Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 4)

1. [1]

   These reasons deal with the final substantive orders and orders for costs that should be made in these proceedings. The latter requires the Court to decide the effect of a number of offers of compromise made by Mr Vaughan during the course of the proceedings.

2. [2]

   This is the fourth judgment that the Court has delivered in these proceedings. The previous judgments are Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan [2018] NSWSC 1455 (J1) delivered on 27 September 2018, Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 2) [2019] NSWSC 509 (J2) delivered on 7 May 2019, and Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan (No 3) [2023] NSWSC 679 (J3) delivered on 22 June 2023.

3. [3]

   The history of these proceedings is now so extended and convoluted that it will be necessary for the purposes of these reasons to assume that the reader is familiar with the content of the three previous judgments.

Short minutes of order proposed by the parties

1. [4]

   Mr Dlakic proposes that the Court make final orders in the terms of the following draft short minutes of order:

2. [5]

   It will not be necessary for the Court to set out the schedule in which Mr Dlakic has calculated the amount of interest to be included in the judgment. It should be noted that the calculation appears to have been made on the basis that Mr Dlakic became entitled to the full amount of the judgment of $521,621.11 on 25 November 2014. That was the date of the deed that has been called the buyback agreement in the earlier reasons, under which Mr Vaughan repurchased the practice of Johnston Vaughan from Mr Dlakic. I found in J1 that Mr Dlakic had a right to elect whether to affirm or to rescind the buyback agreement.

3. [6]

   Mr Vaughan has responded by accepting in principle some of the orders proposed by Mr Dlakic, but by proposing that the Court make orders in the following terms:

4. [7]

   The draft orders proposed by Mr Vaughan are not final in form as they in several respects include observations as to alternative approaches that the Court might adopt to the determination of the final form of the orders to be made.

5. [8]

   Order 1 in both sets of proposed orders records that Mr Dlakic has elected to receive compensation in accordance with the First Scenario for the assessment of the compensation payable to him by Mr Vaughan: see J3 [115] and the outcome at J3 [219]. This compensation has been calculated on the basis that Mr Dlakic has elected to affirm the buyback agreement.

6. [9]

   Mr Dlakic’s order 2 and Mr Vaughan’s alternative orders 5 and 6 have been prepared upon the basis that judgment be entered in favour of Mr Dlakic for $521,621.11, as found in J3.

Determination of the interest payable on the compensation

1. [10]

   The parties disagree as to the proper basis for the calculation of pre-judgment interest.

2. [11]

   The first issue that arises in relation to the calculation of the amount of interest that Mr Vaughan should be ordered to pay to Mr Dlakic is whether Mr Dlakic was correct to calculate that interest on the basis that the whole of the amount of $521,621.11 ought to have been paid to him on the date of the buyback agreement. The quantification of the Unbilled WIP component of the First Scenario compensation was considered at J3 [202]-[218]. As explained at J3 [204], Mr Dlakic was entitled to be paid all of the legal fees received by Mr Vaughan after the date of the buyback agreement on 25 November 2014 for work done for clients before that date, whenever the clients were sent a tax invoice for the legal work done. It follows that Mr Vaughan will have received the amounts paid by clients for work done before 25 November 2014 at different times after that date. Mr Vaughan was only required to remit those amounts to Mr Dlakic after they were received. It therefore follows that Mr Dlakic is not entitled to interest calculated on the whole amount from 25 November 2014.

3. [12]

   The other component of the First Scenario compensation is the Post-Buyback Expenses of $199,683 that were considered in J3 [194]-[198]. As noted at J3 [194], this amount was determined by Ms Exner at R2 [2.8]. The components of this amount of compensation represent amounts paid by Mr Dlakic after the date of the buyback agreement for the expenses of Johnston Vaughan, on the assumption that Mr Dlakic affirms the buyback agreement. They were in effect amounts had and received by Mr Vaughan. Mr Dlakic became entitled to repayment of the amounts at the times they were paid after the date of the buyback agreement. Consequently, interest should be calculated on each amount from the time that it was paid.

