CATCHWORDS

PRACTICE AND PROCEDURE - costs - application by successful party to protracted litigation for costs to be paid on the indemnity basis - consideration of relevant principles and of particular facts of matter.

THE SANKO STEAMSHIP CO. LIMITED AND GRANDSLAM ENTERPRISE CORPORATION v SUMITOMO AUSTRALIA LIMITED

No. G082 of 1991

CORAM:    SHEPPARD J

PLACE:    SYDNEY

DATE:     7 FEBRUARY 1996

IN THE FEDERAL COURT OF AUSTRALIA)

                                  )

NEW SOUTH WALES DISTRICT REGISTRY)    No. G082 of 1991

                                  )

GENERAL DIVISION                  )

              BETWEEN:

                        THE SANKO STEAMSHIP CO. LIMITED

                        AND GRANDSLAM ENTERPRISE CORPORATION

                                                  Plaintiffs

              AND:

                        SUMITOMO AUSTRALIA LIMITED

                                                   Defendant

              AND:

                        SUMITOMO AUSTRALIA LIMITED

                                              Cross-claimant

              AND:

                        THE SANKO STEAMSHIP CO. LIMITED

                                       First cross-defendant

              AND:

                        GRANDSLAM ENTERPRISE CORPORATION

                                      Second cross-defendant

              AND:

                        KIM IN HYEON

                                       Third cross-defendant

CORAM:    SHEPPARD J.

DATE:     7 FEBRUARY 1996

PLACE:    SYDNEY

             SUPPLEMENTARY REASONS FOR JUDGMENT

              (ON APPLICATION FOR COSTS ON THE

                      INDEMNITY BASIS)

HIS HONOUR:  On 29 November 1995 I published reasons for judgment in this matter.  In them I concluded that the defendant was entitled to judgment against each of the plaintiffs in the sum of $8,900,000 together with interest.  I stood the matter over for short minutes and, as necessary, argument on the questions of interest and costs.

     Subsequently the parties agreed on the amount of interest to be included in the judgment.  On 15 December 1995 I directed the entry of judgment for the defendant in the sum of $11,902,213.  The parties were in disagreement about the order for costs because the defendant claimed an order that the plaintiffs should pay the bulk of its costs on the indemnity basis.  This was opposed by the plaintiffs which indicated that they were not opposed to the making of the usual order for costs which would involve payment by them of the defendant's costs on the party and party basis.

     The matter was argued on 19 December 1995.  At the conclusion of the argument, I announced that I had decided to reject the defendant's claim for costs on the indemnity basis.  I ordered that the plaintiffs pay the defendant's costs of the action, that is on the party and party basis.  I also said that I would make no order as to the costs of either party on the application made by the defendant for costs on the
indemnity basis.  I did not then give reasons for either decision but said that I would publish reasons for my decisions in due course.  What follows are those reasons.

     The defendant's claim for indemnity costs was based upon the writing of letters described as Calderbank letters, the word "Calderbank" deriving from the now well-known decision of the English Court of Appeal in Calderbank v Calderbank [1976] Fam 93.  There a husband in matrimonial proceedings had declined to accept an offer by the wife made in an affidavit to the effect that she was willing to make over to the husband a house property which she owned.  Cairns LJ said (at 106) that he had reached the conclusion that that was an offer which in the circumstances the husband ought to have accepted.  As he persisted in the proceedings and recovered a lump sum of a smaller amount than the value of the house, the correct order would be that the husband should have costs up to the date of the affidavit.  Thereafter the wife was to have her costs of the proceedings at first instance.

     The decision in Calderbank has led to the bringing of a number of applications of the kind brought here.  Calderbank itself was not a case about indemnity costs.  But it may be regarded as the source from which have come many applications for indemnity costs made in many courts.  Certainly numbers of such applications have been made in the Supreme Court of New South Wales and in this Court.  The matter is discussed
comprehensively in a judgment of Badgery-Parker J in Rouse v Shepherd (1994) 35 NSWLR 277.

     I do not wish to refer to the authorities in detail.  I discussed the matter extensively in Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 to which Badgery-Parker J refers at 279-280.  Hill J dealt with matter in John S. Hayes & Associates Pty Limited v Kimberly-Clark Australia Pty Limited (1994) 52 FCR 201.  There Hill J expressed his agreement (at 205-6) with the proposition asserted by Olney J (at 4) in WCW Pty Limited v Charthill Limited (unreported, Federal Court of Australia, Olney J, 7 July 1992) that there is no authority supporting the proposition that the mere writing of a Calderbank letter would justify an order for costs in favour of a successful party being taxed on a solicitor and client or an indemnity basis.  Hill J added that nothing in the decision of the Full Court of this Court in Donnelly v Edelsten (1994) 49 FCR 384 warranted the conclusion that the writing of a Calderbank letter drawing the other party's attention to a foreshadowed application for indemnity costs should an offer be refused would automatically lead to there being made an order for indemnity costs.  Each case must depend upon its own circumstances.  I respectfully agree with what both Olney J and Hill J have said.  What needs to be emphasised is that the ordinary rule is that, where the Court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis; see Cussons (at 232), Rouse v Shepherd (at 279) and the judgment of Foster J in Australian Electoral Commission v Towney (No. 2) (1994) 54 FCR 383 at 387-388.  It follows that each case must be looked at upon the basis of its own circumstances.

