ADH Plumbing Pty Ltd v Glenashka Pty Ltd as Trustee of the Colin Henry Wilson Trading Trust trading as Wilsons Betamix Goonumbla Quarry & Wilsons Betamix Concrete and Another (No 2) [2020] NSWDC 790

Catchwords: COSTS – application for indemnity costs based on Calderbank letters – application for a costs order against a third party director of the plaintiff District Court New South Wales Medium Neutral Citation: ADH Plumbing Pty Ltd v Glenashka Pty Ltd as Trustee of the Colin Henry Wilson Trading Trust trading as Wilsons Betamix Goonumbla Quarry & Wilsons Betamix Concrete and Another (No 2) [2020] NSWDC 790 Hearing dates: 26 November 2020 Date of orders: 16 December 2020 Decision date: 16 December 2020 Jurisdiction: Civil Before: Dicker SC DCJ Decision: (1) The applications of the defendant K & H Geotechnical Services Pty Ltd for indemnity costs orders are rejected. (2) Pursuant to s 98(2) of the Civil Procedure Act 2005 (NSW), Mr Adam Hewes is jointly and severally liable to the defendant for the defendant ’ s costs of the proceedings, as agreed or assessed. (3) The plaintiff and the defendant are each to pay their own costs of the application heard on 26 November 2020. (4) Liberty to apply within 7 days in relation to Order (3). Catchwords: COSTS – application for indemnity costs based on Calderbank letters – application for a costs order against a third party director of the plaintiff Legislation Cited: Civil Procedure Act 2005 (NSW) Cases Cited: Botany Bay City Council v Latham (No 2) [2013] NSWCA 450 Calderbank v Calderbank [1975] 3 WLR 586 ; [1975] 3 All ER 333 FPM Constructions Pty Ltd v City of the Council of the Blue Mountains [2005] NSWCA 340 Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 Knight v FP Special Assets Ltd (1993) 174 CLR 178; [1992] HCA 28 Leichardt Municipal Council v Green [2004] NSWCA 341 Loulach Developments Pty Ltd v Roads and Maritime Services (No 2) [2019] NSWSC 601 Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 Taheri v Vitek (No 2) [2014] NSWCA 344 Whitney v Dream Developments Pty Ltd [2013] NSWCA 188; (2013) 84 NSWLR 311 Zhang v Harmsdorf ( No 2) [2019] NSWDC 116 Category: Costs Parties: ADH Plumbing Pty Ltd (Plaintiff) K & H Geotechnical Services Pty Ltd (Second Defendant) Representation: Counsel: P Wallis (Plaintiff) D Elliott (Second Defendant) Solicitors: Hughes & Co (Plaintiff) Lander & Rogers (Second Defendant) File Number(s): 2016/00214324 Publication restriction: No Judgment On 7 October 2020 , the court handed down its reasons for decision in relation to the final hearing in these proceedings. The court made the following orders: “(1) Judgment for the defendant, K&H Geotechnical Services Pty Ltd. (2) The plaintiff is to pay the costs of the defendant, K&H Geotechnical Services Pty Ltd, of the proceedings as agreed or assessed. (3) Liberty to any party to make an application within 14 days to vary order (2) above. (4) The exhibits are to be returned after 28 days.” On 7 October 2020, the legal repre sentative for the defendant K&H Geotechnical Services Pty Ltd ( “ KH ” ) , Ms Berwick, indicated that the defendant intended to make an indemnity costs application. The background to the proceed ings is that the plaintiff , ADH P lumbing Pty Ltd ( “ ADH ” ) sued the defendant , KH, for the alleged negligent provision of professional geotechnical services relating to the construction of roads and parking areas by the plaintiff at the Parkes District Hospital site at Parkes in western New South Wales ( “ the site ” ) in 2014-2015. The plaintiff, which was a company which provided earthworks and road construction services, had been the successful tenderer in 2014 for the provision of road construction civil works at the site commencing in about August 2014. On 23 October 2020 , the following orders were made in chambers: “ Orders By consent, the Court orders: 1. Dispense with the requirement for the plaintiff to file a Notice of Motion seeking the following relief: (a) an order pursuant to s 98(1)(c) of the Civil Procedure Act 2005 (NSW) that the plaintiff pay the defendant's costs of the proceedings on an indemnity basis from a date to be determined; and (b) an order pursuant to s 98(2) of the Civil Procedure Act 2005 (NSW) that Mr Adam Hewes be jointly and severally liable for the plaintiff's costs of the proceedings. 2. The defendant to file and serve any affidavit in support, together with written submissions (not exceeding 5 pages), by 26 October 2020. 3. The plaintiff to file and serve any affidavit in response, together with written submissions (not exceeding 5 pages), by 6 November 2020. 4. The defendant's costs application to be listed for hearing before Judge Dicker SC on 26 November 2020 (estimate 2 hours). ” Following the orders made on 23 October 2020, the parties filed and served written submissions in accordance with the orders. In addition, the defendant/applicant filed an affid avit of Elizabeth Janet Berwick affirmed 28 October 2020 attaching relevant correspondence and documents . T his affidavit was relied on and read by KH at the hearing of the application. F actual background I have already given a general summary above in relation to the claim made by the plaintiff against the defendant for negligence and breach of contract of retainer for the provision of geotechnical services. The plaintiff's claim was rejected by the court. The affidavit of Ms Berwick provides the relevant background to the application . T he relevant background to the matter is as follows. To the extent there is any factual issue, what follows are my factual findings in the matter: O n 15 July 2016, the plaintiff ADH filed a Statement of Claim against The Colin Henry Wilson Trading T rust trading as Wilson s Betamix Goonumbla Quarry & Wilsons Betamix Concrete as first defendant and Colin H enry Wilson as second defendant. O n 23 