Costs
35 It became apparent during the course of submissions that the applicants were bound to fail. The respondents then tendered a copy of an offer of compromise made to the applicants on 29 December 1998. This offer was made jointly by all respondents and pursuant to Order 23 of the Federal Court Rules. It was open for acceptance for 21 days from the date it was made; that is, until 19 January 1999. The respondents offered the applicants "the sum of $500.00 plus costs in settlement of all causes of action pleaded in these proceedings".
36 The offer was not accepted by 19 January, or at all, and the trial commenced on 1 February 1999. Under these circumstances, the respondents seek that the costs incurred after 19 January be taxed or assessed on an indemnity basis.
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.
38 In considering the appropriate costs order in Multicon, Rolfe J discussed two cases in this Court in which judges declined to award costs on an indemnity basis because they were not prepared to categorise the rejection of the offer as unreasonable. These cases were John S Hayes & Associates Pty Limited v Kimberley-Clark Australia Pty Limited (1994) 52 FCR 201, a decision of Hill J, and Sanko Steamship Co Ltd v Sumitomo Australia Ltd (Sheppard J, 7 February 1996, unreported). Order 23 did not apply to either case; on each occasion the issue was discussed in terms of the reasonableness of the offeree's conduct in rejecting the offer and proceeding with the litigation.
39 An earlier Federal Court case is Donnelly v Edelstein (1994) 49 FCR 384. In that case a Full Court (Neaves, Ryan and Lee JJ) awarded a party its costs on an indemnity basis as from a date, during the course of the trial, at which the Full Court held the offeree "had had ample time to assess the strength of the case against [the offeror] and involved an offer that was extremely favourable to the [offeree]".
40 In Multicon Rolfe J acknowledged it would be inappropriate to propound any fixed rule; determination of the proper costs order involves the exercise of a judicial discretion in relation to which it is necessary to take into account all relevant circumstances. However, he criticised the confining of indemnity costs orders to cases where the conduct of the offeree was "plainly unreasonable". His Honour said at 449-450:
"In my opinion it is more consonant with attempting to achieve a settlement that if the negotiations break down or if a party wishes to press more strongly for a settlement, a party should be entitled to strengthen its position by making the offer of settlement, which will require the party to whom the offer is made to make a reasonable and sensible assessment of its position in the light of the offer and the consequence that if it is not bettered there is a real prospect that costs on an indemnity basis will be ordered. There seems to be a suggestion that the party to which the offer is made is under some greater disadvantage in assessing the position than the party making the offer. However, generally speaking, both parties must be aware of the uncertainties of the determination of legal and factual issues and the party making the offer grapples with those uncertainties because, once the offer is made, it may well be accepted. If the offering party can undertake that assessment task there seems to me to be no reason why the offeree cannot do so also. … The other side of that coin is that the fact that there may be difficulties in the litigation applies to both parties and does not, of itself, justify the failure to make a decision as to whether an offer should or should not be accepted."
At 451 Rolfe J propounded this approach:
"In my opinion the proper approach to take to an offer of compromise, whether made under the Rules or pursuant to a Calderbank letter, is that there should be a prima facie presumption in the event of the offer not being accepted and in the event of the recipient of the offer not receiving a result more favourable than the offer, that the party rejecting the offer should pay the costs of the other party on an indemnity basis from the date of the making of the offer. I proceed on the basis that the unreasonableness was the failure by the offeree to accept the offer, which unreasonableness is demonstrated, prima facie, by the ultimate result. This approach is consistent with the decisions to which I have referred, the policy evidenced by the Act and the Rules and the widely accepted philosophy that settlements should be encouraged."
41 Lindgren J considered Rolfe J's approach in MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (1996) 70 FCR 236 but he did not make an indemnity order. In that case the offeror had not used Order 23 but had delivered a "Calderbank letter": see Calderbank v Calderbank [1976] Fam 93. The apparent reason why the offeror did not use Order 23 was that there was not the requisite 14 days between the time when it decided to make the offer and the commencement of the trial. As I read Lindgren J's reasons for judgment, the failure to use Order 23 played a substantial part in his decision not to award indemnity costs. He said at 240:
"The foregoing considerations merely show that there are elements of the regime established by O 23 which may be more protective of an offeree's position than the unregulated offer made in a Calderbank letter. It is difficult to accept, for example, that in the extreme case of an offer made in a Calderbank letter which contained only a minimal element of compromise and was open for acceptance for say only one day, should, in the event of total success of the offeror, give rise to a presumptive entitlement to indemnity costs generally similar to that provided for in O 23, even if, in such a case, the presumptive entitlement might be easily displaced by the offeree."
42 On 11 February 1998 Lehane J gave judgment in respect of an application for indemnity costs in a proceeding, Flemington Properties Pty Limited v Raine & Horne Commercial Pty Limited [1998] FCA 11 February 1998, that has some similarities with the present case. The applicant claimed that a valuer had acted in breach of duty in connection with the making of a property valuation. After earlier offers and counteroffers, the respondent made an offer pursuant to Order 23 to settle the matter upon the basis of a payment of $300,000 plus costs. The offer was not accepted and the applicant failed at trial. In rejecting the respondent's application for indemnity costs, Lehane J said:
"This is not a case to which O 23 r 11 applies: the offers concerned were made by respondents who were wholly successful and are in any event entitled to an order for costs in their favour. The question is to be decided as a matter of discretion, to be exercised having regard to all the circumstances and in the light of the authorities concerning the effect to be given to Calderbank offers. Underlying that line of authority is, undoubtedly, a policy of the law in favour of the sensible compromise of disputes. That policy is promoted if a party who rejects a genuine and realistic offer of compromise risks an order for indemnity costs if it refuses the offer and ultimately obtains a result no better than that which it would have got by accepting the offer.
