Moss v Lowe Hunt & Partners Pty Ltd (No 2) [2011] FCA 18 (20 January 2011)

Last Updated: 5 July 2011

FEDERAL COURT OF AUSTRALIA

Moss v Lowe Hunt & Partners Pty Ltd (No 2) [2011] FCA 18

Citation:		Moss v Lowe Hunt & Partners Pty Ltd (No 2) [2011] FCA 18
Parties:		ANDREW MOSS and PEGASUS STRATEGIC PLANNING PTY LIMITED v LOWE HUNT & PARTNERS PTY LTD and LOWE SYDNEY PTY LTD
File number(s):		NSD 873 of 2008
Judge:		KATZMANN J
Date of judgment:		20 January 2011
Catchwords:		COSTS – Indemnity costs – offer of compromise
Legislation:		Fair Trading Act 1987 (NSW) Federal Court of Australia Act 1976 (Cth) Trade Practices Act 1974 (Cth) NSW Uniform Civil Procedure Rules
Cases cited:		Andrew Moss v Lowe Hunt & Partners Pty Ltd [2010] FCA 1181 Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 Hamod v State of New South Wales (2002) 188 ALR 659, [2002] FCAFC 97 IFTC Broking Services Ltd v Commissioner of Taxation (2010) 268 ALR 1, [2010] FCAFC 31 Nationwide News Pty Ltd v Naidu (2007) 71 NSWLR 471, [2007] NSWCA 377 Port Kembla Coal Terminal v Bravurus Maritime Inc (No 2) (2004) 212 ALR 281, [2004] FCA 1437 South Eastern Sydney Area Health Service v King [2006] NSWCA 2 White v Overland [2001] FCA 1333
Date of hearing:	14 December 2010
Place:	Sydney
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	63
Counsel for the Applicants:	Mr M Lee and Ms R Francois
Solicitor for the Applicants:	Harmers Lawyers
Counsel for the Respondents:	Mr N Rochow SC
Solicitor for the Respondents:	Griffin Lawyers

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 873 of 2008

BETWEEN:	ANDREW MOSS First Applicant PEGASUS STRATEGIC PLANNING PTY LIMITED Second Applicant
AND:	LOWE HUNT & PARTNERS PTY LTD First Respondent LOWE SYDNEY PTY LTD Second Respondent

JUDGE:	KATZMANN J
DATE OF ORDER:	20 JANUARY 2011
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The respondents pay the second applicant’s costs (including any reserved costs) taxed on a party/party basis up to and including 23 March 2009 and thereafter taxed on an indemnity basis.
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 873 of 2008

BETWEEN:	ANDREW MOSS First Applicant PEGASUS STRATEGIC PLANNING PTY LIMITED Second Applicant
AND:	LOWE HUNT & PARTNERS PTY LTD First Respondent LOWE SYDNEY PTY LTD Second Respondent

JUDGE:	KATZMANN J
DATE:	20 JANUARY 2011
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. On 1 November 2010 I delivered judgment in the proceeding in favour of the second applicant (“Pegasus”), reserving the question of costs at its request. The dispute between the first applicant, Mr Moss, and the respondents had been resolved earlier: Andrew Moss v Lowe Hunt & Partners Pty Ltd [2010] FCA 1181 at [4]. The action concerned a claim for damages for misleading or deceptive conduct under the Trade Practices Act 1974 (Cth) or alternatively the Fair Trading Act 1987 (NSW) based on representations made to Mr Moss to persuade him to accept an offer of employment with the respondents, who trade as Lowe Hunt. Mr Moss accepted the offer and entered into a contract of employment with Lowe Hunt. At the time the offer was made and accepted Mr Moss had been conducting a growing consultancy business through Pegasus. As a result of taking up the offer, Pegasus ceased trading. Within three years, however, Mr Moss was retrenched. It took him some time to build the business up again and he claimed damages for the difference between what he would have earned had he not accepted the offer and what he actually earned.
2. Pegasus now seeks an order that Lowe Hunt pay its costs (including any reserved costs) taxed on a party/party basis up to and including 23 March 2009 and thereafter taxed on an indemnity basis. There is no issue that Lowe Hunt should pay costs but they oppose the application for indemnity costs.
3. The foundation for the claim for indemnity costs is that on 23 March 2009 the applicants served an offer of compromise pursuant to O 23 r 2 of the Federal Court Rules (“the Rules”) in the sum of $100,001, plus costs as agreed or taxed. The offer was expressed to remain open for a period of 14 days. The sum proposed in the offer of compromise represented the lowest amount in which a judgment could have been entered to enable Pegasus to recover all of its costs. See O 62 r 36A of the Rules. It was approximately one-third of the judgment sum and less than an eighth of the amount the applicants were then claiming. On any view, therefore, it represented a substantial compromise.
4. Order 23 r 11(4) provides:

(4) If:
(a) an offer is made by an applicant and not accepted by the respondent; and
(b) the applicant obtains judgment on the claim to which the offer relates not less favourable than the terms of the offer;
then, unless the Court otherwise orders, the applicant is entitled to an order against the respondent for costs incurred in respect of the claim:
(c) up to and including the day the offer was made — taxed on a party and party basis; and
(d) after that day — taxed on an indemnity basis.

