Drummond v Gordian Runoff Ltd

Proceedings progress

Six weeks later, the plaintiffs served their evidence in the NCAT proceedings, being an affidavit of John Drummond. Mr Drummond stated that he was a barrister. He described his dealings with the builder, discovery of building defects, efforts to have the defects rectified, investigations undertaken, NCAT proceedings brought against the builder, the appointment of a liquidator to the builder and the insurance claim.
On 7 March 2022, the insurer served submissions in the NCAT proceedings, setting out its position in respect of section 103BB of the Home Building Act and its intersection with section 54 of the Insurance Contracts Act. The submissions were broadly the same as those made in this Court. The insurer referenced Foy v Calliden and Puckeridge v Calliden.
On 14 March 2022, the plaintiffs filed submissions to the effect that section 54 of the Insurance Contracts Act applied or, alternatively, section 109 of the Constitution applied in the event of inconsistency between State and Commonwealth legislation. As I understand it, this was the first time that the plaintiffs had raised section 109 of the Constitution.
On 22 March 2022, the plaintiffs re-pleaded their claim in Amended Points of Claim. Relevantly, the plaintiffs now pleaded: 19. Alternatively, the insurer's purported reliance on s 103BB of the Home Building Act 1989 is inapplicable where the terms of the contract of insurance in question expressly provide indemnity for the claim and expressly incorporate the provisions of s 54 of the Insurance Contracts Act. 20. To the extent that it is alleged on behalf of the respondent that the effect of s 54 of the Insurance Contracts Act 1984 is inconsistent with the effect of s 103BB of the Home Building Act 1989 the insured says that s 109 of the Constitution says that the Commonwealth law shall prevail to the extent of any inconsistency.
On 29 March 2022, the insurer filed a defence to the plaintiffs' Amended Points of Claim in the NCAT proceedings. The insurer denied the pleadings extracted above, adding at [21]: … c. By its terms HBA s 103BB defined the terms of the indemnity offered by the [Home Warranty Insurance scheme] rather than operating as an exclusion term in the said insurance; d. The operation of HBA s 103BB upon the indemnity provided by the [Home Warranty Insurance scheme] is not affected by, or subject to, the operation of the ICA s 54.
On 6 May 2022, the insurer made further submissions on the jurisdiction of NCAT, setting out the insurer's position in respect of section 109 of the Constitution and its application to the case. Again, the submissions were generally in line with those ultimately made in this Court.
On 1 June 2022, Senior Member G Blake transferred the proceedings to this Court on the basis that he was satisfied that the proceedings raised a matter of federal jurisdiction; NCAT did not have jurisdiction to determine the matter.

Consideration

As the plaintiffs submitted, there is no "presumptive entitlement" to indemnity costs flowing from a failure of a party who has rejected a Calderbank offer to achieve a better outcome than provided for in the offer. Rather, the defendant must establish that the Calderbank offer involved a real and genuine element of compromise and that non-acceptance of the Calderbank offer was unreasonable: CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd [2008] FCAFC 173 at [75] (per Moore, Finn and Jessup JJ); Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [8]-[9] (per Basten JA, McColl and Campbell JJA agreeing). Unreasonableness is to be judged by reference to the circumstances facing the offeree at the time of the offer, and not with the benefit of hindsight: CGU at [75]; Miwa at [11]. The factors which the Court may take into account include the stage of the proceeding at which the offer was received, the time allowed to the offeree to consider the offer, the extent of the compromise offered, the offeree's prospects of success (assessed as at the date of the offer), the clarity with which the terms of the offer were expressed and whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it: Miwa at [12].
A relatively low offer may support an indemnity costs order: Owners Corporation Strata Plan 61288 v Brookfield Multiplex Ltd [2012] NSWSC 1586 per McDougall J at [27]. Against this, the reasonableness of the refusal of a Calderbank offer may also be affected by the complexity of the proceedings. For example, in LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd (No 2) [2002] NSWSC 72, Barrett J declined to order indemnity costs despite finding that a defendant's Calderbank offer was reasonable, as the "case was not clear cut, with a myriad of issues of some complexity on which it would have been by no means easy to predict the outcome in advance of full presentation of evidence and full argument": at [53]-[55].
