FEDERAL COURT OF AUSTRALIA

Barnes v Forty Two International Pty Limited (No 2) [2015] FCAFC 19

THE COURT ORDERS THAT:

1.    Paragraphs 1 and 2 of the orders made by Griffiths J on 14 March 2014 (as varied on 25 March 2014) be set aside and in lieu thereof it be ordered that:

“The applicants’ originating application (as amended from time to time) be dismissed.”

2.    Paragraph 4 of the orders made by Griffiths J on 14 March 2014 (as varied on 25 March 2014) be set aside and in lieu thereof it be ordered:

“4.    (a)    Subject to paragraph (c), the applicants pay the respondents’ costs of and incidental to the applicants’ originating application (as amended from time to time).

    (b)    Subject to paragraph (c), the respondents pay the applicants’ costs of and incidental to the respondents’ cross claim.

    (c)    There be no order as to costs in relation to:

i)    the costs of and in relation to the notice of motion filed by the applicants on 19 November 2009;

ii)    the costs of and in relation to the notice of motion filed by the respondents on 4 December 2009;

iii)    the costs of and in relation to the notice of motion for security for costs filed by the respondents on 17 November 2009;

iv)    the costs of and in relation to the notice of motion filed by the respondents on 16 February 2011;

v)    the costs of the notice of motion filed by the respondents on 8 April 2011;

vi)    the costs of the interlocutory application filed by the applicants on 17 November 2011 (relating to the confidentiality of certain documents produced on subpoena by the National Australia Bank);

vii)    the costs of and incidental to the interlocutory hearing on 28 February 2012; and

viii)    the costs of the applicants' interlocutory application filed on 29 February 2012.

(d)    The costs the subject of orders 4(a) and 5 be set-off against the costs the subject of orders 4(b) and 6.”

3.    The respondents pay the appellants’ costs of and incidental to this appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    This proceeding has a lengthy history. On 24 December 2008, the respondents filed an application in this Court seeking damages against Albert Kim Barnes (Barnes) and Lee Hawksley (Hawksley) arising out of transactions under a share purchase agreement executed on 24 October 2006 (share purchase agreement) and later dealings.

2    Pursuant to the share purchase agreement, Barnes, Hawksley and others had sold their shares in Forty Two International Pty Ltd (Forty Two) to BlueFreeway Limited (BlueFreeway). They received an initial payment of $10 million and a later amount of over $16 million under an exit agreement (exit agreement) in November 2007, after which they ceased to have dealings with BlueFreeway and Forty Two. The respondents’ claims were based on alleged breaches of various contracts, breaches of statutory and fiduciary duties and misleading or deceptive conduct.

3    The trial was heard before Griffiths J from 3-21 December 2012 (proceeding NSD 2018 of 2008). His Honour found for BlueFreeway and awarded damages and costs on that basis.

4    His Honour’s judgment was appealed before us. That appeal was allowed. These reasons concern various costs issues that have arisen between the parties consequential upon our decision.

Background

5    The pre-trial phase of this matter was extensive. Numerous interlocutory applications were made by various parties.

6    The trial involved substantial claims by both parties. There were 7 witnesses for the respondents and 11 witnesses for the appellants. The evidence filed was voluminous. The respondents to the appeal (the applicants below) initially pursued a claim for approximately $22 million. On 17 February 2012, Barnes and Hawksley (the appellants to the appeal and the respondents below) filed a cross-claim seeking damages for misleading or deceptive conduct in the amount of $41 million.

7    Reasons for judgment were delivered by his Honour on 18 February 2014 ([2014] FCA 85). On 14 March 2014, following the filing of written submissions, his Honour ruled on costs ([2014] FCA 217) and ordered that judgment be entered against the appellants in favour of BlueFreeway in the sum of $3,062,406.93 comprising damages of $2 million together with interest. His Honour described the $2 million as the “quantum of damages [which] reflects the loss of BlueFreeway’s opportunity or chance to negotiate a termination payment with the respondents which [was] less than the $16 million which was actually paid” (at [3]). That damages head and method of calculation applied both to the cause of action based upon the breach of the implied term of the share purchase agreement and the cause of action based upon the misleading or deceptive conduct. The cross-claim was dismissed. Other consequential orders were made.

8    His Honour awarded the respondents to the appeal 75% of their combined costs of the claim and the cross-claim. His Honour stated that the 25% reduction reflected issues on which the respondents had failed at trial or which had been abandoned during the course of the proceedings. His Honour also noted that “the cross claim took up significant time and resources and the respondents [at trial] failed” ([2014] FCA 217 at [15]). Before us, the appellants have submitted that the cross-claim added little by way of additional cost as it was filed late in the proceeding and relied substantially on affidavits already in evidence. But we see no reason to depart from his Honour’s description.