5. Lowe Hunt accepts that the offer was made in conformity with the Rules.
6. In Nationwide News Pty Ltd v Naidu (2007) 71 NSWLR 471, [2007] NSWCA 377 at [296] Beazley JA (with whom Spigelman CJ agreed) said it was “well accepted” that a court should not deviate from the general rule provided for in the equivalent rule of the NSW Uniform Civil Procedure Rules (r 42.14) save in exceptional cases. In South Eastern Sydney Area Health Service v King [2006] NSWCA 2 at [83] Hunt AJA (with whom Mason P and McColl JA agreed) said:

The onus is on the defendant to persuade the Court that indemnity costs should not be ordered. He must demonstrate the basis on which an order should be made denying the plaintiff’s entitlement to indemnity costs. He must establish that he had given serious thought to the risk involved in non-acceptance of the offer, and that he had assessed the plaintiff’s case properly and in the context of the rule and the achievement of its purpose — to encourage the proper compromise of litigation, in the private interests of the litigants and in the public interest of the prompt and economical disposal of litigation. Generally, exceptional circumstances are required to justify such an order denying the plaintiff’s entitlement.

7. In this Court the relevant principles were discussed in Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 (“Futuretronics”) and more recently in IFTC Broking Services Ltd v Commissioner of Taxation (2010) 268 ALR 1, [2010] FCAFC 31 (“IFTC Broking Services”), where the Full Court said at [9]:

It may be accepted that the prima facie position established by O 23 r 11(6) can be departed from. So much is clear from the statement of exception in the rule which the appellants seek to invoke (“unless the Court otherwise orders”). The cases say more than this, however. The cases establish that:

(1) If O 23 r 11(6) is engaged it is for the applicant to satisfy the Court that the prima facie position established by that rule should be departed from (Futuretronics at [12]).
(2) Unlike a case in which a Calderbank offer (named after the decision in Calderbank v Calderbank [1975] 3 All ER 333) is made, the fact that an unsuccessful litigant acted reasonably in rejecting an offer of compromise “is not of itself a sufficient reason to displace the operation of the rule” (Futuretronics at [11]).
(3) It is true that doubts have been expressed about a need to show “compelling and exceptional circumstances” to justify otherwise ordering (see Port Kembla Coal Terminal at [17]). Nevertheless, properly understood, the rule creates a presumption in favour of indemnity costs which the unsuccessful party must rebut. A court may depart from the presumptive position but only “for proper reasons which, in general, only arise in an exceptional case” (Port Kembla Coal Terminal at [17] cited with approval in Futuretronics at [10]).
(4) The requirement for “proper reasons” for any departure from the prima facie position of indemnity costs reflects the purpose of the rule. As explained by Mason P in Morgan v Johnson [1998] NSWSC 367; (1998) 44 NSWLR 578 at 581F–582E the rule is intended to encourage the compromise of litigation (such compromise being in both the private and the public interest) and to oblige parties “to give serious thought to the risk involved in non-acceptance” on the basis that “litigation is inescapably chancy” (Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 725). For these reasons “the ordinary provision is expected to apply in the ordinary case” (referring to New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100 at 102–103).

8. Mr Lee, who appeared for Pegasus, relied on these principles and also on the terms of s 37M(3) of the Federal Court of Australia Act 1976 (Cth) (“the Act”). Section 37M(3) requires that the Court interpret and apply any power conferred by the civil procedure provisions of the Act and Rules in the way that best promotes their overarching purpose, namely, to facilitate the just resolution of disputes according to law and, as quickly, inexpensively and efficiently as possible. Section 37M(2) provides that the overarching purpose includes the following objectives:

(a) the just determination of all proceedings before the Court;

(b) the efficient use of the judicial and administrative resources available for the purposes of the Court;

(c) the efficient disposal of the Court’s overall caseload;

(d) the disposal of all proceedings in a timely manner; and

(e) the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute.

