FEDERAL COURT OF AUSTRALIA

APF Properties Pty Ltd v Kestrel Holdings Pty Ltd (No 3) [2007] FCA 2016  

COSTS – judgment in excess of amount of offer by applicant to two respondents prior to trial – whether Order 23 applicable – whether in any event indemnity costs should be awarded

Federal Court Rules Order 23

Federal Court of Australia Act 1976 (Cth) ss 23 and 43

APF Properties Pty Ltd v Kestrel Holdings Pty Ltd (No 2) [2007] FCA 1561 cited
King v Yurisich (No 2) [2007] FCAFC 51 cited
Aquatec-Maxcon Pty Ltd v Barwon Water Authority (No 3) [2006] VSC 270 cited
Calderbank v Calderbank [1975] 3 All ER 333 cited
MGICA Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 cited
John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 cited
Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, 7 February 1996) cited
Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 cited
WSA Online Limited v Arms (No 2) [2006] FCAFC 108 cited
Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 cited

APF PROPERTIES PTY LTD v KESTREL HOLDINGS PTY LTD, NICOLAS GRAEME ROBINSON, ROBINSON INVESTMENT CAPITAL PTY LTD, HALISBWYN PTY LTD TRADING AS MANTACH WHITMORE VALUATIONS AND HARRISON HUMPHREYS PTY LTD (NO 3)

TAD 27 OF 2005

HEEREY J

19 December 2007

MELBOURNE

THE COURT ORDERS THAT:

1.         There be judgment for the applicant against the first, second and fourth respondents for damages in the sum of $894,568. 

2.         There be judgment for the fourth respondent against the first and second respondents for damages in the sum of $894,568.

3.         The applicant’s claim against the third respondent for rescission of the Broadmoor lease is dismissed.

4.         The first, second and fourth respondents pay the applicant’s costs to be taxed on a party and party basis up until 21 March 2007 and thereafter on an indemnity basis.

5.         The applicant pay the third respondent’s costs to be taxed on a party and party basis.

6.         The first and second respondents pay to the fourth respondent the costs that are awarded against it as referred to in order 4.

7.         The first and second respondents pay to the fourth respondent its costs of the proceeding to be taxed on a party and party basis.

8.         The time for filing and serving a notice of appeal is extended to 15 February 2008.

9.         There be a stay of judgment against the fourth respondent until 18 January 2008.

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

REASONS FOR JUDGMENT

1                     The substantive judgment in this proceeding was handed down on 15 November 2007: APF Properties Pty Ltd v Kestrel Holdings Pty Ltd (No 2) [2007] FCA 1561.  Further argument has now been heard as to the amount for which judgment should be entered and the question of costs. 

Judgment

2                     I have found that the applicant is entitled to judgment against the first and second respondents (the Robinsons) and the fourth respondent (Mantach) for damages being the difference between the price paid for Broadmoor and Lower Wilmot and the true value of those properties at the time of purchase, together with certain expenses and interest.  The Robinsons were the vendors of the properties and Mantach was a valuer which provided a valuation on which the applicant purchaser relied.

3                     It was accepted, at least implicitly, at the substantive hearing that if the applicant paid too much for the property it followed that it borrowed too much and the damages should include interest paid on the excess borrowing.

4                     In working out the detail for the purpose of the present hearing it is also accepted that there should be an allowance in the respondents’ favour for that portion of the borrowings attributable to the purchase of Mannings Jetty Road, in respect of which the applicant made no complaint.  The price for Mannings Jetty Road constituted 18.25 per cent of the total purchase.   Further it is accepted that the actual percentage of the purchase price borrowed was 68 per cent, and not 70 per cent as used by the applicant’s accountant witness Mr Cooper in his calculations.

5                     The main dispute on the present hearing centred around the reduction of the applicant’s commercial bill facility following its receipt of funds from the sale of Lower Wilmot and Mannings Jetty Road.  These properties were sold on 10 and 12 August 2004 with settlement taking place on 9 September 2004.  The total of the two sale prices was $850,000.

