the relevant statutory and regulatory framework
8 The Court's power to award costs is contained in s 43 of the Federal Court of Australia Act 1976 (Cth) ("the Act"). That section relevantly provides:
"(1) Subject to subsection (1A), the Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs shall not be awarded.
…
(2) Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge."
9 Order 62 of the Federal Court Rules ("the Rules") makes detailed provision in relation to costs. However, that order deals only with costs on a party and party basis, and not on a solicitor/client or indemnity basis.
10 It is clear that the Court has a wide discretion in the award of costs. It is of course a discretion which must be exercised judicially, and in accordance with well-established principles.
11 It has long been accepted that indemnity costs can properly be awarded where the circumstances of the case are such as to warrant the Court in departing from the usual course of ordering costs on a party and party basis. In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 Sheppard J said, at 233, that there should be "some special or unusual feature in the case to justify the Court in departing from the ordinary practice". His Honour went on to provide some examples of cases where it might be appropriate to award costs on an indemnity basis. Included among these examples was that of "an imprudent refusal of an offer to compromise": Messiter v Hutchinson (1987) 10 NSWLR 525 and Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724.
12 Order 23 of the Rules is headed "Offer of Compromise and Payment into Court". Its purpose is to provide a structure which encourages the parties to make and consider fair and reasonable offers to settle proceedings. It provides a means of protecting a party's position in relation to costs in circumstances where the other party has taken an unrealistic view of the merits of its case: Smith v 600 Machinery Australia Ltd [1996] FCA 1029.
13 Order 23 r 2 provides:
"2 (1) In any proceeding, a party may make to another party an offer to compromise any claim in the proceeding on the terms set out in the notice of offer.
(2) If an offer to compromise the separate claims of several parties to the proceeding is in a single notice of offer, the notice of offer must specify separately the offer made to each party."
14 Order 23 r 3 provides that an offer of compromise is made to a party by serving a notice of the offer which is prepared in accordance with O 41 and complies with other requirements as to form. Rule 5 provides that an offer may be made at any time before that prescribed by subrule 7, which is when the Court pronounces the decision or begins to give reasons for that decision. Rule 7 provides that an offer made in accordance with this order is taken to have been made without prejudice unless the notice of offer otherwise provides. Rule 8 provides that save when a notice of offer provides that the offer is not made without prejudice, no statement of the fact that an offer has been made is to be disclosed to the Court at the trial or hearing until after all questions of liability and the relief to be granted have been determined.
15 Rule 11 deals with costs. Subrule (1) is concerned with the effect of acceptance of an offer of compromise upon costs. Subrules (4), (5) and (6) are in the following terms:
"4. Further requirements of offer
(1) If:
(a) a sum of money is offered; and
(b) that sum is inclusive of the costs of the proceeding;
the notice of offer may specify the amount that is in respect of costs.
(2) If:
(a) a sum of money is offered; and
(b) that sum is inclusive of interest;
the notice of offer must specify the amount that is in respect of interest and how it is calculated.
(3) An offer to pay a sum of money is, unless a notice of offer otherwise provides, taken to be an offer to pay that sum within 28 days after acceptance of the offer.
5. Time for making or accepting offer
(1) An offer may be made at any time before the time prescribed by subrule (7) in respect of the claim to which it relates.
(2) A party may make more than one offer.
(3) An offer may be expressed to be limited as to the time that it is open to be accepted, but the time expressed must not be less than 14 days beginning on the day after it is made.
(4) An offeree may accept an offer by serving notice of acceptance in writing on the offeror before:
(a) the expiration of the time specified in accordance with subrule (3); or
(b) the time prescribed by subrule (7) in respect of the claim to which the offer relates;
which ever time is sooner.
6. Withdrawal of acceptance
(1) A party who accepts an offer may, by serving a notice of withdrawal on the offeror, withdraw the acceptance:
(a) if:
(i) the offer provides for payment of a sum of money; and
(ii) the sum is not paid to the offeree or into Court:
(A) within 28 days after the acceptance of the offer; or
(B) within such other time as the offer provides; and
(iii) the notice of withdrawal is served within 7 days after the expiration of the relevant period; or
(b) if the Court gives leave to do so.
