Enerka Apex Belting Pty Ltd v Vickers Systems Pty Ltd

6. On 14 September 2001, the plaintiff served an offer of compromise, which stated that:

"in accordance with Part 2 of Order 26 of the Supreme Court Rules the plaintiff offers to compromise the plaintiff's claim for the sum of $300,000 plus costs."

Needless to say, the offer was not accepted by the defendant. As the plaintiff has now obtained a judgment on the claim to which the offer related "no less favourable" to it than the terms of the offer, the plaintiff submits that it should be awarded the costs of the claim on a party and party basis up to and including 14 September 2001 and thereafter on a solicitor and client basis (r.26.08(2) of the Supreme Court Rules).

11. Mr Peters of counsel, who appeared for the defendant, submitted that there were three reasons why the plaintiff was only entitled to an order that its costs of the proceeding be taxed on a party and party basis.

14. First, Mr Peters submitted that the form of the offer was defective and outside the operation of the Rules in that it referred to "the sum of $300,000 plus costs." Relying on the decision of Giles J in Associated Confectionary (Aust) Pty Ltd v Mineral and Chemical Traders Pty Ltd[1], Mr Peters argued that the offer should not refer to costs. As Mr Peters pointed out, r.26.03(7) governs the liability of the defendant for the plaintiff's costs upon acceptance of the offer. However, the offer in Associated Confectionary was expressed to be "inclusive of costs", which as Giles J observed had the effect of rendering it impracticable to determine whether the offer was more or less favourable than the result of the hearing[2]. But that is not this case.

17. In my opinion, whilst it is no doubt preferable that the offer of compromise not contain the words "plus costs", I do not consider that their inclusion necessarily takes the offer outside the Rules. Mr Peters submitted that an offer of compromise must be in "unambiguously clear" terms leaving the offeree in no doubt as to what is being offered[3]. Inclusion of the words "plus costs", he submitted, meant that the offer was not clear. On what basis were the "plus costs" referred to in the offer to be assessed? Did the "plus costs" include the costs incurred during the 14 day period in which the offer could be accepted? But these questions also exist if there is no mention of costs in the offer, because r.26.03(7) states that:

"... unless the Court otherwise orders, the defendant shall pay the costs of the plaintiff in respect of the claim up to and including the day the offer was served."

Given the introductory words, the same uncertainty about costs exists until the Court rules on the issue or the parties reach agreement.

22. Mr Peters also relied on r.26.03(1), which states:

"An offer of compromise providing for payment of a sum of money to a plaintiff shall, unless it otherwise provides, be taken to be an offer providing for payment of that sum within 14 days after acceptance of the offer."

He submitted that the inclusion of the words "plus costs" meant that the defendant was unable to ascertain the amount required to be paid within the 14 days. I do not agree. If it had wanted to accept the offer, the defendant would have clearly understood, in my opinion, that it would have to pay the sum of $300,000 "within 14 days after acceptance of the offer", and the costs of the plaintiff "forthwith", once they had been taxed (see r.63.03(2) and r.63.10(d) of the Supreme Court Rules).

27. I am, therefore, prepared to treat the offer of compromise as one made in compliance with the Rules.

30. Mr Peters' next argument was based on r.26.08(8) which provides:

"Where the plaintiff obtains judgment for the recovery of a debt or damages, and the amount of the debt or the damages was not in dispute, but only the question of liability, paragraph (2) shall not apply unless the Court is satisfied that the plaintiff's offer was of a genuine compromise."

He submitted that this was a case where the amount of the debt was not in dispute, only the question of liability, and that in the circumstances the plaintiff's offer was not "of a genuine compromise."

35. The terms of r.26.08(8) provide that r.26.08(2) shall not apply "unless the Court is satisfied that the plaintiff's offer was of a genuine compromise." The onus is on the plaintiff, in my opinion, to persuade the Court that the offer was "of a genuine compromise." It does not appear that there is an equivalent in New South Wales to r.26.08(8). Thus, the decision of the New South Wales Court of Appeal in Marsland v Andjelic [No. 2][4], which was cited to me because it concerned the onus of persuasion under that State's Rules, is not relevant, in my opinion.

38. Mr Schlicht of counsel, who appeared for the plaintiff, put forward calculations showing that the amount owing at 14 September 2001 was $319,243.21, being the $308,831.77 debt and interest thereon, from the date of commencement of the proceeding to 14 September 2001, of $10,411.44 (see r.26.08(5)). He submitted that reducing its claim by $19,243.21 was a genuine compromise by the plaintiff. It represented a reduction in the claim of just over six per cent. He submitted that the offer of compromise "represented a genuine effort to compromise the proceeding shortly after an unsuccessful mediation."