6                     According to the applicant, the bill facility was reduced by $250,000 in September 2004 and then by $508,000 in March 2005.  Mr O’Farrell submitted that this was a reasonable response to the reduction of the applicant’s borrowings following those sales.  The payments totalling $758,000 represented almost the entirety of the proportionate amount borrowed on the properties.  He contended that the applicant was not under any obligation to pay off, against its borrowings, the whole of the sale proceeds on the two properties.  That obligation depended on the applicant’s arrangements with its bankers. 

7                     In my opinion, the applicant’s arrangements with its bankers are not relevant for present purposes.  As Mr Ayliffe for the Robinsons pointed out, once the sale of Lower Wilmot and Mannings Jetty Road was settled the applicant had the use of the money.  Whether the applicant was able to reduce the commercial bill facility or preferred to use the money for some other purpose, it nevertheless had the benefit of the money.  The respondents should not pay interest for any further period in respect of that amount. 

8                     Mr Cooper has done recalculations which allow for the Mannings Jetty Road adjustment, the receipt of the $850,000 and also the $122,000 paid in August 2003 for the 99 year lease on Broadmoor.  The net result is $897,379 less $2,811 being the 2 per cent reduction already referred to, leaving the final amount of the judgment at $894,568.  Accordingly, there will be judgment as follows:

1.         Judgment for the applicant against the Robinsons and Mantach for damages of $894,568. 

2.         Judgment for Mantach against the Robinsons for damages of $894,568.

3.         The applicant’s claim against the third respondent for rescission of the Broadmoor lease is dismissed.

Costs

9                     On 7 March 2007 the applicant’s solicitors Ware & Partners wrote letters to Simmons Wolfhagen, solicitors for the Robinsons, and DLA Phillips Fox, solicitors for Mantach.  Each letter was in identical terms.  Omitting formal parts it stated:

Please find enclosed an offer of compromise made by the applicant in this matter to the First, Second and Fourth respondents.

10                  The attached document, entitled with the court heading for the proceeding, was as follows:

OFFER OF COMPROMISE

This Offer of Compromise is served in accordance with Order 23(3) [sic] of the Federal Court Rules. 

The Offer of Compromise is made by the Applicant to the First, Second and Fourth respondents in respect of the cause of action number TAD 27 of 2005. 

TAKE NOTICE that the Applicant will accept payment in the sum of $800,000.00 from the First, Second and Fourth respondents by way of compromise of claim together with the Applicant’s party/party costs of the action to be taxed.

This offer is made in satisfaction of the Applicant’s claim against the First, Second and Fourth respondents in full and final settlement of all causes of action pleaded by the Applicant against the Fourth Defendant [sic] in action number TAD 27 of 2005

TAKE NOTICE that this Offer of Compromise is open for acceptance for a period of fourteen (14) days after the offer is served.

DATED this 7 March 2007

Ware & Partners

per [sgd]

Solicitors for Applicant

TO:

Simmons Wolfhagen

168 Collins Street Hobart Tas 7000

Solicitors for the First and Second Respondents

Phillips Fox

140 William Street Melbourne Vic 3000

Solicitors for the Fourth Respondent

11                  As will be seen, the applicant’s offer of compromise was substantially less than the amount for which judgment is to be entered.  The trial commenced on 19 March 2007 and continued in March and July over a total of fourteen sitting days. 