(2) On withdrawal of an acceptance, all steps in the proceedings taken in consequence of the acceptance have effect only as the Court may direct.
(3) On withdrawal of an acceptance or on the motion for leave to withdraw an acceptance, the Court may:
(a) give directions under subrule (2); and
(b) give directions for restoring the parties as nearly as may be to their positions at the time of the acceptance; and
(c) give directions for the further conduct of the proceedings."
16 It is peculiar that none of the provisions of O 23 deal with the situation where an applicant has rejected an offer of compromise, and subsequently been entirely unsuccessful in establishing liability. That situation has, of course, arisen on many occasions. It has been dealt with, broadly speaking, in conformity with the principles which underlie O 23.
17 In Coshott v Learoyd [1999] FCA 276 it was held that the respondents were entitled to indemnity costs in circumstances where they had made an offer of compromise which had been rejected, and the applicants had been entirely unsuccessful in the proceeding. Wilcox J concluded that the applicants had been foolhardy in pressing on, and had acted unreasonably in inflicting further costs upon the respondents. His Honour held that such costs, however, were to be taxed, and were to exclude any amounts unreasonably incurred.
18 The fact that O 23 provides a detailed regime governing offers of compromise does not mean that it constitutes a code which prevents parties from being able to rely upon the principles developed at common law in relation to what are known as "Calderbank letters": Calderbank v Calderbank [1975] 3 All ER 333. A Calderbank letter (offering an amount which exceeds that ultimately awarded) can be considered by the Court in deciding whether to make an order displacing the usual order that costs follow the event, even though the mechanism under O 23 has not been followed: Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97. A party is entitled to rely upon a Calderbank letter even though it has not complied with the form required by O 23 r 3.
19 The principle is designed to impress upon the parties the need to give careful consideration to the consequences of proceeding further with their dispute: Mowie Fisheries Pty Ltd v Switzerland Insurance Australia Ltd [1996] FCA 931. Such letters constitute "such a useful and flexible weapon for litigants who want to achieve reasonable settlement" that, in the absence of express provision, it should not be inferred that the rule makers intended O 23 to operate to the exclusion of the general principles governing Calderbank offers: Henderson v Amadio Pty Ltd [1996] FCA 184 per Heerey J.
20 It should be noted, however, that the policy of promoting sensible compromise of disputes does not require that an applicant be at risk of having to pay indemnity costs merely because he has received an offer and rejected it: Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd [1998] FCA 53 and Australian Competition and Consumer Commission v Amcor Printing Papers Group Ltd [2000] FCA 163.
21 The leading authority upon the subject of Calderbank offers in this Court is Black v Tomislav Lipovac BHNF Maria Lipovac [1998] FCA 699. There a Full Court, constituted by Miles, Heerey and Madgwick JJ, said at pars [217] and [218]:
"There is a line of authority in the Federal Court supporting the proposition that the mere refusal of a Calderbank offer does not of itself warrant an order for indemnity costs and the offeror needs to show the conduct of the offeree was unreasonable. The cases are WCW Pty Ltd v Charthill Pty Ltd (Olney J, 7 July 1992, unreported), John Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 (Hill J), Sanko Steamship Co Ltd v Sumitomo Australia Ltd (Sheppard J, 7 February 1996, unreported), MGICA v Kenny (1996) 140 ALR 707 (Lindgren J), Fasold v Roberts (Sackville J, 11 September 1997, unreported). To the contrary is the decision of Rolfe J in the Supreme Court of New South Wales in Multicon Engineering Pty Ltd v Federal Airports Corporation (20 June 1996, unreported). His Honour considered that the non-acceptance of an offer more favourable to the offeree than the judgment ultimately awarded prima facie demonstrated unreasonable conduct and the offeree bore the onus of showing why indemnity costs should not be ordered.
