Gonzales v The Owners of Strata Plan 74146

CATCHWORDS: COSTS - application for indemnity costs based on an offer of compromise in respect of which the defendant obtained a judgment more favourable than the offer - r 42.15A UCPR

Bartlett v Coomber [2008] NSWCA 282 Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited (No 2) [2009] NSWCA 12 Bennette v Cohen (No 2) [2009] NSWCA 162 Blagojevch v Australian Industrial Relations Commission (2000) 98 FCR 45 Caine v Lumley General Insurance Ltd (No 2) [2008] NSWCA 109 Elite Protective Personnel v Salmon [2007] NSWCA 322 Equity 8 Pty Ltd v Shaw Stockbroking Ltd [2007] NSWSC 503 Hancock v Arnold (No 2) [2009] NSWCA 19 Jones v Bradley (No 2) [2003] NSWCA 258 Leichhardt Municipal Council v Green [2004] NSWCA 341 Liverpool City Council v Estephan [2009] NSWCA 161 MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 CASES CITED: Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 72 Morgan v Johnson (1998) NSWLR 578 Ofria v Cameron (No 2) [2008] NSWCA 242 Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 Roads and Traffic Authority of NSW v Refrigerated Roadways Pty Ltd (No 2) [2009] NSWCA 336 Re Hodgkinson [1985] 2 Ch 190 Rolls Royce Industrial Power (Pacific) Ltd v James Hardie & Co Pty Ltd [2001] NSWCA 461 Russell v Edwards (No 2) [2006] NSWCA 52 Skalkos v Assaf (No 2) [2002] NSWCA 236 South Eastern Sydney Area Health Service v King [2006] NSWCA 2006 NSWCA 2 The Uniting Church v Takacs (No 2) [2008] NSWCA 172 Trikas v Rheem (Australia) Pty Ltd (1964) 81 WN (Pt 1) (NSW) 504 Vale v Eggins (No 2) [2007] NSWCA 12 Wentworth v Wentworth [1999] NSWSC 638

PARTIES: Marcus Gonzales (Plaintiff) The Owners of Strata Plan 74146 (First Defendant)

COUNSEL: Mr M Daley (Plaintiff) Mr N Polin (First Defendant)

SOLICITORS: Brydens Law Office (Plaintiff) McCulloch & Buggy (First Defendant)

The first defendant has applied for an award of indemnity costs from 23 September 2009, on the basis of an offer of compromise made under r 20.26 of the UCPR.

In the substantive proceedings the plaintiff claimed damages in respect of injuries received on 24 December 2005 when his right index finger was caught in the front door to a block of units, in one of which he was living as a tenant with his wife and children. The first defendant was the occupier of the common property on which the accident occurred. The plaintiff contended that the automatic closing mechanism affixed to the top of the door was either faulty or improperly adjusted, presenting a foreseeable hazard that was the cause of his injuries. The defendant denied liability. In the alternative, the defendant alleged contributory negligence by the plaintiff.

The proceedings were commenced on 23 December 2008. The first defendant denied liability. On 22 September 2009 the first defendant served an offer of compromise on the plaintiff in accordance with r 20.26 of the UCPR. It offered to bear its own costs in return for a verdict in its favour. The offer was expressed to remain open for a period of 28 days. In an accompanying letter the first defendant set out its position and the basis upon which the offer was made. In particular, it was pointed out that there had been no problems with the door prior to the plaintiff's accident, and the defect alleged was unknown to the first defendant.

The offer was not accepted. The proceedings were defended and went to trial on 20 and 21 January 2010. On 5 February 2010 I delivered a written reserved judgment in which I gave judgment for the defendant. I ordered the plaintiff to pay the first defendant's costs, on the ordinary basis, but gave leave to the parties to apply for some other costs order or orders provided any such application was notified to the other party and the court within 14 days, in writing, specifying the order sought. The first defendant made the present application pursuant to that leave.

The first defendant having obtained a judgment in its favour, by definition this was a result more favourable to it than the terms of its offer. Unless the court orders otherwise, therefore, the first defendant is entitled to an order against the plaintiff for indemnity costs from 23 September 2009: r 42.15A UCPR.

The plaintiff opposes the application and submits that the court should otherwise order, on the basis that the offer "was effectively a walk away offer with no genuine element of compromise", largely requiring the plaintiff's total capitulation and designed solely for the purpose of triggering the indemnity costs consequences, and as such did not promote the public policy of promoting settlement. It was further contended that the failure of the plaintiff to accept the offer was not unreasonable. It was submitted that liability was very much in issue, and the matter was akin to an "all or nothing" case. In the result, the plaintiff lost because the court preferred evidence not in the plaintiff's possession to his evidence, and that the defendant did not know the strength of its case until a conference shortly before calling its principal witness, Mr Arcaba, a resident in the premises.

The applicable rule is r 42.15A, which provides:

"42.15A Where offer not accepted and judgment as or less favourable to the defendant

(1) This rule applies if the offer concerned is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim concerned as favourable to the defendant, or more favourable to the defendant, than the terms of the offer.