9. Mr Rochow SC, who appeared for Lowe Hunt, did not dispute these principles. Rather, he contended that this was indeed an exceptional case in which the Court should “otherwise order”. He accepted that the burden of establishing the basis for an alternative order rested with Lowe Hunt. He argued that they had acted reasonably. He accepted that this was not sufficient to displace the prima facie operation of the rules but he said it was a necessary starting point. He moved on to submit that “informational deficiency” can operate as a proper reason for displacing the presumption if, during the currency of an offer the respondent has sought information from the applicant that it needed to evaluate the offer and the information was not supplied. In that respect he relied on Port Kembla Coal Terminal v Bravurus Maritime Inc (No 2) (2004) 212 ALR 281, [2004] FCA 1437 (“Port Kembla”) which was approved by the Full Court in Futuretronics and IFTC Broking Services , and to which I will return.
10. In oral submissions Lowe Hunt’s argument took a different turn. Mr Rochow maintained the position advanced in the written submissions but his primary argument was that indemnity costs should not be awarded because “the case in which the offer was made is not the case which proceeded to trial” and one which, on the then state of the pleadings, the applicants were bound to lose.
11. In a supplementary set of written submissions Mr Rochow put the matter this way (footnotes omitted):

There are matters, that cannot be refuted, (and that require no further inquiry than the evidence available from the Respondents’ Affidavits and exhibits from the Court file), which cumulatively make the case an exceptional one so as to place it outside the default position under the Rules and to justify the Court “otherwise” ordering.
(1) The initial offer of compromise made by Harmers Lawyers on behalf of Mr Moss, on 2 March 2007 the First Applicant, for a redundancy payment in the sum of $350,000. The claim at that stage was an employment related claim predicated upon a lost commercial opportunity to obtain other gainful employment with, inter alia, M & C Saatchi.
(2) The claim of the Second Applicant, Pegasus, not mentioned by name, was limited to $10,000.
(3) The response by the Respondents was to pay Mr Moss in terms of his contractual entitlements as to notice and accrued annual leave.
(4) Proceedings were issued over one year later on 13 June 2008 with a damages claim of $862,787 and a redundancy claim of $24,408.77 for the First Applicant and a claim of $10,120 for the Second Applicant.
(5) The claim was settled by Senior and Junior Counsel.
(6) The Application and Statement of Claim both distinguished between the claims of the First and Second Applicant so as to limit their respective claims to lost opportunities for employment past unpaid employment entitlements for the First Applicant and past unpaid fees on the part of the Second Applicant.
(7) Soon after the issuing of the proceedings, payment was made to the First Applicant in satisfaction of his redundancy claim and the claim of the Second Applicant was also paid.
(8) A defence was filed pleading the payments to both Applicants and denying any further liability.
(9) The claim, as filed, (and in respect of which the offer compromise was made on 23 March 2009, open for 14 days) has now been conceded by the Applicants’ counsel to have been “misconceived”.
(10) The “misconceived” claim proceeded without amendment being made until 21 September 2009.
(11) As at the time of the mediation and the offer of compromise, 23 March 2009, the only evidence in support of the claim for quantum was the inconclusive evidence of the first Moss affidavit at [64] and the Lowensteins letter of 22 December 2008, provided to the Respondents one week before the mediation, which was said to support the claim for damages as it then stood.
(12) On 23 July 2009, in response to an application by the Respondents to amend their defence to plead a failure to mitigate, the Applicants announce their intention to the Court to provide further evidence and amend their claim in a form that was not identified by way of a draft.
12.1 “for the pleadings to be congruent with the evidence”;
12.2 “to conclude the evidence, in particular the evidence of experts which go to the outstanding issue of quantum of the applicant’s claim”;
12.3 (in response to a question from His Honour about the lay evidence having to have been concluded by the end of 2008) [because] there’s been a wealth of correspondence between the parties concerning the need for the first applicant to discover and give additional information about his current earning capacity on the question of damages ... which are necessary to underpin assumptions in the expert evidence”.
(13) The entire original claim of the Second Applicant, as pleaded at the time of issue, had been satisfied by payment before the filing of the defence.
(14) Without amendments made on 21 September 2010, the Second Applicant’s claim would have failed.
(15) The matter had been originally scheduled for trial on 8 December 2008 (three days set aside) on the “misconceived” claim.

12. In his written and oral submissions he also argued that, if the proceeding “could more suitably have been brought in another Court” (here the Federal Magistrates Court) as O 62 r 36A(2) of the Rules provides, that was also a proper reason for making another order.
13. I do not consider that, even taken cumulatively, these matters justify an order other than the presumptive one. I will now explain why.

