SMBC Leasing and Finance, Inc. v Flexirent Capital Pty Ltd (Costs)

This judgment did not decide the whole commercial dispute from scratch. It was a costs and interest decision delivered after the Federal Court had already given substantive reasons in the main case. The judge said the parties had agreed on most final orders after the principal judgment, but two issues still needed to be resolved by the court.

The first issue was whether SMBC should receive pre-judgment interest on damages linked to its funding of liquidators. The second was the appropriate costs order. That means this decision is best read as a case about the financial consequences of litigation after the main liability findings have been made, rather than a full retelling of the underlying contract dispute.

The judgment does, however, reveal the commercial shape of the case. SMBC had spent money funding liquidators as part of a mitigation strategy. The court had already found in the earlier reasons that this was a reasonable step taken to mitigate loss and that it had ultimately been successful. The case also involved different parts of the claim described as the 2018 MRASA and the 2020 MRASA, and the parties had mixed success across those parts.

For business readers, the real value of this judgment is that it shows how post-breach decisions can materially change the final financial result. A business may spend money trying to reduce its loss, pursue recoveries, or stabilise the position after a breach. If that spending is reasonable, it may affect damages and interest. And once litigation is underway, the timing and wording of settlement offers can dramatically alter who pays costs and on what basis.

The first question was about pre-judgment interest. The court had already held in the principal judgment that SMBC was entitled to damages reflecting a portion of its costs of funding the liquidators. The funding was treated as a reasonable mitigation step. The narrower question in this later judgment was whether interest should also be awarded on that amount for the period before judgment.

The second question was about costs. Both sides said their own settlement offers should influence the costs order. Flexirent relied on a pre-litigation offer made on 14 April 2022 for $15.5 million. SMBC relied on a later offer made on 23 July 2025 to settle for $20 million inclusive of costs, and that later offer was expressly made both as a formal Offer of Compromise under the Federal Court Rules and as a Calderbank offer.

The court also had to decide what percentage of SMBC's costs should be recoverable overall. That was necessary because SMBC had not won every part of the case. The judge described SMBC as wholly successful in part of the claim and wholly unsuccessful in another part. So the court had to work out a fair percentage, then decide whether the basis of recovery changed after the July 2025 offer.

The court started from the general position that a successful applicant is generally entitled to pre-judgment interest unless there is good cause to refuse it. SMBC had claimed interest on the amount connected with funding the liquidators, and there was no dispute about the amount of that interest if it was payable. The figure recorded in the judgment was $219,972.91 for that head.

Flexirent argued that interest should not be awarded because the court had already taken the mitigation spending into account when calculating damages. The total cost of funding the liquidators was $1,140,000. The court had also concluded that SMBC was likely to recover $2,847,000 from the liquidators. As a result, the damages award in the main case had been reduced by the net amount of $1,707,000. Flexirent said that this netting exercise meant there should be no pre-judgment interest on the mitigation expenditure.

The court rejected that submission. The judge said it did not provide a sensible reason not to grant interest. The key commercial point was that SMBC had actually sustained losses in funding the liquidators and had not yet received the likely recovery from them. In other words, SMBC had been out of pocket. The fact that likely future recoveries were taken into account in the damages calculation did not change that practical reality.

The practical effect of the court's approach can be stated simply: if a business reasonably spends money to mitigate loss and has not yet recovered that money, the court may still award pre-judgment interest because the business has been kept out of funds before judgment.

For businesses, this matters because mitigation often requires real expenditure. A company may need to fund investigations, insolvency processes, recovery action, or related proceedings to reduce the damage caused by another party's breach. This judgment shows that if those steps are reasonable and recoverable, the court may also recognise the time value of the money spent.

Flexirent relied on a letter sent before proceedings began, offering to settle SMBC's claims for $15.5 million. The letter was sent on a without prejudice basis. Importantly, it did not say that it would be relied on on the question of costs, and it did not say it was a Calderbank offer.

The court accepted that even if an offer does not formally meet Calderbank requirements, it can still be relevant to costs. The judge said the court's discretion on costs is unfettered and that the existence of such an offer remains part of the overall circumstances. The court also said it is desirable that settlement offers are made before proceedings start, especially where litigation is likely to be long and expensive.

But the court also stressed another practical point. It is desirable for a party to make clear in a settlement offer that it proposes to rely on the offer on the question of costs if that is what it intends to do. That helps ensure the other side understands the potential costs consequences of rejection and can obtain advice on that basis. Flexirent's letter did not do that. The court treated that as relevant, although not fatal to the offer's relevance.