(2) Unless the court orders otherwise: (a) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and

(b) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, assessed on an indemnity basis:

(i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and

(ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made."

The rule creates a statutory exception to the rule that costs should follow the event: Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 72 at 725.

The rationale for the rule was considered by the Court of Appeal in Morgan v Johnson (1998) NSWLR 578 at 581 - 582. The President, per Mason P, with whom Sheller JA agreed, stated the following propositions (omitting citations): "(1) The purpose of the rule is to encourage the proper compromise of litigation, in the private interests of individual litigants and the public interest of the prompt and economical disposal of litigation: Maitland Hospital; Hillier.

(2) The aim is to oblige the offeree to give serious thought to the risk involved in non-acceptance: Maitland Hospital.

(3) The prima facie consequence of non-acceptance will be that the rule will be enforced against the non-accepting party: NSW Insurance Ministerial Corporation v Reeve; Hillier. This is because, from the time of non-acceptance 'notionally the real cause and occasion of the litigation is the attitude adopted by [the party] which has rejected the compromise': Maitland Hospital; see also Hillier.

(4) Lying behind the rule is the common knowledge that 'litigation is inescapably chancy': Maitland Hospital. For this reason, the ordinary provision is expected to apply in the ordinary case: ibid NSW Insurance Ministerial Corporation v Reeve. As Clarke JA expressed it in Houatchanthara:

'The rule lays down the general principle that should be applied, and the order provided for in that rule should only be departed from for proper reasons which, in general, only arise in an exceptional case. It is clear that if the rule operates, the plaintiff will be significantly disadvantaged, but that disadvantage flows naturally from the risks of litigation. The idea behind the rule is to encourage settlement or compromise of proceedings, and more specifically, to encourage litigants to give serious consideration to the settlement of proceedings. Where an offer is made by a defendant to a plaintiff, the latter is put on notice that unless he or she accepts that offer, there is a significant risk that the order provided for by the rule may follow. In declining to accept the offer, the plaintiff undertakes the risk and the consequences that flow naturally from that risk."

(5) The discretion to displace the rule is a judicial one, requiring the private and public purposes of the rule to be borne in mind: Maitland Hospital. Reasons must be given for 'otherwise ordering': Hillier; Quach."

(The relevant passages are cited with approval more recently by Tobias JA in Bennette v Cohen (No 2) [2009] NSWCA 162 at [25]).

Although the court retains a discretion to make some other order for costs, where appropriate, it is for the offeree to establish a basis for the court to do so: Caine v Lumley General Insurance Ltd (No 2) [2008] NSWCA 109 at [33].

However, it has consistently been said that an order other than an order in accordance with an offeror's prima facie entitlement to indemnity costs should only be made in "exceptional circumstances": Morgan v Johnson (1998) NSWLR 578, South Eastern Sydney Area Health Service v King [2006] NSWCA 2 at [83]; Caine v Lumley General Insurance Ltd (No 2) [2008] NSWCA 109 at [35].

The concept of success is not to be confused with the concept of compromise. An offer of compromise (as opposed to a Calderbank offer) must involve the element of compromise: The Uniting Church v Takacs (No 2) [2008] NSWCA 172 per Basten JA at [30] - [33]; Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [28] - [30].

In Hancock v Arnold (No 2) [2009] NSWCA 19 the Court said:

"What is required to trigger the costs consequences is an offer of 'compromise'… It is sometimes said that the offer must be "genuine", but this epithet probably adds little to the concept of compromise. Indeed, it may be distracting if it suggests that some assessment is required of the subjective intentions of the offeror. Whether there is an offer of compromise must be capable of objective determination by reference to the circumstances at the time the offer was made": [23]

In Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited (No 2) [2009] NSWCA 12 at [19] it was said by the President of the Court of Appeal, Justice Allsop:

"There are now many authorities on genuineness of offers. All these are fact and circumstance specific to the case and the parties. The offer need only be, or be part of, a genuine attempt to reach a negotiated settlement."

Whether the offer involves the required element of compromise is an evaluative determination, as to which "judicial minds may differ": see the extra-curial paper by the Hon Justice Beazley AO on the Supreme Court website at Speeches at paragraph 28. Thus, an offer designed "merely to trigger any costs sanctions" will not be regarded as an offer of compromise: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [21] - [24], [36] and [39]; Russell v Edwards (No 2) [2006] NSWCA 52 at [8]; Jones v Bradley (No 2) [2003] NSWCA 258 at [12]. Or, the offer involves so small a compromise as to be illusory: Bartlett v Coomber [2008] NSWCA 282 at [8] and [10].

The effect of an outcome whereby the parties to litigation are to bear their own costs is that no party/party costs are payable: Re Hodgkinson [1985] 2 Ch 190; Trikas v Rheem (Australia) Pty Ltd (1964) 81 WN (Pt 1) (NSW) 504. Such costs as the parties may have incurred, or any liability to pay practitioner/client costs, lie where they fall: Wentworth v Wentworth [1999] NSWSC 638. (Thus, an order that each party pay their own costs is inappropriate, the better order being that each party bear their own costs: Liverpool City Council v Estephan [2009] NSWCA 161 at [75].)