4. [13]

   In relation to the calculation of interest on the Unbilled WIP payments, Mr Vaughan’s written submissions correctly doubt that the interest should be calculated from 25 November 2014, but they do not offer any assistance as to how the correct calculation should be carried out. I infer that is because the Court has made no findings concerning the times when the individual payments of fees were received by Mr Vaughan. That was because, as will be explained below in some detail, Mr Vaughan did not comply with the notice to produce that was served on him by Mr Dlakic before the commencement of the first hearing in these proceedings to produce to the Court all of the financial records of the practice of Johnston Vaughan that would ordinarily be taken for granted would be maintained by a functioning solicitor’s practice.

5. [14]

   It will be necessary in the circumstances for the Court to make a practical determination of a fair adjustment to the calculation of interest made by Mr Dlakic to allow for the fact that, on average, the Unbilled WIP payments will have been received at different times after 25 November 2014. I will return to this issue after I have considered the equivalent problem that applies to the Post-Buyback Expenses.

6. [15]

   The Court has also not made any findings concerning when the individual components of the Post-Buyback Expenses were paid by Mr Dlakic. In principle, as these payments were made by Mr Dlakic, the times when they were paid should appear from the records of Mr Dlakic that were used to prove the making of the payments. Ms Exner, at R2 [2.8], referred to R2 [3.40]-[3.44] for her explanation as to how she calculated the amount of $199,683. Ms Exner in those paragraphs referred back to R1 [2.23]-[2.28]. It appears that Ms Exner determined the amount of the Post-Buyback Expenses on a basis that did not lead her to stipulate when each amount was paid.

7. [16]

   The result is that there has been no finding as to when each amount that comprises the Unbilled WIP was received by Mr Vaughan or when each amount of the Post-Buyback Expenses was paid by Mr Dlakic, and it is no longer feasible to make findings on those matters.

8. [17]

   In the circumstances, I propose to exercise my discretion as to the award of interest under s 100 of the Civil Procedure Act 2005 (NSW), by allowing for the spread of the payments received or made by assuming that they all occurred four months after the 25 November 2014 buyback agreement, being 25 March 2015. Using the schedule for the calculation of interest provided with Mr Dlakic’s submissions, the amount of interest of $240,160.46 will be reduced by $11,239.86 (being 37 days in 2014 and 84 days in 2015 at 6.5% per annum). Judgment will therefore be given in favour of Mr Dlakic for $228,920.60.

9. [18]

   Subject to making an equivalent adjustment to the calculation of the interest payable by Mr Vaughan to Mr Dlakic up to the dates that each of the offers of compromise was served, the observations made on behalf of Mr Vaughan in pars 5 and 6 of his proposed short minutes of order are correct insofar as they say that, for the purpose of determining the effectiveness of an offer of compromise, Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.16 requires that interest on the amount of the primary judgment only be calculated up to the date on which the offer was made. Whatever approach is adopted to the calculation of interest on this basis, the total amount of the judgment calculated solely on the basis of the compensation Mr Dlakic may have received was at the date of each offer of compromise less than the amount offered by Mr Vaughan.

10. [19]

    However, pars 5 and 6 of Mr Vaughan’s proposed short minutes of order are incorrect if they were intended to suggest that the interest that should be included in the judgment of the Court made now should be limited to the interest that would have been included in a judgment made on the dates of the offers of compromise. Whatever the effect on Mr Dlakic’s entitlement to be paid his costs, the judgment that is now made in his favour must include the full amount of interest up to the present date. As stated, that will be $228,920.60.

Appropriate costs orders leaving aside the offers of compromise

1. [20]

   I will now turn to a consideration of the costs orders that should be made on the assumption that the offers of compromise served by Mr Vaughan were not effective to cause the Court to make different costs orders than it would usually make in the ordinary course.

2. [21]

   The costs orders sought by Mr Dlakic are set out in order 3 of his proposed short minutes of order. This issue must be considered in the light of the costs orders made on 14 May 2019 to give partial effect to J1 and J2, which were as follows:

3. [22]

   As I understand it, Mr Vaughan accepts that these orders will stand insofar as they deal with costs of the proceedings up to 18 December 2018. I also understand that Mr Vaughan has included order 8A of his proposed short minutes of order only to make it clear that Mr Dlakic is only required to pay the costs the subject of order 18 made on 14 May 2019 on the ordinary basis.