12                  In arguing against giving the offer any costs consequence Mr Cawthorn SC for Mantach, supported by Mr Ayliffe for the Robinsons, contended that the form of offer required all of the respondents to accept it.  Contrary to O 23 r 2(2) it did not specify separately the offer made to each party.  It was not possible for Mantach alone (or as Mr Ayliffe says, the Robinsons alone) to accept the offer in accordance with its terms.  Reference was made to the decision of the Full Court of this Court in King v Yurisich (No 2) [2007] FCAFC 51 at [11] where their Honours said:

There does not appear to be any basis under the terms of O 23 for the proposition that an offer made to all respondents can be accepted only by one. The fund made an offer which required all four respondents to whom it was made to accept its terms. If one respondent failed to accept, the fact that the other three had sought to would not have been a compliance with the terms of the offer. Moreover, in those circumstances there would be nothing which the respondents who wanted to accept the offer could do to comply with its terms. If the fund were correct in its construction of O 23, this would mean that any respondent who had wanted to accept the offer but was unable to persuade the others to do so, would be responsible for the payment of costs on an indemnity basis notwithstanding that respondent’s attempt to satisfy the offer so far as it could.  Given that the obliging respondent had no power to compel the others to act reasonably or to accept the offer, the consequence would be unacceptably harsh. 

Reference was also made to the decision of Byrne J in the Supreme Court of Victoria in Aquatec-Maxcon Pty Ltd v Barwon Water Authority (No 3) [2006] VSC 270 at [20]-[21].

13                  I treat the reference to the “Fourth Defendant” in the final paragraph of the offer as a typographical error.  Read as a whole, the offer is plainly dealing with all causes of action against the Robinsons and Mantach, they being by this stage the only remaining respondents in the proceeding.  No point was taken by counsel for the respondents as to this error.

14                  It may be arguable that the offer in the present case did comply with Order 23.  Order 23 rule 2 provides:

(1)     In any proceeding, a party may make to another party an offer to compromise any claim in the proceeding on the terms set out in the notice of offer.

(2)     If an offer to compromise the separate claims of several parties to the proceeding is in a single notice of offer, the notice of offer must specify separately the offer made to each party.

15                  Sub-rule (2) is speaking of separate claims against separate parties, as for example where applicant A pleads copyright infringement by B, trade mark infringement by C, a Trade Practices Act contravention by D and defamation by E.  There are different claims with different measures of damages.  The need for the separate specification required by sub-rule (2) is obvious.

16                  In the present case, the applicant alleges the one head of loss and damage: it paid more for Broadmoor and Lower Wilmot than they were truly worth.  Each respondent was facing the same monetary liability (as I have held, recent statutory provisions for proportionate liability were not applicable).   It was open to either respondent to pay the $800,000 and, failing agreement with the other respondent, to proceed with its cross-claim, in the course of which it could have made its own Order 23 offer or a Calderbank offer (see Calderbank v Calderbank [1975] 3 All ER 333).  If either respondent had agreed to pay $800,000, it would have been significantly better off than it now is, each respondent being liable to the applicant for $894,568.  True it is Mantach now has a right of indemnity against the Robinsons for the full amount, but as its counsel accepted, it would have had a right of recovery against the Robinsons back in March had it accepted the $800,000 offer.  And Mantach would have had greater prospects of effective recovery had the Robinsons’ assets not been depleted by a fourteen day trial.  Even if Mantach had to run a case against the Robinsons to judgment, that would have been a substantially less expensive exercise than the three cornered contest which in fact took place.

17                  Put another way, there would have been no practical difference if the applicant had addressed an offer to the Robinsons offering to accept $800,000, and an otherwise identical document addressed to Mantach also offering to accept $800,000.  It would be an odd and formalistic result if the fact that the offers were in the one document made a critical difference.

18                  However, it is not necessary to decide whether King prevents such a conclusion.  Even if the offer did not comply with Order 23, it was nevertheless not a nullity.  The making and non-acceptance of it are facts which happened and which are relevant to the exercise of the discretion as to costs.  The only difference is that if Order 23 does not apply there is no presumptive entitlement to indemnity costs: MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 at 240.

19                  In MGICA there was no Order 23 offer but there had been a Calderbank letter which Lindgren J at 238 accepted as relevant.  His Honour pointed out that s 43, and perhaps also 23, of the Federal Court of Australia Act 1976 (Cth) empower the Court to award costs on an indemnity basis.  The discretion must of course be exercised judicially.  His Honour at 239 reviewed a number of single instance Federal Court decisions and in particular John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 at 204-206 and Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, 7 February 1996).  In these cases indemnity costs were refused because, although the offeree achieved a worse result at judgment, it could not be said that there was “no chance of success” (John S Hayes at 206) or that in not accepting the offer the offeree’s conduct was “plainly unreasonable” (Sanko at 9).

20                  Lindgren J noted at 240 that a different approach was taken by Rolfe J in the Supreme Court of New South Wales in Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425.  Rolfe J expressed disagreement with John S Hayes and Sanko.  His Honour took the view that non-acceptance of an offer which was better than the ultimate result itself prima facie demonstrated unreasonable conduct warranting indemnity costs.  Lindgren J at 240 followed the two Federal Court decisions, although he thought that there were many cases, including the one before him, where the different approaches would not produce a different result.

21                  Recently a Full Court of the Federal Court in WSA Online Limited v Arms (No 2) [2006] FCAFC 108 said at [16], citing MGCIA:

A Calderbank offer does not carry the same presumptive entitlement to indemnity costs, but the public policy of encouraging settlement of litigation should nevertheless lead the Court to make an order for indemnity costs where a Calderbank offer has been made in terms which are clear and where it is appropriate to do so.

It is worth noting that one of the aspects of the offer being considered in WSA Online was that it was made to a number of parties and one of them could not accept it independently without the agreement of others.  Nevertheless the Full Court said at [18] this “was not a matter which conclusively operates against the costs order sought”.  In King at [8] the later Full Court cited WSA Online with no suggestion of disapproval.

22                  In this regard I note that prior to trial the applicant reached a compromise with the fifth respondent Harrison Humphreys Pty Ltd, a valuer against whom the applicant pleaded substantially the same case as it did against Mantach.  The terms of that settlement are not known to the Court, and would not be relevant if they were.  The point is, however, that it was possible for the applicant in the circumstances of the present case to settle with one of several respondents.  Outside the specific requirements of Order 23 the Court is in the area of general discretion as to indemnity costs.  The fact that, as a matter of contract law, an offer might not have been capable of acceptance by one respondent is not conclusive against an award of indemnity costs:  WSA Online.

23                  In the final analysis the award of indemnity costs remains a matter of discretion.  In MGICA Lindgren J said at 238 that the obligation to exercise the discretion judicially

… 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. (Emphasis in original)

24                  The locus classicus on the subject is still the decision of Sheppard J in Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225.  His Honour at 230 noted that the power to order such costs is not “to be circumscribed in any way” and, at 231, that the power “is not so circumscribed that an order of this character may be made only against an ethically or morally delinquent party”.  His Honour at 233 noted as one of the circumstances which have been thought to warrant the exercise of the discretion “an imprudent refusal of an offer to compromise”.

25                  In my opinion in the present case the refusal of the applicant’s offer was imprudent.  It was made when the parties’ evidence, or at least the great bulk of it, was available in affidavit form.  It would have been apparent to an objective observer that there was, at the lowest, a serious risk of a Court finding that there had been a gross misrepresentation as to the croppable areas of Broadmoor and Lower Wilmot and that this had led, along with other factors, to a gross over valuation, as demonstrated, apart from anything else, by the result of the subsequent sales.  The objective observer would also have been aware that it would take a long and expensive trial for the applicant to run its case to judgment.

26                  I will order that the Robinsons and Mantach pay the applicant’s costs on a party and party basis up until 21 March 2007 (being 14 days from the date of the offer) and thereafter on an indemnity basis.

Extension of time for appeal

27                  There is no opposition to an extension to 15 February 2008 of the time for filing and serving a notice of appeal.

Associate:

Dated:         19 December 2007