The concept of walk away offers has been given express legislative recognition. Rule 20.26(2) of the UCPR provides:

"An offer must be exclusive of costs, except where it states that it is a verdict for the defendant and that the parties are to bear their own costs."

It will not always be the case that a walk away offer amounts to an invitation to capitulate, or is designed merely to trigger costs sanctions. What is required is an objective determination by reference to the circumstances at the time the offer was made as to whether it involved a compromise, or to use the words of Allsop P, was, or was part of, a genuine attempt to reach a negotiated settlement.

Even if an offer of compromise does contain the required element of compromise, an order for indemnity costs might yet be avoided where the unsuccessful plaintiff demonstrates that the rejection of the offer of compromise was not unreasonable. This determination is also an evaluative judgment requiring a consideration of the facts and circumstances specific to the case: Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited (No 2) [2009] NSWCA 12 at [19]. Relevant factors have been held to include the complexity of the issues: MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236; the modesty of the amount in issue: Ofria v Cameron (No 2) [2008] NSWCA 242; and whether any and what conditions have been placed on the offer: Skalkos v Assaf (No 2) [2002] NSWCA 236.

Another circumstance relevant to the reasonableness of rejection is where the full parameters of the dispute were still uncertain at the time of the offer: Equity 8 Pty Ltd v Shaw Stockbroking Ltd [2007] NSWSC 503 at [42]; or where the offeror's case changes after the offer: South Eastern Sydney Area Health Service v King [2006] NSWCA 2006 NSWCA 2 at [85]; Rolls Royce Industrial Power (Pacific) Ltd v James Hardie & Co Pty Ltd [2001] NSWCA 461. Hence, where all the relevant evidence had not been served before the offer, the discretion to award indemnity costs might be refused: Vale v Eggins (No 2) [2007] NSWCA 12 at [22]. But not where the information is served early: Elite Protective Personnel v Salmon [2007] NSWCA 322 at [147]. Thus, putting a party on clear notice of certain facts affecting the likely outcome will weigh in favour of the offeror: Blagojevch v Australian Industrial Relations Commission (2000) 98 FCR 45.

I turn now to apply these principles in the context of the present application.

The plaintiff first submits that the court should not, in this case, make an order for indemnity costs, but should "otherwise order", the contention being that the first defendant's offer of compromise did not involve any element of compromise. In response, the first defendant points to the history of the proceedings and the point of time at which the offer was made, and the fact that it had incurred legal costs over a period of some 9 months. It submitted that the waiver of the right to recover such significant costs constituted an adequate element of compromise.

In my view the offer in this case contained a real benefit to a plaintiff, something more than total capitulation: see Roads and Traffic Authority of NSW v Refrigerated Roadways Pty Ltd (No 2) [2009] NSWCA 336 at [17]. It might safely be assumed that the defendant had, by that time, incurred considerable practitioner/client costs, the party/party component of which it was prepared to forego the opportunity for recovery, if successful. No evidence was led by the plaintiff that that opportunity was illusory or that a victory might be otherwise 'pyrrhic'.

I am satisfied, therefore, that the first defendant's offer was a genuine attempt to reach a negotiated settlement and involved the element of compromise required.

The plaintiff next submits that the court should not, in this case, make an order for indemnity costs, but should "otherwise order", the contention being that it was not unreasonable for him not to have accepted the first defendant's offer of compromise. In response, the first defendant points to the history of the proceedings and the point of time at which the offer was made. It submits that at that point of time the respective positions of the parties was well defined. The basis for its offer was set out in the letter from the first defendant's solicitors accompanying the offer. The letter makes it clear that, notwithstanding service of the plaintiff's expert report, the first defendant was not under any notice of the supposed defect in the subject door, and the duty of care involved was only to avoid risks of injury that were foreseeable.

The plaintiff's case failed essentially because the court did not accept his evidence about the pre-accident behaviour of the door involved in his accident, and was not satisfied that it had been slamming shut in the violent manner he described. The plaintiff did not present, and it might be assumed, never had any corroborative evidence as to the erratic behaviour of the door, other than his own. The defects in the plaintiff's case were not only not cured when his expert's report was served, they were but further exposed. In my view, the position that obtained at the time of the offer of compromise was that the plaintiff, in objectively assessing the strength of his case, acted unreasonably in failing to accept the offer of compromise.

For these reasons I have not been persuaded to make an order for costs otherwise than in accordance with r 42.15A(2), and the first defendant's application therefore succeeds.

Orders for costs are to be made in accordance with r 42.1 and r 42.2 of the UCPR, unless some other order or orders are appropriate. The prima facie order that is appropriate is for the plaintiff to pay the defendant's costs of this application on the ordinary basis. There is nothing before me to indicate that some other order is appropriate.

(1) I vary the original order as to costs, and order the plaintiff to pay the first defendant's costs of the substantive proceedings on an indemnity basis from 23 September2009. (2) I order the plaintiff to pay the first defendant's costs of this application, on the ordinary basis.

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