     I refer now to the evidence led in support of, and in opposition to, this application.  The evidence was given by affidavit.  There was no cross-examination.  The affidavits comprised two affidavits of Mr R.E. Withnell, the solicitor for the defendant, sworn 12 and 15 December 1995 and three affidavits of Mr S.W. Hetherington, the solicitor for the plaintiffs, sworn 23 and 24 November 1992 and 14 December 1995.

     In the first of his affidavits, Mr Withnell said that on 3 August 1992 the defendant's claim was $13.4 million.  Reference is made in the affidavit to a letter giving particulars of how the claim was made up.  It is unnecessary to refer to the detail of this.  On 26 August 1992 the plaintiffs were served with the defendant's report from accountants assessing the claim at $11.6 million inclusive of interest.  On 10 November 1992 a further report increased the claim to $12.5 million.  On 26 August 1992 Mr Withnell wrote a letter to Mr Hetherington advising him that the plaintiffs were prepared to settle the damages and interest components of the claim for $10.5 million with costs to be agreed or taxed.  The letter said that, if the matter proceeded to judgment for an amount at or exceeding $10.5 million for damages and interest, the defendant would seek its costs on an indemnity basis as from the commencement of the hearing on 31 August 1992.  The letter was headed "Without Prejudice Except as to Costs".

     Mr Hetherington's reply, which was similarly headed, was dated 15 September 1992.  He said that the plaintiffs were prepared to settle the damages and interest components of the claim for $5.25 million with costs to be agreed or taxed.  The letter said that, if the matter proceeded to judgment for an amount of or less than $5.25 million for damages and interest, the plaintiffs would seek their costs on an indemnity basis as and from the "re-commencement" of the hearing on 21 September 1992. It is to be observed that the sum of $5.25 million is exactly one half of the sum of $10.5 million which the defendant had offered to accept.

     On 26 September 1992 there was a without prejudice offer made on behalf of the defendant to settle the matter for $9.75 million for damages and interest.  Again the statement was made that an application for indemnity costs would be made in the event that judgment for damages and interest exceeded $9.75 million.  On 25 September 1992 the plaintiffs' offer was increased to $5.5 million but inclusive of costs.  Previously the plaintiffs' offer had been exclusive of costs.  This offer was rejected on 1 October 1992.

     On 26 October 1992 Mr Hetherington wrote to Mr Withnell informing him that he was instructed to settle the matter on behalf of the plaintiffs for the sum of $3.5 million for damages and interest with costs to be agreed or taxed.  Again reference was made to the production of the letter in support of an application for indemnity costs if the amount recovered was not greater than $3.5 million.  On 10 November 1992 Mr Hetherington wrote to Mr Withnell offering to settle the defendant's claim for the sum of $7.5 million plus costs to be agreed or taxed.  The offer was to remain open for seven days and an undertaking was offered to pay the money referred to within seven days of notification of its acceptance.  On 11 November 1992 Mr Withnell wrote to Mr Hetherington advising him that discussions which had taken place concerning settlement were confirmed and that the defendant would settle for $11 million inclusive of interest and costs.  Alternatively, the offer was to accept $10 million for damages and interest with costs agreed at $1 million provided there was judgment for the defendant on Sanko Steamship's claim for freight.  The offer was to remain open until 16 November.

     I do not need to refer to Mr Hetherington's affidavits of 23 and 24 November 1992.  Annexed to his affidavit sworn 14 December 1995 is an agreement entered into between the parties on 25 November 1992.  The agreement provided that it was agreed that the value of the cargo of fertiliser on board the "Sanko Harvest" was $8,900,000.  It was provided that, in the event that it was successful on the amended cross-claim, the defendant was to be entitled to simple interest on the sum of $8.9 million calculated from 15 April 1991 at a rate equal to the 30 day bank accepted bill rate published in the Reserve Bank of Australia Bulletin plus half of one per cent to the date of judgment.  The agreement was also said to be without prejudice to the claim of Sanko Steamship to the sum sought in respect of the unpaid balance of freight.

     During the course of the hearing I was referred to paragraph one of this agreement but not to paragraphs two and three.  No doubt paragraph two of the agreement dictated the amount which would be recovered by the defendant for interest and was the basis of the agreed amount for interest which was included in the judgment directed to be entered on 15 December last.

     Mr Hetherington annexed to his affidavit of 15 December 1995 a calculation designed to show the amount which the defendant would have recovered had judgment for $8,900,000 together with interest in accordance with the parties' agreement been entered on 26 August 1992.  The amount is $10.16 million.  Mr Hetherington pointed out in his affidavit, and counsel for the plaintiffs stressed, that the amount of the defendant's then offer was $10.5 million together with costs, approximately $350,000 more than the defendant would have recovered.

