DTS Succession Pty Ltd v Survco Pty Ltd (No. 2) [2021] QSC 316

SUPREME COURT OF QUEENSLAND CITATION: DTS Succession Pty Ltd v Survco Pty Ltd (No. 2) [2021] QSC 316 PARTIES: DTS SUCCESSION PTY LTD ACN 614 803 235 (and others) (applicants) v SURVCO PTY LTD ACN 119 449 008 (first respondent) AND MMJ DEVELOPMENT CONSULTING PTY LTD ACN 119 564 073 (second respondent) FILE NO/S: 8993 of 2021 DIVISION: Trial Division PROCEEDING: Civil ORIGINATING COURT: Supreme Court DELIVERED ON: 3 December 2021 DELIVERED AT: Brisbane HEARING DATE: 2 November 2021 (substantive hearing) and on papers (costs) JUDGE: Freeburn J ORDER: The respondents pay the applicants costs of the application on an indemnity basis. CATCHWORDS: PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COSTS – OFFERS OF COMPROMISE, PAYMENTS INTO COURT AND SETTLEMENTS – INFORMAL OFFERS AND CALDERBANK LETTERS – where applicant made respondent two Calderbank offers – where court declared an expert valuation to have been prepared in accordance with the deed of separation – where an order for specific performance was made – whether it was unreasonable for the respondents to reject the offers – whether the respondents ought to pay the applicant’s costs fixed on a standard basis up to the commencement of the trial – whether the respondents ought to pay the applicant’s costs fixed on an indemnity basis after the commencement of the trial – -- 1 of 8 -- 2 S.H.A Premier Constructions Pty Ltd v Niclin Constructions Pty Ltd (No. 2) [2020] QSC 323, followed. COUNSEL: Mr L Copley (Applicants) Mr G Sheahan (Respondent) SOLICITORS: Talbot Sayer (Applicants) ESJ Law (Respondent) REASONS Introduction [1] On 4 November 2021, the court declared that the valuation of Mr McDonald of Pilot Partners had been prepared in accordance with clause 4 of the deed of separation and release dated 1 March 2021. An order for specific performance was made. The reasons were published as DTS Succession Pty Ltd v Survco Pty Ltd.1 [2] The issue to be considered now is costs. [3] The applicants, having succeeded on their application, seek an order that the respondents pay the applicants’ costs. Further, the applicants seek an order that: (a) the respondents pay the applicants’ costs fixed on a standard basis up to 24 September 2021, and thereafter on an indemnity basis; or alternatively (b) the respondents pay the applicants’ costs fixed on a standard basis up to 1 November 2021, and thereafter on an indemnity basis. [4] Those alternative orders are sought on the basis of two ‘Calderbank’ offers to settle made on 17 September 2021 and 28 October 2021. The applicants contend that it was unreasonable for the respondents to reject the offers. 1 [2021] QSC 283. -- 2 of 8 -- 3 [5] On the other hand, the respondents contend that there should be no order as to costs, or alternatively any order of costs in favour of the applicants ought to be on the standard basis. [6] Both parties rely on written submissions which were received on 11 November 2021 (from the applicant) and 22 November 2021 (from the respondent). The applicants also rely on an affidavit of Mr Denovan which exhibits the two ‘Calderbank’ offers. The offers [7] The applicants’ offer on 17 September 2021 refers to the limited basis for challenge of an expert determination. They refer to Mr McDonald’s affidavit which addresses each of the issues that had been raised by the respondents’ expert, Ms Letts. [8] In the interests of avoiding the costs of a full day hearing, the applicants offered the respondents consent orders which were to the effect of the orders eventually made on 4 November 2021. The offer was that Mr McDonald’s valuation be declared to be prepared in accordance with clause 4.3 of the deed and that there be an order for specific performance of the deed. The proposed orders were to be on the basis that there be no order as to costs. The offer was expressed to be open until 24 September 2021. [9] A further and similar offer was made by a without prejudice letter on 28 October 2021. That offer was made in the week before the application was heard and determined. In both offers the applicants warned that if the offer was not accepted they would seek costs on an indemnity basis. [10] The second offer was accompanied by an open letter that: (a) rejected the allegation that Mr McDonald had not been appointed by the parties; (b) rejected the claim that Mr McDonald lacked independence; (c) asserted that the applicants had not made submissions to Mr McDonald; (d) submitted that Mr James made submissions to Mr McDonald in breach of clause 4.3(c) of the deed, and failed to provide a copy to the applicants; -- 3 of 8 -- 4 (e) submitted that Mr McDonald’s decision not to assign a value to the work-in- progress was justified; and (f) claimed that there was no basis for saying that Mr McDonald should have requested a valuation of plant and equipment. [11] Neither offer was accepted. There is no evidence of a counter-offer. Relevant Legal Principles [12] The