Oneflare Pty Ltd v Chernih [No.2]

1. [1]

   HIS HONOUR: I heard these proceedings over five days in March, and a further day in August, 2016 and gave judgment on 13 September 2016 [1] . I concluded that the plaintiff’s claim failed, and that there should be judgment for the defendants. The parties accept that costs should follow the event. However, the defendants seek a special order for costs. That is the subject of these reasons.

Nature of an issues in the proceedings

1. [2]

   To give background to what follows, I set out [1] to [5] of my earlier reasons:

Resolution of the issues

1. [3]

   I concluded that the issues, as stated at [5] of my earlier reasons, should be disposed of as follows:

   1. (1)

      first issue: I concluded that the terms of the retainer were in substance that Oneflare retained Mr Chernih to provide “aggressive” SEO strategies that included link-building; that Mr Chernih was retained to design the strategy and process that would give effect to what Oneflare wanted; that he was required to use reasonable care and skill in the performance of the retainer; and that there was no general duty of care to warn of the risks attaching to the strategies that Oneflare told Mr Chernih it wanted him to pursue, and for the execution of which it retained him [2] .

   2. (2)

      Second issue: I concluded that Oneflare, through its principals Messrs Dong and Lim, laid down the essential elements of the strategy to be employed, and that Mr Chernih assisted Oneflare in the execution of that strategy; and (contrary to the evidence of Messrs Dong and Lim) that steps in the execution of that strategy were not undertaken at the direction or on the instruction of Mr Chernih [3] .

   3. (3)

      Third issue: on my findings as to the scope and performance of the retainer, the question of breach did not arise.

   4. (4)

      Fourth issue: I concluded that if it were necessary (contrary to my conclusion as to breach) to assess damages, they should be assessed at $673,560.00, together with interest from 17 March 2015 [4] .

The special order that the defendants seek

1. [4]

   The defendants (from now on, I shall do as I did in my earlier reasons, and refer only to Mr Chernih) ask for an order that their costs be paid on the ordinary basis up until 3 February 2015, and on the indemnity basis from 4 February 2015. They rely on an offer of compromise dated and served on 3 February 2015. That offer of compromise offered to settled the whole of Oneflare’s claim on the basis that there be judgment in favour of the defendants with no order as to costs.

2. [5]

   Although the offer was stated to be open for acceptance until 9 March 2015, it was in fact rejected by email, sent within an hour or so after service, on 3 February 2015.

3. [6]

   In those circumstances, Mr Chernih invokes UCPR r 42.15A. That rule reads:

4. [7]

   The letter under cover of which the offer of compromise was served stated that if for any reason it were held to be invalid (presumably, by reference to the formal requirements of UCPR r 20.26), it would nonetheless be relied upon as a Calderbank [5] offer. The submissions for Oneflare did not take any issue with the form of the offer of compromise, and it is thus unnecessary to consider that alternative characterisation of the offer.

5. [8]

   I should note that Oneflare’s submissions included the proposition that there was no real element of compromise, and hence that the offer did not engage r 20.26. I do not read that to suggest any defect of form. In any event, if the rule were not engaged for that reason, the alternative characterisation of the offer as a Calderbank offer would be unlikely to advance Mr Chernih’s claim for indemnity costs.

The parties’ submissions

1. [9]

   Mr Chernih’s submissions, relying on the offer in its character as an offer of compromise, noted that the default position under r 42.15A was that the costs consequences specified should operate unless the court ordered otherwise. That meant, the submissions said, that the onus was on Oneflare to demonstrate why the default consequences should not follow. The submissions referred to the judgment of McColl JA in Caine v Lumley General Insurance Ltd (No.2) [6] . Her Honour said [7] :

2. [10]

   Mr Chernih’s submissions made the following points:

   1. (1)

      Oneflare had made two previous offers to settle, on 3 and 14 November 2014, for $300,000.00 inclusive of costs and $413,000.00 (without any specification as to costs) respectively.

   2. (2)

      The significance of the sums offered should be assessed against the fact that Oneflare’s particularised loss of revenue was said to be $2.1 million, and this was the measure of damages sought from Mr Chernih.

