CATCHWORDS

COSTS - indemnity basis - party and party basis - offer of settlement made by applicant by way of Calderbank letter shortly before commencement of hearing - applicant succeeded on hearing - offer of settlement more favourable to respondents than outcome of hearing - whether respondents should pay applicant's costs on an indemnity basis or on a party and party basis - whether Calderbank letter, without more, generates presumptive entitlement to indemnity costs - relationship between Calderbank letter and ) O 23 of Federal Court Rules.

Federal Court Rules, O 23

Calderbank v Calderbank [1976] Fam 93

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 (FCA/Woodward J)

Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359 (Powell J)

John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 (FCA/Hill J)

Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 (FCA/Sheppard J)

The Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, FCA/Sheppard J, 7 February 1996)

MGICA (1992) LIMITED v KENNY & GOOD PTY LTD & ANOR (NO 4)

No NG 420 of 1994

Lindgren J

Sydney

27 September 1996

IN THE FEDERAL COURT OF AUSTRALIA     )

NEW SOUTH WALES DISTRICT REGISTRY     )    No NG 420 of 1994

GENERAL DIVISION                      )

          BETWEEN:

MGICA (1992) LIMITED (Formerly MGICA LIMITED) (ACN No 000 488 362)

                           Applicant

          AND:

KENNY & GOOD PTY LIMITED

                    First Respondent

          AND:

LANCE KENNY

                   Second Respondent

CORAM:    Lindgren J

PLACE:    Sydney

DATE:     27 September 1996

                      MINUTE OF ORDERS

THE COURT ORDERS:

1.   THAT there be no order as to the costs of the argument on 17 September 1996 on the applicant's application for an order that the respondents pay its costs of the proceeding on an indemnity basis.

2.   THAT subject to Order 1, the respondents pay the applicant's costs of the proceeding.

NOTE:     Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA     )

NEW SOUTH WALES DISTRICT REGISTRY     )    No NG 420 of 1994

GENERAL DIVISION                      )

          BETWEEN:

MGICA (1992) LIMITED (Formerly MGICA LIMITED) (ACN No 000 488 362)

                           Applicant

          AND:

KENNY & GOOD PTY LIMITED

                    First Respondent

          AND:

LANCE KENNY

                   Second Respondent

CORAM:    Lindgren J

PLACE:    Sydney

DATE:     27 September 1996

                 REASONS FOR JUDGMENT (No 4)

In this proceeding, I published Reasons for Judgment (No 3) on 30 August 1996 which I incorporate in these present Reasons.  In Reasons for Judgment (No 3), I gave my reasons for concluding that the applicant ("MGICA") was entitled to recover damages from the respondents in a sum of $1,977,513.67 plus interest under s 51A of the Federal Court Act 1976 ("the FCA Act").  The proceeding was stood over for the making of orders, including orders as to costs.  The parties agreed on the calculation of interest.  In conformity with that agreement, on 17 September 1996 I ordered that judgment be entered for MGICA against the respondents jointly and severally in the sum of $3,007,299.72 inclusive of interest as
at that date in the sum of $1,029,786.05.

The parties disagree on the order for costs to be made.  MGICA seeks an order that the respondents pay its costs on the usual party and party basis down to 10.00 am on 7 August 1995 (the first day of the hearing) and on an indemnity basis thereafter.  The respondents resist that order, contending that there is no occasion for a departure from the usual order under which they would pay MGICA's costs on a party and party basis.

The basis of MGICA's application for indemnity costs is that by a "Calderbank letter" (cf Calderbank v Calderbank [1976] Fam 93) dated 3 August 1995, MGICA offered to settle for $2,200,000 plus costs, provided the offer was accepted by 10.00 am on Monday, 7 August 1995. 

