Christofidellis v Zdrilic

The settlement negotiations between the applicants and the second and third respondents

4 Evidence of offers of settlement made by the parties in these proceedings is admissible on this application by virtue of section 131(2)(h) of the Evidence Act 1995 (Cth). 5 The first offer to settle the proceedings was made to the applicants' solicitors by the solicitors for the second and third respondents (the respondents) under cover of their letter of 13 May 1997. This offer was on terms that judgment be entered in favour of the respondents, with the applicants to contribute $22,500 towards their costs. It was also expressed to be "subject to and conditional upon Mr and Mrs Zdrilic (the first respondents) agreeing to the dismissal of the second Cross-Claim against our clients on the basis that there be no order as to costs". The letter concluded with advice that "unless the offer is accepted within 14 days of the date of this letter, if the matter proceeds, our client will be seeking, at the hearing, costs on an indemnity basis from the date of the letter". 6 On 18 July 1997, the applicants' solicitors wrote to the respondents' solicitors offering to settle the proceedings on a different basis. The precise terms of that offer are not clear on the material before the Court, but the fact of its existence is clear from the subsequent rejection of the offer by the respondents' solicitors. That rejection was contained in their facsimile of 18 July 1997 in which their earlier offer of settlement was also repeated, but for one material difference relating to the settlement of the first respondents' cross claim. In this respect, the respondents' solicitors wrote: … our client (sic) would be prepared to resolve that matter on the basis that judgment be entered in their favour on the cross claim with no order as to costs but subject to your client's agreement [to settle the claim against the first respondents]. 7 This offer was only open for acceptance until 5 pm on the day it was made. It is not clear on the material before the Court at what time the facsimile was sent or received. 8 On 19 July 1997 the solicitors for the parties had a discussion regarding the settlement of the proceedings. In the course of this discussion an offer was made on behalf of the respondents that they were prepared to settle the proceedings on the basis that there be a verdict in their favour with no order as to costs. The applicants rejected this offer in a letter dated and faxed on the morning of 21 July 1997 which also contained an offer that the proceedings be settled on the basis that judgment be entered in their favour in the sum of $50,000 with no order as to costs. This "all inclusive" offer, to adopt the phrase used in the letter, was open for acceptance until 9 am on Wednesday 23 July 1997. 9 Under cover of their solicitor's letter of 22 July 1997, the respondents rejected this offer and repeated their offer to settle the proceedings on the basis that the applicants' claim be dismissed with all parties to bear their own costs, subject to and conditional upon the first respondents agreeing to the dismissal of their cross claim with no order as to costs. Subsequent correspondence between the parties indicates that the offer was open until 5pm on 23 July 1997. A copy of this letter was provided in a sealed envelope to the New South Wales District Registrar of the Court on 25 July 1997, pursuant to a direction conveyed to the parties under cover of my Associate's letter of 8 July 1997. 10 As referred to previously, the first day of the hearing of these proceedings took place on 28 July 1997. Their prior offers of settlement having either been expressly rejected or expiring without acceptance, the respondents made a further offer of settlement in open court that the application be dismissed with no order as to costs. The material difference in this offer was that it not expressed to be subject to settlement of the first respondents' cross claim. This offer expired at 2.15 pm on that same day, having not been accepted by the applicants. The same offer was again made in open court on 30 July 1997, the third day of the hearing. That offer expired at noon that day without acceptance.

The parties' submissions on the awarding of costs 11 The respondents made three submissions in support of their application for indemnity costs. The first was premised on an assertion that the ultimate result of the proceedings was better for them, and worse for the applicants, than would have been the case if the applicants had accepted any of their seven offers of settlement. The respondents submitted that they are therefore prima facie entitled to indemnity costs. Whether such a rebuttable presumption exists depends on this Court's acceptance of the view expressed by Rolfe J in Multicon Engineering Pty Limited v Federal Airports Corporation (1996) 138 ALR 425. That view has not previously carried much force with members of this Court: see, for example, MGICA (1992) Pty Limited v Kenny & Good Pty Limited (1996) 70 FCR 236 at 240, although, with respect, I think that it has attractions, especially for the public interest. Alternatively, the respondents submitted that the various offers of settlement, given the ultimate result of the litigation, are at least relevant to determining their application for indemnity costs. Reference was made to the cases of John S Hayes & Associates Pty Limited v Kimberley-Clark Australia Pty Limited (1994) 52 FCR 201; Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, Federal Court, Sheppard J, 7 February 1996); and MGICA (1992), in support of this alternative. 12 The respondents' second submission was that the applicants' case suffered from manifest weaknesses of such an order that, properly advised, they should have known that they had no chance of success. That being the case, the respondents submitted that it is proper to consider the awarding of indemnity costs against the applicants. The judgment of Woodward J in Fountain Selected Meats (Sales) Pty Limited v International Produce Merchants Pty Limited (1988) 81 ALR 397 was relied upon as authority in this respect. 13 The respondents' final submission was that, given the manifest weaknesses in the applicants' case, the settlement offers and the ultimate result of the proceedings, it was so unreasonable and imprudent of the applicants not to have agreed to a settlement that an award for indemnity costs is justified in the circumstances of this case. 14 The applicants made five submissions as to why the respondents should not be awarded indemnity costs. The first was that the first two offers of settlement were incapable of acceptance as they were subject to a condition that the first respondents' cross-claim be dismissed, a matter over which the applicants had no control and was accordingly unreasonable. The second submission was that the subsequent offers, made in the week prior to the hearing date and on days one and three of the hearing, demonstrated no real compromise on the state of the pleadings and evidence. Further, the applicants submitted, the short time period for which these offers were open to be accepted demonstrates that the offers were not reasonable. That this period was in fact less than the 14 day period prescribed by Order 23 of the Federal Court Rules was offered in support of this submission. In any event, the applicants submitted that the offers put on behalf of the respondents cannot properly form a basis for an application for indemnity costs as the respondents failed to disclose reasons for their view that the application had no merit. 15 The applicants' final submission was that their case as propounded was not weak, but rather that it was unsuccessful because of the way the evidence fell out in cross-examination. That the evidence and submissions of the respondents were ultimately accepted did not, the applicants contended, demonstrate that the proceedings had no chance of success, were plainly unreasonable or were deliberately mischievous, as could potentially justify the making of an order for indemnity costs. 16 The respondents made five further submissions in reply to the applicants' criticisms of their offers of settlement. The first was that the condition placed on the offer became irrelevant once the applicants reached a settlement in principle of their claims against the first respondents on 22 July 1997, which would in turn lead to the first respondents dropping their cross claim against the respondents. The second submission was that the respondents were under no obligation to give reasons for their view that the applicants' case would fail. They submitted that their reasons were, in any case, given to the applicants in their outline of submissions served on them on 24 July 1997 and orally by their counsel at the commencement of the hearing on 28 July 1997. The respondents contended that this provision of their reasons enhances their prospects of being awarded indemnity costs, reference being made in this regard to the recent decision of Wood CJ at CL in Hetherington v Mirvac Pty Limited [1999] NSWSC 515. The respondents also replied that in any event, the fact that the applicants were found to have tried to positively mislead the Court meant that the applicants should have known, even without the respondents' reasons, that their case was doomed to fail. 17 The respondents' final submission in reply, relating to the applicants' criticism that Order 23 of the Federal Court Rules was not complied with, was that no earlier complaint as to the form or period for which the offers were open had been made and, as such, the criticism was misplaced. 18 The questions that arise from these submissions require the identification of the principles that govern the awarding of indemnity costs against unsuccessful applicants, and whether the application of those principles to this case justify the awarding of such costs.

19 Section 43 of the Federal Court of Australia Act 1976 (Cth) (the Act) provides this Court with jurisdiction to award costs in proceedings conducted before it. It is often said that section 23 may also grant the Court the same jurisdiction:see, for example, the comments of Sheppard J in Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 228; Hill J in John S Hayes at 202; and Lindgren J in MGICA (1992) at 238. Whatever be the status of section 23 on this issue, the express terms of section 43 clearly provide the Court with jurisdiction to award indemnity costs. This section 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. (1A) In a representative proceeding commenced under Part IVA or a proceeding of a representative character commenced under any other Act that authorises the commencement of a proceeding of that character, the Court or Judge may not award costs against a person on whose behalf the proceeding has been commenced (other than a party to the proceeding who is representing such a person) except as authorised by: (a) in the case of a representative proceeding commenced under Part IVA - section 33Q or 33R; or (b) in the case of a proceeding of a representative character commenced under another Act - any provision in that Act. (2) Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge. 20 Order 62 of the Federal Court Rules (the Rules), headed COSTS, is not of assistance in deciding this application. Order 23 of the Rules, headed OFFER OF COMPROMISE AND PAYMENT INTO COURT, relates in part to the awarding of costs in proceedings where offers of compromise have been made and not accepted: see sub-rules 11(4) and 11(5). However, Order 23 of the Rules does not expressly provide for a case in which an applicant rejects an offer made by a respondent but the applicant's claims subsequently fails. 21 In any event, the offers of settlement in this case do not meet the formal and temporal requirements of offers of compromise as prescribed by Order 23. In particular, they did not comply with the form prescribed by Order 41, nor were they expressed to be open for a 14 day period: see rules 3 and 5 of Order 23. The failure to comply with the threshold provisions of Order 23 prevents the applicability of those rules to the awarding of costs in these proceedings.

22 In Re Sanchez; Ex parte Smits & Anor (1994) 49 FCR 326 I concluded that the effect of section 43 of the Act was that the "usual rule" that the successful party will receive an order for costs was replaced by a statutory regime which leaves the matter in the unfettered discretion of each Court to be exercised judicially in light of all the circumstances of the particular case. The silence of the Act and the Rules on the awarding of costs in proceedings that a respondent has successfully defended has led members of this Court to consider how that judicial discretion ought to be exercised in such a case. In my opinion, the two recent decisions of a Full Court of this Court in Re Wilcox; Ex parte v Venture Industries Pty Ltd (1996) 141 ALR 727 (Black CJ, Cooper and Merkel JJ) and Abbott v Random House Australia Pty Ltd [1999] FCA 1540 (Beaumont, Miles and Drummond JJ)have settled this question. In this respect, the following extract of the judgment in Re Wilcox (at page 732-3) was quoted with approval in Abbott: In order to exercise the discretion [to award indemnity costs] judicially the following principles have been accepted by the court as applicable: (a) the court ought not to depart from the rule that costs be ordered on a party and party basis unless the circumstances of the case warrant the court in departing from the usual course; (b) the circumstances which may warrant departure from the usual course arise as and when the justice of the case so requires or where there may be some special or unusual feature in the case to justify the court in departing from the usual course; (c) while the circumstances in cases in which indemnity costs have been ordered offer a guide, the question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for costs other than on a party and party basis. 