   3. (3)

      At the time the later of those offers had been made, Oneflare’s evidence in chief had been served.

   4. (4)

      That evidence in chief was remarkable because it excluded almost all the emails passing between the parties, which in my view were significant (including because they were inconsistent with Oneflare’s case), a matter on which I commented in my earlier reasons [8] :

   5. (5)

      The offer of compromise had been rejected extremely hastily, leading to the inference that it had not been seriously considered.

3. [11]

   Oneflare’s submissions made the following points:

   1. (1)

      there was no significant element of compromise; although Mr Chernih had offered to forego his costs, there was no evidence of the amount of those costs; it was likely that those costs would have been “relatively modest” as at 3 February 2015, because of the relatively limited amount of work that would have been done by then; and cases supporting the proposition that an offer to forego costs could contain an element of compromise [9] were distinguishable, because in each case the court had pointed out that by reason of the procedural history and the time at which the offers were made, the costs offered to be foregone could be inferred to have been substantial.

   2. (2)

      Alternatively, there was no general requirement to show exceptional circumstances before ordering otherwise; the discretion was one to be exercised having regard to all the circumstances of the case [10] .

   3. (3)

      The speed of rejection of the offer was irrelevant, because an identical offer made some seven months earlier had been rejected.

   4. (4)

      By the time the offer was made, Oneflare had obtained expert evidence quantifying its claim at $2.1 million.

   5. (5)

      The deficiencies in Oneflare’s evidence in chief had nothing to do with the question, because the offer of compromise was made before Mr Chernih served his evidence.

4. [12]

   In reply, Mr Chernih submitted that UCPR r 20.6 expressly provided [11] for a “walk away” offer to be a valid offer of compromise. There was a real element of compromise because Mr Chernih offered to give up any claim for costs.

Decision

1. [13]

   I set out UCPR r 20.26:

2. [14]

   Rule 42.15A has been set out earlier in these reasons.

3. [15]

   I do not regard Mr Chernih’s service of an earlier offer of compromise as being of any particular relevance. It is apparent that it was served before Oneflare had put on its evidence. It may be regarded as an attempt to get rid of the case before anyone incurred substantial costs.

4. [16]

   Because the earlier offer was served before Oneflare’s evidence was provided, it follows, I think, that such consideration as may have been given to the earlier offer would not translate automatically, and without further consideration, to the later offer. In those circumstances, Oneflare should have considered the later offer having regard to the evidence in chief on which it proposed to rely. Oneflare must have known, even if its legal advisers did not, of the gaps in the evidence: specifically, of the gaps in the email record. Oneflare could hardly have thought that the emails in question were irrelevant. It is open to infer that they did not find their way into Oneflare’s evidence in chief precisely because Oneflare, through Messrs Dong and Lim, understood all too well that they were inimical to its case.

5. [17]

   In those circumstances, the failure of Oneflare to re-evaluate the case upon receipt of the second offer of compromise it is a significant factor bearing upon the exercise of the discretion to “order otherwise”.

6. [18]

   I turn to Oneflare’s earlier offers to settle. Mr Chernih submitted that these offers showed that Oneflare “must have seriously doubted it’s prospects of success in establishing its claim against the defendants” [12] . I do not agree.

7. [19]

   The most that can be drawn from Oneflare’s two offers – particularly, (the second, and higher, which arguably left costs to be decided by the court) – is that Oneflare had given serious consideration to its case, in the light of its evidence in chief. That evidence was, presumably, in the course of preparation at the date the first of the offers was made, and either served or about to be served at the date the second of those offers was made. If anything, those offers – particularly, the second – show that Oneflare had given serious consideration to its position, and was seeking to promote resolution of its dispute with Mr Chernih.

8. [20]

   The other matter of significance, in my view, is that when Mr Chernih served his offer of compromise, Oneflare did not know what his evidence would say. Thus, Oneflare had no ability to assess the strength of its case not only by reference to its own evidence but also by reference to Mr Chernih’s evidence.