     Material in the various affidavits establishes that in the second half of 1992, the defendant had reason to think that it might recover substantially more than $8.9 million.  This was because its claim was based on a market value for the phosphate which was carried by the Sanko Harvest which proved to be too high.  Apparently the defendant was able to obtain a replacement shipment from South Africa the price for which was substantially less than that thought to be applicable in the particulars given on 3 August 1992.  The fact remains, however, that the amount recovered by the defendant was $8.9 million together with interest.  Thus, the amount which would then have been recovered, had this judgment been obtained in August 1992, would have been less in fact than the amount which the defendant had then offered to accept.

     In all those circumstances it seemed to me to be difficult for the defendant to maintain that this case was an appropriate one for an order for payment of costs on an indemnity basis.  At the relevant time its offer was to accept more than it would have been entitled to recover if the action had been determined by a judgment entered then.

     Apart from this matter though, it seems to me that one needs to be careful about making orders based on perceived unreasonable conduct in refusing to accept offers.  It is in the public interest, as well as in the interests of parties to litigation, for negotiations to settle cases to take place and for settlements to be achieved if they possibly can be.  It has been said that the fact that the law does not provide a full indemnity for costs may be an important spur to settlement; see the judgments of Devlin LJ in Berry v British Transport Commission [1962] 1 QB 306 at 323 and Handley JA in Cachia v Hanes (1991) 23 NSWLR 304 at 318 referred to in the judgment in Cussons at 227-8.  In some cases the so called Calderbank approach may place a weapon in the hands of parties to litigation which ought not be allowed to be abused.  The ordinary rule is that costs when ordered in adversary litigation are to be recovered on the party and party basis.  Any attempt to disturb that situation needs to be carefully considered.  It should only be departed from where the conduct of the party against whom the order is sought is plainly unreasonable.

     This was a difficult case involving a myriad of issues both of fact and of law.  There was grave uncertainty about the applicable limitation regime which applied to the situation, uncertainty which was not resolved until the High Court gave its judgment late last year; see Sanko Steamship Co. Limited v Sumitomo Australia Limited (1995) 131 ALR 490.  Even then Brennan CJ dissented taking the view that the 1976 Convention was the applicable Convention and not the 1957 Convention.  My own reasons for judgment reflect the difficult contractual and other issues which had to be considered.  In the judgment I have also alluded to the difficulties that arose because of the need to sift and weigh evidence from a
multiplicity of witnesses who gave evidence through interpreters.  The case was certainly not clear cut and was hard fought.  In those circumstances it seems to me very difficult to reach the conclusion that either party was acting at all unreasonably.

     It was for those reasons that I considered that the appropriate order for costs was the usual order which would involve the payment by the plaintiffs of the defendant's costs on the party and party basis.

     Before I conclude this aspect of the matter, I should mention that so much of Order 23 of the Federal Court Rules as deals with offers of compromise did not come into force until 1994.  The matter was mentioned during the argument but no submission based upon it was made by either party.

     As to the costs of this application, as mentioned I reached the conclusion that there should be no costs of the application.  Ordinarily the costs of any proceeding follow the event.  It was on that basis that counsel for the plaintiffs applied for the costs of the defendant's application for indemnity costs.  Notwithstanding the ordinary rule, I thought at first that the appropriate order was that the costs of that application be costs in the principal proceedings.  I was minded to take that view because it did not seem to me that the defendant was acting unreasonably in
making the application which it did.  The application could by no means be described as hopeless and it is an area where the various authorities are not entirely consistent.  In those circumstances the view was open that this was but one more interlocutory step in a long fought out proceeding.  The defendant was undoubtedly entitled to the general costs of the proceedings and my provisional view was that this application was but one further step in those proceedings.  Such an order would have meant, of course, that the plaintiffs would have had to pay the costs of this application as part of the general costs of the action even though they had been successful in resisting the application for indemnity costs which was made.

     Having heard further argument about the matter, I was persuaded that my original view ought not to be maintained.  In lieu thereof, I reached the conclusion that I should make no order as to the costs of the application.  I concede that this outcome has a degree of imperfection about it but, as I saw the matter at the time and still see it now, I think the result I have reached is the fairest of the solutions.  I do not think it would have been right to visit the defendant with the plaintiffs' costs of the application, it having been made in the circumstances which I have described.

     In the result I declined to order that the defendant's costs be paid on the indemnity basis and made no order as to
the costs of the application made by the defendant for costs on that basis.

     I certify that this and the twelve (12) preceding pages are a true copy of the reasons for judgment herein of the Honourable Justice Sheppard.

     Associate

     Dated

                         APPEARANCES

Counsel for the Plaintiff:        A.J. Meagher SC

Solicitors for the Plaintiff:     Ebsworth & Ebsworth

Counsel for the Defendant:        P.E. King

Solicitors for the Defendant:     Withnell & Co.

Dates of Hearing:                 19 December 1995

Place of Hearing:                 Sydney

Date of Judgment:                 7 February 1996