The insurer submitted that, when the Calderbank offer was made, the issues were reasonably well understood. The case was not one that turned significantly upon evidence. The Calderbank offer set out the defendant's argument, being the argument that ultimately prevailed. The plaintiffs, who were represented, were well capable of assessing and evaluating the issues involved. The offer was for a figure that is not insubstantial.
The plaintiffs submitted that the Calderbank offer of $10,000 did not involve a "real and genuine element of compromise" where the plaintiffs' insurance claim was some $215,000. The proceedings were then in NCAT at an early stage and the central issue in the proceedings had not yet been pleaded. The plaintiffs could not then make a proper assessment of the offer absent a complete understanding of the defences raised by the insurer on this issue. The proceedings involved a complex legal argument in relation to novel issues, which had yet to be decided by a superior court. The Calderbank offer was derisory and invited capitulation. Nor did the letter reflect the dispositive reasoning in my primary judgment or engage with section 109 of the Constitution. In the circumstances of the case at the time the Calderbank offer was made, it was not unreasonable for the plaintiffs to reject it.
Considering, first, whether the insurer's Calderbank offer involved a real and genuine element of compromise, at the time of the offer, the plaintiffs' claim was being advanced in NCAT. NCAT is not bound by previous decisions of the tribunal and thus was not bound to follow Puckeridge v Calliden. That said, it is permissible, if not desirable, for members to follow such decisions unless they are convinced the decision was clearly wrong, in the interests of consistency and predictability in decision-making and maintaining public confidence in the legal process: Director of Liquor Licensing v Kordister Pty Ltd [2011] VSC 207 at [107] (per Bell J). Likewise, NCAT was not bound to follow a judgment of the District Court and thus was not bound to follow Foy v Calliden, albeit the tribunal may be "considerably assisted by reference to a relevant judgment of the District Court and I would expect that, except on rare occasions, such judgment would be compellingly persuasive": Valentine v Eid (1992) 27 NSWLR 615, 621-622 (per Grove J).
That is, at the time the Calderbank offer was made, the insurer could be forgiven for forming the view that the plaintiffs' claim was most unlikely to succeed in that tribunal. The NCAT proceedings had been on foot for two months. Presumably, the insurer's costs were then minimal. The insurer's offer was $10,000 and an agreement to waive recovery of those (minimal) costs. Nonetheless, I consider that this involved a real and genuine element of compromise in the circumstances at the time of the offer. The quantum of the plaintiffs' claim does not detract from this assessment, where the insurer was entitled to think the tribunal would most likely find that the plaintiffs were not entitled to claim on the policy at all.
The offer was made in a letter which addressed the key issue then pleaded by the plaintiffs and why the plaintiffs' argument was wrong, in terms not dissimilar to my primary judgment. Contrary to the plaintiffs' submission, it was not incumbent on the insurer to anticipate and address other arguments which might be put forward by the plaintiffs in support of their contention, such as reliance on section 109 of the Constitution, where the plaintiffs did not then advance such an argument. Were it otherwise, an offeror would be obliged to incur additional time and cost setting out other arguments the offeree might not have thought of, which seems contrary to basic notions of commercial settlement discussions.
Turning, then, to whether the plaintiffs' non-acceptance of the Calderbank offer was unreasonable, this largely turns on whether the plaintiffs should have then perceived that their legal argument was most unlikely to be accepted in NCAT. I note the reference to a "discovery policy" in the plaintiffs' Points of Claim. This is a term used in some of the authorities relied on by the plaintiffs at the hearing. This suggests that they had, unsurprisingly, turned their mind to High Court authority on the application of section 54 of the Insurance Contracts Act. What may have assisted the plaintiffs to assess the Calderbank offer was the existence of decisions on the issue which, although not binding on NCAT, would likely be followed by the tribunal. Although the insurer was a party in both Puckeridge v Calliden and Foy v Calliden, the Calderbank letter did not refer to these decisions.