4. [23]

   I found at J3 [231] that, subject to the effect of any offers of compromise served by Mr Vaughan, Mr Dlakic is entitled to an order that Mr Vaughan pay all of his costs incurred after 14 May 2019 on the ordinary basis. At J3 [232], I found that these costs should include the costs of the reference that Mr Vaughan was ordered to pay in the first instance by order 13 made on 14 May 2019. At J3 [234]-[242], I dealt with Mr Dlakic’s application for orders that Mr Vaughan be ordered to pay his costs of specific aspects of these proceedings in any event, even if a general costs order was not made in favour of Mr Dlakic for the proceedings after 14 May 2019.

5. [24]

   As I am satisfied that an order should be made, subject to the effect of the offers of compromise served by Mr Vaughan, that Mr Vaughan pay Mr Dlakic’s costs of the proceedings after 14 May 2019, including his costs of the reference, on the ordinary basis, I am not sure why Mr Dlakic has sought in his proposed order 3 separate costs orders for individual parts of these proceedings. I am also not sure whether the separate costs orders will equate to a general order that Mr Vaughan pay Mr Dlakic’s costs after 14 May 2019 on the ordinary basis. I would prefer to make the general costs order.

6. [25]

   Order 3(d) proposed by Mr Dlakic would require Mr Vaughan to pay interest on the costs payable to Mr Dlakic. Mr Vaughan’s proposed short minutes of order do not include an equivalent order. Subject to the effect of the offers of compromise served by Mr Vaughan, an order should be included requiring Mr Vaughan to pay Mr Dlakic interest on his costs from the dates those costs were paid by Mr Dlakic: see s 100(4) and (5) of the Civil Procedure Act and Lahoud v Lahoud [2006] NSWSC 126 at [83] per Campbell J (as his Honour then was).

Offers of compromise served by Mr Vaughan

1. [26]

   Mr Vaughan served his first offer of compromise pursuant to UCPR r 20.26 on 18 December 2018. The covering letter stated that Mr Vaughan also relied upon the offer of compromise under the principles in Calderbank v Calderbank [1975] 3 WLR 586. The operative part of the offer of compromise provided:

2. [27]

   Mr Vaughan’s second offer of compromise was served on 20 February 2019, and was made on the same basis as the first offer. It was in the same terms as the first offer except that the amount stipulated in par 2 was increased to $750,000.

3. [28]

   Mr Dlakic did not accept the first offer of compromise in the time allowed and his solicitor rejected the second offer by letter dated 22 February 2019.

Compliance of offers with formal requirements

1. [29]

   Mr Dlakic made the following submissions as to why the offers of compromise did not comply with the requirements of UCPR r 20.26:

2. [30]

   I will deal with Mr Dlakic’s third submission below, which is based upon the inadequate response made by Mr Vaughan to a notice to produce the financial records of Johnston Vaughan to the Court before the commencement of the first hearing.

3. [31]

   Both offers of compromise were made by Mr Vaughan after J1 was delivered on 27 September 2018. Paragraph 1 reflected a finding in J1 that Mr Dlakic had failed in his claims for compensation from Mr Vaughan for professional negligence in relation to the loans made to Mr Dlakic by the persons referred to in par 1. Paragraph 3 reflected the fact that Mr Vaughan had advised the Court during the hearing that he withdrew his cross claim against Mr Dlakic. Paragraphs 1 and 3 therefore were consistent with the findings that the Court had already made in J1.

4. [32]

   The only paragraphs in each of the offers of compromise that have any significance to the determination of the costs orders that should be made in these proceedings are pars 2 in each of the offers. In essence, Mr Vaughan offered to compromise all outstanding claims as at the time of the publication of J1 by paying to Mr Dlakic first $650,000, and then $750,000.