October 2017, ADH filed an A mended Statement of Claim against Glenashka Pty Ltd as trustee for The Colin Henry Wilson Trading Trust trading as Wilsons Betamix Goonumbla Quarry & Wilsons Betamix Concrete ( “ Wilsons ” ) as first defendant and KH as second defendant. O n 21 December 2017, KH served an unsealed copy of its Defence to the A mended Statement of Claim on ADH. A sealed copy was served on ADH on 1 February 2018 . O n or around 16 August 2018, ADH served its evidence in chief, comprising an affidavit of Mr Hewes sworn 16 August 2018 . O n 21 September 2018, KH filed a Notice of Motion seeking that ADH pay security for costs. O n or around 28 March 2019, a settlement was reached between ADH and KH in respect of the Notice of Motion. O n 11 April 2019, J udicial R egistrar Howard ordered, by consent, that: “1. [KH's] Notice of Motion for security for costs filed 21 September 2018 be dismissed; 2. [ADH] pay [KH’s] costs of the Notice of Motion for security for costs filed 21 Septem ber 2018 as agreed or assessed.” J udicial R egistrar Howard noted in the signed consent orders the following: “3. Adam Dennis Hewes, the sole director and secretary of the Plaintiff, agrees and undertakes to be jointly and severally liable for any costs order that the Second Defendant may obtain against the Plaintiff in the proceedings” . On 29 July 2019, KH served its evidence in chief consisting of four affidavits of Mr Kennedy, Mr Mead, Mr Miller and Mr Berry. O n 3 October 2019, the parties participated in a mediation . Following the mediation, judgment was ente red in favour of Wilson s on 11 October 2019. B etween 11 October 2019 and December 2019, there was correspondence between ADH an d KH in relation to a proposed F urther A mended Statement of Claim. O n 18 December 2019, ADH filed the Further Amended Statement of Claim and served it on KH on 20 December 2019. O n 21 January 2020, KH filed its D efence to the Further Amended Statement of Claim. O n 27 March 2 020, KH served further evidence , being a further affidavit of Mr Kennedy sworn 27 March 2020 . O n 16 April 2020, Judicial R egistrar Howard made orders including that the parties were to participate in an informal settlement conference to be held by 29 May 2020. O n 28 April 2020, ADH served its evidence in reply consisting of an affidavit of Mr Hewes sworn 28 April 2020. O n 26 May 2020, the parties participated in an informal settlement conference. O n 26 June 2020, KH served a further affidavit of Mr Berry sworn 2 6 June 2020 . Offers to settle the proceedings On 24 January 2018, KH served an Offer of Compromise on ADH. This Offer of Compromise is not relied upon by the defendant KH in its application for indemnity costs . See the written submissions of counsel for KH. On 25 January 2018, KH conveyed through its solicitors a Calderbank offer to ADH. This Calderbank offer is not relied on for the purposes of the application. On 4 June 2019, KH , through its solicitors , served a detailed letter , purporting to be a Calderbank offer , to the solicitors for ADH . The letter included the following: “14. In this regard, we are instructed to offer [to settle] the Proceedings on the basis that: (a) K & H client pays your client the sum of $55,000 inclusive of interest, costs and any applicable taxes; (b) Your client discontinues the P roceedings against our client; (c) The parties enter into suitably worded deed of release and settlement to include an indemnity in the event that the First Defendant [Wilsons] seeks to join our client to the P roceedings.” See page 25 of the exhibit to Ms Berwick’ s affidavit. On 4 July 2019, ADH , through its solicitors , rejected the Calderbank offer on behalf of KH. See page 27 of the exhibit to Ms Berwick ’ s affidavit. As at 4 June 2019: P leadings with respect to the Amended Statement of Claim filed on 23 October 2017 had close d ; ADH had completed service of its evide nce in chief in respect of the A mended Statement of Claim; KH had filed its Notice of Motion for security for costs and settled it on the basis that ADH would pay KH's costs of the application; and KH had incurred $65,774 .42 in legal costs and disbursements ( including approximately $15,800 associated with the Notice of Motion seeking security for costs ) . On 26 March 2020, KH , through its solicitors, sent a detailed Calderbank offer to ADH which enclosed an offer to compromise the proceedings on the following basis: “42. We are instructed to convey an offer to settle the Proceedings on the following basis: (a) Judgment is entered for K & H; (b) The P laintiff makes a contribution of $10,000 to K & H's costs (in respect of the Costs Orders) ; (c) N o other orders as to costs; and (d) The parties enter into a suitably worded deed of settlement and release.” See p a ge 3 6 of the exhibit to Ms Berwick ’ s affidavit. ADH did not respond to th is offer to settle made through KH's solicitors. A s a t 26 March 2020: Pleadings with respect to ADH's Further A mended Statement of Claim filed on 18 December 2019 had close d ; ADH and KH had served t heir main evidence with respect to the Further Amended Statement of Claim; KH had secured costs orders in relation to ( or ADH's agreement to pay KH's costs of ) : T he Notice of Motion for security for costs; and KH's costs thrown away by ADH's Further Amended Statement of Claim filed on 18 December 2019; KH had incurred $133,416.86 in legal costs and disbursements ( including approximately $15,800 associated with the Notice of M otion ) . KH's costs of the proceedings up to 9 October 2020 total $215,658 .33. As set out above, KH reached an agreement with ADH and Mr Hewes in respect of security for costs. D etailed financia l disclosure was provided by Mr Hewes and ADH to KH in January 2019. A D eed of Guarantee and I ndemnity dated March 201 9 was executed by Mr Hewes, ADH and KH. The