The pre-litigation position

14. This is the matter raised in points 1 - 3.
15. Lowe Hunt filed a second affidavit from its solicitor, Andrew Clare. The second, amongst other things, annexed copies of correspondence between Mr Moss’s solicitors (Harmers Workplace Lawyers) and Lowe Hunt’s then solicitors (McArdle Legal). All this correspondence predated the filing of the statement of claim by over a year. No evidence was called to show what Lowe Hunt made of it. Its relevance is, at best, doubtful. In any case, although not all matters raised in that correspondence found their way into the pleadings or were the subject of evidence, the basis of the claim of misleading conduct agitated in the proceeding appears in some detail in an early letter dated 2 March 2007. In the same letter the loss to Mr Moss is said to include “[t]he lost opportunity cost of earnings he could have made in the course of his steadily growing business, had he not abandoned it on the basis of Lowe Hunt’s conduct”. In another (dated 12 March 2007) Harmers wrote:

Our client accepts that his position has been made redundant but continues to seek adequate compensation for the misleading and deceptive behaviour which enticed him to join a company saddled with a large amount of debt; and which consequently resulted in great financial, professional and personal cost to him. Our client appreciates that Lowe Hunt is prepared to publish a departure announcement of his choosing, but furthermore requires that Lowe Hunt recognise the situation in which its continued concealment of the facts has caused him damage to date and will continue to cause damage in the future.

As you are aware, our client’s damage is compounded by the fact that he is a top player in a very small industry. Accordingly, he expects to suffer continued loss until he is able to find new employment, or else rebuild his personal business to the level at which it was prior to his relationship with Lowe Hunt.

16. For reasons that I will explain shortly, this contention and the claim for “lost opportunity cost” are not materially different from the claim that was finally made.

The pleading point

17. This is the matter raised in points 4-10 and 12-15.
18. In the original statement of claim filed on 13 June 2008 Mr Moss claimed damages totalling $862,787 being the amount he said he would have earned from his consultancy business with Pegasus over a three year period from October 2005 if Mr Moss had not accepted Lowe Hunt’s offer of employment in October 2005 less the amounts he in fact earned from that employment over the same period. It also indicated that he would give Lowe Hunt credit for any further amounts earned in the three year period the subject of the claim. The statement of claim included a claim for what was characterised as a promised incentive bonus (which was particularised as the loss in the principal claim and which was not ultimately pursued), an unquantified sum for distress (a claim that was not pursued either) and for redundancy pay of $24,408.77 (four weeks’ salary), which I was informed was paid in full in July 2008. The only claim brought by Pegasus in the original statement of claim was for failure to pay $10,120 for 46 hours consultancy work between 29 August 2005 and 2 September 2005, which I was also informed was paid well before the offer of compromise was made. In oral submissions Mr Lee, who had no role in the settlement of the original pleading, frankly acknowledged that the claim as pleaded was misconceived.
19. Lowe Hunt said it was keen to have the case go to trial on the original pleading because it was confident it would fail. Mr Rochow variously submitted that (on that pleading)the applicants’ case was hopeless or doomed to fail. In oral submissions, in response to a question I asked him, Mr Rochow also said that his clients had no notice until August or September 2009 when Pegasus served its expert’s report of the new case that they would have to meet at trial.
20. In his second affidavit Mr Clare testified that the first occasion Lowe Hunt was made aware that the applicants intended to amend the statement of claim was at a directions hearing on 27 July 2009, well after the offer of compromise lapsed. It is fair to say that at that time, Mr Lee, who then appeared for the applicants, in outlining the nature of the amendments gave no indication that it was proposed that the substantial part of the claim for loss of a commercial opportunity was to be repleaded so as to be Pegasus’s claim, not Mr Moss’s.
21. The nub of Lowe Hunt’s argument was that, if any such claim was to be made, it could only be brought by Pegasus and the only indication they had that such a case would be made was given well after the time the offer of compromise had lapsed.
22. I was initially attracted to Lowe Hunt’s argument. On closer examination, however, there are a number of problems with it.
23. First, as Mr Lee pointed out, Lowe Hunt were given an indication of the nature of the case that would be made before the offer of compromise was served. Putting aside the way in which the claim was actually pleaded, to which I will return in a moment, a report from Mr Moss’s accountants and tax agents, Lowensteins Arts Management Pty Ltd (“the Lowenstein report”), served a week before the mediation, flagged to Lowe Hunt the way the applicants put their case. The report noted that:
    • The firm had been asked to provide an estimate of the projected earnings of both Mr Moss and his associated company had he not taken up employment with Lowe Hunt.
    • It included a schedule setting out projected and actual income payable or paid to Mr Moss and Pegasus (and its earlier incarnation, Brandstand), including a projected increase in the hourly billing rate in 2007 and 2008.
    • The schedule noted that the assumptions for the years 2004 to 2006 were based on the actual figures included in the financial accounts.
    • The estimate was said to be based on the following assumptions and information:
      • That historical trading figures of the company provide a reliable estimate of future earnings;
      • That the major clients who worked with the company in the previous years would continue to use its services;
      • That new clients would emerge based on referrals from existing and past clients;
      • That Mr Moss would be the only employee of the company generating income;
      • That the company would be able to bill out approximately 35-45 hours per week of recoverable time;
      • Review of invoices raised;
      • A review of previous years financial accounts;

[Emphasis added.]