5. [33]

   Uniform Civil Procedure Rules r 20.26 relevantly provides:

6. [34]

   I do not accept that the offers of compromise are technically deficient for the reasons submitted by Mr Dlakic. As explained, the offers were made after the publication of J1, which had already decided that Mr Dlakic’s professional negligence claims against Mr Vaughan had failed, and recorded that the cross claim by Mr Vaughan had been withdrawn. Paragraph 2 of each of the offers was clearly intended to dispose of the whole of the balance of the proceedings. In making the offers, Mr Vaughan was not making separate offers to compromise different parts of the proceedings. He was suggesting orders to deal with aspects of the proceedings that had already been determined or recorded by J1, and then making a separate global offer to compromise the whole of the proceedings that remain to be decided. As will be seen below, there are nonetheless difficulties with the terms of the offers of compromise, but they are not difficulties that involve technical non-compliance with UCPR r 20.26.

Matters relevant to the effectiveness of the offers of compromise

1. [35]

   A number of matters are relevant to the effectiveness of the offers of compromise served by Mr Vaughan, and in particular whether the Court should ‘order otherwise’ under UCPR r 42.15(2). That rule provides:

Need for second hearing and J2 in any event

1. [36]

   First, as noted at J1 [481], those reasons necessarily left unresolved many ‘loose ends’ that required consideration by the parties for the purpose of the submission of draft short minutes of order to give effect to the reasons. They included the consequences of the inadequacy of the response of Mr Vaughan to the notice to produce served by Mr Dlakic that I will consider in more detail below. They also included the consequences of Mr Dlakic’s entitlement that was decided in principle in J1 to be registered as the holder of one of the two shares in Davlite Pty Ltd (Davlite), which was the company that owned the property from which the practice of Johnston Vaughan was conducted.

2. [37]

   It was necessary for the Court to conduct the hearings on 28 March and 4 April 2019 that led to the publication of J2 on 7 May 2019, in order to determine the orders that should be made by the Court to give effect to the reasons in J1 that dealt with subjects other than the amount of compensation payable by Mr Vaughan to Mr Dlakic. Those orders were made on 14 May 2019. Some of the orders are set out in J3 [46]. Both of Mr Vaughan’s offers of compromise were made between the publication of J1 and the hearing that began on 28 March 2019. The point of these observations is that, even if the offers of compromise were otherwise effective, in my view they would not have the effect of justifying an order that Mr Dlakic pay Mr Vaughan’s costs of the hearing on 28 March and 4 April 2019 or the preparation for that hearing. That forensic effort was needed in any case to enable the Court to make orders to give effect to the reasons in J1, which in practical terms was incomplete, and dealt with subjects other than the amount of the compensation payable by Mr Vaughan to Mr Dlakic.

Significance of Mr Dlakic’s right to elect between remedies

1. [38]

   Secondly, it must be remembered that in J1 the Court found that Mr Dlakic had a right of election to affirm or rescind the buyback agreement. The reasons in J1 did not contain sufficient findings to enable Mr Dlakic to know which election would be most favourable to him. That was because of the inadequacy of Mr Vaughan’ response to the notice to produce that I will consider below. Relevantly for present purposes, Mr Dlakic retained the right to elect to rescind the buyback agreement. That election would have raised issues concerning the restoration of the status quo that were considered at J2 [15]-[18]. Mr Dlakic would not have been able to resume the conduct of the practice of Johnston Vaughan himself because his practising certificate had been suspended and the deterioration in his mental faculties left no real possibility that he would regain the right to practice.

2. [39]

   However, as discussed at J2 [42]-[49], Mr Dlakic had entered into a conditional agreement for the sale of the practice of Johnston Vaughan. The point of these observations is that the right of election that Mr Dlakic retained meant that his remedy may not have been limited to the payment of compensation by Mr Vaughan. There may have been an element of compensation together with the transfer of the practice of Johnston Vaughan by the direction of Mr Dlakic to his purchaser.