23 In MGICA (1992), Lindgren J examined the authorities Multicon Engineering, John S Hayes and Sanko Steamship regarding the effect of unaccepted offers of settlement on the awarding of costs. The respondents have placed some reliance in their submissions on each of these four cases. Having examined the authorities, Lindgren J expressed his preference for the conclusions reached by Hill J in John S Hayes and Sheppard J in Sanko Steamship over that reached by Rolfe J in Multicon Engineering. The result is that there are now at least these three single judge decisions in this Court that conflict with the presumption said to arise in Multicon Engineering. Further, these three authorities suggest that an order for indemnity costs is only appropriate in a case where an offer of settlement has been rejected in circumstances that made the further litigation of the proceedings plainly unreasonable. To adopt this approach will provide a useful yardstick by which the question prompted by Re Wilcox and Abbott can be answered here, viz. whether the particular facts and circumstances of this case warrant the making of an order for costs other than on a party and party basis. See also Marks v GIO Holdings Ltd (1996) 66 FCR 128. 24 In John S Hayes, Hill J provided what was intended to be, and I believe is, an accurate summary of the principles first crystallised from the authorities by Sheppard J in Colgate Palmolive. The following passage of the judgment of Hill J (page 203) sets out the kind of circumstances that have in the past and can be expected in the future to result in the awarding of indemnity costs in accordance with the principle that was pronounced in John S Hayes, Sanko Steamship and MGICA (1992): So indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying the Court exercising its discretion in that way. Certain circumstances have been thought appropriate to the grant of discretion to order indemnity costs. For example, proceedings constituting abuse of process of the Court brought for some collateral purpose, fall within this category: Packer v Meagher [1984] 3 NSWLR 486. Thus in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, Woodward J said (at 401): "I believe that it is appropriate to consider awarding 'solicitor and client' or 'indemnity costs' whenever it appears that an action had been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard for the known facts or the clearly established law. Such cases are fortunately rare. But when they occur, the Court will need to consider how it should exercise its unfettered discretion." Nevertheless care must be taken not to circumscribe the discretion by reference to closed categories. It is not a necessary condition of the power to award costs that a collateral purpose be shown. The categories warranting the exercise of the discretion are not closed: Colgate Palmolive at 223; Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd (unreported, Federal Court, 3 May 1991) per French J at p 8; Ragata Developments Pty Ltd v Westpac Banking Corporation (unreported, Federal Court, 5 March 1993) per Davies J at p 6. In each case it will be necessary to look at the particular facts and circumstances to see whether an exercise of discretion to order costs on an indemnity basis is warranted. 25 The effect of this case law is that the respondents are only entitled to an order for costs on an indemnity basis if the applicant's failure to accept one of their offers was so unreasonable in all of the circumstances of this case that an order for costs on a party and party basis will not do them justice.