orders made by Judicial Registrar Howard on 11 April 2019 which have been refer red to above , were consent orders signed by the legal representatives for the parties on 10 April 2019. These consent orders included the notation that Mr Hewes agreed and undertook to be jointly and severally liable for any costs orders that KH may obtain against the plaintiff in the proceedings. P rinciples applicable to the application for indemnity costs C ounsel for both parties referred in their written submissions to the judgment of the court in Zhang v Harmst orf (No 2) [2019] NSWDC 116. At [7]-[ 12 ] in that case, I stated the following: “7. The relevant powers of the court as to costs are located in s 98 of the Civil Procedure Act 2005 (NSW) and Part 42 of the Uniform Civil Procedure Rules 2005 (UCPR). The appropriate order as to costs in proceedings is in the discretion of the court. The usual order is that costs follow the event and are awarded on the ordinary basis: Part 42.1 and Part 42.2 of the UCPR. Offers of compromise and Calderbank offers constitute possible exceptions to the general rule and may result in an award of indemnity costs in favour of the successful party from a certain date. 8. The rejection of a Calderbank offer by a party does not mean that indemnity costs follow as a matter of course. The applicant must demonstrate to the court that the rejection of the offer was “unreasonable” in all the circumstances of the case: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19] ; Jones v Bradley (No 2) [2003] NSWCA 258 at [12] ; Russell v Edwards (No 2) [2006] NSWCA 52 at [8] ; Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 at [7] . 9. In NRMA Insurance for the Nominal Defendant v Al-Bayati (No 2) [2019] NSWCA 14 , the Court of Appeal stated in paragraph 10 as follows: “[10] The party making an offer of compromise or Calderbank offer bears the onus of satisfying the court that it should exercise the costs discretion in its favour: Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 ; Commonwealth of Australia v Gretton [2008] NSWCA 117 at [46] ; County Securities Pty Ltd v Challenger Group Holdings Pty Ltd (No 2) [2008] NSWCA 273 at [31] ...” 10. In Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 , Basten JA (with whom McColl and Campbell JJA agreed) stated as follows at paragraphs [8]-[16]: [8] The willingness of the courts to take account of a “without prejudice” offer of settlement in disposing of costs was originally tempered by the view that the practice should only be adopted where the alternative of a payment into court was unavailable: Cutts v Head [1984] Ch 290. The practice was, however, adopted in this jurisdiction without the restriction: Messiter v Hutchinson (1987) 10 NSWLR 525 (Rogers J); SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [45] (Giles JA). The expansion of formal rules providing for offers of compromise has not diminished the willingness of the courts to act upon informal offers, rather the contrary. However, there is no presumption that an offeree who does not accept an offer and does not obtain a judgment more favourable than the offer will necessarily pay indemnity costs from the date of the offer: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19] (Santow JA, Stein AJA agreeing); Jones v Bradley (No 2) [2003] NSWCA 258 at [6] –[9]; Ambulance Service of New South Wales v Worley (No 2) [2006] NSWCA 236 ; 67 NSWLR 719 at [18] . The approach frequently adopted in this jurisdiction has been to ask two questions, namely whether— (a) there was a genuine offer of compromise, and (b) it was unreasonable for the offeree not to accept it. Genuine offer of compromise [9] There is authority for the proposition that both an offer of compromise under the rules and an informal offer must involve “a real and genuine element of compromise”: Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) [2006] NSWCA 120 ; 67 NSWLR 706 at [8] . While this terminology is not entirely apposite, it has been described as “serviceable”: Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [25] (Spigelman CJ, Beazley and McColl JJA). To characterise an offer by reference to epithets such as “real” or “genuine” adds little to the requirement of compromise, and may imply (wrongly) that the appropriate inquiry is as to the subjective intentions of the offeror: Hancock v Arnold; Dodd v Arnold (No 2) [2009] NSWCA 19 at [23] (Ipp, McColl and Basten JJA); Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 at [17] –[18]. As explained by Giles J in Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368: Compromise connotes that a party gives something away. A plaintiff with a strong case, or a plaintiff with a firm belief in the strength of its case, is perfectly entitled to discount its claim by only a dollar, but it does not in any real sense give anything away, and I do not think that it can claim to have placed itself in a more favourable position in relation to costs unless it does so. Unreasonable refusal [10] Most cases will turn on the second element, namely whether there has been an unreasonable refusal by the offeree. This in turn involves a number of considerations. (a) timing [11] It is not in doubt that the response of the offeree must be assessed at the time it was made, and not with the benefit of hindsight resulting from a known outcome, recorded in a judgment: Regency Media at [33]. However, that factor should not entail a detailed investigation into the state of preparation or knowledge of the offeree as at the date of the offer. The expense and use of resources which settlement is intended to avoid include those involved in the assessment and preparation of a case. (b) relevant factors [12] In Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298 ; 13 VR 435 the Court of Appeal (Warren CJ, Maxwell P and Harper AJA) identified