Interest under s 51A of the FCA Act calculated on $1,977,513.67 in the usual way up to 7 August 1995 would have amounted to $765,178.53 which, with the principal sum of $1,977,513.67, would have made a total of $2,742,692.20.  Thus, MGICA's ultimate total success in the proceeding shows that its offer to accept $2,200,000 plus costs rather than to insist on $2,742,692.20 plus costs, constituted a concession to the extent of $542,692.20.

The proceeding was fixed on 7 March 1995  for a hearing to commence on Monday 7 August 1995 at 10.15 am for an estimated hearing time of seven days.  Apparently there was a without prejudice conference at the chambers of senior counsel for MGICA on Tuesday 25 July 1995 when the respondents offered to pay $200,000 including costs.  MGICA rejected that offer and countered with an offer of $2,350,000 inclusive of costs and interest. 

On 31 July 1995, the solicitors for the respondents wrote to the solicitors for MGICA referring to these earlier offers and stating:

     "Given your indication that your client would not be prepared to go any lower than $2.2 million inclusive of costs and interest (we note you did not have those formal instructions), it would seem our clients have little choice but to litigate this claim.

     Given the hearing date is now less than one week away, our clients have instructed us to put to you an offer of $300,000 plus costs.  This offer is put on a commercial basis, but also takes into account the general risks of litigation."

The letter advanced certain considerations directed to convincing MGICA that the respondents might well succeed.  It concluded by advising that the offer to pay $300,000 plus costs remained open until 9.00 am on Monday 7 August 1995.  The letter was headed "WITHOUT PREJUDICE EXCEPT AS TO COSTS."

The response was the critical letter to which I referred earlier from the solicitors for MGICA offering to settle for $2,200,000 plus costs.  That letter stated that the offer represented a "significant compromise on the full value of the applicant's claim as previously particularised".  No doubt this was a reference to the foregoing of interest of $542,692.20 which settlement for $2,200,000 would involve.  The letter was also headed "WITHOUT PREJUDICE EXCEPT AS TO COSTS".

Under s 43 and perhaps s 23 of the FCA Act, the Court's power to award costs encompasses power to award costs on an indemnity basis.  The discretion must be exercised judicially.  However, this does not mean, and it is wrong to think, that the law requires that the discretion be exercised in a certain way in a particular case because of the presence or absence of factors which may have been persuasive in an earlier case.  How the discretion is to be exercised in a particular case depends on all relevant circumstances of that case.

Order 62 of the Federal Court Rules makes it clear that in the absence of an order having a different effect, costs are payable on a "party and party" basis.  Order 23 of those Rules provides for the making of offers of compromise.  The regime established by O 23 was not utilised in the present case.  If MGICA had made an offer conforming to O 23, sub-r 11 (4) of that Order, now to be noted, would have applied:

     "11 (4)   If:

              (a)  an offer is made by an applicant and not accepted by the respondent: and

              (b)  the applicant obtains judgment on the claim to which the offer relates not less favourable and terms of the offer;

              then, unless the Court otherwise orders, the applicant is entitled to an order against the respondent for costs incurred in respect of the claim:

              (c)  up to and including the day the offer was made - taxed on a party and party basis; and

              (d)  after that day - taxed on an indemnity basis."

If MGICA had made its offer in conformity with O 23 it would have enjoyed a presumptive entitlement to indemnity costs. 

I accept (the contrary was not contended by the respondents) that not withstanding MGICA's non-utilisation of the regime provided in O 23, the making of its offer by means of the Calderbank letter is a relevant matter for consideration on the question whether the discretion to order costs on an indemnity basis should be exercised.  In Messiter v Hutchinson (1987) 10 NSWLR 525 (Rogers J) and Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97 (Spender J), it was accepted that the writing of a Calderbank letter was relevant to the question whether there should be a departure from the usual approach according to which costs follow the event.  In my opinion, in respect of the relevance of the writing of a Calderbank letter, this question is analogous to the question whether the usual party and party basis should be departed from.