3. [40]

   As recorded at J3 [8], during the hearing that led to the publication of those reasons, the Court was told that Johnston Vaughan had ceased to operate on 30 June 2019. As I then noted, the consequence was that, for all purposes, any consideration of Mr Dlakic being able to conduct the practice of Johnston Vaughan or to sell it became academic. Mr Vaughan apparently unilaterally decided to cease the conduct of the practice of Johnston Vaughan. As recorded elsewhere, Mr Vaughan continued to practice as a solicitor under his own name. The relevance of this for present purposes is that Mr Dlakic’s right of election to rescind the buyback agreement and to recover the benefit of the practice of Johnston Vaughan that was alive when each of the offers of compromise was served was terminated by the unilateral conduct of Mr Vaughan. The legitimacy of that conduct was not an issue that had been raised in the proceedings. However, it remains relevant to the determination of the effectiveness of the offers of compromise that par 2 of each offer required Mr Dlakic to accept a lump sum compensation. Neither offer dealt with the possibility that Mr Dlakic may have elected to rescind the buyback agreement. Mr Vaughan’s unilateral termination of the practice of Johnston Vaughan has had the retrospective effect of obscuring the need to consider the potential value to Mr Dlakic of recovering the practice of Johnston Vaughan in assessing whether the final outcome of these proceedings was no more favourable to Mr Dlakic than the terms of the offers for the purposes of UCPR r 42.15.

Significance of Mr Dlakic’s equitable entitlement to a share in Davlite

1. [41]

   Thirdly, it is necessary to address the significance of the fact that at the original hearing Mr Dlakic claimed a declaration that the transfer of one of the shares in Davlite from Mr Dlakic to Mr Vaughan as a result of Mr Vaughan having represented to ASIC on 27 August 2012, without Mr Dlakic’s consent, that Mr Dlakic had transferred that share to Mr Vaughan was void, or alternatively an order setting the transfer aside: see J1 [6]. The Court dealt with that claim at J1 [326]-[465], and concluded in the last-mentioned paragraph that Mr Dlakic remained in equity the owner of the share.

2. [42]

   On 14 May 2019, as part of the orders that gave effect to the reasons in J1 and J2, the Court made the following orders:

3. [43]

   The significance of these orders may have been forgotten by the parties, as they were some of the relatively few orders that the Court was able to make that actually resolved one of the issues at the hearing. I am not aware of the Court being told anything about the performance of these orders, and I assume that, whatever was necessary to be done to make Mr Dlakic the holder of one of the two shares in Davlite, was done.

4. [44]

   As I have explained above, par 2 of each of the offers of compromise served by Mr Vaughan dealt with all remaining issues in the proceedings after the publication of J1, other than Mr Dlakic’s professional negligence claims against Mr Vaughan (which were to be dismissed) and Mr Vaughan’s cross claim against Mr Dlakic (which had been withdrawn). Paragraph 2 of the offers of compromise required that Mr Dlakic accept $650,000, or $750,000, as a compromise of all of his remaining claims. I have already explained above how that compromise would have terminated the extant right of Mr Dlakic to elect to rescind the buyback agreement and regain the benefit of ownership of the practice of Johnston Vaughan. But it would also have had the effect of extinguishing Mr Dlakic’s right to be reinstated as a holder of one of the issued shares in Davlite. Consequently, the determination of whether the orders made by the Court in favour of Mr Dlakic will be no more favourable to Mr Dlakic than the terms of either offer of compromise would require the Court to be able to assess and add the value of Mr Dlakic’s holding of one of the shares in Davlite to the amount of the compensation that Mr Vaughan will be ordered to pay to Mr Dlakic, together with interest calculated up to the date each of the offers was made. Davlite owned the property in the commercial part of Kogarah that it leased to the person who conducted the practice of Johnston Vaughan. The Court has not been given any evidence of the value of the property. Nor has the Court been given evidence of the value of one of the two shares in Davlite.

Significance of Mr Vaughan’s failure to comply with the notice to produce

1. [45]

   Fourthly, it is necessary for the Court to consider the consequences of the conduct to the proceedings of the failure by Mr Vaughan to properly respond to the notice to produce the financial records of Johnston Vaughan that was served on him by Mr Dlakic before the commencement of the original hearing. For that purpose, it will be appropriate to set out as background relevant parts of my earlier judgments in the context of the chronology of the determination of these proceedings.

