Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd & Ronald C. Aitken [1998] FCA 53 (11 February 1998)

FEDERAL COURT OF AUSTRALIA

COSTS - indemnity basis - offer of compromise - weight to be given to a Calderbank letter having regard to its terms and to the other circumstances of the litigation.

Federal Court Rules 1979 (Cth) , O 23 r 3, r 11

John S. Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201, followed

MGICA (1992) Ltd v Kenny & Good Pty Ltd (No. 4) (1996) 140 ALR 707, followed

Colgate-Palmolive Co. v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225, followed

Donnelly v Edelsten [1994] FCA 992; (1994) 49 FCR 384, followed

Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425, not followed

FLEMINGTON PROPERTIES PTY LIMITED v RAINE & HORNE COMMERCIAL PTY LIMITED and RONALD C AITKEN

NG 903 of 1993

LEHANE J

SYDNEY

11 FEBRUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 903 of 1993

BETWEEN:	FLEMINGTON PROPERTIES PTY LIMITED Applicant
AND:	RAINE & HORNE COMMERCIAL PTY LIMITED First Respondent RONALD C AITKEN Second Respondent
JUDGE(S):	LEHANE J
DATE OF ORDER:	11 FEBRUARY 1998
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The application for indemnity costs (the present application) be dismissed.

2. The applicant pay the respondents' costs of the proceeding other than the costs of the present application.

3. The respondents pay the applicant's costs of the present application.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 903 of 1993

BETWEEN:	FLEMINGTON PROPERTIES PTY LIMITED Applicant
AND:	RAINE & HORNE COMMERCIAL PTY LIMITED First Respondent RONALD C AITKEN Second Respondent

JUDGE(S):	LEHANE J
DATE:	11 FEBRUARY 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

The applicant claimed damages from the respondents on the footing that a valuation prepared by the respondents for the applicant, of property which the applicant proceeded to purchase, was made negligently, in breach of the respondents' contract of retainer and in circumstances where the respondents' conduct in carrying out their retainer infringed s 52 of the Trade Practices Act 1974 (Cth). The detailed circumstances are described in my judgment delivered on 14 August 1997 (reported at (1997) 148 ALR 271) and I need not repeat them. The respondents successfully resisted the applicant's claims: I held that the applicant had not established that the respondents had breached any duty owed to the applicant; and I held also that, even if a breach of duty had been established, no loss had resulted. There is no doubt that in those circumstances the respondents are entitled to an order that the applicant pay their costs; but the respondents seek an order that their costs, incurred after the day on which they made an offer of settlement to the applicant, be paid on an indemnity basis.

On 24 August 1995, the respondents, by letter from their solicitors to the applicant's solicitors, made an offer of settlement. The letter was a Calderbank letter, as that term has come to be understood. The offer was "that our clients will pay your client the sum of $250,000 inclusive of interest and costs in full and final settlement of their claim". The proceeding had been commenced on 15 November 1993; by the time the offer was made discovery had taken place and, with certain significant exceptions to which I shall return, statements comprising the bulk of the evidence in chief had been exchanged. The applicant rejected the offer. The difference between the positions taken by the parties was considerable: on 19 October 1995 the applicant made an offer to settle on the basis that the respondents pay to the applicant the sum of $3.5M, inclusive of costs and interest, and indemnify the applicant against any capital gains tax which might be payable by reference to the applicant's receipt of that sum. On 21 December 1995 the respondents made a second offer, this time in the form of an offer of compromise under O 23 r 3 of the Federal Court Rules: the offer was one of settlement upon payment by the respondents to the applicant of $300,000 plus costs. The second offer by the respondents thus, from the applicant's point of view, improved upon the first by adding $50,000 to the sum offered plus costs which, even on a party/party basis, must by then have been reasonably substantial. That offer, however, did not by any means bridge the gap between the parties' positions: on 12 March 1996 the applicant made an offer to compromise the proceeding on payment by the respondents of $1.89M plus interest of $746,750 plus costs plus an indemnity against capital gains tax.

The proceeding had been set down for trial commencing on 10 April 1996. That fixture was, however, vacated on the application of the respondents, because the second respondent was ill. The trial commenced on 2 September 1996. Meantime, on 26 July 1996, the applicant sold four of the five lots making up the total parcel of land valued and purchased, for an aggregate price exceeding by rather more than $4M the price which, somewhat more than four years earlier, it had paid for the whole parcel; and it continued to hold the remaining lot, which was valued as at 6 September 1996, by the expert valuer called by the applicant in the proceeding, at $8M.

This is not a case to which O 23 r 11 applies: the offers concerned were made by respondents who were wholly successful and are in any event entitled to an order for costs in their favour. The question is to be decided as a matter of discretion, to be exercised having regard to all the circumstances and in the light of the authorities concerning the effect to be given to Calderbank offers. Underlying that line of authority is, undoubtedly, a policy of the law in favour of the sensible compromise of disputes. That policy is promoted if a party who rejects a genuine and realistic offer of compromise risks an order for indemnity costs if it refuses the offer and ultimately obtains a result no better than that which it would have got by accepting the offer.

Its promotion, however, does not in my view require that an applicant who receives any offer and rejects it be at risk of an order for payment of indemnity costs should the applicant ultimately fail to obtain any relief because it fails to make good the cause of action on which it relies. There is, after all, a policy also against deterring parties from pursuing claims to which they reasonably believe themselves entitled. A case - particularly a complex commercial case - in which there is room for substantial argument, and opposing views, about issues going to liability is by no means uncommon. Nor is it uncommon in such a case that an applicant, if it makes good the elements of its cause of action going to liability, will be entitled to substantial damages. 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: see, for example, John S. Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 at 205-207; MGICA (1992) Ltd v Kenny & Good Pty Ltd (No. 4) (1996) 140 ALR 707 at 711-713. That approach is reflected in the judgment of Sheppard J in Colgate-Palmolive Co. v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225, particularly in his Honour's identification, among circumstances which have been thought to warrant the exercise of the discretion to award costs on an indemnity basis, "an imprudent refusal of an offer to compromise" (at 233). It is reflected also in the decision of the Full Court in Donnelly v Edelsten [1994] FCA 992; (1994) 49 FCR 384 at 395, 396. It may be that a somewhat different approach has found favour in the Supreme Court of New South Wales (see particularly Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425); in my view, however, I should follow the well established course of authority in this court.

One of the questions which I resolved in favour of the respondents was whether their valuation was appropriately made (as they made it) on what was described as a five lot basis, rather than a one lot basis, a valuation on a five lot basis being one which valued each of the five lots in the parcel separately and aggregated the separate values. That was a question of law, involving the construction of provisions of the Valuation of Land Act 1916 (NSW) and of the lease subject to which the property was purchased. The questions of construction are discussed in detail in my reported judgement; all that need be said of them now is that they were by no means straightforward or, though in the end I came to a clear conclusion about them, reasonably capable only of one answer. The expert witness called by the applicant took the view that, having regard to the provisions of the lease, a one lot valuation was required; an officer of the Valuer-General's Department, who subsequently valued the land for the purposes of the lease, took the same view. If that view were right, a different conclusion as to breach of duty might have followed.

Additionally, at the time when each of the respondents' offers was made, the applicant had available to it two reports prepared by its expert but only the first of several reports of the respondents' expert: his other reports became available considerably later. That is significant for a number of reasons. First, the applicant's expert reported, in substance, that if the respondents' valuation had been properly done it would have yielded a value approximately half that at which the respondents had arrived. Secondly, the applicant's expert had made an assessment of the market value of the property, at the date on which the applicant acquired it, at an amount more than $3M less than the applicant paid for it. Thirdly, the first report of the respondents' expert made it clear that he regarded as appropriate the approach which had been taken by the respondents and disagreed in a number of significant respects with that taken by the applicant's expert; in my view, however, counsel for the applicant was justified in submitting that that first report in a number of significant respects stated opinions without elaborate reasons, the reasoning process being exposed in a number of significant respects only well after the offers had been made and rejected. Certainly it is true that, in the end, I preferred the evidence of the respondents' expert; but I did so in the light of all the experts' reports and of cross-examination extending over several days.

It was not suggested that the prospect of the ultimate sale should have been taken into account by the applicant in considering either offer; the sale of the four lots took place, and the valuation of the fifth was made, many months after the second offer was rejected.

In short, at the time when it considered the offers the applicant, in my view, had reason to think it had significant prospects of success on liability and, if it were to succeed on liability, a prospect of recovering very substantial damages. In those circumstances, I cannot conclude that there was anything imprudent about the rejection of an offer the value of which was less than one tenth of the damages which, if its expert's evidence were accepted, it might have recovered; and I do not think that its rejection of the offers, in the circumstances which I have described, justifies the making of an order for payment of costs on an indemnity basis.

Senior counsel for the respondents suggested that, if I should take the view that an order should not be made for payment of indemnity costs incurred since the date of rejection of either of the offers, nevertheless the applicant should be ordered to pay, on an indemnity basis, costs incurred by the respondents after the four lots were sold. The suggestion was that the applicant should have enquired, when that happened, whether either of the offers previously made was still open for acceptance. But I do not think that the Calderbank principle extends so far; the time fixed for acceptance of the offers had, of course, long since expired when the lots were sold. If an order were to be made for payment of indemnity costs from the date of sale it must, I think, be on the basis that the applicant persisted in a claim which, in the light of (then) known facts and established law, no longer had prospects of success. In my view, however, an order cannot, in this case, be justified on that basis. The applicant mounted at trial a substantial argument, based on high authority, to the effect that (assuming breach of duty) the applicant should be taken to have suffered a loss, caused by the breach, measured by the difference, at the date of purchase, between the amount actually paid for the land and its real or market value. In ascertaining whether loss resulted from the breach, the amount realised on sale over four years later was (it was said to follow) irrelevant, as was the September 1996 valuation of the fifth lot. While, as my judgment may indicate, I felt some sympathy with the respondents' submission that the applicant's argument offended against common sense, the legal question involved was by no means easy: a large volume of submissions, oral and written, was devoted to it as are slightly more than nine pages of my reported judgement. Having found it necessary, in order to reach a conclusion, to consider in detail a long series of cases of binding and persuasive authority, I cannot now find that the case was one which the applicant ought not have pursued.

I have already ordered that the original application be dismissed. For the reasons I have given, it is appropriate now to order that the applicant pay the respondents' costs of the proceeding other than the costs of the respondents' application for indemnity costs. I have not heard argument as to the costs of this application; but, although there was no formal motion seeking an order for indemnity costs, the matter was specially fixed for argument in circumstances where, otherwise, no further appearance by the parties would have been necessary (compare MGICA at 713). In those circumstances, and subject to anything which counsel may wish to put to me, my view is that the applicant should have its costs of resisting the present application.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lehane

Associate:

Dated: 11 February 1998

Counsel for the Applicant:	Mr D.J. Russell
Solicitor for the Applicant:	Abbott Tout
Counsel for the Respondents:	Mr D.L. Davies S C
Solicitor for the Respondents:	Phillips Fox
Date of Hearing:	4 February 1998
Date of Judgment:	11 February 1998