It is important, however, to appreciate that the mere making of an offer by a Calderbank letter and its non-acceptance followed by a result more favourable to the offeror (less favourable to the offeree) than that represented by the offer will not automatically lead to the making of an order for payment of costs on an indemnity basis: W C W Pty Ltd v Charthill Ltd, unreported, FCA/Olney J, 7 July 1992; John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 (Hill J) ("John S Hayes") at 204-206.

Judges have described in a variety of ways that which is necessary or sufficient to support an order for indemnity costs.  In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, Woodward J said (at 401) that it was "appropriate to consider awarding" indemnity costs where it appeared that an action had been commenced or continued in circumstances where the applicant, properly advised, "should have known that he had no chance of success".  His Honour continued:

     "In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law."

In Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359, Powell J said (at 362) that a departure from the general rule that costs are payable on a party and party basis is justified:

     " ... only where the action taken, or the action threatened, by the defendant constituted, or would have constituted, an abuse of the process of the court, or where the actions of the defendant, in the conduct of any defence to the proceedings, have involved an abuse of the process of the court, in the sense that the court's time, and the litigants' money, has been wasted on totally frivolous and thoroughly unjustified defences."

In Regata Developments Pty Ltd v Westpac Banking Corporation, unreported, FCA, 5 March 1993, Davies J said that indemnity costs may be awarded where an unsuccessful proceeding was brought and prosecuted "not for the bona fide purpose of protecting and enforcing a legal right, but to achieve an ulterior or extraneous purpose" (at 4).

In Colgate Palmolive Pty Ltd v Cussons Pty Ltd (1993) 46 FCR 225, Sheppard J noted that "an imprudent refusal of an offer to compromise" was one circumstance which had been thought sufficient to warrant the exercise of the discretion.

In John S Hayes, supra, Hill J declined to order indemnity costs in favour of a respondent, noting that the case was not one in which the applicant had had "no chance of success" (at 206).  His Honour concluded that it was not "so unreasonable" (at 207) for the applicant to have brought and continued its case against the respondent that indemnity costs should be ordered.  Similarly, in The Sanko Steamship Co Ltd and Grand Slam Enterprise Corporation v Sumitomo Australia Ltd, unreported, FCA, 7 February 1996 ("Sanko"), Sheppard J said that recovery of costs on the usual party and party basis
should "only be departed from where the conduct of the party against whom the order is sought is plainly unreasonable" (at 9 - emphasis supplied).

A different approach was taken by Rolfe J in Multicon Engineering Pty Ltd v Federal Airports Corporation, unreported, NSW/Sup Ct, 20 June 1996 and raises a question of principle.  His Honour expressed disagreement with Hill J in John S Hayes and Sheppard J in Sanko, in so far as their Honours would require an applicant for indemnity costs to prove that the non-acceptance of its offer was unreasonable.  Rather, Rolfe J took the view that the non-acceptance of an offer which the ultimate result established had favoured the offeree, itself prima facie demonstrated unreasonable conduct and an entitlement to indemnity costs with the result that the offeree bore the onus of showing why indemnity costs should not be ordered.

With respect, I would follow the two single judge decisions in this Court unless I thought that they were plainly wrong.  I do not think that they were, and will therefore follow them.  I will refer to certain considerations which lead me to think that they were not plainly wrong.  Order 23 establishes a regime which, if utilised, gives rise to a presumptive entitlement to indemnity costs.  Notwithstanding the policy of encouraging settlement of litigation, it should not be assumed that the mere writing of a Calderbank letter generates the same presumptive entitlement to indemnity costs that is provided for in O 23.  In one respect, the present case illustrates why not.  If O 23 had been complied with, MGICA's offer would have had to be open to be accepted not less than 14 days beginning on the day after the offer was made (O 23, sub-s 5 (3)).  Accordingly, in view of the offer's expiry at 10.00 am on 7 August 1995, it would have had to be made no later than 23 July 1995.  An offer made then would have been more protective of the position of the respondents as offerees than the Calderbank letter which was in fact written on 3 August 1995.  Moreover, in a case of offers to pay a sum of money inclusive of interest, O 23 sub-r 4 (2) requires that the notice of offer specify the amount that is in respect of interest and how it is calculated.  A Calderbank letter containing an offer to pay a sum of money which did not specify those matters would not be so protective of the  offeree's interests. 