41. In Tickell v Trifleska Pty Ltd[5], Rogers CJ Comm D held that a purported offer of compromise which stated that the plaintiff would settle for the whole of the amount claimed, together with interest, was not an offer of compromise within the New South Wales equivalent of O.26, notwithstanding that the plaintiff had obtained judgment "no less favourable" than the offer. His Honour ruled that the purported "offer of compromise" was not "a realistic assessment of what, in the circumstances, represented a fair and proper compromise" but rather "yet another, formally stated demand for payment designed simply to trigger the entitlement to payment of costs on an indemnity basis."[6]

44. In Hobartville Stud Pty Ltd v Union Insurance Co Ltd[7], Giles J held that a purported offer of compromise which stated that the plaintiff would settle for one dollar less than the full claim was also not an offer of compromise which would entitle the plaintiff to a costs order on a higher basis. His Honour referred to the definition of "compromise" found in The Macquarie Dictionary, 2nd Rev, (1987):

"a settlement of differences by mutual concessions; an adjustment of conflicting claims, principles, etc, by yielding a party of each ..."

In his Honour's view, discounting the claim by one dollar was not in any real sense giving anything away and therefore the plaintiff was not compromising the claim and was not entitled to claim that it had placed itself in a more favourable position in relation to costs.[8]

49. Both of these cases were ones where the amount of the debt was not in dispute. It was only a question of liability. That is the situation in this proceeding. Nevertheless, it is helpful to consider a further New South Wales case which involved the question of the quantum of the damages to be awarded. In Maitland Hospital v Fisher [No. 2][9] an offer was made by the plaintiff that she would accept the sum of $200,000 plus the costs of the trial and the appeal. The appeal was dismissed so that the plaintiff retained her judgment in the sum of $206,090. The Court of Appeal, consisting of Kirby P, Mahoney JA and Samuels A-JA, held that she should receive her costs of the appeal on the higher basis. Their Honours stated:

"Although the amount of the deficit is small, being only 2.5 per cent of the judgment sum, it is real and not trivial or contemptuous. For a person in the position of the respondent, who was a kitchenmaid when injured in the service of the appellant, $6,090 is a real sum. Furthermore, the respondent would have been advised (correctly in the event) that she stood very little chance of losing her judgment in the appeal. Lee A-J's reasons were careful. On liability they provided two possible bases for recovery, although only one was considered in this Court. Most of the elements in the damages claim were either conceded or uncontested. The amount awarded for past general damages was regarded as 'modest'. Thus, even if a re-assessment had been required, it was extremely unlikely that a judgment of much less than that recovered would have been entered. All of this the respondent was probably told. In such circumstances, the offer of compromise was one which realistically assessed the chances of success in the appeal. It offered an inducement (admittedly small) to the appellant against the risks which are inherent in any litigation. Events have borne out of the justification of the actual offer made and the wisdom of making it. It is important to stress, however, that a 2.5 per cent compromise is not to be taken as having general precedental significance. The decision to award or withhold indemnity costs where a plaintiff's settlement offer has been made but not accepted, involves a discretion to be exercised by reference to all of the circumstances of the case, not by applying a fixed mathematical formula."[10]

Two significant differences between Maitland Hospital v Fisher [No. 2] and the present case are that the proceeding sought to be compromised was an appeal, so that, theoretically at least, one could be more confident of predicting the outcome, and that the amount of the damages was, to some extent, still in dispute, so that any reduction in the claim was more significant. Unlike the present proceeding, it was not a case of all or nothing.

54. In my opinion, there were serious questions in this proceeding in respect of liability. It was by no means clear that the plaintiff would succeed in its claim. In the circumstances, it is my opinion that a six per cent reduction in the claim was not an offer "of a genuine compromise." Although the sum of $19,243.21 could not be said to be "trivial or contemptuous", and although this decision is not to be concluded "by applying a fixed mathematical formula", I cannot treat the six per cent reduction as a realistic assessment of the chances of success in the proceeding. In my view, the offer must therefore have been made more in the hope of obtaining an advantage on costs rather than for the purpose of genuinely compromising the dispute. It seems to me that, from the defendant's point of view, paying $300,000 plus costs to settle the claim would have been seen not as a compromise but as capitulation.