24. It also included the following statements:

Based on our discussions with Andrew Moss, in his opinion, his company had significant earning potential prior to entering into the arrangement with Lowe Hunt.

His salary package as an employee of Lowe Hunt ... reflected this potential.

The major clients he was developing included...... as well as new clients ..................Of these new clients he did not have the opportunity to develop them to their [scil.] potential due to his commitment to Lowe Hunt.

Had he remained active in his own company he would have developed these client relationships further during a very buoyant time in the Australian economy between 2006 and 2007 financial years.

[Emphasis added.]

25. The nature of the report was not in admissible form but it clearly set out the nature of the claim the applicants were intending to bring and upon which basis the mediation was to be conducted. The case as formulated in the Lowenstein report did not differ significantly from the nature of the case presented at trial.
26. The affidavit Mr Moss filed and served in October 2008 included evidence that he had ceased working as an employee in January 2003, established his own business providing strategic advertising, consulting and research services in or before May 2003, incorporated a company at that time and Pegasus in late 2004/early 2005 and gave details of the sources and turnover of the business in each of the years before he accepted Lowe Hunt’s offer of employment. It also contained evidence showing that he did not resume work in his business on a full-time basis after he had been retrenched from Lowe Hunt in February 2007 until around July of that year and he deposed to the reduction in business turnover. It is true that the amount of reduced business turnover is not necessarily the same as the amount of lost income. Nevertheless, the nature of the lost opportunity, whose it was and the way in which it came about are all apparent from the affidavit, if they were not apparent to Lowe Hunt even before the statement of claim was filed.
27. Secondly, at least the substantial part of the claim that was originally pleaded was the same claim (albeit reduced in value) as the claim that was run at trial. In the original statement of claim the applicants pleaded that:

As a result of entering into the contract of employment with the Respondents trading as Lowe Hunt, and ceasing carrying on his consultancy business of the second applicant, the first applicant suffered loss and damage.

28. The particulars of the claim for the sum of $862,787 show that it was calculated on the difference between what Mr Moss would have earned in his consultancy business if he had not taken up the offer of employment with Lowe Hunt and what he actually earned. The claim at trial was for the loss of the opportunity for the consultancy business to earn income caused by Mr Moss’s decision to accept Lowe Hunt’s job offer. It was based on the difference between what the business would have earned had it continued trading and what it actually earned The only difference in substance was that in the original pleading it was alleged to be Mr Moss’s loss or damage but in the amended pleading it was put as the company’s. In the course of oral submissions the following exchange shows that Lowe Hunt’s counsel accepted as much:

HER HONOUR: So the only difference between the nature of the claim that is put in the original statement of claim and that which went to trial is that at trial the claim was put as Pegasus’s claim rather than Mr Moss’s claim.

MR ROCHOW: Yes.

HER HONOUR: But it was derived in the same way, in that it was calculated by reference to what he would have earned through the vehicle of the company

MR ROCHOW: Yes.

HER HONOUR: or what the company would have earned through his labour.

MR ROCHOW: Yes. That’s correct, your Honour, except for this; that the claim as framed at that stage by Pegasus was confined to the $10,000.

29. Mr Moss was the sole director and shareholder of Pegasus. All the income Pegasus earned came from his labour. The company was always a party to the proceeding. As Pegasus put it in its written submissions in reply:

[A]t all times the information provided by the Applicants to the Respondents about Mr Moss’s loss of commercial opportunity concerned the loss of earnings of Pegasus. That is, if the Respondents had put the argument in closing that only Pegasus suffered damage which could be compensated, then the Applicants could have sought to amend their pleadings with no prejudice to the Respondents (as the evidence which had been adduced and discovery given demonstrates that this was a technical pleading point).

30. Mr Rochow conceded that an amendment at such a late stage would have been granted. He was then invited to indicate how his clients would be prejudiced in such an event.

HER HONOUR: I know it is always hard looking back to answer questions that judges put about, “Well, how are you prejudiced?” But, realistically, given that this is a company which is run by one man for one man and whose earnings are derived through the labours of one man and you’ve had the evidence of what the company was earning, what he earned, what he was capable of earning; you’ve had the opportunity to test all of that; how could you conceivably be prejudiced by an amendment that rectifies what is arguably a misconception by the pleader?

MR ROCHOW: Your Honour, we can’t say - I can’t identify a specific prejudice other than one that would be compensated in costs.