the factors relevant to determining whether the rejection of an offer was unreasonable as including the following: (a) the stage of the proceeding at which the offer was received; (b) the time allowed to the offeree to consider the offer; (c) the extent of the compromise offered; (d) the offeree’s prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; (f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree’s rejecting it. [13] The court rejected the suggestion that an offer need set out with specificity the bases upon which it was said that the offeree should accept the compromise proffered. The relevance of such material would depend upon the extent to which the issues had already been canvassed, for example by way of pre-litigation correspondence, and whether there were circumstances with which the offeror might reasonably expect the offeree not to be conversant. In some circumstances greater leniency may be accorded to a defendant offeree at an early stage of proceedings, than to a plaintiff offeree. [14] The extent of the compromise offered will always be a relevant factor in determining the reasonableness of the offeree’s rejection. In Robb Evans & Associates an offer in c ompliance with the UCPR, r 20.26, involved an effective amount (after deducting a sum as to which there was no dispute) of less than $2,000 to settle a claim in excess of $800,000. The court stated: [20] ... If the offer were based on a legal assessment of the likelihood of success in an amount in excess of $800,000, the claim should have been struck out as frivolous and vexatious. It ultimately failed in this Court, but could not, on any view, be so categorized. It is implausible that the appellant so categorized it in quantifying his offer. [21] If the appellant had carried out a commercial evaluation, rather than a pure legal assessment of the likelihood of success, he would undoubtedly have concluded that, even if ultimately successful, he would be unlikely to recover many thousands of dollars of costs incurred if the litigation proceeded. A commercially based offer would have taken that matter into account. This offer clearly did not. ... [23] ... The amount offered, beyond that amount which was not in dispute, is properly characterized as trivial or contemptuous. It does not engage the costs consequences provided by r 42.15. [15] A similar approach was applied in Regency Media, where an offer of $10,000 was made in response to a claim of approximately $600,000: at [16]. The court noted at [32]: If a derisory offer, of the kind made in these proceedings, could result in an order for indemnity costs, then it is likely that many, perhaps most, contract interpretation disputes would result in an indemnity costs order, if the formality of an offer in accordance with the rules had been made at an early stage. If the appellant were to succeed in the present case, it is quite likely that such an offer would accompany most statements of claim as a matter of commercial practice. The purpose of the special order — to encourage settlement — would no longer be served. An order for indemnity costs could, in our opinion, become the normal order in many commercial disputes. (c) onus of proof [16] The general rule is that costs payable under an order of the court are to be assessed on the ordinary basis: UCPR, r 42.2. The court may otherwise order, but the burden of persuading the court will lie with the offeror: Black v Lipovac [1998] FCA 699 ; 217 ALR 386 at [217] (Miles, Heerey and Madgwick JJ), which has been regularly followed in the Full Court — see, eg, CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 at [75] (Moore, Finn and Jessup JJ). Again, however, the reference to onus of proof is not intended to suggest that an application for indemnity costs be turned into a mini-trial. Generally, such applications are dealt with on the papers, a practice which should be maintained. It is nevertheless correct, as a matter of principle, to say that it is the offeror which must persuade the court that the rejection of the offer was, in the circumstances at the relevant time, unreasonable. 11. The Miwa decision has been followed in numerous later cases: see Hanna v Raoul [2018] NSWCA 201 at [154] per Beazley P and Ku-ring-gai Council v Chan (No 2) [2018] NSWCA 73 at [6] . The Miwa case was relied on by both parties in their written submissions. 12. The principles applicable therefore appear to be as follows: (a) A party who is forwarded an offer who does not accept an informal Calderbank offer and thereafter obtains a judgment which is less favourable than the offer made will not necessarily be required to pay indemnity costs to the offeror from the date of the offer; (b) Whether indemnity costs should be awarded to the offeror depends on first, whether there has been a genuine offer of compromise and secondly, whether in all the circumstances it was unreasonable for the offeree not to accept the offer; (c) A number of factors are relevant. These include the following; (d) The stage of the proceedings at which the offer was received and whether the offeree was conversant with the issues in the case; (e) The extent of the compromise offered; (f) Whether the amount offered was properly characterised as trivial or contemptuous; (g) The time allowed to the offeree to consider the offer; (h) The offeree's prospects of success, assessed as at the date of the compromise; (i) The clarity of the offer; and (j) Whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it. The defendant KH, also sought an order pursuant to s 98(2) of the Civil Procedure Act 2005 ( NSW ) that Mr Adam Hewes be jointly and severally liable for the plaintiff's costs of the proceedings. Section 98 of the Civil Procedure Act 2005 provides as follows : 98 Courts powers as to costs (1) Subject to rules of court and to this or any other