Federal Court of Australia

Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann (No 4) [2021] FCA 1548

ORDERS

THE COURT ORDERS THAT:

1.    There be no order for costs.

2.    The amount of $116,000 deposited by the plaintiffs into the plaintiffs’ solicitors’ trust account as security for the defendants’ costs under Order 4 of the orders made on 9 July 2020 be repaid to the plaintiffs forthwith.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

REEVES J:

1    On 10 August 2021, I delivered my reasons for judgment in Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann (No 3) [2021] FCA 938 (the primary judgment). Order 1 of that judgment directed the parties to prepare and submit to my Chambers a draft set of orders to, among other things, address the question of costs. On 20 August 2021, the lawyer for Mr Said Jahani and Mr Michael McCann, the first and second defendants (the Administrators), provided a draft order to my Chambers proposing that the question of costs be determined on the papers. The plaintiffs, Shafston Avenue Construction Pty Ltd (Shafston), 28 Baxter Street Construction Pty Ltd (Baxter) and Lincoln Street Construction Pty Ltd (Lincoln), agreed to that course. Accordingly, I made orders directing the parties to file written submissions on costs. These reasons arise from those submissions.

2    The only issue raised in those submissions was whether the Administrators ought to be awarded their costs of the proceeding on an indemnity basis from 12 September 2019, that being the date on which an offer was made to settle the proceeding. The Administrators also sought an order that the security that the plaintiffs were ordered to provide for the Administrators’ costs of the proceeding be paid to them.

THE OFFER OF COMPROMISE

3    In an affidavit filed with the Administrators’ submissions, their lawyer, Mr Scott Sharry of Clayton Utz, deposed to having sent a letter to Macpherson Kelley, the lawyers for the plaintiffs, on 12 September 2019. That letter was headed “Without prejudice save as to costs” and contained an offer to settle the proceeding, which was “open for acceptance for 14 days from the date of [the] letter”. The terms of the offer were as follows:

1.    We note that his Honour Justice Reeves had now delivered judgment in relation to paragraphs 5 to 10 of the Second Amended Originating Application (2AOA).

2.    As a consequence, paragraphs 1 to 4 of the 2AOA remains to be determined.

3.    On the material delivered by your clients to date in relation to paragraphs 1 to 4 of the 2AOA, we consider that your clients’ claims are without basis and unlikely to succeed.

4.    In order to avoid incurring further substantial costs in the Proceeding, which costs may in due course come to be charged (at least in part) against the assets that would otherwise be available for distribution to creditors, our clients are prepared to offer to settle the proceeding on the basis that:

(a)    paragraphs 1 to 4 of the 2AOA be dismissed; and

(b)    each party bear their own costs of paragraphs 1 to 4 of the 2AOA.

5.    We attach a Form 45 Notice of Offer to Compromise in the above terms. This offer is open for acceptance for 14 days from the date of this letter following which time it will lapse.

6.    Should our client successfully defend the proceeding, our clients will refer to the contents of this letter on the question of costs and our clients will seek an order for indemnity costs against your clients, in accordance with r 25.14 of the Federal Court Rules 2011 (Cth) and/or the principles in Calderbank v Calderbank [1975] 3 All ER 333.

(Emphasis in original)

4    It can be seen that this offer was made under r 25.14 of the Federal Court Rules 2011 (Cth) (FCR) and the principles in Calderbank v Calderbank [1976] Fam 93. Mr Sharry deposed that the plaintiffs did not respond to the offer. He further deposed that, between 16 September 2019 and 23 August 2021 (the date that orders were made dismissing the proceeding), the Administrators had incurred costs amounting to a sum of $773,491.83.

THE CONTENTIONS

5    In their written submissions, the Administrators first contended that their “walk away” offer represented a genuine attempt to compromise in the proceeding. Next, they contended that the plaintiffs’ failure to accept their offer was unreasonable within the meaning of r 25.14(2) of the FCR and was therefore a “special or unusual feature” justifying an award of indemnity costs, relying on the judgments in Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 at 223 and Trustee for The MTGI Trust v Johnston (No 2) [2016] FCAFC 190 at [17]. In that respect, they listed a number of factors attracting unreasonableness in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298 at [25].

6    As regards the question of genuineness, while they accepted that their offer was a “walk away” offer, they relied on the facts that the proceeding had been on foot for more than a year, several affidavits had been filed and it was “apparent” that they had already incurred costs in defending the proceeding. They further contended that the fact that the paragraphs of the originating application the subject of their offer were adjourned to a date to be fixed pending resolution of the dispute concerning the Deed of Company Arrangement which was raised by other paragraphs of that originating application had little bearing on the genuineness of the offer.