The foregoing considerations merely show that there are elements of the regime established by O 23 which may be more protective of an offeree's position than the unregulated offer made in a Calderbank letter.  It is difficult to accept, for example, that in the extreme case of an offer made in a Calderbank letter which contained only a minimal element of compromise and was open for acceptance for say only one day, should, in the event of total success of the offeror, give rise to a presumptive entitlement to indemnity costs generally similar to that provided for in O 23, even if, in such a case, the presumptive entitlement might be easily displaced by the offeree.

In many cases the different approaches of Hill J and Sheppard J on the one hand and Rolfe J on the other hand will not produce a different result.  The present is such a case.

Clearly, the circumstances must take a case out of the "ordinary" or "usual" category if an order for indemnity costs is to be made, since, as noted earlier, the Rules evince an intention that in that category of case, an order for costs signifies an order for costs on a party and party basis.  Perhaps the various "tests" which have been suggested are classifiable as "abuse of process", "ulterior or extraneous purpose" and "unreasonableness" tests.  Be this as it may, I have concluded that none of the formulations to which I have referred encompass the present case.

MGICA points out that the respondents had themselves resorted to the use of a Calderbank letter in their solicitors' letter dated 31 July 1995.  But the question whether the respondents would have been advantaged thereby on the issue of costs is an open one: it raises an issue of the same kind that MGICA's present application raises.

MGICA observes that at the time when its offer was made on 3 August 1995, it was too late to invoke the regime afforded by O 23 because the hearing was to commence on 7 August 1995 with an estimated duration of seven days.  This is true, but it was open to either party to have resorted to O 23 by taking action earlier.

MGICA submits that the respondents could and should have appreciated the errors in his valuation which the second respondent ("Mr Kenny") conceded in cross examination he had made.  With the benefit of hindsight, he could, and, in a perfect world I suppose should, have done so.  But such matters are ordinary incidents of litigation which contribute to a party's failure in a proceeding and the making of the usual order for costs against it.  It is not submitted that when the respondents were considering MGICA's offer, Mr Kenny was aware that his valuation contained errors, correction of which would necessitate the concessions that he made in cross examination and a reduction in the amount of his valuation to a figure substantially less than $5,500,000.

For their part, the respondents submit that the precise basis on which MGICA sought to establish, and succeeded in establishing, negligence had not been spelled out in the pleadings or particulars.  The respondents refer to a letter dated 8 August 1994 from their solicitors to MGICA's solicitors seeking particulars of sub-para (l) of para 20 of the amended statement of claim which was as follows:

     "(l)Ascribing to the buildings constructed on the land, a value greater than could reasonably be ascribed to them.  The overestimate of the value of the buildings appears to be partly attributable to an incorrect calculation of the
floor area of the buildings and partly to the allocation of an excessive rate per square metre for the value of the buildings."

MGICA's solicitors replied on 2 September 1994 contending that the respondents' solicitors' inquiry went only to a "matter of evidence".  Accordingly, the particulars sought were not supplied.  MGICA says that it was not in a position as at 8 August 1994 to supply the particulars because, at that time, the respondents had not given discovery.  The respondents filed their list of documents on 27 September 1994.  I assume that MGICA was able to give the particulars from a date shortly thereafter.  It did not do so.

It is easy with the benefit of hindsight to think that the respondents were imprudent in not accepting MGICA's offer to settle for $2,200,000 plus costs.  Events have proved the offer a reasonable one.  MGICA succeeded on every issue.  I assume that there will be a substantial amount of costs which MGICA has incurred after 7 August 1995 which it will not be able to recover from the respondents under the usual order and which it would not have incurred if its offer had been accepted.  For all these reasons, it is perhaps understandable that MGICA should feel aggrieved in not obtaining an order for indemnity costs.