Flexirent argued that its $15.5 million offer had not been bettered because the agreed judgment amounts, excluding pre-judgment interest, totalled less than that figure. The court said that comparison was too simplistic. To understand the result, one had to understand how the AUD figure had been calculated. The damages figure had been reduced because SMBC had successfully pursued mitigation steps that generated likely future recoveries. At the time Flexirent made its offer in April 2022, SMBC was still pursuing that mitigation strategy and had not yet succeeded in obtaining any recovery. It was incurring additional expenditure in the context of Flexirent's alleged breaches in order to mitigate its losses and obtain recovery elsewhere.

The court held that, in the circumstances of this case, the likely future recoveries should not be taken into account to increase the comparative value of Flexirent's settlement offer. The judge described it as fortuitous for Flexirent that the likely recovery from the liquidators could later be determined in the proceedings. Looking at the position as at 14 April 2022, the court considered that if the proceedings had been determined then, SMBC would probably have bettered the offer. Once the later success of the mitigation strategy was taken out of the equation, SMBC had achieved a meaningfully better outcome than what Flexirent had offered, even before taking into account that SMBC had already incurred significant legal costs by that date and the offer was intended to cover them as well.

The court also said that even if the April 2022 offer were treated as better than the ultimate result, SMBC's rejection of it was reasonable. One reason was the mitigation context just described. Another was that at the time of the offer SMBC was trying to obtain documents under a contractual right so it could better assess its 2020 MRASA case, and it was later successful in obtaining those documents.

So while the court took Flexirent's offer into account, it did not lead to indemnity costs in Flexirent's favour. Nor did it justify a middle-ground order that each party bear its own costs.

SMBC's later offer was materially different. By letter dated 23 July 2025, SMBC offered to settle the proceedings for $20,000,000 inclusive of costs. The offer was expressly made as a formal Offer of Compromise under the Federal Court Rules and as a Calderbank offer.

The court noted that the letter explained substantial costs had already been incurred. The judge said there was no question that Flexirent, properly advised by its solicitors, would have known that substantial further costs would be incurred if the matter proceeded to hearing. By 23 July 2025, costs were likely to be in the millions of dollars.

The court found that SMBC had obtained judgment for the equivalent of roughly $19,452,627.73 including pre-judgment interest. Once costs were included, the judgment was substantially more favourable than the offer. Flexirent did not submit otherwise.

That finding mattered because the relevant rule provides that where the judgment is more favourable than the terms of the offer, the applicant is entitled to indemnity costs in accordance with the rule. The court emphasised that the rule does not turn on whether rejection of the offer was reasonable. Reasonableness might be relevant if the court were considering making an order inconsistent with the rule, but a reasonable rejection does not itself switch off the entitlement created by the rule.

The court saw no reason to make an order inconsistent with the rule. The judge said Flexirent's case on the 2018 MRASA was at best weak, and that SMBC's case on the 2020 MRASA was also weak. That explained why SMBC's offer of $20 million was sensibly pitched where it was. The court concluded that Flexirent's rejection of the offer was not sufficiently reasonable to justify displacing the operation of the rule, and indeed said it was difficult to characterise the rejection as reasonable at all.

The result was that Flexirent had to pay 70% of SMBC's costs from 11 am on 25 July 2025 on an indemnity basis.

For business readers, the lesson is direct. If you are making a serious settlement offer and want strong costs consequences, timing and formality matter. A properly framed formal offer can create a much stronger position than an informal proposal. If you are receiving such an offer, you need to assess it against the likely judgment plus costs, not just against the likely damages figure.

SMBC did not recover all of its costs. The court accepted that the case involved mixed success. SMBC was wholly successful on part of the claim and wholly unsuccessful on another part. That meant the court had to decide what percentage of SMBC's costs should be recoverable.

SMBC sought 72.6% of its costs. The judge said that figure accorded with his sense of the time required in the case split between the 2018 MRASA issues and the 2020 MRASA issues. The main factual and legal focus had been on the 2018 MRASA. The court noted that Flexirent had mounted a defence on that part of the case grounded on the proposition that reliance on a warranty was necessary to obtain damages for breach of contract. The judge said this defence required overseas witnesses to attend for lengthy cross-examination in support of a proposition of dubious legal merit.