9    On 2 April 2014, the appellants appealed the judgment of Griffiths J on various grounds, some of which they succeeded upon, being:

    First, it was said that his Honour was in error in finding the implied term of the share purchase agreement contended for by BlueFreeway (ground 1). Further, it was asserted that he was in error for finding a breach thereof (ground 2). Further, it was said that he should also have found that the loss claimed did not fall within either limb of Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 (Hadley v Baxendale) (ground 3). Grounds 1-3 were upheld by us.

    Second, it was said that his Honour was in error in various respects in relation to his findings on liability on the misleading or deceptive conduct case (grounds 4-6). Each of those grounds were rejected by us.

    Third, it was said that his Honour erred in finding in favour of BlueFreeway on its claim for damages based upon the value of a lost opportunity or chance to negotiate, which the appellants asserted had not been pleaded, opened or run during the course of evidence (ground 7); further, that his Honour should have dismissed BlueFreeway’s claim for damages (ground 8). Grounds 7 and 8 were upheld.

    Fourth, it was said that in any event his Honour erred in his valuation of the lost opportunity (grounds 9 and 10). Those grounds were rejected.

    Finally, it was said that his Honour erred with respect to his construction and application of a release provision embodied in clause 10 of the exit agreement (grounds 11-14). Those grounds were rejected.

The appellants did not appeal against his Honour’s dismissal of their cross-claim.

10    On 14 November 2014, we delivered our reasons for judgment on the appeal ([2014] FCAFC 152), allowing the appeal and finding that the award of damages of $3,062,406.93 made by his Honour should be set aside with the originating application being dismissed. As was explained at [30]:

The amount and basis for the damages award based on a lost opportunity, which was common to both the cause of action for breach of an implied term of the share purchase agreement and the cause of action for misleading or deceptive conduct, was neither pleaded nor opened. Further, the case was not conducted by BlueFreeway on that basis, and appears to have arisen as an afterthought during closing written submissions and oral closing addresses. As his Honour did not find in favour of BlueFreeway on its pleaded case on damages, in such circumstances, his Honour should have dismissed the proceedings, rather than finding for BlueFreeway on an alternative damages basis that was neither pleaded nor run at trial. Further, and in any event, to the extent that his Honour’s damages award rested upon a finding of a breach of an implied term of the share purchase agreement, such a finding was not maintainable; no such implied term ought to have been found; in any event, there was no breach thereof; moreover, the finding of damages based upon a loss of opportunity did not fall within either limb of Hadley v Baxendale.

11    We proposed that the costs of both the trial and the appeal follow the event, subject to certain carve outs with respect to the costs of various interlocutory steps below, and indicated that we intended to make final orders in the following terms:

1.    Paragraphs 1 and 2 of the orders made by Griffiths J on 14 March 2014 be set aside and in lieu thereof it be ordered that:

“The further amended application filed on 5 May 2011 be dismissed.”

2.    Paragraph 4 of the orders made by Griffiths J on 14 March 2014 be set aside and in lieu thereof it be ordered:

“4.    (a)    Subject to paragraph (c), the applicants pay the respondents’ costs of and incidental to the applicants’ further amended application filed on 5 May 2011.

    (b)    Subject to paragraph (c), the respondents pay the applicants’ costs of and incidental to the respondents’ cross claim filed on 17 February 2012.

    (c)    There be no order as to costs in relation to:

i)    the costs of and in relation to the notice of motion filed by the applicants on 19 November 2009;

ii)    the costs of and in relation to the notice of motion filed by the respondents on 4 December 2009;

iii)    the costs of and in relation to the notice of motion for security for costs filed by the respondents on 17 November 2009;

iv)    the costs of and in relation to the notice of motion filed by the respondents on 16 February 2011;

v)    the costs of the notice of motion filed by the respondents on 8 April 2011;

vi)    the costs of the interlocutory application filed by the applicants on 17 November 2011 (relating to the confidentiality of certain documents produced on subpoena by the National Australia Bank);

vii)    the costs of and incidental to the interlocutory hearing on 28 February 2012; and

viii)    the costs of the applicants' interlocutory application filed on 29 February 2012.”

3.    The respondents pay the appellants’ costs of and incidental to this appeal.

12    Following the delivery of our reasons, the Court made orders on 14 November 2014 affording the parties an opportunity to file written submissions regarding the form of final orders including costs. Time for the filing of submissions was subsequently extended.

13    On 28 November 2014, the appellants filed submissions on the proposed form of orders. The appellants have submitted that they are entitled to indemnity costs in relation to the trial costs from 3 November 2012 onwards on the basis of a Calderbank offer (see Calderbank v Calderbank [1975] 3 All ER 333), alternatively from 15 November 2012 on the basis of an offer of compromise made by the appellants before the commencement of the trial, both offering that all claims (principal claim and cross-claim) be dismissed with no order as to costs in favour of any party.

14    In support of their claim to indemnity costs, the appellants have relied upon an affidavit of Albert Kim Barnes sworn on 28 November 2014 (Barnes’ affidavit) and a bundle of letters, being correspondence containing the offers made by the parties at the pre-trial stage approximately 4 years after the commencement of the proceeding. Specifically, the offers were as follows:

    The first offer was a Calderbank offer made by the appellants’ solicitors below, Herbert Geer, to the respondents by way of a letter dated l November 2012 (the first offer) stating that the appellants would be prepared to agree to a full and final resolution of the proceedings on the basis that the parties agreed to discontinue all proceedings with no orders being made as to costs. The first offer was made shortly following a mediation and direct negotiations between the parties. The offer was open for a short period of time only, until 5 pm on 2 November 2012. The respondents’ solicitors below, Argyle Lawyers, replied to the first offer on 2 November 2012 and rejected the offer stating that their clients were “not prepared to accept any settlement which [did] not involve receipt by them of a financial settlement from your clients”. The respondents have submitted that the first offer cannot be considered an effective offer as they were only given a short time to respond, which they argued was not a reasonable timeframe.

    The appellants' second offer by way of a letter from their solicitors below dated 13 November 2012 (the second offer) was an offer of compromise made pursuant to r 25.01 of the Federal Court Rules 2011 (Cth) (the Rules) on the basis that all claims (including cross-claims) be dismissed, any prior costs orders made be vacated and each party pay their own costs of all proceedings. That offer was open for 14 days from the date of service of the offer. The respondents’ solicitors below responded to the second offer by way of letter dated 29 November 2012, rejecting the offer of compromise and making a Calderbank offer in reply. In summary, they offered to settle the proceedings on the basis that the appellants pay $3 million inclusive of costs as cleared funds on or before 21 December 2012, or otherwise that judgment be entered in the respondents’ favour for the sum of $16,436,488 (the full amount claimed) plus costs and that consent orders be signed giving effect to this. That offer was expressed to remain open for acceptance until 9.30 am on 3 December 2012 (the first day of the trial). The appellants rejected it.

15    In support of the present application for indemnity costs, Barnes has deposed that he and Hawksley had agreed to divide the legal fees and disbursements charged by their then solicitors Herbert Geer, who represented them at trial, between them equally. Barnes deposed that as at 20 March 2013, the cumulative amount of fees invoiced to him totalled $1,801,634.06 representing half of the total fees and disbursements charged by Herbert Geer. The invoiced fees incurred by Barnes as at 26 November 2012 totalled $1,250,197.35.

16    On 5 December 2014, the respondents filed an outline of submissions regarding the proposed form of orders. The respondents have opposed the making of any order for indemnity costs and submitted that the appellants are entitled only to the costs orders proposed by us (see [11]). The respondents further submitted that the costs payable by the respondents in respect of the trial costs should be set-off against the costs payable by the appellants to the respondents in respect of the cross-claim. On the question of the set-off, we consider that to be appropriate and the appellants have not objected thereto. The Rules do not provide for such a set-off and a set-off at common law or in equity may be problematic for reasons that we do not need to elaborate on for present purposes. We will make the appropriate set-off order.

17    It is noted that the parties have not objected to our proposed order 1. There was also no objection to our proposed order 3, that the respondents pay the appellants' costs of and incidental to this appeal. There were also no objections to the carve outs suggested in relation to the costs of various interlocutory applications below. The key issue between the parties is the indemnity costs question.

Calderbank offer

18    We accept that “walk away” offers can be the proper subject of a Calderbank offer or an offer of compromise under r 25.01 (see Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53 at [130]-[132] per Besanko, Perram and Katzmann JJ; Clark v Federal Commissioner of Taxation (2010) 222 FCR 102 at [90]-[92] per Greenwood J; Uniline Australia Ltd v SBriggs Pty Ltd (No 2) (2009) 82 IPR 56; [2009] FCA 920 at [38] per Greenwood J). In the present case, for the appellants to offer to “walk away” with each party bearing their own costs involved a substantial element of compromise in forgoing a potential entitlement to recover the substantial costs that had been incurred to the date of the relevant offer (or thereabouts) by the appellants. The Barnes’ affidavit setting out the costs incurred (albeit solicitor/client) up to November 2012 indicates that, even taking a substantial percentage thereof on a party/party basis, something of significant value was offered to be given up. It is also to be remembered that the offers were made close to trial, when significant costs had already been incurred. There is little doubt that each offer involved a genuine element of compromise.

19    In our opinion, the respondents’ refusal of the first offer does not justify an order for indemnity costs. The respondents were not given a reasonable time within which to respond.

