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JUDGMENT

1. On 2 July 2026, I delivered judgment in Khan v Fairmont Homes (NSW) Pty Ltd [2026] NSWSC 770. I will assume familiarity with that judgment and adopt the defined terms used in it.

2. The orders I made on that occasion included the following:

“(2) Pursuant to s 41 of the Local Court Act 2007 (NSW), the judgment and orders of the Local Court made on 9 October 2025 are set aside and, in lieu thereof:

(a) The Local Court proceedings are dismissed.

(b) The defendant is to pay the plaintiff’s costs of the Local Court proceedings.

(3) The defendant is to pay the plaintiff’s costs of the proceedings in this Court.

(4) If either party contends for different costs orders to those which are provided for in Orders 2(b) and/or 3, they should make an application to my Associate by 4pm on 7 July 2026, whereupon I will vacate Orders 2(b) and/or 3.”

3. On 7 July 2026, the plaintiff made an application to my Associate for a different costs order to that contemplated by Order 2(b). By operation of Order 4, Order 2(b) was, thereupon, vacated.

4. By her application, the plaintiff requested that Order 2(b) be substituted with an order that the defendant pay her costs of the Local Court proceedings on an indemnity basis.

5. The plaintiff’s application was opposed by the defendant.

6. In support of her application, the plaintiff relied on an offer she made to the defendant on 1 June 2023, which relevantly proposed:

“On a purely commercial basis, with the view to resolving this matter without further costs being incurred by the parties, our client has instructed that she is prepared to settle on the following terms:

1. Your client retains the sum of $28,000.00, being the full amount of the deposit in full and final satisfaction of the dispute;

2. Your client releases our client from any and all claims arising in relation to this dispute or otherwise in relation to the Building Contract;

3. The parties enter into a deed of settlement, drafted by your office, on the above terms; and

4. Each party is to bear their own costs.”

7. The offer was expressed to have been made in accordance with the principles set out in Calderbank v Calderbank [1975] 3 All ER 333 and remained open for acceptance for a period of 28 days.

8. The general rule is that costs payable under an order of the Court are to be assessed on the ordinary basis: Uniform Civil Procedure Rules (“UCPR”) r 42.2. However, the Court retains a discretion to deviate from this general rule in appropriate circumstances and order that some (or all) of a party’s costs be paid on the indemnity basis: s 98(1) Civil Procedure Act 2005 (NSW). One circumstance in which courts have repeatedly done so is where a party has obtained a judgment which is no less favourable than an earlier offer made in accordance with the Calderbank principles.

9. Where, as here, the party who made the relevant offer chose not to avail themselves of the formal offer of compromise process provided for in Part 42 Division 3 of the UCPR, the mere fact of having bettered that offer will not, alone, be sufficient to secure an order that any portion of its costs be paid on an indemnity basis. Rather, as was recently observed in Chalik v Chalik [2025] NSWCA 136 at [137]:

“… where a plaintiff rejects a Calderbank letter, and the defendant obtains judgment which is no less favourable than the terms of the offer — the offeror is not presumptively entitled to indemnity costs: Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 3) [2021] NSWCA 160 at [23] –[24]. Rather, as the Court held in Stewart v Atco Controls Pty Ltd (in liq) (No 2) (2014) 252 CLR 331; [2014] HCA 31 at [4]:

This Court has a general discretion as to costs. The non-acceptance of a Calderbank offer is a factor, in some cases a strong factor, to be taken into account on an application for indemnity costs.

Nonetheless, in exercising discretion as to costs in relation to Calderbank letters, the Court looks to (i) whether there was a genuine offer of compromise; and (ii) whether it was unreasonable for the offeree not to accept it: Ziegler atf Doris Gayst Testamentary Trust v Cenric Group Pty Ltd [2020] NSWCA 85 at [69]; Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [8].”

10. It is now well accepted that the party seeking an order that its costs be paid on the indemnity basis bears the burden of persuading the court that a departure from the usual approach contemplated by UCPR 42.2 is warranted: Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) [2011] NSWCA 344 at [16].

11. The plaintiff’s application rested on an assertion that she has “bettered” the offer through the orders I made on 2 July 2026. To assess whether the plaintiff has made out this assertion, it is useful to break the offer down into its elements.

12. First, the plaintiff proposed that the defendant retain the $28,000 deposit which she had paid under the contract. While this may — at least arguably — have reflected some level of compromise on the part of the plaintiff, it is to be noted that she was not, at the time of the offer, seeking to recover that deposit from the defendant. Rather, the defendant was seeking the payment of further moneys from her. The Local Court proceedings were subsequently commenced by the defendant. At no point did the plaintiff file a cross-claim or otherwise seek the recovery of the deposit. In the outcome, the defendant has retained the deposit paid by the plaintiff under the contract. However, I do not accept that this means the plaintiff has bettered this first element of the offer.