Act— (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis. (2) Subject to rules of court and to this or any other Act, a party to proceedings may not recover costs from any other party otherwise than pursuant to an order of the court. (3) An order as to costs may be made by the court at any stage of the proceedings or after the conclusion of the proceedings. (4) In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to— (a) costs up to, or from, a specified stage of the proceedings, or (b) a specified proportion of the assessed costs, or (c) a specified gross sum instead of assessed costs, or (d) such proportion of the assessed costs as does not exceed a specified amount. (5) The powers of the court under this section apply in relation to a married woman, whether as party, tutor, relator or otherwise, and this section has effect in addition to, and despite anything in, the Married Persons (Equality of Status) Act 1996 . (6) In this section, costs include— (a) the costs of the administration of any estate or trust, and (b) in the case of an appeal to the court, the costs of the proceedings giving rise to the appeal, and (c) in the case of proceedings transferred or removed into the court, the costs of the proceedings before they were transferred or removed. It has been held that a section similar to the terms of s 98 of the Civil Procedure Act was sufficient to confer on the court a general power to make costs orders against non-parties: Knight v FP S pecial A ssets Ltd ( 1993 ) 174 CLR 178; [1992] HCA 28 . The Court of Appeal in Heath v Greenacre B usiness Park Pty Ltd [2016] NSWCA 34 at [33] confirmed that the principle extended to s 98 itself. In FPM Constructions Pty Ltd v City of the Council of the Blue Mountains [2005] NSWCA 340 Basten JA (with whom Beazley and Giles JJA agreed) confirmed that the District Court has the power to make a costs order against a non-party. At paragraphs 203 and following, Basten JA summarised the principles applicable as follows: Whether the court should make an order against a non - party involves the exercise of a discretionary power; T he prima facie general principle is that an order for costs is only made against a party to the litigation; H owever, an or der can be made against a non- party if the interests of justice require that it be made; T he circumstances include where the person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of process of the court. In the former case the real litigant rather than the nominal party may be made liable for costs; O ne category of case where the power may be exercised is where there is a class of persons, equally affected by a particular matter, any of whom may sue, and where the court may properly infer that the actual plaintiff was a person of straw and that the real driving force behind the proceedings was a different person, with financial resources; O ther factors include that the party is insolvent or a person of straw, the non-party has played an active part in the litigation and the non-party must have an interest in the subject of the litigation. See also the analysis by Gleeson JA ( with whom M acf arlan JA agreed ) in Heath v Greenacre B usiness Park Pty L td , above, at [ 32 ] -[33] and [80]-[81]. At [ 2 10 ] in the FPM C onstructions case, above, Basten JA stated that a survey of the cases by him in which orders had been made against non- parties estab lish ed that they tend to satisfy at least some, if not a majority, of the following criteria: T he unsuccessful party to the proceedings was the moving party and not the defendant; T he source of funds for the litigation was the non-party or its principal; T he conduct of the litigation was unreasonable or improper; T he non-party, or its principal, had an interest ( not necessarily financial ) which was equal to or greater than that of the party or, if financial, was a substantial interest, and T he unsuccessful party was insolvent or could otherwise be described as a person of straw. Submissions of the parties Both parties relied on detailed written submissions and made further oral submissions . Counsel for KH submitted, in general summary , as follows : E ach of the letters dated 4 June 2019 and 26 March 202 0 were marked “ W ithout prejudice save as to costs ” , and expressly referred to Calderbank v Calderbank [1975] 3 All ER 333 in the letter. Each of the letters therefore clearly operated as Calderbank offers; T he 26 March 2020 offer was effectively an offer to “ walk away ” . I t is well settled that a “ walk a way ” offer is capable of engaging the principles in Calderbank v Calderbank or the Rules particularly if made at a later stage of the proceedings : see Bota ny Bay City Council v Latham (No 2) [2013] NSWCA 450; Taheri v Vitek (No 2) [2014] NSWCA 344; Leich h ardt Municipal Council v Green [200 4] NSWCA 341 at [25] – [26]; A walk a way offer may be genuine where the offer involves the sacrifice of substantial recoverable costs. A walk a way offer made late in proceedings, say, just before trial, is more likely to be considered reasonable because both parties will be fully aware of the strengths and weaknesses of their cases; I t has been suggested that a walk a way offer can successfully trigger the indemnity costs mechanisms under the rules, but “ the claim or defence would have to approach something of the character of being frivolous or vexatious for that to be the case ” : Regency M edia Pty Ltd v AAV Australia Pty Ltd [200 9] NSWCA 368 at [ 31 ] . H owever, that is not always the case particularly where the defendant forgoes the possibility of a favourable costs order thereby forgoing a valuable entitlement and making a genuine offer of compromise: Loulach Developments Pty Ltd v R oads and Maritime S ervices (No 2) [2019 ] NSW SC 601 at [ 10 ]-[ 11 ] ; A s at 4 June 20 1 9: Pleadings with respect to the A