying the special costs regime relating to Calderbank offers is well-known. In Commonwealth of Australia v Gretton [2008] NSWCA 117, Beazley JA (as her Excellency then was) identified the rationale for special costs rules as the public policy (and private interest) recognised in the early settlement of litigation and the discouragement of wasteful litigation (see at [41]). In Leichhardt Municipal Council v Green [2004] NSWCA 341, Santow JA (Bryson JA and Stein AJA agreeing) said at [14]: … the practice of Calderbank letters is allowed because it is thought to facilitate the public policy objective of providing an incentive for the disputants to end their litigation as soon as possible. Furthermore, however, it can be seen as also influenced by the related public policy of discouraging wasteful and unreasonable behaviour by litigants. 1. More recently, the Court of Appeal in Miwa (No 2) reiterated the public policy objectives of special costs orders; Basten JA (with whom McColl and Campbell JJA agreed), albeit in the context of the objects underlying the offer of compromise procedures under the rules (equally applicable to the policy in relation to Calderbank offers in my opinion), identified those at [6] as including: 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. In Brymount Pty Ltd v Cummins (No 2) [2005] NSWCA 69 (at [14]), Beazley JA (as her Excellency then was) (Ipp and McColl JJA agreeing) identified a number of factors as relevant to the determination as to whether costs should be awarded on an indemnity basis where a Calderbank offer had been made: whether rejection of the compromise offer was reasonable in the circumstances; the time frame in which the offeree had to consider the offer; and whether the letter of compromise explicitly stated that the offer was made in Calderbank terms, the exact conditions of the offer, and whether indemnity costs would be pursued if the offer was rejected. 2. As already noted, it was not suggested in the present case that there was not a genuine offer of compromise in the Calderbank offer that was made by the defendants. Nor was there any doubt as to the identification of the offer as an offer being made in accordance with Calderbank principles. The sole question thrown up by Midcoast's submissions is whether the defendants have established that it was unreasonable for Midcoast not to accept the offer at the relevant time. In my opinion, the defendants have done so. 3. During the time that the Calderbank offer remained open for acceptance, Midcoast was served with an expert report from Ms Salmon that very clearly indicated that there was a real contest as to the contamination claim. That report, dated 31 October 2017, contained a review of earlier, environmental site assessments; an assessment as to the state of the site at 31 July 2015 (see at [74]); and addressed the potential source of contamination at the site (see at [77]). The report pointed to the difficulty of identifying the date of the failure of the tanks most likely to have caused contamination of the northwest groundwater (see at [96]). There was also contention as to the extent of the remediation that would be required assuming liability were to be established. On any view of the expert evidence that had been served as at the time that the Calderbank offer was open for acceptance, the claims for past and future remediation were not clear-cut (and this was particularly the case having regard to the fact that the area where the source of the contamination was identified as likely to have been off the site in question). The plaintiff was relying at that stage on expert evidence that in essence required a wholesale remediation of the site in circumstances where there was an issue as to the location in which contamination had occurred and whether it required such extensive remediation. 4. As to the make good claim, there was at that stage evidence from which it was clear that there was an issue as to the reliability of the basis on which the make good claim had been made. Mr Plant in his affidavit admitted certain items but the balance of the make good claim was dependent on a schedule of make good items (prepared by reference to inspections carried out at least eight months prior to the first defendant's occupation of the premises and a year before the commencement of the original lease) and without reference to any condition report at the commencement of the lease (nor with any consideration as to whether any of the claimed make good items had been rendered otiose as a result of subsequent renovation of the premises by Midcoast). 5. It must have been clear by the time the defendants' evidence was served (and while the offer was still open for acceptance) that there was thus a real contest as to liability and as to the quantum of the amounts for which the defendants would be liable if Midcoast did succeed on one or more of its claims. Moreover, at that stage, Midcoast still retained the sum of $35,000 which had been retained out of the security bond and had not been applied to the Debt Claim or any other amount that it claimed was then owing. 6. The time allowed for acceptance of the offer was 28 days but was seemingly capable of extension. There was a period of almost two weeks from the service of evidence in which Midcoast was in a position to form an assessment as to the offer weighed against the likely cost of pursuing the matter to a contested hearing. 7. In all the circumstances, I have concluded that it was unreasonable for Midcoast not to accept the Calderbank offer. 8. Accordingly, I have concluded that a special costs order of the kind here sought by the defendants is warranted. There has been no issue taken with the order sought in relation to interest on costs (as was sought in the amended statement of claim at prayer 4). The basis on which an order for interest on costs is recognised as appropriate was considered by Campbell JA in Lahoud v Lahoud [2011] NSWSC 994. It is not necessary here to repeat the principles there set out. I consider such an order here to be appropriate, though I have expressed it in somewhat different terms than expressed in the proposed consent orders. The orders I now make are as follows: 1. Order the plaintiff to pay: 1. 80% of the defendants' costs of the proceedings up to and including 18 October 2017 on the ordinary basis; and 2. the defendants' costs from 19 October 2017 on the indemnity basis. 1. Order the plaintiff to pay interest to the defendants on the allowed percentage of the costs the subject of order 1(i) and the costs the subject of Order 1(ii) on the basis that interest be calculated on the amounts actually paid for or on account of costs and disbursements to the defendant's legal advisers in connection with these proceedings, at the rate set out in UCPR r 36.7 from the date of payment of each such amount until the first to occur of such time as the plaintiff has paid the costs due to the defendants under Order 1, or any further order relating to interest on costs in these proceedings. 2. Liberty to apply on seven days' notice for any further order in relation to Order 2. ********** 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: 17 October 2019