FEDERAL COURT OF AUSTRALIA

Mikaelian v Commonwealth Scientific & Industrial

Research Organisation [1999] FCA 541

COSTS – indemnity basis – offer of compromise – weight to be given to a Calderbank letter and other circumstances of the litigation in awarding costs.

Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 cited

Calderbank v Calderbank [1975] 3 WLR 586 cited

John S Hayes and Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 cited

Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd (unreported, 11 February 1998) cited

RAFFI MIKAELIAN v

COMMONWEALTH SCIENTIFIC AND INDUSTRIAL RESEARCH ORGANISATION AND COLLIERS JARDINE (NSW) PTY LIMITED

NG 1154 of 1997

HILL J

31 MAY 1999

SYDNEY

THE COURT ORDERS THAT:

No order as to costs.

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

REASONS FOR JUDGMENT – COSTS

1                     On 12 May 1999 I delivered judgment in this matter.  At the request of the parties I made no order as to costs, but instead ordered the parties to file written submissions.

2                     In the ordinary course costs would follow the event (cf Order 62 rule 15 of the Federal Court Rules), the costs being assessed on a party and party rather than an indemnity basis.  Two factors, however, take the present case out of the ordinary. 

3                     The first is that I found that the Respondents were guilty of conduct in breach of s 52 of the Trade Practices Act 1975.  That factor might in an appropriate case mean that no order as to costs should be made against the Applicant, or even that some proportion of the Applicant’s costs should be paid by the Respondents, notwithstanding that in the result the Applicant had no cause of action against the Respondents arising out of that breach. 

4                     The second is that in the present case two letters offering compromise had been written by or on behalf of the Respondents but rejected by the Applicant.  In an appropriate case, for example one where the rejection of the compromise was imprudent or unreasonable, this might result in the order of costs after the making of that offer being for costs on an indemnity rather than a party and party basis (cf Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 per Sheppard J.)

5                     In the first letter dated 31 August 1998 written by  the solicitors for CSIRO the offer was to pay a sum of $20,000 plus reasonable costs to date other than costs incurred in connection with the Affidavit and expert report of a Mr Hennessy dated 27 February 1998. The letter was headed “Without prejudice except as to costs”. It referred expressly to Calderbank v Calderbank [1975] 3 WLR 586 and indicated that the offeror had the intention of tendering the letter “on the question of costs including indemnity costs, if appropriate”.

6                     In the second letter dated 1 April 1999, written by the solicitors for the Second Respondent, but said to be written on behalf of that company and CSIRO the offer was increased to $25,000 together with costs, without now the exclusion of the costs of Mr Hennessy’s report.  That letter was expressed to be a “confidential communication – Without prejudice except as to costs”.  It was stated to be open for acceptance until 7 April 1999.  Reference in it was likewise made to Calderbank and the possibility of an application being made for indemnity costs.

7                     It is common ground that the mere fact that an offer to compromise has been made does not require the conclusion that an indemnity costs order would follow: John S Hayes and Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 at 205-6.  The making of such an offer is but one of many factors which must be taken into account in the exercise of the judicial discretion.  Where the failure to accept the offer is unreasonable, or “imprudent” (see Colgate-Palmolive at 233) the Court will be more ready to make an indemnity costs order.  As Lehane J said in Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd (unreported, 11 February 1998):

“The Calderbank policy by no means necessarily requires, in such a case, that the applicant, if ultimately unsuccessful, be required to pay indemnity costs because it rejected an offer of a small fraction of the amount which it claims.  It may be – perhaps is likely to be – otherwise where the offer is a commercially realistic one made upon a sensible and informed assessment of the prospects and risks of the litigation on each side.

Considerations of that kind explain, no doubt, the course of authority in this court which measures the weight to be given to a Calderbank offer having regard to its terms and to the other circumstances of the litigation, including the relative strengths and weaknesses of each party’s case as they might have been apparent to the parties when the offer was made.”

8                     Behind what may be said to be the Calderbank letter approach lie two competing policies which make it imperative to consider all the relevant circumstances in which the offer is made.  The first is that the parties should be encouraged, where possible, to resolve their dispute without litigation.  So the making of an order for indemnity costs offers both a carrot to the maker of the offer, and a stick to the recipient who does not accept it.  But conversely, the courts must ensure that litigants are not unduly pressured into not proceeding with a claim which they perceive to be well founded.  It is in the public interest that a compromise leaves both parties to litigation with confidence in the system of justice and with the feeling that justice has, at least substantially, been done.

9                     The Applicant’s claim was for damages of up to $2.9 million.  The offer was clearly minuscule, perhaps even derisory, in comparison.  That no doubt is a relevant factor to take into account.  So too is the obvious fact that, in any event, the Applicant’s claim appears to have been grossly inflated.  In saying this I must add that no evidence has been put before me on the question of damages so that my comments do no more than reflect a view based on such evidence as I heard.  It is true, as the Respondents point out that the fact that the Applicant lost in the Supreme Court might have alerted the Applicant to the difficulties he would face.  It is true also that the claim for fraud was misconceived.  Against these factors must be balanced both that the Applicant succeeded in showing that the Respondents’ conduct was misleading or deceptive, or likely to mislead or deceive as well as the fact that ultimately the real matter which proved fatal for the Applicant was whether Mr Charara ever told Mr Mikaelian about the existence of the right of first refusal. 

10                  While it is true that Mr Charara had filed an affidavit dated 26 February 1998 in which he had deposed to a conversation to this effect with Mr Mikaelian, that is to say considerably before the hearing, Mr Mikaelian disputed that this conversation took place.  Given that, at that stage the outcome of the case may be said to have rested upon whether I believed Mr Mikaelian or Mr Charara, I doubt if it can be said to have been unreasonable for Mr Mikaelian to reject a very low offer of settlement (with or without the payment of all his costs).  It is relevant also that the corroboration of Mr Charara’s evidence on which my judgment ultimately rested, did not appear in affidavit form but emerged during the hearing.

11                  It must be born in mind, too,  that when a judge makes a factual finding by preferring one witness’s account of a conversation to another it does not mean that the judge has found that the witness whose evidence was not preferred was lying, any more than it means that the judge has found that the other witness was telling the truth.  It means no more than that the judge has reached a conclusion on the balance of probabilities which version is more likely than not to be correct.  Where a party’s case, as here, depended ultimately on matters of credit and belief, where findings could only be made after a full exploration of the evidence, it is not really remarkable that a small offer of settlement would be rejected, even if after all the evidence has been heard the result is such that the unsuccessful party can be seen to have been well advised to accept the offer.  Once there is added to this the fact that I have found the Respondents in breach of s 52 of the Trade Practices Act it seems to me that it would be unjust to make an order for indemnity costs against Mr Mikaelian, even if in the result his claim has been unsuccessful.

12                  There remains the question whether I should, nevertheless, depart from the ordinary rule that costs follow the event having regard to my finding that the Respondents were in breach of s 52.  It is true that I have refused declaratory relief to the Applicants to this effect.  But this is only because it was accepted by the Applicant that it would be futile to do so if I was of the view that Mr Charara’s evidence should be accepted.  There is no doubt that, but for the conduct of the Respondents this case would never have been brought.  To order that the Applicant in these circumstances pay the Respondent’s costs appears to me quite unjust, even though in the end result the Applicant has been unsuccessful.  I have taken into account also the fact that the pleadings did not at all time disclose that declaratory relief was sought.

13                  I would accordingly make no order as to costs.

Associate:

Dated:              31May 1999