CH2M Hill v State of NSW

Supreme Court of NSW|2012-11-08|Before: McDougall J

Judgment 1HIS HONOUR: The plaintiff (CH2M) sued the State of New South Wales to recover damages for what it said was breach of contract on the part of the former Department of Commerce (DOC). Under that contract, DOC undertook to provide design services for earthen lagoons that formed part of an upgrade of a sewage treatment plant. 2On 24 August 2012, I gave judgment dismissing the claim: CH2M Hill v State of NSW [2012] NSWSC 963. I ordered CH2M to pay the State's costs, and reserved liberty to apply for some different or special costs order. Pursuant to that liberty, the State moves for an order that its costs be paid, from one of various dates, on the indemnity basis.

3On 21 June 2011, the State served an offer of compromise pursuant to UCPR r 20.26. That offer was open for some 28 days. By it, the State offered to compromise CH2M's claim on the basis that there be verdict and judgment for the State, with each party to bear its own costs. There was no response to that offer of compromise. 4On 13 June 2012, the State made a "Calderbank" offer (Calderbank v Calderbank [1975] 3 All ER 333). By that offer, the State offered to pay $3 million inclusive of interests and costs, effectively in full satisfaction of CH2M's claim. That offer was rejected. It may be noted that, as at 13 June 2012, the proceedings had been fixed for hearing (to commence on 3 July 2012, with an estimate of some six weeks), and had been subject to intensive case management. 5On 26 June 2012, the State served another offer of compromise pursuant to r 20.26. By that offer, the State offered to compromise the proceedings on the basis that it pay $3 million within 28 days of acceptance of the offer. The offer was said to be open for acceptance for some 7 days. Since there was no stipulation as to costs, it follows that the offer was made on the basis that the State would also pay CH2M's costs (on the ordinary basis). The offer was rejected. 6On 4 July 2012, (the day after the hearing had commenced), the State made a further offer of compromise pursuant to r 20.26. The State offered to compromise CH2M's claim by the payment of $3,500,000.00, again with 28 days of receipt of acceptance. The offer was said to be open for acceptance for 5 days. Again, by implication, it was made on the basis that, in addition, the State would pay CH2M's costs. 7Each of the third and fourth offers (that is, those served on 26 June and 4 July 2012) was accompanied by a letter which said in substance that the offer was to be treated also as a Calderbank offer. 8The third offer was expressly rejected. There was no reply to the fourth offer.

The parties' contentions 9The State's primary position is that costs on the indemnity basis should follow from: (1) CH2M's failure to accept the first offer of compromise (that served on 21 June 2011); and (2) the fact that the outcome of the proceedings was "as favourable, if not more favourable, to [the State] than the terms of" that offer (written submissions on costs, 28 September 2012). 10The State submits that "[t]here was a distinct and identifiable element of compromise". That submission was put on the basis that at the time the offer was made, the proceedings had been afoot for about 18 months, and the State had incurred considerable costs in discovery and in the preparation of its extensive evidence (in response to the extensive evidence in chief of CH2M). 11There is no quantification of the costs incurred by the State at that point. However, I have no doubt that they were substantial. Not only was each side's evidence extensive; the volume of documents discovered (and, no doubt, inspected) by each was massive. 12CH2M submits that the first offer did not involve "a real and genuine element of compromise" (written submissions on costs dated 5 October 2012, citing The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No.2) (2006) 67 NSWLR 706 at [8]). 13CH2M submitted, further, that: (1) there had been a significant change in the case between the time when the first offer was made and the commencement of the hearing; (2) it was appropriate to take into account what was said to be the complexity of the issues; and (3) it was also relevant to take into account the context in which the offer was made and the time limited for its acceptance.

14I do not propose to recount the evidentiary material on which those submissions were based or the detail with which they were elaborated. It is sufficient to note that, by the time the first offer was made, the parties' evidence in chief was complete. Each party was commercially sophisticated, and had available to it legal and technical advice of the highest quality. Each party was well capable of assessing the evidence (both its own and that of the other party), and understanding what were the real issues. Each party was in a position to make an informed decision as to how those issues might be resolved. 15I accept that the expert evidence in particular developed a life of its own, as the principal experts undertook a series of investigations and experiments in an attempt to find support for their conclusions. I accept, further, that in the case of the two experts who dealt with geosynthetic clay liners (a key issue in the case): (1) the experts were world leaders in their respective fields; and (2) those experts collaborated, in an exemplary way, in the exchange of information and ideas. 16None of that changes the fact that CH2M's case was, in my view, fundamentally flawed. In substance, CH2M sought to deflect onto the State responsibility for failures in the lagoons, which failures, I concluded, were caused principally by defects in construction for which CH2M (or the joint venture of which it was then part) was responsible. 17This is not a case in that any way resembles the one I considered in Ballard v Multiplex [2012] NSWSC 825, where, for an ill resourced litigant to give proper consideration to an offer of compromise, it would have been necessary for him to direct his attention and his meagre resources from preparation of his case. 18To my mind, the submissions put on this point by CH2M do no more than seek to divert attention from the real reason why its claim failed. Its claim did not fail because some technical dispute of unimaginable complexity was resolved only through an intensive process of collaboration and concurrent evidence. Rather, as I have indicated, it failed because CH2M refused to acknowledge that the real cause of the collapse was the defective work undertaken by it and its joint venture partner, not the result of design deficiencies. 19In my view, that particular issue was obvious at the time the first offer of compromise was made. It was not an issue which was significantly advanced, or in respect of which either party's case significantly changed, thereafter. On the contrary, it was an issue in respect of which both the State's defence and my conclusions found detailed - indeed convincing - support in the joint venture's own documents. Those documents recorded the investigations undertaken by the joint venture. The conclusions, as to defects in workmanship and the significance of the defects as causes of the failure of the lagoon walls, were damning. 20Thus, unless it be correct to say that there was no significant element of compromise offered by the first offer of compromise, the consequence of its non-acceptance must be that costs are payable on the indemnity basis from the date the first offer of compromise was made. 21To my mind, there was a real element of compromise. Each party must have incurred very substantial costs by the time the offer was made. By making the offer in the terms that it did, the State gave up the opportunity to recover its costs (at least, so much as might be allowed on assessment) from CH2M in the event (which has happened) that the proceedings were resolved in its favour. Although, as I have said, the amount of costs incurred by the State at the time the offer was made has not been quantified, it is apparent, from the range and volume of its evidence in chief (and from the range and volume of discovery) that those costs must have amounted to many hundreds of thousands of dollars. 22Although I do not rely on it as a dispositive factor, I note that CH2M did not reply to the offer, and did not offer any evidence of its reasons for failing to reply (or, for that matter, of its reasons for failing to accept the offer). 23The failure to reply may be contrasted with the next two offers, where at least CH2M's solicitors replied expressing brief (although in my view misguided) reasons why their client was not inclined to accept the offer. It is open to infer that, in those cases, CH2M had given some consideration to the terms of the offer. The absence of any reply to the first offer, considered in that context, is capable of leading to the inference that it did not give any real consideration to the first offer. 24In the circumstances, I see no reason to "otherwise order", so as to deflect the costs consequences of non-acceptance of the first offer (see UCPR r 42.15A).

25Accordingly, I order that the costs ordered to be paid by the plaintiff to the defendant be assessed on the ordinary basis up until 21 June 2011, and on the indemnity basis on and from that date. I order that the costs so payable include the costs of this application.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 November 2012

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