mended Statement of Claim had closed; ADH had completed service of lay evidence in chief; KH had resolved its motion for security for costs on the basis that ADH would pay KH's costs of the application; and KH had incurred $65,774.42 in legal costs and disbursements; T he elements necessary to establish ADH's cause of action as at 4 June 2019 were within its own knowledge and it was able to assess its position. The offer involve d the payment of $55,000 by KH and the sacrifice of substantial recoverable costs and it was therefore unreasonable not accepting it; A s at 26 March 2020: P leadings had closed. ADH and KH had served their lay evidence in chief and reply evidence save for Mr Berry's affidavit sworn 26 June 2020. B y this time, ADH was therefore fully aware of the strengths and weaknesses of its case; G iven the manner in which ADH had pleaded its case against KH, it had limited prospects of success . This was particularly emphasised in the oral submissions of KH ; KH had costs orders in its favour in relation to the Notice of Motion for security for costs and KH ’ s costs thrown away by ADH being granted leave to file and serve the Further Amended Statement of Claim; KH had incurred $133,416.86 in legal costs and disbursements ( including approximately $15,800 associated with the Notice of Motion ) . ADH ’ s offer to walk away in respect of its substantial costs contained a significant compromise on its part; ADH was represented by experience d solicitors and counsel. The offer was not derisory and involve d the sacrifice of substantial recoverable costs. KH had a strong case on the pleadings. There was no expert evidence led by ADH relating to the material grading. In all of the circumstances, ADH's rejection of the offer was unreasonable and by proceeding in the matter , ADH put itself at risk of an indemnity costs order ; T he court has a wide discretion in relation to making a costs order against a third party like Mr Hewes. Mr Hewes guaranteed the payment of any costs or der made against ADH under the Deed of G uarantee. There is also no issue here about piercing the corporate veil so as to denude an entrepreneur of legitimate protection he or she may have by the interposition of a corporation. In addition to giving the personal guarantee, Mr Hewes gave a personal undertaking to be jointly and severa lly liable for any costs order that KH may obtain against ADH in the pr o c e eding. The undertaking was noted in orders made by Judicial Registrar Howard on 11 April 2019. The court should therefore uphold the bargain reach ed between the parties in which KH gave up its right t o obtain security for its costs. Counsel for the plaintiff submitted , in general summary , as follows: W hile the letters of offer referred to in the submissions made by the defendant did not specifically indicate an intention to rely on the offers for an application for indemnity costs , they were each described as being offers made pursuant to the principles in Calderbank v Calderbank and the plaintiff conceded that the offer s should be considered on the authorities relevant to Calderbank offers; T he usual rule with Calderbank offers is that costs, while always in the discretion of the court, generally have to be assessed on the ordinary basis and the offeror bears the onus of persuading the court that it should otherwise order. In particular , it must show that the offeree acted unreasonably in rejecting the offer made in the proceedings; T he offer of 4 June 2019, while it offered a sum of $55,000 inclusive of interest and costs, did not constitute a genuine compromise and it was not unreasonable for the plaintiff not to accept it. The offer was made early in the proceedings and acceptance of the offer required the plaintiff to indemnify the defendant against the possibility that Wilson s, then the first defendant in the proceedings, would join KH to the proceedi ngs, presumably by way of Cross-Claim . This was a significant additional consideration at th e time the offer was made. At the time , whilst the plaintiff had filed its lay evidence and was aware of the issues in its own case, it did not have the benefit of the defendant's evidence, which was critical to the final determination of the matters before the court. B ased on the information available to the plaintiff at the time of its non-acceptance of the 4 June 2019 offer, its conduct was not unreasonable such as to engage the consequences of an indemnity costs order on the basis of the principles in Calderbank ; The requirement for the plaintiff to indemnify the defendant against the possibility that Wilsons would join KH to the proceedings was relevant and not only theoretical and slight . Even if Wilsons did join KH and lost, ADH would incur costs on this issue. It was also inappropriate for ADH to be expected to engage in a careful consideration of the requirement for an indemnity and assess the risks involved. It was not unreasonable to reject the Calderbank offer with that requirement as a term of the offer; The offer of 26 March 2020 was a walkaway offer. However , it was not simply a walk away offer but also required the plaintiff to contribute a sum of $10,000 to the defendant's costs ; Even if it was simply a walkaway offer, the Court of Appeal decision in Regency M edia , above, shows that the claim or defence would have to approach “ something of the character of being frivolous or vexatious ” for indemnity costs to be considered; Although the defendant asserts that the plaintiff had , an d ought to have known that it had , significant weaknesses in its case, the plaintiff's case against the defendant as to the precise terms of the agreement between the parties , was ultimately determined by a number of critical conversations between Mr Hewes on behalf of the plaintiff and various employees of the defendant . T he