AAI Limited trading as Vero Insurance v Technology Swiss Pty Ltd

1. There be no order as to costs of the appeal and cross-appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THE COURT: 1 The remaining issue in this appeal is costs. 2 In AAI Limited trading as Vero Insurance v Technology Swiss Pty Ltd [2021] FCAFC 168 we explained why Vero's (the insurer's) appeal and TS's (the insured's) cross-appeal against the orders made by the primary judge consequential on his Honour's reasons in Technology Swiss Pty Ltd v AAI Limited trading as Vero Insurance [2021] FCA 95 had to be dismissed. 3 In circumstances where both the appeal and cross-appeal were dismissed it might be thought that the parties could agree that each party should bear its own costs of the appeal and cross-appeal. The subject-matter of the appeal and cross-appeal might also be thought to reinforce this proposition. Vero had claimed a right of recoupment of the entire sum it had paid TS, being $425,000. TS had claimed Vero had no right of recoupment beyond the agreed amount of $200,000 which TS accepted that Vero had paid by way of indemnity under the contract of insurance. The primary judge rejected the claims of both parties and required TS to pay to Vero in accordance with Vero's right of recoupment $116,770.06 and the undisputed amount of $200,000 (a total of $316,770.06 from the total of $425,000). Vero appealed claiming a right of recoupment in respect of the entire sum of $425,000 (including the undisputed amount of $200,000). TS cross-appealed claiming Vero had no right of indemnity beyond the agreed sum of $200,000. 4 We concluded that the primary judge had identified the correct legal principle to be applied in a case of payment of a single sum in respect of a range of matters including, under the terms of the deed of settlement, "in full and final settlement of the Insurance Claim". The principle is that the insurer's right of recoupment applies to that part of the payment which, by reference to the objectively determined mutual intention of the insurer and insured, is (or was) in substance (if not in form) a payment under the contract of insurance to reduce the insured's loss. We also concluded that the primary judge had correctly applied this principle he had derived from the authorities to identify the sum of $116,770.06 (in addition to the undisputed sum of $200,000) as having been paid by Vero under the contract of insurance to reduce TS's loss. 5 Vero accepted that in these circumstances each party should pay its own costs of the appeal and cross-appeal. TS did not. TS contended that by reason of an offer of compromise made on 6 and 7 July 2021, Vero should pay TS's costs up to 7 July 2021 on the usual basis and thereafter on an indemnity basis. TS contended, in the alternative, that because it "had significantly greater commercial success" than Vero and having regard to "the relative significance of the issues" in the appeal and cross-appeal, Vero should pay 30% of TS's costs of the appeal and cross-appeal. 6 We reject both of TS's contentions. 7 We do not accept that the offer was made by TS under r 25.14(1) of the Federal Court Rules 2011 (Cth) (the Rules). 8 Rule 25.14(1) applies to an offer made by a respondent to an applicant. While TS made the offer in its capacity as a respondent to Vero's appeal, it also made its offer in its capacity as an applicant in its cross-appeal. Further, the appeal and cross-appeal were substantively indivisible. In substance, the disputed component of the $425,000 amounted to $225,000 (as $200,000 was agreed to have been paid by Vero by way of indemnity under the contract of insurance and was thus subject to Vero's right of recoupment). Of this $225,000, the primary judge had found that Vero was entitled to a payment by way of recoupment in the sum of $116,770.06. In the appeal and cross-appeal Vero and TS each claimed a right to the full $225,000 in dispute. In these circumstances the offer was made by TS as much in its capacity as an applicant in its cross-appeal as a respondent to Vero's appeal. Rule 25.14(2) applies to an offer made by a respondent. Unlike r 25.14(1), the consequence of an indemnity costs order as a result of a failure to accept an offer applies under r 25.14(2) only if "an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed". It follows that there is no proper basis upon which to treat TS's offer as if it were made under r 25.14(1) as opposed to r 25.14(2). 9 In any event, the offer made on 6 July 2021 was ambiguous in its terms. The offer was for TS to pay to Vero $25,000 including interest and costs. In response to a query about the meaning of the offer, TS's solicitors clarified on 7 July 2021 that the offer was for TS to pay to Vero $25,000 in addition to the sum of $316,770.06 the primary judge had found to be payable by Vero to TS. The offer was made on the basis that the appeal and cross-appeal be dismissed with no order as to costs, and the orders and declarations made by the primary judge (including the costs orders below) not be disturbed. 10 Given this, the communications of 6 and 7 July 2021 were not an offer of compromise in accordance with Pt 25 of the Rules. It follows that the applicable principles are that: (a) indemnity costs do not follow the non-acceptance of the offer as a matter of course as a result of the dismissal of Vero's appeal, (b) TS must show that non-acceptance of the offer was imprudent or plainly unreasonable, and (c) relevant factors will include whether the offer was reasonable and included the offeror's reasons that the offeree's case would fail: Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 at [6]-[9]. 11 TS's offer does not satisfy any of these requirements. TS's submissions to the contrary fail to recognise that: (a) the reasoning of the primary judge represented an important development and extension of existing principles concerning an insurer's right of recoupment, (b) it was not imprudent or unreasonable for Vero to not accept TS's offer in circumstances where there was no clear authority dictating the outcome, (c) it could not be said that TS's cross-appeal had any greater inherent merit than Vero's appeal, (d) TS failed in its cross-appeal, just as Vero failed in its appeal, and (e) on the terms of the offer Vero would receive $25,000 out of the $108,229.94 (that is, the disputed $225,000 less the amount of $116,770.06) and TS would retain $83,229.94, but Vero would remain liable for TS's costs (including costs on an indemnity basis from 8 August 2020) under the orders made by the primary judge. In contrast, if Vero succeeded in its appeal, it would receive the whole $425,000 (the disputed amount of $225,000 and the undisputed amount of $200,000) and the costs orders of the primary judge would likely be reversed so TS would pay Vero's costs of the proceeding below. 12 These considerations weigh against the making of any order for indemnity costs as a result of TS's offer as clarified. 13 As Vero otherwise submitted, the issues in both the appeal and cross-appeal were inherently intermingled, representing different approaches for disturbing the same findings and orders of the primary judge. There is no merit in TS's proposed approach leading to an entirely arbitrary award of costs in its favour as to 30% of the total costs of the appeal and cross-appeal. 14 Rather, there should be no order as to costs of the appeal and cross-appeal. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Perram, Jagot and Derrington.