Where the insurer seeks an indemnity costs order, I consider that it bears the onus. There is no evidence that the plaintiffs were aware of Puckeridge v Calliden and Foy v Calliden. Absent such knowledge, it was reasonable for the plaintiffs to proceed on the basis that they had an argument which may well be accepted by the tribunal. Where the insurer knew of these decisions but did not bring them to the attention of the plaintiffs when making the Calderbank offer, I conclude that it was not unreasonable for the plaintiffs to reject the offer.
Turning then to the offer of compromise, the insurer submitted that the offer was made shortly after the transfer to this Court. The proceedings had been on foot for ten months and the defendant had incurred substantial costs. By that time, the insurer had outlined its position in detail in its defence, its submissions of 7 March 2022 and its submissions of 6 May 2022. The issues were sufficiently clear to allow the offer to be evaluated. The offer involved a reasonable compromise, which involved the insurer forgoing its claim for costs. An offer of verdict for the defendant may also support an indemnity costs order where the offer is made after the parties have exchanged submissions, the offeree is aware of the nature of the argument to be put against it and has itself incurred substantial costs: Gold & Copper Resources Pty Ltd v Hon Chris Hartcher, Minister For Resources & Energy, Special Minister (No 2) [2015] NSWCA 163; Botany Bay City Council v Latham (No 2) [2013] NSWCA 450; Taheri v Vitek (No 2) [2014] NSWCA 344. In Taheri, an offer for judgment with no order as to costs was said to be a 'generous' compromise.
The plaintiffs submitted that an offer under rule 20.26 of the UCPR must be a real and genuine offer in order for indemnity costs to follow pursuant to rule 42.14: Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [25] (per Spigelman CJ, Beazley and McColl JJA). Where an offer lacks an element of compromise, but otherwise complies with the rules, the court may exercise its discretion under the rules to "otherwise order" that indemnity cost not be paid. That discretion should be exercised having regard to all the circumstances; exceptional circumstances are not necessary: Regency Media at [15]. The Offer of Compromise was a "walk away" offer submitted seven weeks after the proceedings were transferred to this Court and before any defence or written submissions were filed in this Court. A walk away offer will not generally involve the necessary element of compromise. It can trigger the indemnity costs mechanisms under the rules, however "the claim would have to approach something of the character of being frivolous": Regency Media at [31]; Leach v The Nominal Defendant (QBE Insurance (Australia) Ltd) (No 2) [2014] NSWCA 391 at [51] to [53] (per McColl, Gleeson JA and Sackville AJA agreeing). The claim in this case was not frivolous or approaching frivolous. It turned on a question of construction on which there was no considered authority (and no Supreme Court authority) and the rejection of the argument based on section 109 of the Constitution. Thus, the plaintiffs submitted that Court should "otherwise order."
Regency Media concerned the interpretation of a contract. If the plaintiff's construction of the contract was correct, then it was entitled to some $600,000 but, if not, it was entitled to nothing. As such, the Court observed, "this was an all or nothing case … Either one party or the other party was correct": at [29]. Shortly after the commencement of the proceedings, and before a defence had been filed, the defendant offered to settle the proceedings for $10,000. The Court regarded this as "an invitation to surrender, rather than any form of commercial compromise … The offer can be accurately described as derisory": at [30]. Further, at [31]-[32]: [31] An offer which is in substance an invitation to surrender can result in the successful triggering of the indemnity costs mechanisms under the rules. … However … as the claim or defence would have to approach something of the character of being frivolous or vexatious for that to be the case. … If it were otherwise, the public policy to encourage settlement would rarely be served, in an all or nothing case. These proceedings were not of that character … [32] The normal order for costs, even in a clear case, is that each party bears its own costs without full indemnity. If a derisory offer, of the kind made in these proceedings, could result in an order for indemnity costs, then it is likely that many, perhaps most, contract interpretation disputes would result in an indemnity costs order, if the formality of an offer in accordance with the rules had been made at an early stage. If the appellant were to succeed in the present case, it is quite likely that such an offer would accompany most statements of claim as a matter of commercial practice. The purpose of the special order - to encourage settlement - would no longer be served. An order for indemnity costs could, in our opinion, become the normal order in many commercial disputes.