court ultimately preferred the evidence of the defendant's witnesses based on the overall assessment of all the evidence. The plaintiff's case, whilst ultimately unsuccessful, was a long way from being “ frivolous or vexatious ” and in all the circumstances , the non- acceptance of the offers made was not unreasonable so as to attract an order for indemnity costs ; The proposed third party costs order should not be made. Such costs order s are in the discretion of the court but the circumstances must be exceptional in all the circumstances. The Notice of Motion for security for costs was resolved by the parties on terms that are agreed. It is not appropriate that the matter be now revisited by the defendant seeking in addition to the relie f obtained on settlement of the M otion , an order that Mr Hewes pay the defendant's costs personally. The defendant has rights pursuant to the D eed it entered into with Mr Hewes and if it believes there has been a breach of that D eed in a manner that prejudices its rights, it can take appropriate action to enforce those rights. No basis for the making of a third party costs order has been established. In oral reply, counsel for the defendant pointed to: The nature of the plaintiff ’ s limited pleaded case; The plaintiff ’ s lack of expert evidence at the trial – the parties still do not know the grading of the material used through independent expert evidence; In relation to the first Calderbank offer dated 4 June 2019, the court needed to consider the likelihood of the deed of indemnity referred to in the offer being called upon. It was submitted that the requirement for the deed did not create an onerous obligation on ADH; Calderbank walk away offers made late in the proceedings need to be considered on their merits. There was no general rule that they cannot be sufficient to warrant an indemnity costs order. The principle in Regency Media is more appropriate for an offer made earlier in proceedings. The comments made by Leeming JA in Loulach are significant and should be applied to this case. C onsideration W hether the letters dated 4 June 2019 and 26 March 2020 constitute valid Calderbank offers Each of the letters dated 4 June 2019 and 26 March 2020 are headed “ W ithout prejudice save as to costs ” . B oth letters state that the offer within them is made in accordance with the principles set out in Calderbank v Calderbank [ 1975 ] 3 All ER 333. In my view, therefore, each of the letters operated as a Calderbank offer: Whitney v Dream Developments Pty Ltd [2013] NSWCA 188; (2012) 84 NSWLR 311 at [41] – [44]. The wording of the letter s makes clear that they would be relied on in relation to the question of costs should a verdict more favourable than the offer be achieved. Coun se l for the plaintiff did not dispute this in his written submissions. The proposed third-party costs order against Mr Hewes As indicated above, KH submits that the costs order should also be made against Mr Hewes. The argument is primarily based on the fact that as well a s giving a formal personal guarantee in the Deed of Guarantee and Indemnity (Berwick exhibit page 334) , Mr Hewes also gave a personal undertaking to be jointly and severally liable for any costs order that KH may obtain against ADH in the proceedings. That undertaking , which appears to be an inter partes undertaking, was expressly noted in orders made by Judicial Registrar Howard on 11 Apr il 201 9. The Deed itself is dated March 2019: Berwick exhibit pages 334 and 337. If Mr Hewes had only entered into the formal Deed of G uarantee and Indemnity , in my view the argument for a personal costs order against Mr Hewes would be weaker. KH would then probably have to pursue proceedings against Mr Hewes on the Deed of Guarantee if its costs, after assessment, could not be recovered from ADH . However, the Short Minutes of Order of the orders made by the Judicial Registrar on 11 April 2019 were made by consent. The court expressly noted that Mr Hewes “ agrees and undertakes to be jointly and severally liable for any costs order that the Second Defe ndant may obtain against the P laintiff in the proceedings ” . I acco rdingly reject the submission made by counsel for the plaintiff t hat no basis for making a third party costs order has been established because the Defendant KH has rights pursuant to the Deed it entered into with Mr Hewes and that bargain should be respected . In my view , the undertaking noted by the Judicial Registrar after the date of the Deed is significant and strongly indicates that a third party costs order is appropriate . T he undertaking noted on 11 April 2019 by Judicial Registrar Howard appea rs to be separate to the D eed. Accordingly , there is no issue of the court acting unreasonably in piercing the corporate veil so as to deprive an individual of the legitimate protection provided by operating through a corporation. In the exercise of my discretion as to costs, I consider it is appropria te to make the order against Mr Hewes sought by the defendant. The indemnity costs orders sought O ffer of 4 June 2019 KH, as the party making the Calderbank offer, be ars the onus of satisfying the c ourt that it should exercise the cost s discretion in its favour in making an indemnity costs order. The mere rejection of a Calderbank offer by a party does not mean that indemnity costs follow as a matter of course. As the authorities outlined by me in Zhang , above, establish , the applicant must demonstrate to the court that the rejection of the offer by ADH was “ unreasonable ” in all the circumstances of the case. The offer appears to have been a genuine offer and involved a significant degree of compromise having regard to the payment to be made by KH. However, i n my view KH has failed to establish that the rejection of the offer by ADH was unreasonable in all the