2. [46]

   The conclusion that I reached in J1 concerning the issue that is now relevant was as follows:

3. [47]

   The observations that I made at [474]-[475] are important to the resolution of the costs dispute between the parties.

4. [48]

   I dealt with the cause of the difficulty at greater length earlier in the judgment, as follows:

5. [49]

   The issue that the Court raised in J1 [105] concerning the indeterminate result of the Court’s inquiry into why the production of the business records of Johnston Vaughan was so fundamentally incomplete and haphazard has not satisfactorily been resolved during the course of the balance of the proceedings. Mr Vaughan has neither explained nor cured his delinquent response to the notice to produce.

6. [50]

   It is necessary to say a little more about the observations in J1 [106]-[107] insofar as they throw relevant light on the matter now under consideration. At the time Johnston Vaughan was an operating law practice under the control of Mr Vaughan. It must have prepared and retained financial records in order to enable it to operate. It was not that Mr Vaughan could not produce the documents the subject of the notice to produce because of evidence that the documents had been destroyed or were unavailable. At the last minute, Mr Vaughan produced substantial quantities of documents that had the deficiencies described by Mr Paul, who was a witness called for Mr Dlakic. In extraordinary circumstances, Mr Vaughan simply did not do what was necessary to produce the documents required by the notice to produce in a form that was meaningful and useful to Mr Dlakic, his legal representatives, and the Court.

7. [51]

   However, considerable light was cast on the issue in the course of the hearing concerning the Court’s adoption of the expert reports of Ms Exner that took place on 20-22 March 2023, and led to the publication of J3 on 22 June 2023. As I explained at J3 [157]-[165], Mr Vaughan sought to rely upon two new affidavits that contained considerable detail concerning the financial affairs of Johnston Vaughan for the relevant period that appeared to be based on business records that prima facie ought to have been produced by Mr Vaughan in response to the notice to produce that was served upon him by Mr Dlakic before the original hearing. I held that in the circumstances Mr Vaughan should not be permitted to rely upon the two affidavits for the purpose of the determination of the compensation that was payable to Mr Dlakic. However, at J3 [165], I made a limited qualification to that ruling to the effect that, where Mr Dlakic sought to prove matters that were not dealt with in Ms Exner’s reports, the consequence may be that fairness would require the Court to permit Mr Vaughan to rely upon responsive evidence in his affidavits.

8. [52]

   In a number of paragraphs in J3, I was required to deal with parts of Mr Vaughan’s new affidavits in which he made assertions of fact that appeared to be based upon detailed financial records that he had available to him when he made his affidavits which had previously not been produced to the Court: see J3 [175], [181], [195], [196], [209]. I expressed the following conclusions on this issue:

9. [53]

   Thus, while the reasons for Mr Vaughan’s inadequate response to Mr Dlakic’s notice to produce at the original hearing could not at that time be determined, it seems clear from the terms of Mr Vaughan’s new affidavits that – one way or another that was not explained to the Court – Mr Vaughan had gained possession of detailed financial records of Johnston Vaughan that enabled him to create detailed evidence in answer to Mr Dlakic’s reliance upon the conclusions in Ms Exner’s reports and his attempt to extrapolate from those conclusions to support the assessment of the compensation that he claimed. The only conclusion available on the probabilities is that much more comprehensive financial records of Johnston Vaughan were available to be produced at the original hearing, if Mr Vaughan had conscientiously responded to the notice to produce, and that Mr Vaughan has only gathered those financial records at times after the publication of J1 and J2 and the delivery by Ms Exner of her two reports, in circumstances where Mr Vaughan was disappointed by the contents of those findings and was determined to improve his position by making use in his new affidavits of financial records of Johnston Vaughan that were always available to him had he sought them with proper diligence.

Significance of the instructions given to Ms Exner as referee

1. [54]

   It is now necessary to refer to aspects of J2, as that was the judgment in which the Court was required to confront the consequences of its finding in J1 that Mr Dlakic had established in principle the right to rescind the buyback agreement, but as a result of the inadequate production of the financial records of Johnston Vaughan by Mr Vaughan, Mr Dlakic had not been able to prove the amount of the compensation to which he would have been entitled according to whether he elected to affirm the buyback agreement or to rescind it, so that he did not have a sound basis for making the election.