Whilst the defendant in Regency Media was ultimately successful on appeal, the Court considered that the plaintiff's contentions "did not have the degree of hopelessness, nor did they have any element of frivolity or vexation, of a character that would support an invitation to surrender being accepted as a real and genuine offer of compromise": at [34]. The Court declined to award indemnity costs.
Some caution should be taken when applying Regency Media, not because it is wrong but because the Court's observations resonate in the particular context in which those observations were made. In Loulach Developments Pty Ltd v Roads and Maritime Services (No 2) [2019] NSWSC 601, Leeming JA (sitting at first instance) observed that Regency Media was a case where an offer of $10,000 was made at an early stage of proceedings, before a defence had been filed, which was "a world away" from an offer of $100,000 made at a time when the offeror had incurred some $260,000 in costs: at [11]. More recently in Hungry Jack's Pty Ltd v Fourtounas (No 2) [2011] NSWCA 26, Basten and White JJA noted of Regency Media that "context is important" and, further, that rule 20.26 has since been amended to expressly permit the offer of judgment in favour of a defendant with no order. At [10]: Care must be taken in relying on statements made in earlier cases (such as Regency Media) applying a different rule.
As Ward JA (Beazley P and Leeming JA agreeing) observed in Prospect Resources Ltd v Molyneux [2015] NSWCA 171 at [94]: … Regency Media does not lay down a rigid rule … What amounts to a derisory offer, as opposed to an offer containing a sufficient element of compromise, must to a large extent be a matter of impression; as must the assessment of whether, in all the circumstances, non-acceptance of an offer inviting capitulation would be unreasonable.
The facts at hand are not the same as Regency Media. This was not a case where the insurer served the offer of compromise before pleadings had closed, but rather after the insurer had set out its reasoning on the subject at length in the Calderbank letter, two defences and two sets of submissions. Nor can the plaintiffs' claim be cast as novel, where there was already a judgment squarely on point, which indicated that their argument may be wrong: Foy v Calliden. The plaintiffs' submission that there was no considered authority on the point is a tad harsh. More accurately, the same insurer had advanced the same arguments in respect of the legislative history of section 103BB, the legislative intent of the provision, its application and intersection (or lack thereof) with section 54 of the Insurance Contracts Act, and those submissions were accepted. I did the same, albeit by a more circuitous route.
I accept that the arguments advanced by the plaintiffs were complex and the task of statutory construction is (never) easy. But nor was this uncharted territory, where this precise task had already been undertaken in Foy v Calliden. It is also true that the plaintiffs' argument was an 'all or nothing' point, where acceptance of the plaintiffs' argument would have the effect that the insurer would be obliged to pay their claim. That can be said of any case where an insured contends that their insurance claim ought be paid, by arguing for a particular construction of the policy.
While the offer of compromise was a 'walk away' offer, I consider that it was nonetheless a reasonable compromise where the insurer was offering to forego its entitlement to costs in respect of a claim which had been on foot for a year and appears to have involved several interlocutory steps. The legal issues had been fully articulated at the time of the offer. The onus lies on the plaintiffs to establish good reason why the Court should "otherwise order": Hungry Jack's at [11]. I am not satisfied in the circumstances that the Court should make a different order than that provided by rule 20.26.
I decline to be drawn, however, into making an order for interest on costs. These proceedings were of small compass and involved a discrete issue. The proceedings do not appear to have been overly protracted. I am also somewhat concerned by the insurer's repeated suggestion that it has incurred substantial costs in this matter, where the plaintiffs' claim was for a modest amount of some $215,000. The plaintiffs did appear by senior counsel, but without a junior. It is not entirely clear why the insurer needed both senior and junior counsel, where the junior counsel had appeared for the insurer in Foy v Calliden.

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