Its promotion, however, does not in my view require that an applicant who receives any offer and rejects it be at risk of an order for payment of indemnity costs should the applicant ultimately fail to obtain any relief because it fails to make good the cause of action on which it relies. There is, after all, a policy also against deterring parties from pursuing claims to which they reasonably believe themselves entitled. A case - particularly a complex commercial case - in which there is room for substantial argument, and opposing views, about issues going to liability is by no means uncommon. Nor is it uncommon in such a case that an applicant, if it makes good the elements of its cause of action going to liability, will be entitled to substantial damages. The Calderbank policy by no means necessarily requires, in such a case, that the applicant, if ultimately unsuccessful, be required to pay indemnity costs because it rejected an offer of a small fraction of the amount which it claims. It may be --perhaps is likely to be - otherwise where the offer is a commercially realistic one made upon a sensible and informed assessment of the prospects and risks of the litigation on each side."
Lehane J went on to comment that considerations of that kind no doubt explain:
"… the course of authority in this court which measures the weight to be given to a Calderbank offer having regard to its terms and to the other circumstances of the litigation, including the relative strengths and weaknesses of each party's case as they might have been apparent to the parties when the offer was made."
43 After referring to the authorities and noting Multicon, Lehane J concluded he "should follow the well established course of authority in this court". In considering whether the applicant had acted unreasonably in failing to accept the respondents' Order 23 letter, Lehane J said the case involved a difficult question of law and that the offer was made before some of the respondent's expert reports were available to the applicant. He said:
"In short, at the time when it considered the offers the applicant, in my view, had reasons to think it had significant prospects of success on liability and, if it were to succeed on liability, a prospect of recovering very substantial damages. In those circumstances, I cannot conclude that there was anything imprudent about the rejection of an offer the value of which was less than one tenth of the damages which, if its expert's evidence were accepted, it might have recovered; and I do not think that its rejection of the offers, in the circumstances which I have described, justifies the making of an order for payment of costs on an indemnity basis."
44 In Black v Lipovac (Miles, Heerey and Madgwick JJ, [1998] FCA 4 June 1998, not reported), a Full Court of this Court considered the apparent divergence between the view taken in this Court and that suggested by Rolfe J. The Court said:
"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.'"
45 The Full Court noted that the trial judge had refused an application on behalf of the plaintiff for indemnity costs from the date of refusal of the Calderbank offers because he thought the offers were not unreasonably or imprudently refused. The Full Court agreed. The first offer was made before the critical expert reports were served. The second offer, by its terms, lapsed on the day after receipt. It accompanied a report that contained "a substantial and new hypothesis" for the plaintiff's case.
46 As the Full Court suggested in Black, the difference between the approach propounded by Rolfe J and that adopted in this Court may be more apparent than real. Everybody agrees there can be no fixed rule; a proposition established for this Court by the terms of s43 of the Federal Court of Australia Act 1976 conferring on the Court a discretionary jurisdiction in relation to costs. Everybody also agrees that, while the ordinary practice is to award costs on a party-party basis, it is sometimes appropriate to take a different course, including ordering indemnity costs against a party who has acted unreasonably. The difference between Rolfe J and the Federal Court decisions seems to turn on whether there should be "a prima facie presumption" of indemnity costs against a party who has not accepted an offer of compromise made pursuant to the Rules or a Calderbank letter and achieved no better result at trial, or whether this is only a factor to be taken into account in determining whether the offeree acted unreasonably. On either view, the Court has to look at the whole situation, including the circumstances that applied at the time of non-acceptance of the offer.
47 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".
48 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.
49 The offer made in the present case was for a nominal amount; unlike the situation in Donnelly v Edelstein, 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.
50 The applicants knew there was a lively contest as to whether they had sustained any damage at all. They also knew there was no evidence about the effect on the vertical plane of Mr Learoyd's errors; so they would be unable to demonstrate that they made any difference at all, in terms of the use and enjoyment of their house or its resale value. Their only valuation evidence was Mr Fawcett's opinion that the erection of the Mak residence had affected the value of the Coshott residence to the tune of $500,000, as compared with the situation if the 1917 building was to remain indefinitely. This evidence was offered despite Mr Fawcett's personal opinion, elicited in cross examination, that there was at all times a reasonable probability that the 1917 building would soon be replaced by a larger building and the served evidence of the Council's valuer, Frank Egan, that, if 7 Gilliver Avenue was to be regarded as a redevelopment site, there was no loss of value at all. Even leaving aside the legal issues I identified at the commencement of these reasons, it should have been obvious to the applicants that their case faced enormous problems. In the circumstances, I think it was foolhardy of them to press on, and unreasonable to inflict further costs on the respondents. There is a case for a special costs order.
51 However, one of the difficulties about an order for indemnity costs is its open-ended nature. Because the underlying concept is one of indemnity, the order allows recovery even of costs that have been unreasonably incurred, or incurred in an unreasonable amount. The Court will rarely know whether such costs have been incurred. So the Court risks making an order that is unreasonable in effect. This is not a proper course to take, even as a response to unreasonable behaviour on the other side.
52 This problem was avoided by a Full Court in Re Wilcox; Ex parte Venture Industries Pty Ltd (1996) 72 FCR 151. The Court ordered that the prosecutors pay the costs of the second respondent taxed "on the basis that such costs are to include all costs except insofar as they are of an unreasonable amount or were unreasonably incurred so that, subject to such exceptions, the second respondent will be completely indemnified by the prosecutors for its costs". I think it is appropriate to make an order in similar form in this case, in relation to costs incurred after 19 January 1999. The costs incurred by the respondents on or before 19 January should be taxed on a party-party basis.
I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox.