REASONS FOR JUDGMENT

1                     On 19 February 2010, I dismissed the applicant’s claim for damages against the respondent (Eric Preston Pty Ltd v Euroz Securities Limited [2010] FCA 97).  The applicant, Eric Preston, claimed that the respondent, Euroz, had caused it to suffer loss and damage by reason of having breached contractual, tortious and fiduciary duties owed to Eric Preston and by having engaged in misleading or deceptive conduct in contravention of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth).  Eric Preston claimed damages in an amount ranging between $4.117 million and $4.957 million.

2                     Euroz cross-claimed for the sum of $93,606.52 comprising unpaid commissions in respect of Eric Preston’s share trading activities.  Euroz also claimed interest.  Euroz succeeded in its cross-claim and on 17 May 2010, the Court ordered that Eric Preston pay Euroz the sum claimed in the cross-claim and interest in the amount of $18,707.17 and costs.

3                     Euroz now claims that the Court should order that Eric Preston pay Euroz’s costs of the application up to 12 March 2009 on a party and party basis and the costs of the application, from and including 13 March 2009, on an indemnity basis.  Euroz relied upon two grounds in support of this claim.  First, Euroz contended that Eric Preston unreasonably refused to accept an offer to settle the proceeding shortly before the commencement of trial.  Secondly, Euroz contended that, in light of the criticism made in the principal judgment of Mr Drummond’s evidence, and the findings of fact made at trial, Eric Preston had brought its case in wilful disregard of known facts.  It relied on the well-known observations in the case of Colgate Palmolive Co v Cussons Pty Ltd (1993) 45 FCR 225 at 233, per Sheppard J and other authorities to like effect.

4                     I deal first with Euroz’s contention that the offer was unreasonably refused by Eric Preston.

5                     The relevant offer was made in a letter from Euroz’s solicitors to Eric Preston’s solicitors dated 9 March 2009.  The letter read as follows:

We write to you regarding the utility of your client’s claim in light of the recent announcements regarding the ANZ/Opes settlement.  In that respect we attach copies of the ANZ announcement, the Opes Circular to Creditors and also the ASIC statement supporting the Opes settlement.  You will see from those documents that the proposed settlement would provide to your client a return of approximately 40 cents in the dollar on his 27 March 2008 Portfolio value, which on the figures presented by Mr Blaski [sic] would be approximately $1.9 million.

We asked Ernst & Young to conduct a further valuation of your client’s position as at 8 October 2008 (the date of your client’s purported notice of termination), 15 October 2008 (the date of liquidation) and now.  We attach a schedule setting out those further valuations.  Ernst & Young estimate that the net value of your client’s portfolio is as follows:

1.                   8 October 2008 on a contract claim basis - $1.33 million;

2.                   15 October 2008 on a contract claim basis - $1.017 million;

3.                   Now on a contact [sic] claim basis – negative $208,000;

4.                   8 October 2008 on a reconstituted Leveraged Equities Portfolio basis - $2.19 million;

5.                   15 October 2008 on a reconstituted Leveraged Equities Portfolio basis - $1.96 million;

6.                   Now on a reconstituted Leveraged Equities Portfolio basis - $773,000.

As you would appreciate from the evidence and amended defence put on by Euroz, it strongly contests liability and there are good grounds as to why it would succeed on liability.  Moreover, as your client’s case is put on the basis that it would have retained its Leveraged Equities Facility, then the appropriate assessment of damages is the current value of that portfolio.  In that regard, your client’s assertion that he would have sold down his Opes Portfolio to retain equity of $4 million is, with respect, implausible and contrary to both the contemporaneous documents and to your client’s own pleaded case.

The proposed ANZ/Opes settlement delivers to your client a sum far higher then [sic] the current value of its portfolio.  Even if a date in October is taken, as set out above, on only one of the four possible available scenarios would your client be entitled to any damages and then only to the extent of approximately $300,000.  Euroz’s Cross Claim of $96,000 must also be taken into account.

Accordingly, even if your client can overcome the substantial hurdles in the way of a successful finding on liability, it is very unlikely your client can obtain any award for damages.

Taking all of these matters into account, Euroz is prepared to resolve the matter on a walk away basis, namely:

1.                   The proceedings and the cross-claim are dismissed and the parties provide mutual releases;

2.                   No order as to costs.

Would you please let us have your response to this offer by 5.00 pm, Thursday 12 March 2009.

6                     By letter dated 13 March 2009, Eric Preston’s solicitors responded as follows:

I refer to your letter dated 9 March 2009.