circumstances of the case for the following reasons: A s at 4 June 201 9 , while the plaintiff had filed its lay evidence and was aware of the issues in its own case, it had not received the defendant's affidavit evidence; W hile the offer letter provided significant detail in relation to justifying the offer, that is not a substitute for the service of the evidence relied on by KH in the proceedings; W hile the offer included KH paying ADH the sum of $55,000 inclusive of interest, costs and any applicable taxes it also required the parties to “ enter into suitably worded deed of release and settlement to include an indemnity in the event that the First Defendant seeks to join our client to the Proceedings ” . A t the time the offer was m ade , Wilson s was still a party to the proceedings. The offer was made on the basis that an indemnity would be provided by ADH. In my view, that was a significant matter which rendered it not unreasonable for ADH to reject the offer. The sophisticated analysis which counsel for KH submits should have been undertaken by ADH to arrive at the conclusion the deed of indemnity sought was unlikely to be called upon does not alter my view. I accept the submission of counsel for AD H that such an approach required a degree of analysis and acceptance of a risk which does not make the rejection of the offer to have been unreasonable; While I have no doubt , as stated above, that the offer was a genuine offer of compromise , the requirement for an indemnity made the offer uncertain within the principles in Miwa , above, and potentially a n unattractive one if Wilson's subsequently joined KH . The deed proposed was not included with the offer ; T aking the above matters into account, in my view there was not an unreasonable refusal to accept the offer by ADH. Offer of 26 Mar ch 2020 The offer of 26 March 2020 was in substance a “ walk away ” offer and was made substantially later when most of the affidavit evidence had been served. However, again , I do not consider that ADH was acting unreasonably in not accepting the offer for the following reasons: T he offer in paragraph 42 of the 26 March 2020 letter ( Berwick exhibit page 36) had as a term the following: “ T he parties enter into a suitably worded deed of settlement and release ” . W hat this meant was unclear. N o proposed Deed of S ettlement and release was annexed to the letter. It was therefore entirely uncertain what would be proposed in the Deed of Settlement and release by KH . It may have included matters beyond the matters in the pleadings as otherwise it is unclear why the deed was being sought ; The offer was not simply a walk away offer but required ADH to make a contribution of $10,000 towards KH's costs. This had to be considered in the light of the resolved security for costs motion. In the Regency Media case, above, at [ 31 ] , the three judges of the Court of Appeal in a joint judgment stated that an offer which is in substance an invitation to surrender “ would have to approach something of the character of being frivolous or vexatious for that to be the case ” . I note the persuasive comments of Leeming JA in the Loulach D evelopments case, above at [ 10 ]- [11] , in relation to walk away offers made late in proceedings . The payment of $10,000 wa s not nominal even though KH had incurred substantially more costs at that time (and had the security for costs orders in its favour) . Whilst the plaintiff ’ s case had some difficulties (as counsel for KH pointed out in detail in his submissions), I do not consider that it could be classed as “ something of the character of being frivolous or vexatious ” . It was in fact a detailed and somewhat complex case ; I accept the submission by counsel for the plaintiff that aspects of the case turned on the court ’ s review of the whole of the evidence in the light of the oral evidence of the various witnesses including their cross-examination. In the end, in substance, the court preferred the evidence of the defendant's witnesses to that of ADH. That was relevant on a number of matters including the value of the Wilsons test certificate provided to KH. I accepted Mr Kennedy ’ s version of the conversation relating to the certificate. Further, the court ’ s conclusions were arrived at after a review and consideration of voluminous documents including those of a technical nature. Taking into account all of the above matters, particularly the requirement for the parties to enter into “ a suitably worded deed of settlement and release ” , I find that the conduct of ADH in rejecting the Calderbank offer dated 26 March 2020 was not unreasonable in all the circumstances. In coming to that conclusion I have taken into account the matters set out in Ms Berwick ’ s affidavit and in the written and oral submissions of counsel for KH. Accordingly, in the exercise of my discretion as to costs, I reject the application for indemnity costs. Costs Each of the parties has had some success in relation to the arguments made at the hearing on 26 November 2020. In my view, exercising the discretion as to costs which I have, an appropriate order as to the application is that each party pay their own costs of the application heard on 26 November 2020. D etermination F or the above reasons, the Court makes the following orders: T he applications of the defendant K & H Geotechnical Services Pty Ltd for indemnity costs orders are rejected. P ursuant to s 98 (2) of the Civil Procedure Ac t 2005 ( NSW ) , Mr Adam Hewes is jointly and severally liable to the defendant for the defendant ’ s costs of the proceedings, as agreed or assessed. The plaintiff and the defendant are each to pay their own costs of the application heard on 26 November 2020. Liberty to apply within 7 days in relation to Order (3). ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 December 2020