relevant legal principles are settled. Bond J summarised the principles in S.H.A Premier Constructions Pty Ltd v Niclin Constructions Pty Ltd (No. 2) (‘S.H.A Premier Constructions’).2 The principles are: First, the usual rule is that where the Court orders the costs of one party to litigation to be paid by another party, the order is for assessment of those costs on the standard basis. Second, the Court will depart from the usual rule where the circumstances of the case warrant that course. Third, one feature which may justify a departure from the usual rule is the rejection of a Calderbank offer to compromise. However, it is wrong to think that an offeree’s rejection of a Calderbank offer gives rise to a presumption that the offeree should pay the offeror’s costs on an indemnity basis if the offeree obtains a less favourable result than contained in the offer. Rather, the correct approach is to consider whether the rejection of the offer, in all the circumstances, justifies a departure from the usual rule. Fourth, the balance between the competing policy considerations of, on the one hand, appropriately encouraging settlement and, on the other, not discouraging potential litigants from bringing their disputes to the courts, is found by applying a test of “reasonableness”. The policy rationale for requiring the offeree to indemnify the offeror for costs incurred after the offeree’s unreasonable rejection of an offer is that, from the time of the unreasonable rejection, notionally the real cause and occasion of the litigation is the unreasonable attitude adopted by the offeree. Fifth, deciding the critical question of whether the offeree’s rejection of the offer is unreasonable in all the circumstances will always involve matters of judgment and impression. However, the discretion as to costs must be exercised judicially and is subject to review in accordance with the principles set out in House v The King (1936) 55 CLR 499 at 505. Without being exhaustive concerning the considerations which should be taken into account, a court should ordinarily have regard to at least the following matters: (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; 2 [2020] QSC 323 at [8]-[14]. -- 4 of 8 -- 5 (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; and (f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it. [footnotes omitted] [13] The offers were made in a clear and comprehensible way and at a time when each party understood the other’s case. The offers afforded the respondents a reasonable opportunity to consider each offer. Both offers foreshadowed applications for indemnity costs, and so the respondents could be in no doubt of the likely consequences if the offers were rejected and the applicants succeeded. Further, the applicants’ offers were made accompanied by a relatively full explanation for the applicants’ stance and for its confidence that the court would find in their favour. The applicants were candid about their arguments. [14] That leaves two considerations mentioned by Bond J in S.H.A Premier Constructions and one further factor which is relevant in this case. Factor 1: Extent of the Compromise Offered [15] The compromise offered by the offers was to consent to an order that there be no order as to costs. That is, the proposal was that each party bear their own costs. [16] It is impossible for me to know the extent of that offer of compromise. Essentially, the applicants were offering to bear the costs of preparing the application. The likelihood is that those costs would have included some investments of time by solicitors, and possibly, counsel, in preparing the affidavits and other court material. It may well have involved paying for Mr McDonald’s time and effort in response to Ms Letts’ criticisms. [17] It is likely that there was some significance to those costs. However, given the nature of the dispute, the offer made was likely to be the most generous that the applicants could reasonably offer by way of compromise without unwinding the deed of separation and release. Factor 2: The Prospects of Success [18] The prospects of success have to be assessed at the time of the offer. [19] The respondents submit that: -- 5 of 8 -- 6 (a) a negligent expert determination may still bind the parties to the agreement; (b) in effect, that is the position they find themselves in – bound by Mr McDonald’s negligent valuation; (c) the respondents reasonably relied on their own expert, Ms Letts, who raised serious issues with Mr McDonald’s report; (d) the correct principle of fairness to be applied is that costs are not to be awarded to punish a party. [20] I accept completely that last proposition. [21] The balance of those submissions are difficult to accept. [22] There is no proper basis for a claim that Mr McDonald performed the expert determination in a negligent way. Indeed, it is surprising that the respondents continue to make allegations of professional negligence against Mr McDonald. [23] Each of Mr Letts’ criticisms of Mr McDonald’s report are explained and dismissed at paragraphs [22] to [57] of the reasons. None of the criticisms have any proper basis. [24] It must be accepted that the respondents did rely on their expert, Ms Letts. However, the respondents appear to have accepted and prosecuted any possible criticism raised by Ms Letts’ and they appear to have done so without any investigation at all. For example, Ms Letts’ first criticism was a guarded criticism that she had been ‘unable to verify’ that Mr McDonald had complied with the requirements of APES 225 in relation to engagement letters. Mr McDonald then produced an engagement letter. The complaint was not withdrawn. And, as explained in the reasons, in the circumstances of the deed, this complaint was not a substantive complaint in the context where Mr McDonald was jointly appointed by the parties under the express terms of the deed. It was a technical complaint that had no direct connection to the valuation that Mr McDonald arrived at. The same applies to the criticisms about Mr McDonald failing to identify the party engaging him. [25] That is not Ms Letts’ only guarded criticism. After identifying an ambiguity in the deed, Ms Letts comments that: ‘The Valuer does not appear to have made any comments in the Report regarding Working Capital, which would be a failure to -- 6 of 8 -- 7 adhere to clause 4.3.’3 Thus, the criticism of Mr McDonald was a guarded one in the sense that Ms Letts was saying that, on the surface, there should be comments. Again, there is no evidence of any explanation having been sought from Mr McDonald. Of course, Mr McDonald did respond to each criticism levelled at him. My point, though, is that even guarded criticisms of Mr McDonald appear to have been accepted as a proper basis for alleging that Mr McDonald prepared a negligent expert determination. [26] The respondents made ten complaints to the effect that Mr McDonald had failed to act impartially. [27] The first, to take an example, was that Mr McDonald was engaged by Mr Richardson. That engagement by Mr Richardson was consistent with the applicants’ obligations pursuant to the deed. The respondents failed to comply with that obligation. They were informed that Mr McDonald was engaged. They made no complaint at the time. The complaint ultimately made, to the effect that Mr McDonald was engaged by one side and was therefore not a substantive complaint. The one-sided nature of Mr McDonald’s engagement was entirely due to the respondents’ decision not to engage and to fail to meet their own obligations to jointly engage Mr McDonald. [28] To allege professional negligence is a serious allegation, especially where the professional is engaged to make an expert determination. The same applies to the allegations of a failure to act impartially. The allegations needed proper investigation. That appears not to have occurred here. Instead, each of Ms Letts’ criticisms of Mr McDonald, even guarded criticisms, seems to have been fully embraced and prosecuted by the respondents. None were abandoned, even during the hearing. [29] Those are circumstances which, as a matter of discretion, would favour giving the applicants a full indemnity for their costs. The applicants have been required to meet both negligence and lack of impartiality allegations against Mr McDonald. That was in circumstances where the deed executed by both parties appointed Mr McDonald as the expert valuer to determine the value of the shares in the company. In other words, the applicants have been forced to defend the competence and impartiality of 3 Ms Letts’ report at [37]. -- 7 of 8 -- 8 an expert who stood in the position of referee or umpire. And, they have been forced to do so in circumstances where both parties appointed the expert valuer. Factor 3: The Nature of the Proceeding [30] There is an additional factor. This application was made because the respondents disputed that Mr McDonald’s expert determination was within the terms of the deed. The deed itself recorded an agreed compromise under the deed. The respondents were to be ‘bought out’ by the applicants (the continuing shareholders) at a share price determined by an independent expert – Mr McDonald. [31] In that sense, the applicants, as the continuing shareholders have been put to the expense of enforcing the compromise agreement recorded in the deed. [32] It seems to me that the nature of that relief is an additional reason why the applicants, as the continuing shareholders, ought to receive a full indemnity for their costs. If it were otherwise, the value they take under the deed would be undermined by the costs incurred in their proceedings to enforce the deed and their failure to obtain a full indemnity for those costs. [33] Thus, the applicants have succeeded, and so the costs should follow the event. And, having regard to the circumstances set out above, the applicants should have a full indemnity for their costs by an indemnity costs order. -- 8 of 8 --