Our client disagrees with your client’s assessment of its prospects, as such it rejects the proposal contained in your correspondence.

7                     Euroz did not contend that the offer was one which fell within the ambit of O 23 of the Federal Court Rules.  Rather, Euroz contended that the offer was to be regarded as a so‑called Calderbank offer to settle the proceeding prior to trial.

8                     Euroz contended that Eric Preston’s rejection of its offer was unreasonable for a number of reasons.

9                     First, Euroz said the letter offered a compromise of real value to Eric Preston, and that Eric Preston was now in a considerably worse position than if it had accepted the offer.

10                  Secondly, Euroz contended that Eric Preston was aware at the time that the offer was made that it would be able to recover a substantial part of the loss that it claimed on the basis that it would be able to participate as a creditor in the proposed scheme of arrangement which included the Opes Prime group of companies, ANZ, Merryl Lynch and the liquidators of Opes Prime Stockbroking Ltd.

11                  Thirdly, submitted Euroz, by the time that Eric Preston rejected the offer, Eric Preston was aware of the defences raised by Euroz which ultimately succeeded at trial.  By that date, said Euroz, Eric Preston must have known that it would not succeed on its claim because it was founded on factual allegations which were not sustainable.  In particular, Euroz referred to the fact that the Court rejected Mr Drummond’s evidence on a number of crucial matters.  These included the allegation that Mr Caldow had made the crucial representation that the Opes Prime facility was the same as the Leveraged Equities facility, that Mr Drummond had relied upon that representation to enter into the Leveraged Equities facility, and that Euroz had caused Eric Preston’s loss.  Euroz also drew attention to the fact that the Court had commented adversely on the failure of Mr Drummond to give a full and frank account of events in his affidavit evidence and on the disparity between Mr Drummond’s evidence in cross-examination and that in his affidavits.  Euroz also referred to the Court’s comments to the effect that it appeared that, in certain respects, Mr Drummond’s affidavits had been tailored to advance a case which Eric Preston’s lawyers sought to advance.  Euroz said that these were relevant considerations to an assessment of whether the rejection of the offer of compromise was unreasonable.

12                  The onus is on Euroz to show that the offer was unreasonably refused by Eric Preston.  Whether Eric Preston’s conduct in refusing the offer was unreasonable, must be assessed prospectively and by reference to liability and the amount of the damages that was offered (Seven Network Ltd v News Ltd (2007) 244 ALR 374 at 389).

13                  Eric Preston made a number of contentions in opposition to the contention that it had acted unreasonably in rejecting the offer of compromise.

14                  First, Eric Preston contended that the offer was not truly a compromise of commercial value.

15                  In my view, it cannot be said that the offer made by Euroz did not constitute a commercial compromise of value.  It has been recognised that in certain circumstances, that an offer to forego costs could be sufficient in itself to constitute an offer of commercial value.  As Finkelstein J observed in the case of Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (No 4) [2009] FCA 803 at [13]:

Take for example a case that has progressed for some time and the parties’ costs are quite high.  In that event an offer to walk away may, in a business sense, be a significant offer:  see for example Commissioner of Taxation v Evenfront (No 2) (2009) 223 FLR 28 at 31.

16                  The offer in this case was made by Euroz one week before the commencement of the trial.  By that time each of Euroz and Eric Preston would have incurred a considerable amount of costs in the preparation of the case.  Also, each party was on the brink of incurring a very considerable amount of costs in the conduct of the trial.  Further, in this case, Euroz’s offer also included an offer to forego the amount of about $100,000 by way of its cost claim.  Accordingly, in my view, it could not be said that the offer did not comprise a serious attempt to compromise the litigation because it lacked commercial value.

17                  However, that still leaves to be decided the question of whether Eric Preston acted unreasonably in rejecting the offer.  As mentioned, this question has to be assessed prospectively by reference to the position that Eric Preston was in at the time the offer was made, and also by reference to the questions of liability and damages.

18                  Eric Preston also submitted that the offer was not unreasonably refused because the offer was not timely, the offer was not left open for a reasonable period of time and the offer did not give reasons with sufficient particularity why Eric Preston would fail.  In my view, there is no substance in any of these three contentions.

19                  First, it cannot be said that the offer was not timely.  There is no absolute standard by which to measure whether an offer of compromise is “timely”.  In this case, the offer was made a week before the trial was due to commence.  It is the case that each of the parties had by that time incurred considerable costs in preparing for trial.  However, it is also the case that the parties were yet to incur even more costs in the conduct of an 11 day trial.  Further, by the time that the offer was made each of the parties was, by reason of the proximity to trial, in a good position to assess the strengths and weaknesses of its case.  Also, it is well‑known that many cases settle shortly before trial.  The policy considerations encouraging settlement of litigation would be undermined if it was the case that an offer made shortly before trial was to be regarded as not being timely, and this factor would mitigate against a finding that an otherwise reasonable offer, was unreasonably refused.

20                  Secondly, the same considerations referred to in the preceding paragraph apply in relation to Eric Preston’s contention that the offer was not open for a reasonable period of time.  The offer was made a week before trial and was open for acceptance until the Friday before the commencement of the trial.  The offer was made in sufficient time for Eric Preston to have avoided significant costs related to the conduct of the trial if it was otherwise minded to accept the offer.  It is apparent from Eric Preston’s letter of 13 March 2009 that the offer was not accepted because of the optimistic view that Eric Preston held as to its prospects of success.  Eric Preston did not advance any evidence demonstrating that it would have come to a different assessment of its prospects of success had the compromise offer been made at an earlier time.

21                  Thirdly, it is the case that the offer did not with particularity state the reasons why Euroz contended that Eric Preston’s case would fail.  However, in my view, this did not constitute an obstacle to Eric Preston understanding the basis on which Euroz contend that Eric Preston’s case on liability faced “substantial hurdles”.  A very significant reason why Eric Preston’s case failed was that the evidence of Mr Drummond was not accepted on crucial matters going to liability.  By the time the offer was made, the parties were fully apprised of the different versions of events contained in the respective witness statements of Mr Drummond and Mr Caldow.  It would, therefore, have been clear to the parties and to their experienced legal advisers that credibility issues would loom very large in the determination of the case.  Further, the solicitors for Eric Preston did not seek further clarification of the basis upon which Euroz’s solicitors contended that Eric Preston faced “substantial hurdles” in respect of liability, before rejecting the offer.  In those circumstances, it is to be inferred that they did not need any further information from Euroz in order for them to make their own optimistic assessment of Eric Preston’s prospects of success referred to in the latter rejecting the offer.

22                  The offer, however, did set out the rationale on which it was based.  That rationale was that, as Eric Preston’s claim for damages was premised on the contention that it would have kept its portfolio with Leveraged Equities, the value of that portfolio would have been adversely affected by the decline in the share market which occurred in late 2008 and early 2009, with attendant adverse consequences for the quantum of Eric Preston’s damages claim.

23                  Euroz went on to support its argument by predicting, accurately, as it transpired, that the Court would not accept Eric Preston’s evidence in support of its claim that it would have sold down the portfolio in March 2008 to retain $4 million in equity.  Euroz argued further that after having taken into account the estimated dividend that Eric Preston would get from the Opes Prime scheme of arrangement, the best that it could hope to receive by way of damages was about $300,000 and that would have to be reduced by the amount of the cross‑claim.

24                  There was nothing in the letter from Eric Preston’s solicitors to suggest that Eric Preston did not comprehend the rationale of the offer being put by Euroz.  As I have already mentioned, Eric Preston rejected the offer because it had an optimistic view of its prospects of success, not because of any failure to comprehend the rationale for the offer.

25                  Accordingly, I do not accept the contention that because the offer letter did not clearly particularise the basis on which Eric Preston would fail, that this is a factor militating against the finding that it acted unreasonably in rejecting the offer.

26                  Next, Eric Preston contended that the proceeding was complex both as to fact and law and that it involved multiple causes of action and a long history of transactions between the persons involved.  It was also said that there was expert evidence in the case; and that Eric Preston was entitled to assume that the evidence of its witness, Mr McKimm on the “duties of a stockbroker” would be accepted.

27                  It is the fact that the trial in this matter lasted 11 days and that this, in itself, is some measure of the complexity of the proceeding.  But, it is also the case that Eric Preston’s statement of claim, particularly after it was amended at the commencement of the trial, lacked coherence, rigour and specificity.  Further, much time at the trial was taken up in exploring matters, including by reference to the evidence of Mr McKimm, which were not germane to the issues determinative of the trial.

28                  There were really two main issues on which the trial turned.  First, Mr Drummond’s evidence was not accepted on key aspects of the case, including in particular, causation.  Secondly, Eric Preston did not prove that the retainer pleaded and particularised at para 3 of the statement of claim had been made.  In my view, therefore, whilst there were indeed elements of complexity in this proceeding, the complexity was not such as would, of itself, have sufficiently explained and excused Eric Preston’s rejection of Euroz’s offer, if the offer was otherwise reasonable.  Certainly, there was no indication in Eric Preston’s rejection letter that it was inhibited in assessing the prospects of success of its client’s case by reason of the complexity of the proceeding.