7    At to the unreasonableness of the plaintiffs’ failure to accept the offer, the Administrators contended that, as at the date of their offer, the plaintiffs ought to have been aware of their low prospects of success, particularly having regard to the detailed reasons provided for rejecting their Proofs of Debt. Further, the Administrators contended that the fact that, by the time of their offer, they had not yet delivered their expert and lay evidence could not have made any “real difference” because the plaintiffs’ claims turned largely on the construction of documents that were already available to them. As to Lincoln’s success with respect to a part of its defects and warranties claims, the Administrators contended that success must be considered in the context of the $2,150,000 in bank guarantees that Lincoln had exercised. They contended that, to achieve a “practically meaningful” result in those claims, Lincoln would have needed to obtain a judgment in excess of the amount of those guarantees. Finally, they relied on the concise and clear terms of their offer and the fact that it allowed a 14 day acceptance period in accordance with r 25.05 of the FCR.

8    For their part, the plaintiffs contended that they were in a better position than if they had not pursued the litigation as they were ultimately partially successful in relation to Lincoln’s Proof of Debt. They contended that, in a commercial sense, the primary judgement “may be correct” but that it did not resolve the issue relating to the use of the bank guarantees. Because of this, they contended that the Administrators’ contention that they would have needed to obtain judgment in excess of $2,150,000 was incorrect. They contended that was so because the legal effect of the primary judgment was that the Administrators were wrong to reject Lincoln’s Proof of Debt and that “vindicate[d] the [p]laintiffs’ position”. Further, they contended that, even if only a commercial, rather than legal, test were used to assess the effect of the judgment, the use to which the bank guarantees may be put remained a live issue. In this respect, they contended that they may lodge a further Proof of Debt “on the basis that the [b]ank [g]uarantee[s] [have] been expended entirely on Lincoln’s defects claims … On that view, the [p]laintiffs would be entitled to be admitted to proof for between $570,000 and $979,945.22”. On this basis, they contended they were partially successful and that the costs ought to follow the event on a party and party basis.

9    The plaintiffs contended that it was not unreasonable for them to fail to accept the offer because of their success on Lincoln’s Proof of Debt. Alternatively, they contended that the outcome they achieved was better than they would have achieved by accepting the offer. They contended that was so because the offer was a “walk away” offer and the Administrators were found to have erred in their adjudication of Lincoln’s Proof of Debt. They also contended that their conduct in dealing with the offer must be assessed without the bias of hindsight and in light of the parties’ position as at the date the offer was made, relying on the observations in Stipanov v Mier (No.2) [2006] VSC 424 at [12] and Bert & Ors v Red 5 Limited & Anor [2017] QSC 8 at [25]. In this respect they referred to the primary judgment at [50]-[58] and claimed that events occurring after the expiry of the offer were both unforeseeable as at that date and deleterious to their prospects of their success in the proceeding.

10    Alternatively, the plaintiffs contended that the Court, if “not persuaded to grant [them] their costs in the proceeding” ought to order that each party bear its own costs. They put this contention on the footing that costs should not be apportioned based on a calculation of each party’s success on the issues in the proceeding. To that end, they contended that the Court ought to “focus on the broad interests of justice, having regard to the overall outcome of the litigation”. In respect of that “overall outcome”, they contended that, while the legal result of the proceeding was of more moment than “subordinate” commercial considerations, it would be “reasonable” to order that each party bear its own costs “if the Court wish[ed] to broadly consider and assess the parties’ success in accordance with the issues considered in the [primary judgment] and having regard to certain legal, and uncertain commercial outcomes”.

11    In their reply submissions, the Administrators contended that the plaintiffs’ claims that they were the successful parties in the proceeding was “quite audacious” and contrary to the outcome of the proceeding and the ordinary principles which applied to a determination of costs. Relying on the observations in ALDI Foods Pty Ltd v Transport Workers’ Union of Australia (2020) 282 FCR 174; [2020] FCAFC 231 at [88] per Besanko, Bromberg and O’Bryan JJ and the observations of Spender J in O’Keeffe Nominees Pty Ltd v BP Australia Ltd (No 2) (1995) 55 FCR 591 at 594, they contended that the key question was whether the “objective sought by the litigation is achieved, even though the applicant does not succeed on every issue in the litigation”. On that footing, they contended that the matter was not suited to an issue-by-issue apportionment of costs. They contended that was so because it involved three claims brought by three plaintiffs in respect of three separate Proofs of Debt and they were successful in two out of three of those claims.