26 The circumstances relied on here are the purported manifest weaknesses of the applicants' case and their perception that the judgment concluded the proceedings on more favourable terms for them than would any of the prior offers of settlement. 27 I share the respondents' assessment that the proceedings would have ended more favourably for the applicants, had they accepted any of respondents' offers of settlement, than occurred in the judgment. In this respect, there can be no doubt that the quantum of party/ party costs in these proceedings would far exceed the $22,500 contribution sought in the respondents' first offer of settlement on 13 May 1997. That the proceedings commenced in 1995 and concluded with a hearing that took nine days in mid-1997 makes such a finding inevitable. I also agree with the respondents' contention that the applicants' case suffered from manifest weaknesses. So much is apparent from the judgment, particularly my finding that the applicants cannot have relied on any representations by the respondent as to the dimensions of the property. As such reliance was a necessary element of the claim, the applicants' claim was always destined to fail. This inevitability strongly supports the making of an order for costs on an indemnity basis in favour of the respondents. 28 In addition, the finding made in the judgment regarding the lack of credibility of the applicants as witnesses is also of relevance, as is the condition placed on a number of the respondents' offers of settlement that the offer was subject to the settlement of the first respondents' cross claim against them. These two relevant considerations and a number of other circumstances relied upon by the applicants as bases for which the indemnity costs order should not be made require a little further discussion. 29 The effect of my adverse finding on the credibility of the applicants as witnesses was that I had no satisfactory evidence on which to conclude that the representations allegedly made by the respondents regarding the property were in fact made. It was this finding rather than any manifest weaknesses in the applicants' case that ultimately determined these proceedings. I agree with the submission made on behalf of the applicants that such a finding would not by itself or in the ordinary course of events justify an order for indemnity costs. However, the fact that these proceedings were destined to fail regardless of the applicants' credibility as witnesses suggests that this case is not of the class contended for by the applicants. Furthermore, it weighs heavily in support of my making the order sought by the respondents. 30 Identifying the relevance of the conditions put by the respondents on their offers of settlement made on 13 May, 18 July and 22 July 1997, by which the offers were made subject to the settlement of the first respondents' cross claim, is a matter of some importance in determining this application. However, the submission made on behalf of the applicants that the inclusion of such a condition made the offers unreasonable is fundamentally flawed. The applicants are of course correct to point out that they did not exercise any control over whether the first respondents would agree to the settlement of their cross claim on the terms suggested by these respondents. Where the applicants are in my view mistaken is in their implicit suggestion that the respondents' offers were not capable of acceptance merely by virtue of the inclusion of such a condition. It was open to the applicants to agree to the terms in any of these three offers of settlement with the performance and enforcement of any such agreement merely subject to the condition precedent that the first respondents' cross claim be settled as suggested. Accordingly, the inclusion of this condition did not render these three offers nugatory and the offers remain a relevant circumstance to have regard to on this application. That being the case, the terms of the offers of settlement, when considered in light of the weakness of the applicants' case and the ultimate result of the proceedings, provide further support for the making of the order sought in this application. 31 The applicants' reliance on the respondents' failure to provide express reasons for their repeated assertion that the applicants' case was manifestly weak can be dismissed out of hand. The effect of what the applicants say in this respect is that the respondents should only be entitled to an order for indemnity costs if they had provided further particulars of their assertions about the applicants' claim at the time they made their offers of settlement. I disagree. Settlement negotiations are not to be encouraged as a procedure for the parties to require further information from one another. There are enough such processes already in the contemporary litigator's arsenal. There is a major public interest in settlement of litigation. This interest cannot be converted into a forensic exercise in itself. 32 The applicants' contention that the offers demonstrated no real compromise is also erroneous and unhelpful. It is erroneous because the respondents removed from the offer a provision which would have seen the applicants contribute $22,5000 towards their costs. It is unhelpful because it belies the fact that the respondents could not have made an offer on better terms without sacrificing their right to the judgment they believed was supported by the state of the evidence and the pleadings as they then were. 33 The final contention of the applicants, regarding the time period for which the offers were open, carries some relevance to the determination of this application. In this regard, the applicants are quite right in their submission that offers of settlement made so as only to be open for acceptance for very short periods of time might be so unreasonable as not to properly form the basis of an order of the kind sought here. Even so, the first offer of settlement was open for acceptance for a full two weeks. The shorter time periods in respect of the subsequent offers reflected the closeness of the commencement of proceedings. In those time periods, the costs of the preparation for the hearing would have also been growing in a manner inversely proportional to the period for which each offer was left open. So much is to be expected in the ordinary course of litigation. Furthermore, to accede to the applicants' contention on this point would effectively punish the respondents for employing their best efforts to settle these proceedings in a manner that would, and was intended to, have saved costs. It would also send a message to litigants that this Court encourages parties to employ their best efforts to settle proceedings, but those best efforts should stop two weeks before hearing, because any efforts in those two weeks could not be objectively viewed as reasonable. I am keen to avoid sending any such message.

Conclusion 34 On balance, in my opinion, the circumstances of this case support an order that the applicants should pay the respondents' costs on an indemnity basis from 27 May 1997, the day after the expiry of their first offer of settlement. It is my opinion that the applicants' rejection of that offer was plainly unreasonable, and greatly contributed to the costliness of the proceedings without any serious likelihood that their claim would succeed. 35 I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Einfeld AO.

Associate: Dated: 24 May 2000 Counsel for the Applicants: Mr M. Cranitch SC, Mr P. Taylor and Mr A. Gruzman

Solicitor for the Applicants: GELLS Solicitors

Counsel for the Second and Third Respondents: Mr R. Angyal

Solicitor for the Second and Third Respondents: Holman Webb

Date of Hearing: 28, 29, 30 & 31 July 1997 1, 4 & 5 August 1997 7 & 8 October 1997

Written Submissions completed: 28 January 2000

Date of Judgment: 24 May 2000