29                  Eric Preston then contended that it was justified in refusing the offer because the quantum of loss which was put forward by Euroz‘s offer letter of compromise was based on misconceptions of legal principles.  In particular, Eric Preston argued that none of the dates which was referred to by Euroz was relevant for the purposes of assessing damages.  The dates of 8 October and 15 October 2008 coincided with the date of the notice of the first meeting of creditors of Opes Prime and the date of the actual meeting, respectively.  The date of 4 March 2009 coincided with the date on which Euroz was advised of the proposed settlement between ANZ, Merryl Lynch and the Opes Prime liquidators, which, if made, would give rise to a distribution, through a scheme of arrangement, of up to 40 cents in the dollar to Opes Prime’s client creditors, including Eric Preston.

30                  Eric Preston claimed damages founded on two alternative bases, namely, breach of contract, on the one hand, and a breach of the other duties pleaded, namely, tortious, statutory and fiduciary, on the other hand.  As to the first category, Eric Preston claimed damages ranging between $4.117 million and $4.957 million.  As to the second category, Eric Preston did not distinguish between any of those causes of action, claiming the sum of $4.68 million.  However, underlying both of the categories of the claims for damages was the premise that had Euroz performed its duty, Eric Preston would not have entered into the securities lending and borrowing agreement with Opes Prime, but would have continued trading using its margin loan facility with Leveraged Equities.

31                  Eric Preston contended that the appropriate date for the assessment of Eric Preston’s loss depended upon whether the damages were to be assessed by reference to the contractual measure or the “other causes of action” measure.

32                  As to contractual damages, Eric Preston contended that damages were to be assessed by reference to the date on which Eric Preston said that Euroz breached its retainer.  Mr Blashki, the expert called by Eric Preston, and acting on its instructions, assessed damages by reference to 1 June 2007 (Eric Preston’s closing submissions p 62).  Mr Blashki, applying what was referred to as the “expectation” measure, assessed the value of Eric Preston’s portfolio by reference to what a person on 1 June 2007 might reasonably have expected to be the appropriate growth in Eric Preston’s portfolio between that date and 27 March 2008 - when administrators were appointed to Opes Prime, and, when, said Eric Preston, its loss crystallised.  Mr Blashki estimated that the expectation value of the portfolio, looked at prospectively from 1 July 2007, ranged between $4.117 million and $4.957 million.  The actual value of the portfolio at 27 March 2008 was treated by Mr Blashki as nil.  The loss was the difference between those two figures.

33                  As to the damages claim in respect of the other causes of action, Eric Preston contended that the appropriate date for the assessment of damages was the date of “the loss of Eric Preston’s portfolio”, namely, 27 March 2008.  The figure of $4.68 million, claimed by Eric Preston in this category, was founded on a reconstruction of Eric Preston’s trading activities on the basis that it had used the Leveraged Equities facility, rather than the Opes Prime facility, up to 27 March 2008.  Mr Blashki concluded on that scenario, the net value of Eric Preston’s portfolio would have been $4.68 million.  Further, the actual value of Eric Preston’s portfolio on 27 March 2008 was nil.  The loss was the difference between those two figures.

34                  Had it been necessary to decide the question of the appropriate measure of damages at the trial, it is likely that I would have rejected the so-called “expectation” measure as being the appropriate means of assessing damages.  It is the case that there is a general rule that contract damages are assessed by reference to the date of breach.  However, the general rule must be adapted to meet the special circumstances of each case, to best accommodate the compensation principle.

35                  Eric Preston’s case was run on the basis that the alleged duty owed under the pleaded retainer was coextensive with the duty of care owed in tort.  Further, the contention underlying the claim for damages under both the categories relied on by Eric Preston, was that, but for the breach of duty, Eric Preston would have continued to trade using the Leveraged Equities facility.  In my view, in those circumstances, there should, therefore, be no difference in the date for the assessment of damages between the contractual and in “the other causes of action” bases which were in issue in this proceeding.  Accordingly, it is likely that, in assessing damages, I would have applied the following observations of Chesterman J in the case of Moloney v Bells Securities Pty Ltd [2005] QSC 013 at [105] to the damages claimed by Eric Preston:

In “no transaction” cases, of which this is one, the assessment depends upon the extent to which the plaintiff is worse off as a result of entering the contract which, on the relevant hypothesis, he did because of the negligence or statutory contravention.

36                  It is likely that I would have accepted that 27 March 2008 was the appropriate date by which to assess damages.  It is also likely that I would have assessed damages based on the difference between the position Eric Preston would have been in had it not, in June 2007, entered the Opes Prime agreement, and the position it was in on 27 March 2008.  It is, therefore, likely that this assessment would have been founded on the difference between the value of Eric Preston’s portfolio had it continued its trading activities using the Leveraged Equities facility, less the value of Eric Preston’s claim as a creditor of Opes Prime, which I would have assessed with the benefit of hindsight.

37                  It follows that, whether the valuation of Mr Blashki or Mr Pendergast, the expert called by Euroz, was used to assess the quantum of damages to be awarded, it is clear that the quantum of damages likely to have been awarded would have been substantially higher than the amount contemplated in Euroz’s offer of compromise letter.  Assuming that a value of $1.9 million could be placed on the value of Eric Preston’s rights as a creditor of Opes Prime, the difference between the value of Eric Preston’s portfolio had it remained with Leveraged Equities, and Eric Preston’s position at 27 March 2008, would have been in the region of $2 million to $2.5 million.

38                  It follows that I accept Eric Preston’s submission, that the quantum of the Euroz offer did not take sufficient account of the fact that if it lost on liability, it faced the prospect of an award against it of substantial damages.

39                  Eric Preston made a further point that the offer was founded upon a premise that Eric Preston’s rights as a creditor of Opes Prime would be vindicated to the extent of $1.9 million.  This, in turn, was founded upon the assumption that a scheme of arrangement would yield Opes Prime creditors the dividend referred to in Euroz’s offer.

40                  I accept Eric Preston’s submission that there were a number of uncertainties which at the date of the offer, stood as obstacles to the receipt of the anticipated dividend, and that this was a factor which militated against a finding that the rejection of the offer was unreasonable.

41                  At 13 March 2009, there was still a number of conditions precedent affecting the proposed settlement between the Opes Prime group of companies, ANZ, Merryl Lynch and the liquidators of Opes Prime.  These conditions precedent included the meeting of creditors to approve the scheme of arrangement and the Court hearings.  In my view, these circumstances diminished the weight of Euroz’s argument that it was unreasonable for Eric Preston to have rejected the offer because an amount of $1.9 million would be forthcoming to it.

42                  A further element of Euroz’s contenton that the rejection of the offer was unreasonable, was that Eric Preston had prosecuted a claim in circumstances where it ought to have known that the facts on which it was founded would not be made out, because Mr Drummond’s evidence would not be accepted.

43                  It is the case, that there were unsatisfactory elements in the evidence of Mr Drummond.  These were identified in the principal judgment.  However, I have had some difficulty in assessing the weight to be given to this contention as a factor in determining whether it was unreasonable for Eric Preston to have refused Euroz’s compromise offer.  I have come to the view, after anxious consideration, that this consideration should not lead to a finding that Euroz’s offer was unreasonably refused.

44                  In the case of Walker v Citigroup Global Markets Pty Ltd [2005] FCA 1866, Kenny J considered whether an award of indemnity costs should be made.  At [32], Kenny J observed:

Before turning to the applicant’s second argument in support of an indemnity costs order, I would say something of Mr Fulton’s evidence since the applicant placed some store by it.  In Walker (No 1), I found Mr Fulton to be an unreliable witness.  For example, I found that he had fabricated some of his evidence to support the respondents’ case:  see, eg, Walker (No 1) at [55].  This is a consideration that militates in the applicant’s favour.  Nevertheless, when the matters referred to above are borne in mind and considered in the context of the entire proceeding, I do not find that the conduct of Mr Fulton takes this case far enough outside the ordinary range of cases to justify indemnity costs.

45                  In this case, I did not find that Mr Drummond had fabricated evidence.  Further, I do not find that Mr Drummond’s conduct took the case so far out of the range of the ordinary case such as to result in a finding that Eric Preston and its legal advisers should have known that Mr Drummond’s evidence as set out in his affidavits, would be rejected.

46                  When all of the factors are weighed up, it is my view that Euroz’s offer did not sufficiently take into account the basis upon which damages were likely to be assessed and the risk that Euroz might face a judgment against it for substantial damages, and that this factor outweighs the other factors, in determining whether the offer was unreasonably refused.  Accordingly, I conclude that Euroz has not established that Eric Preston unreasonably refused its offer of compromise.

47                  It follows also from my findings in [45] above, that Euroz’s claim for indemnity costs founded on the independent ground that Eric Preston proceeded to advance a claim in defiance of known facts, is also rejected.

48                  It follows that Eric Preston is to pay Euroz’s costs on a party and party basis.

Associate:

Dated:         30 September 2010