In reality there is not a substantial difference between the two views; both accept that the reasonableness of the conduct of the offeree, viewed in the light of the circumstances which existed when the offer was rejected, is relevant to the exercise of the discretion to award indemnifying costs. To the extent there is a difference, we would prefer the by now well established line of authority in decisions of single judges of this Court. However, we would not, with respect, necessarily endorse the view of Sheppard J in Sanko that the conduct of the offeree has to be "plainly unreasonable". To adopt an especially high standard of unreasonableness would operate as a fetter on the discretion to award indemnity costs and diminish the effectiveness of the Calderbank offer as an incentive to settlement. There is in our view force in the comments of Byrne J in the Supreme Court of Victoria in Mutual Community Ltd v Lorden Holdings Pty Ltd (unreported, 28 April 1993) at 12-13:
"The policy of the Court is to encourage litigating parties to undertake genuine settlement negotiations and, for that purpose, to face up to serious offers of settlement.
The response of a litigant in receipt of an offer of settlement will always be affected by the prospect that the sum which the Court might order including party and party costs may be less advantageous than the terms of the offer. Experience, however, shows that this prospect alone is not always sufficient to compel a litigant to face up to the offer. The further prospect of a super-added costs penalty if a reasonable offer be not accepted is a salutary inducement to an offeree to undertake this often painful task."
22 In Coshott v Learoyd (supra) it had become apparent during the course of submissions that the applicants were bound to fail. The respondents then tendered a copy of an offer of compromise which had been made to the applicants in accordance with O 23. The offer was said to be open for acceptance for 21 days from the date it was made. It offered the applicants "the sum of $500 plus costs in settlement of all causes of action pleaded in these proceedings". The offer had not been accepted. The respondents sought an order that the costs incurred after the date stipulated for acceptance be taxed on an indemnity basis.
23 Wilcox J observed at par [37]:
"Order 23 of the Rules covers offers of compromise by any party to any other party: see rule 2. The offer made in this case complied with the formal requirements of rule 3. Rule 11 sets out provisions concerning costs. Where an applicant makes an offer which is not accepted by the respondent and the applicant obtains a judgment not less favourable than the terms of the offer, the applicant is prima facie entitled to have costs on an indemnity basis as from the date of the offer. Where a respondent makes an offer that is not accepted and the applicant obtains a judgment not more favourable than the terms of the offer, the applicant is prima facie entitled to party-party costs until the day after the offer and the respondent to party-party costs thereafter. However, rule 11 does not cover the situation that occurred in this case, where a respondent's offer is rejected and the applicant is wholly unsuccessful. Apparently the situation is similar under the equivalent rule of the New South Wales Supreme Court. The omission was pointed out, and deprecated, by Rolfe J in Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425. Nonetheless, Rolfe J awarded the defendant costs on an indemnity basis as from the date of rejection by the plaintiff of an offer of compromise made by the defendant."
24 His Honour then discussed a number of the relevant authorities, some of which have been referred to earlier in this judgment. He referred to the difference between the approach taken by Rolfe J in Multicon Engineering Pty Ltd v Federal Airports Corporation (supra), and that taken by the Full Court in Black v Lipovac. He continued at pars [47]-[49]:
"Where an offer is made pursuant to Order 23, with the safeguards to the offeree that are thereby imported, it seems to me its non-acceptance should be given considerable weight; otherwise, there is not much point in offerors using the Order. And the purpose of the Order is a salutary one; it is to enable a party to "raise the stakes" in the litigation, and thereby encourage the opposing party to give more anxious consideration to the desirability of a settlement. This was the point made by the Full Court in Black, in adopting the comments of Byrne J in Mutual Community Ltd v Lorden Holdings Pty Ltd and rejecting the standard "plainly unreasonable".
As Black itself demonstrates, it does not follow that non-acceptance of a Calderbank offer (or even an Order 23 offer) must lead to an order for indemnity costs; the Court must still consider the whole of the circumstances. However, whether or not it is correct to talk about a "prima facie presumption", non-acceptance of an Order 23 offer should at least be regarded as providing to the offeror a good start in the task of persuading the Court to award more than party-party costs.
The offer made in the present case was for a nominal amount; … it can hardly be described as "extremely favourable" to the applicants. Nonetheless, the offer involved payment by the respondents of the applicants' costs incurred to that date, which would have included the fees paid to its expert witnesses. The hearing was imminent. And, as a direction had been made for the evidence in chief of all parties to be in affidavit form, and all affidavits had then been filed and served, the applicants were in a position to assess the strength of their case against the respondents. By the terms of the offer they had three weeks to make that assessment."