31. When pressed on the kind of prejudice, all he pointed to was the need to file an amended defence.
32. Thirdly, there is reason to think that Lowe Hunt remained silent about the pleading issue in the hope of obtaining a forensic advantage. They were clearly alive to the point. Mr Rochow indicated that it was part of Lowe Hunt’s thinking that there had been a misconception on the applicants’ part about the way they had pleaded the claim for loss of earnings from the consultancy business but asserted it was not for Lowe Hunt to tell the applicants how to plead their case. He said “We wanted this statement of claim to go to trial. We sought an order and an order was made for a hearing in December 2008”. Mr Rochow also said that “there was certainly a decision made not to point out any of the errors that were perceived in the claim, but to bring the matter on for trial”. Pegasus submitted that it was “telling” that after Lowe Hunt purported to pay the entirety of Pegasus’s claim in July 2008, they never questioned why the company continued to maintain the proceeding against them.
33. I am reminded of what Allsop J said in White v Overland [2001] FCA 1333 at [4]:

[B]y way of general principle I would simply like to make perfectly plain my view that in the efficient and proper conduct of civil litigation, even civil litigation hard fought between parties, it should always be recognised that in the propounding of issues for trial the parties should take steps to ensure that all relevant parties to the dispute are cognisant of what the issues are. Any practice of quietly leaving footprints in correspondence or directions hearings to be uncovered some time later in an attempt to reveal that a matter was always in issue should be discouraged firmly. Even if something has been said, where it is evident, or indeed suspected, that the other side is proceeding on the basis of a misconception or has not appreciated something, as a general rule, efficiency, common sense and an appreciation of the costs and resources (both public and private) likely to be wasted by confusion in litigation will mandate that a party through his or her representative ensure that the other is not proceeding on a misconception or that the other does appreciate something that has been said. Litigation is not a game. It is a costly and stressful, though necessary, evil. To paraphrase Roscoe Pound from "The Causes of Popular Dissatisfaction with the Administration of Justice" (1906) 29 ABA Rep 395, 404-406, the "sporting theory of justice" and any behavioural manifestation of it should be seen as a survival, or better, a relic, of the days when a lawsuit was a fight between two clans: cf Jackamara v Krakouer [1998] HCA 27; (1998) 195 CLR 516 at 526-527 per Gummow and Hayne JJ. Representatives do not owe duties to the other side's client. They owe duties to their own client. But no one's interests are advanced by litigation proceeding on assumptions which are seen or suspected to be false. This is very much the case when an issue, if it is to be propounded, might endanger the instructions of those acting for the other side. In saying this I need make no reference to the well-known responsibility of the Crown and emanations of the Crown to act at all times as model litigants beyond referring to what was said by the Full Court of this Court in Scott v Handley [1999] FCA 404 at [43] ff. I would expect no less than that which I have indicated of bitterly competitive commercial parties in the hardest fought of cases. In the long run, the only consequence of keeping issues hidden or not clearly identifying them is to disrupt the business of the court leading to the waste of valuable public resources and to lead to the incurring of unnecessary costs by the parties, costs which ultimately have to be borne by someone.

[Emphasis added.]

34. There was also an inconsistency about Lowe Hunt’s position. On the one hand, they argued that at the time the offer of compromise was made there was nothing to compromise because Pegasus had recovered the only amount it sought. On the other, Mr Rochow and Low Hunt did not doubt that this was a true offer to compromise the proceeding. He conceded that it would not be proper to argue otherwise.

The dearth of evidence

35. On 24 October 2008 Mr Moss filed an affidavit deposing to the turnover of his business during the 2003, 2004 and 2005 calendar years and in the period between July 2007 and August 2008 but did not set out the basis for the calculation of the claim that appeared in the statement of claim.
36. At a directions hearing before Flick J on 19 November 2008 the parties asked that the proceeding be referred to mediation and his Honour made an order to that effect. Importantly, at that hearing Mr Rochow told his Honour:

We expect that they – and I understand what my friend is saying, they don’t want to incur further expense with an expert prior to a mediation. We can see the force in that.

37. Also during the course of that hearing his Honour asked Ms Francois, who was then appearing for the applicants, whether it was possible (noting that it was “obviously desirable”) for some evidence to be put on about how much Mr Moss was actually claiming and how he calculated it. He asked: “Otherwise, how is a mediator going to effectively mediate”. Ms Francois replied: “Because, your Honour, we can extrapolate in a crude form the projected cash flow”. Ms Francois offered, however, to provide before the mediation “a rough document”, not in admissible form, from Mr Moss’s accountant setting out projected earnings. His Honour said he thought that should be done, expressly did not require an expert’s report and noted that Mr Rochow had not sought a direction to that effect. The document that was produced was the Lowenstein report. It is dated 22 December 2008, although for some unexplained reason it was unsigned (or, at least, the copy annexed to Mr Clare’s affidavit was unsigned) and not served until seven days before the mediation.
38. A mediation was held on 23 March 2009 in accordance with Flick J’s order, at the conclusion of which the applicants filed and served their offer of compromise which was expressed to be open for 14 days.
39. On 2 April 2009, some ten days later and four days before the offer would lapse, Mr Clare wrote two letters to Harmers. One dealt with the offer of compromise. The other with the $862,787 figure claimed in the statement of claim. It is not clear which came first. The former was in the following terms:

We refer to our clients Offer of Compromise dated 23 March 2009.