But it is necessary (a) to recall that the ordinary order for costs gives only party and party costs, leaving the party whose stance has been demonstrated to be supported in law bearing the additional costs which it has incurred; and (b) to put oneself in the respondents' position when MGICA's offer was made.  While the offer did involve a not insignificant concession of $542,692.20 as against total success, the amount of $2,200,000 plus costs which MGICA was offering to accept represented 80.21% of the amount of $2,742,692.20 plus costs to which it would have been entitled if there had been no question about liability.  Was the respondents' failure to pay 80.21% of the amount of MGICA's claim plus interest to 7 August 1995, in the circumstances which prevailed on 3 August 1995, such as should attract an order for indemnity costs?

During the currency of the offer (3-7 August 1995) the parties expected the hearing to occupy seven days.  MGICA's offer was neither made nor received in the context of an expected hearing time of 17 days which eventuated.

MGICA submits that it was unreasonable for the respondents to reject its offer because they did not have an independent expert who supported their valuation of $5,500,000.  I have read again the affidavits which had been filed as at 3 August 1995 when MGICA made its settlement offer.  They included a lengthy affidavit by Mr Kenny sworn 8 December 1994 describing the valuation procedure which he followed and an affidavit of Terry Ponton sworn 13 December 1994 "supporting" Mr Kenny.  For MGICA, they included affidavits of Thomas Matthew Phelan sworn 11 November 1994 and 3 March 1995 and of Terence Alfred Large also sworn 11 November 1994 and 3 March 1995.  The six affidavits of these four valuers show, as Reasons for Judgment (No 3) show, that the issues of fact and of expert opinion were complex.  Although it is possible to discern in MGICA's experts' affidavits the basis on which I found against the respondents, the evidence supporting liability assumed clear form only as the case, particularly the cross examination of Mr Kenny, progressed.   Moreover, the respondents were entitled to think that the "subjective" aspect of the appeal of a house would signify that some latitude must be allowed in the range of values which might be arrived at by different valuers, all acting non-negligently. 

Importantly, it was arguable, as the respondents submitted, that MGICA's damages should be limited to the difference between $5,500,000 and the true value as at 18 April 1990 ($3,900,000 to $4,000,000); see South Australia Asset Management Corporation v York Montague Ltd [1996] 3 WLR 87; [1996] 3 All ER 365 (HL).  I do not know what figure that difference of say $1,550,000 plus interest on it to 7 August 1995 gives, but it is an amount less than $2,315,178.53 ($2,742,692.20 - [$1,977,513.67 - $1,550,000]).  Against that amount, whatever it is, the offer to accept $2,200,000 must have been seen to offer virtually no compromise and to seek a virtual capitulation.

Although the case is a borderline one, I do not think that all the circumstances as at 3-7 August 1995, including the appreciation which the respondents should have had of the offer and of their case were such as to take the case out of the ordinary or usual category in which the unsuccessful party must pay the successful party's costs on the party and party basis.

Accordingly, subject to one matter, there will be the usual simple order that the respondents pay MGICA's costs.  In relation to the argument on MGICA's application for indemnity costs, clearly the respondents should not be ordered to pay MGICA's costs.  There was no motion for an order for indemnity costs.  The matter was dealt with pursuant to the order which I made that the proceeding be listed for the making of orders.  The parties had to appear for other purposes when the application for indemnity costs was argued.  I think that the just result is that there be no order for costs on the argument in relation to indemnity costs.

              I certify that this and the preceding 14 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

              Associate:

              Dated:             27 September 1996

Heard:        17 September 1996

Place:        Sydney

Decision:     27 September 1996

Appearances:  Mr R W White of counsel instructed by Hickson Lakeman & Holcombe appeared for the applicant.

              Mr D Davies of counsel instructed by Colin Biggers & Paisley appeared for the respondents.