12    As to Lincoln’s partial success on its claim, they contended that the question whether they were successful in a legal or commercial sense is of no import. They contended that was so because the primary judgment required that allowance be made for the fact that Lincoln exercised the bank guarantees and that was reflected in the final orders that were made on 23 August 2021. Further, they contended that it was too late for the plaintiffs to raise issues relating to those guarantees and that, throughout the proceeding, both parties proceeded on the understanding that the bank guarantees were to be deducted from Lincoln’s claim. In any event, they contended, the issue about the use of the bank guarantees was therefore irrelevant on the question of costs. Finally, they contended that the plaintiffs’ contention that they obtained a better outcome at trial than they would have if they had accepted the offer was fallacious because the effect of the final orders was no different to that proposed by the offer.

THE PRINCIPLES

13    Rule 25.14(1) of the FCR provides that where there has been a non-acceptance of an offer to compromise, the key question is whether the “judgment [was] less favourable than the terms” of that offer:

If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer:

(a)    the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and

(b)    the respondent is entitled to an order that the applicant pay the respondent’s costs after that time on an indemnity basis.

14    In Guo v Commonwealth of Australia (No 2) [2018] FCA 13 at [10], Jagot J accepted that the relevant question in determining whether a judgment was “less favourable” than the terms of the offer is whether the applicant “won anything of value or anything [they] could not have won without fighting the action through to a finish … this requires a comparison of the relief sought with a comparison of the relief granted” (citations omitted). Jagot J also observed that such a victory could include “non-monetary elements”: at [11]. See also Roache v News Group Newspapers Ltd [1992] TLR 551, applied in Timms v Clift [1998] 2 Qd R 100 at 107; Metz Holdings Pty Ltd v Simmac Pty Ltd (No 3) [2011] FCA 1450 at [26]; and Reurich v Club Jervis Bay Ltd (No 2) [2018] FCA 1727 per Markovic J at [17] and [27]-[28].

CONSIDERATION

15    At the outset, I reject the plaintiffs’ contention that the application of the bank guarantees exercised by Lincoln was, or remains, a live issue in this proceeding. That issue was not raised in the pleadings, nor in the issues template, nor in their written submissions. It was also not mentioned in the Administrators’ offer. Whatever may have been the “understanding” of the parties about the guarantees, it was first raised with the Court after the delivery of the primary judgment whilst the parties were canvassing draft orders to reflect the reasons in that judgment. In those circumstances, I do not propose to have regard to that issue (if it exists) in determining this costs application. It follows that I also reject the Administrators’ contentions that Lincoln’s success in respect of its Proof of Debt should be assessed in the context of those guarantees.

16    With that issue aside and having regard to the “walk away” nature of the Administrators’ offer, I consider the plaintiffs jointly obtained a judgment that was more favourable to them than if they had accepted that offer. Specifically, they succeeded in establishing that Lincoln’s Proof of Debt should be allowed at $570,000, more than the Administrators had allowed. While this sum was much lower than that initially claimed by Lincoln, it is plainly a better outcome than that the plaintiffs would have achieved by accepting the Administrators’ “walk away” offer and by choosing not to “[fight] the action through to a finish”. For these reasons, I reject the Administrators’ application for indemnity costs of the proceeding.

17    With that application disposed of, the positions of the parties become somewhat paradoxical. For their part, the Administrators have contended that there should not be any apportionment of the costs by issues. If that approach were adopted, it would follow that the plaintiffs would ordinarily be entitled to the costs of the proceeding based on their success mentioned above. However, perhaps in recognition of the fact that Shafston and Baxter both failed completely in their claims, the plaintiffs have not sought such an order. Instead they have contended that each party should bear its own costs of the proceeding. In these circumstances and having regard to the broad discretion that exists under s 43 of the Federal Court of Australia Act 1976 (Cth), I consider that is the appropriate costs order.

CONCLUSION

18    For these reasons, I consider that the Administrators are not entitled to an order for indemnity costs and that there should instead be no order for the costs of the proceeding. In that event, the plaintiffs are entitled to be repaid the amount they provided as security for the costs of the proceeding pursuant to my orders of 9 July 2020. I will make orders accordingly.

Associate:    

Dated:    8 December 2021

SCHEDULE OF PARTIES