20    True it is that the first offer was made shortly after a failed mediation and shortly before trial. It can be assumed that all parties at that time had considerable and detailed knowledge of their own case and their opponents’ case and the risks involved in proceeding to trial. Nevertheless, given the complexity of the proceedings, its long history and the fact that there were claims and cross-claims involved, some time would have been needed to assess and analyse the merits of the Calderbank offer and to take instructions thereon. Moreover, the trial was a month away; there was no good reason for such a short time being given.

21    Now it may be correct to say that even if further time had been given, the respondents’ attitude (as set out in [14] above) may not have changed. But we do not consider that this strongly militates against the point that in any event a reasonable time had not been given.

22    In such circumstances, it was not unreasonable for the respondents to refuse the offer. The appellants have not shown that the refusal was unreasonable (Black v Lipovac (1998) 217 ALR 386; [1998] FCA 699 at [218] per Miles, Heerey and Madgwick JJ).

23    We should also say that we have also considered in this context whether the first offer was more favourable to the respondents than the result ultimately achieved by them. For the reasons set out below, in the context of discussing the second offer, we are inclined to the view that it was more favourable. But as we have already said, it has not been shown that it was unreasonable for the respondents to have refused the first offer.

Offer of compromise

24    The offer of compromise was made under r 25.01. It applied to both the principal claims and the cross-claim.

25    Rule 25.14 provides as follows:

25.14    Costs where offer not accepted

(1)    If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer:

(a)    the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and

(b)    the respondent is entitled to an order that the applicant pay the respondent's costs after that time on an indemnity basis.

(2)    If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs:

(a)    before 11.00 am on the second business day after the offer was served – on a party and party basis; and

(b)    after the time mentioned in paragraph (a)--on an indemnity basis.

(3)    If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant's costs:

(a)    before 11.00 am on the second business day after the offer was served – on a party and party basis; and

(b)    after the time mentioned in paragraph (a)--on an indemnity basis.

Note 1:    Costs on an indemnity basis is defined in the Dictionary.

Note 2:    The Court may make an order inconsistent with these rules--see rule 1.35.

26    The applicable limb for present purposes is r 25.14(2) rather than r 25.14(1).

27    The respondents’ written submissions have put a submission seeking to demonstrate that the second offer was not more favourable to them than the result they ultimately achieved. So, at [14(f)] they submitted:

[T]he Court cannot dissect what costs are applicable to the claim and what are applicable to the cross claim to make an assessment of whether the offer of a walk away settlement was more or less favourable than the costs orders to be made by this Court on the ordinary basis.

28    But in our view, and notwithstanding his Honour’s description of the cross-claim and that part of the proceedings taken up with it, the offer would have been more favourable to the respondents in terms of costs than that ultimately achieved.

29    But given that r 25.14(2) applies, this is not the correct focus and nor is it sufficient for the appellants to establish a prima facie entitlement to indemnity costs. They need to show that the respondents (the applicants below) unreasonably failed to accept the second offer. Once that is shown, there is a presumption that an indemnity costs order will be made, subject to any operation of r 1.35 (see Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141 at [14]-[18] per Gilmour, Jagot and Nicholas JJ). We note that the language of r 25.14(2) differs from the earlier O 23 r 11(6); r 25.14(2) applies to the second offer even though the proceedings were commenced before the rule change (r 1.04(2)).

30    Now the second offer was open for 14 days, so the timing consideration referred to earlier in discussing the first offer is not as significant.

31    Generally, in our view it has not been shown that the respondents acted unreasonably in refusing the second offer.

32    First, the second offer was still made close to the commencement of the trial.

33    Second, the proceedings were complicated and did not permit of a straightforward assessment in terms of risk, the potential upsides and downsides of proceeding to trial and the quantification of the benefits flowing from the second offer if accepted.

34    Third, it could not be said that the respondents’ principal claims were without merit. Indeed, the appellants failed on many issues both at trial and on appeal in relation to the respondents’ principal claims. Moreover, the appellants failed on their cross claim.

35    Fourth, and in elaboration of the second point, there was considerable uncertainty in quantifying the costs advantages of the “walk away” offer as compared with proceeding to trial given that there was both a principal claim and cross-claim. Moreover, the appellants’ inducement to offer to settle was at the lower end of the spectrum.

36    In all the circumstances, we are not satisfied that it has been shown that the failure to accept the second offer was unreasonable.

Conclusion

37    We will not make any order for indemnity costs. The costs orders that we make will be on the usual party/party basis. We will make an order for set-off and otherwise make orders in the terms foreshadowed in our earlier reasons with slight modifications.

Associate:

Dated: 24 February 2015

Schedule

    No: (P)NSD341/2014

Federal Court of Australia

District Registry: New South Wales

Division: General

Second Appellant:        Lee Hawksley

Second Respondent:        BlueFreeway Limited (ACN 112 262 819)

Third Respondent:        The Gang of 4 Pty Ltd (ACN 095 624 678)