2. [55]

   I made the following observations on this issue in J2:

3. [56]

   The instructions that were given to Ms Exner as referee were consistent with order 3 made by the Court on 8 August 2019, and were in the following terms, as set out at J3 [55]:

4. [57]

   That part of the description of Task 1 which states: “This amount is to be a sum which fairly and equitably in all of the circumstances is the best estimate of the likely net profit of the business of Johnston Vaughan over the relevant period…” is of great significance to the determination of the issue before the Court. If Mr Vaughan had produced the financial records of Johnston Vaughan that should have been available, then Mr Dlakic may have been able to tender documentary evidence during the first hearing that may have enabled the Court to make all necessary findings of fact, and to enable Mr Dlakic to make a soundly based election between the alternative remedies that were available to him. Even if that were not practicable, the Court could have made orders for an accounting to take place, after the publication of J1, that would have enabled findings to be made on a strict accounting basis using the relevant business records. As it was, that was not possible, because the necessary evidence was not available. Consequently, Ms Exner, as an experienced forensic accountant, was appointed by the Court to determine issues such as the “likely” net profit of Johnston Vaughan on a “best estimate” basis, that was fair and equitable in the circumstances. That exercise was expected to be an approximation of the true circumstances that would require Ms Exner to use her professional judgment and to make appropriate extrapolations from what could objectively be proved.

5. [58]

   The inadequate response by Mr Vaughan to the notice to produce put Mr Dlakic in the practical position where the necessary financial records of Johnston Vaughan were not available to enable the compensation to which he was entitled to be determined with reasonable documentary precision. As the Court is not entitled to guess or to make up amounts of compensation payable by one party to another without an adequate objective basis, the circumstances committed Mr Dlakic to do the best he could in the reference process. It will be clear from an examination of the discussion in J2 of Mr Dlakic’s entitlement to the individual components of the First Scenario and the Second Scenario for the calculation of the compensation payable to Mr Dlakic, that the whole exercise, both at the reference and before the Court, was hamstrung by the absence of the necessary financial records.

6. [59]

   The significance of these considerations is that, at the time Mr Dlakic received the offers of compromise served by Mr Vaughan, he did not have, in my opinion, any sound basis for assessing the prospects that he would ultimately receive, as a result of the reference and the adoption of the referee’s reports by the Court, an amount of compensation that was above or below the amount that Mr Vaughan had offered to pay. This consideration is entirely separate from the circumstances that the offers of compromise required Mr Dlakic to abandon his right to elect to rescind the buyback agreement and to enforce the Court’s finding in J1 that Mr Dlakic was entitled to the beneficial ownership of one of the shares in Davlite.

Relationship between amounts offered and the outcome of the proceedings

1. [60]

   In the light of these considerations, the Court must now determine whether Mr Vaughan has satisfied the requirements of UCPR r 42.15.

2. [61]

   I consider that Mr Vaughan has not done so, and in any event, if it were necessary to do so, I would make an order otherwise under r 42.15(2).

3. [62]

   This case does not satisfy the requirement in r 42.15(1) that “the plaintiff obtains an order or judgment on the claim no more favourable to the plaintiff than the terms of the offer.” As I have explained above, if Mr Dlakic had accepted either offer, he would have lost his right to assert beneficial ownership of one of the two shares in Davlite. As he did not accept the offers, he retains that right. That right is likely to have a considerable value. In any event, Mr Vaughan has not demonstrated that the amount of the compensation plus interest payable to Mr Dlakic calculated up to the date of each offer plus the value of Mr Dlakic’s share in Davlite is less than the amount stipulated in par 2 of each offer.