57. It is important to bear in mind the purpose of the rules relating to offers of compromise. There is no doubt that there is a "... particular policy of the law to encourage resolution of litigation by settlement ..."[11] The rationale of this policy was explained by Rogers CJ Comm D in Tickell v Trifleska Pty Ltd[12]:

"It is the primary aim of any judicial system to attempt to bring the parties to a point where, with fairness to themselves, they are able to dispose of the dispute between them by compromise. It is only in the last resort that a dispute should proceed to trial and to determination. That is for any number of reasons. It is in the interests of the community that scarce resources, such as the court, should not be over-taxed. It is in the interests of the community and of the parties themselves that they should not engage in the rancour which a dispute in court necessarily entails. It is in the interests of the parties themselves to save themselves the expenditure of time and energy necessarily entailed in participation in contested court proceedings."

In Grbavac v Hart[13], Hayne JA referred with approval to the statement by the New South Wales Court of Appeal in Maitland Hospital v Fisher [No. 2][14] of the objectives of rules in that State which were broadly similar but not identical to O.26:

"1. To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff's real claim which can be placed before its opponent without risk that its 'bottom line' will be revealed to the court; 2. To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and 3. To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation."[15]

Such a policy is not advanced, in my opinion, by rewarding a plaintiff in respect of costs when, in all the circumstances, its offer of compromise did not represent a genuine or reasonable attempt at settlement, and therefore did not hold any real attraction for the defendant, because it did not make a sufficient reduction in the claim. Accordingly, I find that r.26.08(2) does not apply because I am not satisfied that the plaintiff's offer was "of a genuine compromise."

64. Mr Peters' third argument was that I should "otherwise order" under r.26.08(2) that the costs not be on a solicitor and client basis after the day the offer of compromise was served. It will be obvious from my reasons concerning r.26.08(8), that I am of the view that all of the plaintiff's costs of the claim should be on a party and party basis. I would therefore, in the exercise of my discretion, have been prepared to "otherwise order", if I had found that r.26.08(2) applied.

68. Just before the trial was due to commence, the defendant was given leave to file and serve a counterclaim. On the last day of the hearing, the defendant indicated that it was not proceeding with the counterclaim.

71. Mr Schlicht submitted that the plaintiff was entitled to its costs on the counterclaim on a solicitor and client basis because it was clear that the defendant should never have brought the counterclaim. He argued that the counterclaim was hopeless and that if the defendant had been properly advised it would never have been brought.

74. Mr Peters submitted that this was not a case falling within any of the recognised categories for the awarding of costs on a solicitor and client basis.[16] He argued that the plaintiff had wrongly refused to give discovery of documents concerning the cost price of the stock. When sample documents were eventually discovered, the defendant considered them and then abandoned its counterclaim. I do not propose to investigate the rights and wrongs of this discovery issue, because I am firmly of the view that regardless of that issue the defendant's conduct of the counterclaim was responsible, particularly in not persisting with it once the view had been formed that it could not succeed. In the circumstances, I consider that it would be wrong to order the defendant to pay the costs of the counterclaim on any basis other than party and party.

1. There be judgment for the plaintiff in the sum of $308,831.77 and interest in the sum of $47,344.24.

3. The defendant pay the plaintiff's costs of the proceeding, including the costs of the counterclaim, such costs to be taxed on a party and party basis.

[1] (1991) 25 NSWLR 349

[2] (1991) 25 NSWLR 349 at 351

[3] Grbavac v Hart [1977] VicRp 18; [1977] 1 VR 154 at 161 per Tadgell JA

[4] (1993) 32 NSWLR 649

[5] (1990) 25 NSWLR 353

[6] (1990) 25 NSWLR 353 at 355

[7] (1991) 25 NSWLR 358

[8] (1991) 25 NSWLR 358 at 367-8

[9] (1992) 27 NSWLR 721

[10] (1992) 27 NSWLR 721 at 725

[11] Baltic Shipping Co v Dillon ("The Mikhail Lermontov") (1991) 22 NSWLR 1 at 9 per Gleeson CJ

[12] (1990) 25 NSWLR 353 at 354-5

[13] [1996] VSC 37; [1997] 1 VR 154 at 164

[14] (1992) 27 NSWLR 721

[15] (1992) 27 NSWLR 721 at 724

[16] See, for example, Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225b at 233-4 per Sheppard J