9. [21]

   I accept of course that a prime purpose of r 20.26 is to achieve early settlement of disputes, and thus to avoid expenditure on costs. In those circumstances, it is easy to understand why a party may choose to serve an offer of compromise before going to the expense of preparing and serving its evidence. The benefit of that approach is that if the offer does lead to a settlement, then costs are saved. The downside is that making an offer in those circumstances deprives the offeree of the opportunity of considering it in the light of the offeror’s evidence.

10. [22]

    In this case, for whatever it is worth, Mr Chernih’s affidavit was extremely lengthy, and extremely detailed in its approach to all the relevant conversations, meetings and other relevant events, and in relation to performance of the retainer.

11. [23]

    Consideration of the discretion conferred by r 43.15A(2) requires at least two things:

    1. (1)

       an understanding of the language and purpose of the rule (understanding of purpose being informed by relevant authority); and

    2. (2)

       attention to the particular facts of the particular case, by reference to which facts the discretion is to be exercised.

12. [24]

    In this case, although I am prepared to infer that the time taken for consideration of Mr Chernih’s offer was minimal, the key point is that nothing, in terms of evidence, had changed since Oneflare made its second offer on 14 November 2014. As I have said, the obvious inference is that when Oneflare made that second offer, it did so having regard to its analysis of its case, by reference to its evidence which by then had been served or was about to be served. It had had no opportunity, either by reference to Mr Chernih’s evidence or (so far as the material put before the court in relation to costs shows) any other relevant consideration, to re-evaluate its position.

13. [25]

    In those circumstances, I do not consider the apparent brief duration of such consideration as Oneflare gave to Mr Chernih’s offer to have any real significance.

14. [26]

    What is left, then, is Mr Chernih’s relevantly unexplained rejection (or non-acceptance) of Oneflare’s second offer, and Oneflare’s equally unexplained rejection of Mr Chernih’s offer. Whilst Oneflare has not given any evidence of the reasons for its rejection of Mr Chernih’s offer, it can I think be inferred with reasonable certainty that there was nothing put to it in support of the offer, nor any other material put before it, to require it to reappraise, so as to lead to some revision of, the analysis that by inference underpinned its offer of 14 November 2014.

15. [27]

    The relatively small compromise inherent in Mr Chernih’s offer is of some significance. By the time he made his offer, there had been one directions hearing; Mr Chernih had prepared and filed his list response; and Mr Chernih, presumably, had considered Oneflare’s evidence and perhaps had commenced preparation of his own. Of course, in all those tasks, he had had the benefit of his solicitors’ legal advice. There can be no doubt that he had incurred costs. But whether those costs were “substantial”, particularly having regard to the amount of Oneflare’s claim and the very much reduced amount for which it had offered to settle, is unilluminated by evidence.

16. [28]

    It is correct (and the submissions for Mr Chernih accept this) that Oneflare’s offers – even the second, higher, offer – indicate a very substantial degree of compromise compared to its estimated claim. Taking the latter at full value, the element of compromise was of the order of $1.7 million, or four times the offer that was put. There is no evidence of the amount, or value, of the compromise embodied in Mr Chernih’s offer.

17. [29]

    In all the circumstances, and accepting as I do that it is the offeree – Oneflare – that must persuade the court to order otherwise, I am of the view that this is not a case where it is appropriate that indemnity costs should follow rejection of Mr Chernih’s offer. The key matters underpinning that conclusion are:

    1. (1)

       the fact that the litigious landscape had not changed in any relevant way between 14 November 2014 and 3 February 2015; and

    2. (2)

       although Oneflare had demonstrated willingness to offer, at least on the face of things, a very substantial compromise, there is no measure of the value of Mr Chernih’s compromise.

18. [30]

    On that analysis, there is no point in considering Mr Chernih’s offer in its alternative characterisation as a Calderbank offer.

Conclusion and orders

1. [31]

   It follows that the application for a special costs order should be dismissed with costs.

2. [32]

   I make the following orders:

   1. (1)

      order the plaintiff to pay the defendants’ costs up until and including 13 September 2016.

   2. (2)

      Order the defendants to pay the plaintiff’s costs of the defendants’ application for a special costs order.

   3. (3)

      Costs to be set off.