4. [63]

   It is arguable that the same requirement is unsatisfied because the acceptance by Mr Dlakic of either offer would have precluded his right to elect to rescind the buyback agreement and regain the practice of Johnston Vaughan, even if only for the purpose of on-selling it. The fact that the opportunity to regain the practice of Johnston Vaughan by electing to rescind the buyback agreement was lost for later practical reasons, because Mr Vaughan unilaterally terminated the practice, may cloud the issue of how r 42.15 should be applied. However, the evidence led by Mr Vaughan does not establish that, at the time each of his offers of compromise were made, the amounts offered in pars 2 of the offers were more than the amount of the compensation plus interest payable to those dates plus the value of the benefit to Mr Dlakic of rescinding the buyback agreement and regaining the benefit of the practice of Johnston Vaughan.

Determination whether to apply UCPR r 42.15

1. [64]

   I will now consider the alternative issue of whether, even if r 42.15(1) is technically satisfied, the Court should order otherwise so that r 42.15(2) will not take effect.

2. [65]

   In Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268, Gleeson JA and Tobias AJA said:

3. [66]

   Hallen J has helpfully reviewed the authorities on the application of Div 3, Part 42 of the UCPR, including when it is appropriate for the Court to “otherwise order" in Ballam v Ferro (No 2) [2022] NSWSC 1358, as follows:

4. [67]

   It is not necessary in this case for the Court to attempt to synthesise all of these observations on the Court’s approach to whether to order otherwise under UCPR r 42.15, although I will say that I consider the concise explanation given by Kunc J to be particularly helpful. I am satisfied that, whatever complexion should be given to the proper approach to the application of the rule, this is a clear case in which the Court should order otherwise within the meaning of the rule.

5. [68]

   Paragraph 2 of each of the offers of compromise required Mr Dlakic to accept a lump sum in compromise of all of his remaining claims for compensation, as well as the recovery of the practice of Johnston Vaughan by means of the recission of the buyback agreement, and also his claim to be the beneficial holder of one of the two shares in Davlite. They were bare offers and did not provide any explanation as to why Mr Vaughan had a reasonable expectation of achieving a result in the defence of Mr Dlakic’s claims that was more advantageous to Mr Vaughan than the lump sums that were offered. More importantly, Mr Vaughan remained in default in respect of his response to the notice to produce the financial records of Johnston Vaughan that was served on him before the initial hearing. The consequence was that Mr Dlakic remained in a state of evidentiary deprivation concerning the making of a rational assessment of what the likely outcome of his proceedings would be. Mr Vaughan only sought to introduce evidence of the financial records of Johnston Vaughan during the reference and at the hearing for the adoption of the referee’s reports, and he did so in a piecemeal way that led to the rejection of the evidence. The consequence was, in my opinion, that it was not reasonable for Mr Dlakic to be required to respond to an offer of compromise under UCPR r 20.26, until after the issue by Ms Exner of her second report. Prior to that time, Mr Dlakic’s remedial fate was largely ‘up in the air’, and dependent upon the exercise of evaluative judgments by Ms Exner on the basis of insufficient financial information. Mr Dlakic could not reasonably have been expected to respond to an offer of compromise until after he had been given the opportunity to consider the likely consequences of Ms Exner’s two referee’s reports.

6. [69]

   As a separate matter, even if the currency of Mr Dlakic’s entitlement to elect to rescind the buyback agreement and his right to the beneficial ownership of one of the two shares in Davlite does not have the effect that Mr Vaughan has failed to satisfy UCPR r 42.15(1), I consider that it would be entirely unjust, in all of the circumstances, for the Court to reverse the costs obligations between the parties as from the dates of the offers of compromise, and to impose the burden of indemnity costs upon Mr Dlakic, given that he would have had to abandon his right of election to rescind the buyback agreement and his entitlement to the beneficial ownership of one of the two shares in Davlite, if he had accepted either of the offers of compromise.

Conclusion

1. [70]

   In the circumstances, given the costs orders that have already been made by the Court, the proper costs order is that Mr Vaughan be ordered to pay all of Mr Dlakic’s costs of the proceedings since 14 May 2019, including his costs of the reference, on the ordinary basis.

2. [71]

   It should now be possible for the parties to agree final short minutes of order to give effect to these reasons, so that these proceedings are brought to a belated end. Mr Dlakic should take the lead in preparing the short minutes of order and ensure that they are provided to my Associate in the near future.