Our clients have considered the offer on the material currently available to them. On that material, they are unable assess whether or not to accept such offer. Your clients have not provided any evidence or indeed any basis as to the quantum of their alleged loss. If you have any such evidence, please provide the same for the purposes of consideration of the offer.

In this regard we confirm that Mr Moss is yet to file and serve any Affidavit evidence as to the basis and calculation of his loss. Further that your clients have not served any Expert Reports as to any alleged loss suffered by them.

In the absence of the above, and without some proper basis being provided upon which to assess the offer, our clients will argue that the offer of Compromise should not be taken into consideration when assessing costs, whatever the outcome of the proceedings.

[Emphasis added.]

40. The assertion in bold was, of course, incorrect. The Lowenstein report provided such a basis.
41. As Harmers pointed out in later correspondence there was also an inconsistency between the assertion in the letter that the applicants “have not provided any evidence” and what appeared in the second letter sent the same day.
42. The second letter stated:

On the information currently available to our clients by way of evidence and discovery from your client, assuming your clients are able to overcome the hurdles to establishing liability, they are of the very firm opinion that Mr Moss and his company’s losses are significantly less than those claimed, if those losses are anything at all.

43. Mr Clare asserted that Mr Moss had not provided any evidence beyond the filing of an affidavit on 24 October 2008 and again referred to the failure to serve an expert’s report. He then stated:

Notwithstanding this, it does not seem possible that damages could be anything of the order claimed upon consideration of the discovered documents.

44. This protestation, of course, said nothing of the small fraction of the claim that was reflected in the offer of compromise.
45. Mr Clare went on to propose that the parties jointly apply for the matter to be transferred to the Federal Magistrates Court, noting its upper jurisdictional limit of $750,000 and the costs penalties under the Rules if the applicants did not recover more than $100,000 in damages.
46. On 24 April 2009 Harmers replied to Mr Clare but by this time the offer had expired.
47. Lowe Hunt could have asked the applicants to leave the offer open until the information they sought was provided, but they did not. I put little weight on the failure to serve an expert’s report. Flick J made no order that such a report be served. He and the parties plainly envisaged mediation (and settlement) could proceed without one. As Lowe Hunt, themselves, recognised the applicants were trying to minimise costs. Lowe Hunt did not oppose the matter going to mediation, did not suggest it would be futile because there was nothing left to mediate, and did not request that it be deferred until the information it required was made available.
48. As Hely J observed in Port Kembla (at [22]), the Rules permit an offer of compromise to be made at any time before the pronouncement of judgment and do not require that proceedings should have reached any particular stage of development before an offer with costs consequences can be made. There is no reason, therefore, as his Honour went on to point out, that such an offer could not be made at the time the statement of claim is filed (when no evidence would be expected to have been served) and “every reason for encouraging offers of compromise to be made as early as the circumstances reasonably permit”. Thus, the failure to support the offer with evidence cannot be a proper basis for refusing indemnity costs.
49. In any event, the applicants did provide some material to enable Lowe Hunt to make an assessment. As I said earlier, although the Lowenstein report was obviously not in admissible form, it set out the parameters of the claim. The information that supported it had been discovered, was readily attainable or was capable of being reduced to admissible form. There is no evidence that Lowe Hunt asked for the financial reports upon which the figures up to 2006 were said to have been based. The applicants’ purpose was to keep costs down. That was a purpose consistent with the overarching purpose of the civil procedure provisions of the Act and Rules. The decision in Port Kembla is not authority for the propositions Lowe Hunt advances. In that case his Honour merely considered that there was no such deficiency of information and no relevant information had been sought but not supplied.
50. In my view this submission is simply another way of saying that it was reasonable for Lowe Hunt not to accept the offer and proof of these things takes the matter no further.