13. Secondly, the plaintiff sought an expansive release from the defendant, which was to be reflected in a deed of settlement drafted by the solicitor for the defendant. The defendant submitted that the release sought by the plaintiff extended well beyond the outcome she ultimately achieved in the proceedings.

14. The principles reflected in Port of Melbourne Authority v Anshun (1981) 147 CLR 589; [1981] HCA 45 mean that — at least in a practical sense — the plaintiff is now largely immune from any claim that the defendant may have sought to make against her arising out of the dispute or the contract. Whether the proposed contractual release would have provided any wider protection to the plaintiff than that which she has secured through her successful defence of the proceedings, would depend on the nature of any future claim that the defendant may wish to bring. Even then, it may well be a matter about which sensible minds would differ. For present purposes, it is sufficient for me to note that the outcome of the proceedings has not placed the plaintiff in a better position than that which she would have been in had the offer been accepted by the defendant.

15. Finally, the plaintiff proposed that each party bear their own costs. In the outcome, she has secured an order that the defendant pay her costs of the proceedings in both the Local Court and in this Court. However, the offer must be assessed at the time it was made. The offer was made before the Local Court proceedings had been commenced by the defendant. It is far from clear that any costs which might have been incurred by the plaintiff prior to the offer will be recoverable under any cost orders which I might make in relation to the Local Court proceedings. In these circumstances, I am also not persuaded that the plaintiff has bettered this element of the offer.

16. For the above reasons, I am not satisfied that — in the context of the Local Court proceedings — the plaintiff has “bettered” the offer. At best, she has obtained a judgment which is, in a practical sense, no less favourable than the terms of the offer.

17. It nevertheless remains incumbent upon the plaintiff to demonstrate that the defendant’s rejection of the offer was unreasonable.

18. In Miwa, the Court of Appeal endorsed (at [12]) the following list of factors identified in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) 13 VR 435; [2005] VSCA 298; as being relevant to determining whether the rejection of an offer was unreasonable:

"(a) the stage of the proceeding at which the offer was received;

(b) the time allowed to the offeree to consider the offer;

(c) the extent of the compromise offered;

(d) the offeree's prospects of success, assessed as at the date of the offer;

(e) the clarity with which the terms of the offer were expressed;

(f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it."

19. Here, the plaintiff said that the offer was made before the proceedings in the Local Court were commenced on 3 July 2023 and would have wholly settled the dispute between the parties. Neither of these propositions was disputed by the defendant. Nor was it suggested that the defendant was given insufficient time to consider the offer.

20. The defendant submitted that the offer contained no real element of compromise. As I have already noted, the offer was made prior to the commencement of the Local Court proceedings. The plaintiff had not — at that time or at any time since — articulated any claim for the return of the deposit which she had paid under the contract. It was the defendant that was seeking the payment of further moneys by the plaintiff. In these circumstances, it is arguable that the offer contained no element of compromise by the plaintiff. At best, any compromise it reflected was extremely limited in its extent.

21. An assessment of the plaintiff’s prospects of success, viewed prospectively as at the date of the offer, is complicated by the fact that — in both the Local Court and in this Court — none of the arguments that she was advancing when she made the offer succeeded. As the defendant submitted, none of the contentions then being raised by the plaintiff had any bearing on the ultimate outcome of the proceedings. The outcome of the proceedings ultimately turned on a question of construction. While the plaintiff’s prospects on that issue remained constant, the fact that the construction which I ultimately accepted did not feature amongst the arguments the plaintiff advanced in support of the offer (or in the Local Court) is relevant when considering whether the defendant’s rejection of it was unreasonable.

22. The proceedings in both the Local Court and in this Court would have been avoided had the defendant accepted the offer. Given the costs it has likely incurred in connection with the proceedings, and those of the plaintiff’s costs which it has now been ordered to pay, it would have been in the defendant’s commercial interest to have done so. Nevertheless, having considered the factors discussed above, I am not persuaded that it was unreasonable for the defendant not to have accepted the offer.

23. For the reasons given above, the plaintiff has not established that she should have any portion of her costs of the proceedings in the Local Court paid on the indemnity basis.

Orders

1. Reinstate Order 2(b) made on 2 July 2026, with the effect that the defendant is ordered to pay the plaintiff’s costs of the Local Court proceedings on the ordinary basis.
2. Order that the plaintiff pay the defendant’s costs of her application to vary Order 2(b) made on 2 July 2026.

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