As to the 2020 MRASA, the court said it must have been evident to both parties, at least by 23 July 2025, that SMBC's case was weak because comparatively little time was spent on it. The court also said it was clear from the terms of SMBC's offer that SMBC itself harboured doubt about its prospects on the 2020 MRASA.

The judge rejected Flexirent's submission that the percentage should be determined by counting paragraphs in the pleading. Instead, the court took a broader and more practical view of how the case had actually been run and where the time and effort had gone.

The court also dealt with an earlier discovery costs order made by Needham J on 8 May 2025. The parties disagreed about what that order meant. The judge accepted SMBC's construction. The order was interpreted as meaning that Flexirent would get its costs of that application only if it successfully defended the proceedings. Because Flexirent lost, it was not entitled to those costs. At the same time, SMBC was not entitled to its costs of that application either.

Taking all of those matters into account, the court fixed the recoverable percentage at 70%, not 72.6%. The final costs structure was therefore split by time and basis: 70% of SMBC's costs up to 11 am on 25 July 2025 on a party-party basis, and 70% from that time on an indemnity basis.

This judgment is a reminder that courts look closely at both documents and conduct when deciding costs. The wording of a settlement letter matters. Whether it says it will be relied on for costs matters. Whether it is made under the formal court rules matters. Whether it is inclusive of costs matters. The date it is made matters. And the surrounding commercial context matters too, including what each side knew or should have known at the time.

The same is true for mitigation. If your business spends money after a breach to reduce loss or pursue recovery, you should be able to show what was spent, why it was spent, and why the step was commercially reasonable at the time. If the mitigation strategy later produces recoveries, the court may take those into account in the damages analysis. But this case shows that the existence of likely future recoveries does not necessarily wipe out the argument for pre-judgment interest on the money already spent.

Businesses should also note the court's practical approach to costs percentages. The judge did not simply count pleading paragraphs. The court looked at where the real factual and legal effort had gone, which issues occupied most of the hearing, and which parts of the case were weak or strong. That means internal case assessment should be realistic and ongoing. If one part of a claim or defence is weak, that can affect both settlement strategy and the eventual costs outcome.

Most businesses will never run litigation of this size, but the principles are still useful. First, if another party's breach forces your business to spend money to contain the damage, recover assets, or support related recovery action, keep careful records and get advice early. The court may treat that spending as part of your recoverable loss, and this judgment shows that interest may also be available where you have been out of pocket before judgment.

Secondly, settlement strategy should be approached as a financial exercise, not just a legal one. Compare the likely judgment amount, any offsets or future recoveries, pre-judgment interest, costs already incurred, future costs, and the strengths and weaknesses of each issue. A settlement offer that looks close to the likely damages figure may still be commercially poor once costs are included. Equally, an offer that appears lower than the eventual total judgment may still have been reasonable or even attractive at the time it was made, depending on what was then known.

Thirdly, formality matters. A without prejudice offer may still be relevant, but if you want stronger costs protection you should consider whether a formal offer under the court rules is appropriate. This case shows the difference clearly. Flexirent's early informal offer was relevant but did not secure the result it wanted. SMBC's later formal offer changed the costs position decisively.

Finally, do not assume that success on the main claim means full recovery of costs. Courts can and do reduce recoverable costs where a party has mixed success across different issues. If your business is pursuing multiple claims or defences, some strong and some weak, that can affect the final costs percentage even if you are the overall winner.

The principal judgment in the proceeding was delivered on 30 January 2026. This costs judgment was delivered on 27 February 2026 by Thawley J in the Federal Court of Australia. The court entered judgment, awarded pre-judgment interest, made percentage-based costs orders, and set a timetable for costs to be determined in a lump sum if not agreed.

The court directed SMBC to provide bank account details for payment on the day of judgment. It also ordered the exchange of a Costs Summary and Costs Response, followed by short written submissions on the quantum of the lump sum costs order, with the issue to be determined on the papers unless the court ordered otherwise.

This explainer is based on the published Federal Court judgment SMBC Leasing and Finance, Inc. v Flexirent Capital Pty Ltd (Costs) [2026] FCA 182. The judgment expressly assumes familiarity with the earlier principal reasons in SMBC Leasing and Finance, Inc. v Flexirent Capital Pty Ltd [2026] FCA 29.

Because this is a costs judgment, it does not fully set out the underlying commercial facts of the contract dispute. The discussion here therefore focuses on the issues clearly decided in this ruling: pre-judgment interest on mitigation expenditure, the effect of settlement offers on costs, the percentage apportionment of costs, and the lump sum costs process.