Applicant in default of Court orders

51. Mr Rochow argued that at the time of the offer the applicants were clearly in default of orders and there would be a tension between obtaining the benefit of the Rules when the party seeking it is in breach of orders made under the Rules.
52. Mr Rochow pointed to the order made on 21 July 2008 requiring the parties to “give discovery of (sic) agreed categories by 29 August 2008” (order 3) and to the correspondence post-dating the mediation which showed that the applicants were still discovering documents a year later. He also referred to the order made on 8 September 2008 for the applicants to file and serve all affidavits upon which they propose to rely on or before 24 October 2008 and the applicants filing further affidavits from Mr Moss in 2009, after the offer had expired.
53. Mr Rochow asked rhetorically:

Why ... would a client in my clients’ position or a respondent in my clients’ position, be put to the normal penalty when it’s assumed in the rules that the person who is making an offer is in compliance with the rules and has put their best foot forward? I don’t say that that’s an implication that’s readily available, but it would be strange, in our respectful submission, your Honour, that if one were to issue a claim on day 1 which is hopeless, put in an offer of compromise on day 2, or whatever trial number you might want to put in there, but enough to vault the costs minimum. Then on day 3, or sorry, when I say day 3, after the expiration of the offer, reassemble the entire claim, re-plead it, get it all in order, put all your evidence on, and say, now you suffer the cost consequence of my doing so and proceeding on the basis of a claim that couldn’t proceed from the beginning, and at the time that you receive the offer, and you just have to wear whatever comes out of the judgment plus indemnity costs. That does not, in our respectful submission, amount to what is incorporated and envisaged by section 37M.

54. The evidence upon which Pegasus relied showed that the applicants were six business days late in substantially complying with order 3 and the transcript of 8 September 2008 records that Ms Francois explained to the Court that the delay was due to Mr Moss moving house which, she said, had disorganised his affairs.
55. The Court varied order 3 at the directions hearing of 8 September 2008. Mr Robertson, the solicitor who swore the affidavit on which Pegasus relied, said the applicants complied with that order. In September 2009 the applicants provided documents purportedly in compliance with their ongoing discovery obligations, although Mr Rochow raised questions about the failure to discover some of the material in compliance with the order made the previous year.
56. With the exception of expert evidence, Mr Robertson submitted that the applicants complied with order 5 of the Court's orders of 8 September 2008 (which required the applicants to file and serve all affidavits on which they proposed to rely on or before 24 October 2008) by filing the affidavit of Mr Moss sworn on 23 October 2008 and the affidavit of Mr Lansdell sworn on 24 October 2008. The applicants sought to obtain the respondents' consent that there be a Court-appointed expert to reduce the expense of the proceedings but the respondents’ refused their consent. On 20 October 2010 the applicants filed a notice of motion seeking an order to that effect.
57. The applicants complied with order 1 of the Court's orders made on 27 July 2009 when they filed their expert report on 26 August 2009. Mr Robertson said that “the process of obtaining the expert's report and the joint expert report led to formalising Mr Moss's instructions in the further affidavits of Mr Moss sworn 26 August 2009 and 15 October 2009”.
58. There is little doubt that in some respects the applicants did not comply with the timetables fixed by the Court. The rhetorical question Mr Rochow asked, however, proceeds on a misconception. Indemnity costs are not a penalty. As Gray J (Carr and Goldberg JJ agreeing) said in Hamod v State of New South Wales (2002) 188 ALR 659, [2002] FCAFC 97 at [20] (albeit in a different context):

Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail...Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do...

59. In any event, the failure to comply with the Court orders was largely explained. The applicants’ default could not be described as egregious. Regrettably, it is not unusual for parties to fall foul of Court timetables. Pegasus pointed to default on the part of Lowe Hunt, too, with respect to the orders concerning discovery leading to Flick J making the observation on one occasion that they had discovered a “startling inadequacy of documents”, the vacation of the first hearing date and an order that they answer interrogatories.
60. I have given earnest consideration to Lowe Hunt’s argument but, on balance, even taken with the other matters, I do not think it is sufficient to displace the presumption.

Proceeding could have been brought elsewhere

61. Lowe Hunt referred to the terms of O 62 r 36A(2) of the Rules, which provides:

If the court or a judge is of the opinion that a proceeding – including a cross-claim for a money sum or damages brought in this court – could more suitably have been brought in another court or in a tribunal and so declares, then any costs to be paid, including disbursements, will be reduced by one-third of the amount otherwise allowable under this order.

62. The suggestion that the proceeding could have been brought in the Federal Magistrates Court was not made until after the offer of compromise was served. Indeed, the inference is available that it was conceived as a response to the size of the offer. If Lowe Hunt seriously thought that this Court was an unsuitable (or a less than suitable) forum, it could have applied for the proceeding to be transferred but it did not. It could also have applied for a declaration and sought an order under O 62 r 36A(2) but it did not.

Conclusion

63. I am not persuaded that this is a proper case in which to make an order other than that which Pegasus seeks. It should therefore have its costs (including any reserved costs) on a party-party basis up to and including 23 March 2009 when the offer of compromise was made and thereafter on an indemnity basis.
    

I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Katzmann.

Associate:

Dated: 20 January 2011