Leichhardt Municipal Council v Green

CITATION : Leichhardt Municipal Council v Green [2004] NSWCA 341 HEARING DATE(S) : written submissions JUDGMENT DATE : 22 September 2004

JUDGMENT OF : Santow JA at 1; Bryson JA at 59; Stein AJA at 61 DECISION : Application for indemnity costs dismissed with costs.

CATCHWORDS : COSTS - application for indemnity costs - Calderbank letter sent by appellant prior to proceedings below offering settlement in terms "verdict in favour of the Council with each party to bear its own costs" - whether genuine offer of compromise - whether discretion to award indemnity costs should be exercised. District Court Act 1973 s148B; Pts 19A and 39A r25 LEGISLATION CITED : Legal Practitioners Act 1987 Division 6 of Pt 11 Supreme Court Act 1970 s76; Pts 22 and 52A r22 Bishop v State of NSW (Dunford J, 17 December 2000, unreported) Brodie v Singleton Shire Council; Ghantous v Hawkesbury City Council (2001) 206 CLR 512 Byrnes v Burwood Council [2002] NSWCA 343 Calderbank v Calderbank [1975] 3 All ER 333 Cutts v Head [1984] Ch 290 Colgate Palmolive v Cussons (1993) 118 ALR 248 Computer Machinery Co Ltd v Drescher [1983] 1 WLR 1379 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 GIO General Ltd v ABB Installation & Service Pty Ltd [2000] NSWCA 118 Hillier v Sheather (1995) 36 NSWLR 414 Hobartville Stud v Union Insurance Co (1991) 25 NSWLR 358 CASES CITED : Jones v Bradley (No 2) [2003] NSWCA 258 Laguillo v Haden Engineering Pty Ltd [1978] 1 NSWLR 306 Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 McKerlie v State of New South Wales (No. 2) [2000] NSWSC 1159 Morgan v Johnson (1998) 44 NSWLR 578 Multicon Engineering Pty Limited v Federal Airports Corp (1996) 138 ALR 425 Oshlack v Richmond River Council (1998) 193 CLR 72 Richmond Valley Council v Standing [2002] NSWCA 359 RTA v McGuinness [2002] NSWCA 210 Singh v Singh (No 2) [2004] NSWSC 225 SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 Tickell v Trifleska Pty Ltd (1991) 25 NSWLR 353 PARTIES : LEICHHARDT MUNICIPAL COUNCIL (Appellant) Kevin Anthony GREEN (Respondent) FILE NUMBER(S) : CA 40448/03 COUNSEL : K M GUILFOYLE (Appellant) P R STERNBERG (Respondent) SOLICITORS : Phillips Fox (Appellant) Elias Gates & Associates (Respondent)

LOWER COURT District Court JURISDICTION : LOWER COURT DC 10367/02 FILE NUMBER(S) : LOWER COURT Garling DCJ JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40448/03 DC 10367/02

SANTOW JA BRYSON JA STEIN AJA

22 SEPTEMBER 2004 LEICHHARDT MUNICIPAL COUNCIL v Kevin Anthony GREEN Judgment 1 SANTOW JA: INTRODUCTION Since judgment was delivered, submissions have been received by both parties following the successful appeal by Leichhardt Municipal Council, defendant in an action brought by the respondent. Essentially the successful appellant seeks a variation of the order for costs so as to obtain costs on an indemnity basis from 19 March 2003. It bases its application on what it contends is the proper application of the principles in Calderbank v Calderbank [1975] 3 All ER 333, following an offer to settle contained in a letter of that date. 2 The salient facts concerning that offer of 19 March 2003 are as follows: (a) Trial was set down for 1 May 2003; (b) Five weeks before the trial, Council issued a letter dated 19 March 2003 making an offer of settlement in terms of "verdict in favour of the Council with each party to bear its own costs". The settlement offer was expressed to be open for 28 days from the date of the letter. The offer appears to have been a Calderbank offer, but not an offer under Pt 19A of the District Court Rules; (c) Green did not accept the offer; (d) On 13 May 2003, Garling DCJ entered judgment for Green in the sum of $173,354 with costs; (e) On 20 May 2004, this Court set aside the judgment at trial and entered a verdict in favour of the Council with costs;

Submissions 3 A summary of the written submissions made by each party is as follows: 4 (a) Council claims costs on an indemnity basis for the period after 19 March 2003, invoking the principles in Calderbank (supra) arguing that the Court should exercise its discretion in the circumstances, in particular contending: (a) The offer was made at a reasonable time prior to the trial. The offer was dated 19 March 2003. The trial was set down 1 May 2003 - more than 5 weeks after the date of the offer;

(b) The offer was open for a reasonable time - 28 days;

(c) the evidential basis for the offer was set out in the body of the letter, allowing the Respondent the opportunity for an objective analysis of the case, and the opportunity to make an informed tactical decision based upon the evidence that they had served;

(d) Reference was made by the appellant to the evidential problems within the Respondent's case, such that it was reasonable that the Respondent should have settled the matter without costs penalties;

(e) the attention of the Respondent was drawn to the opinions expressed by the experts and the fact that there was no evidence by which the opinions of the experts were supported. This is a matter that was addressed by this honourable Court in the judgment at paras [34] and [38], whereby the Court found that the opinions of the experts were no more than speculation;

(f) The letter was sent by the Appellant with a bona fide view to settlement of the matter. The matter could have been addressed by the Respondent and the matter could have been resolved on the basis that each party pay its own costs;

(g) The evidential problems were not addressed by the Respondent and the experts' reports were not rectified. Instead, the Respondent prosecuted the matter on the same evidence and using the same reports that were shown in the letter to be insufficient to establish his claim. This view was confirmed by the judgment of this Court." 5 In reply the appellant added this: "An analysis of the factual and evidential matrix operating in the present case at the time of sending the Calderbank letter reveals that the Respondent was bringing a claim where:

(a) the experts employed by him had engaged in speculation and the admissibility of their reports was compromised by application of the reasoning in Makita (Australia) Pty Limited v Sprowles [2001] NSWCA 305;

(b) the Respondent had fallen into a hole near a Water Board outlet, and the Respondent had discontinued against the Water Board;

(c) cases such as Ghantous in the High Court and the Road authority cases in the New South Wales Court of Appeal, had delineated the nature and the duty incumbent upon a road authority.

On the evidence before the Court, at the time of the sending of the Calderbank letter, the Respondent's claim had obvious difficulties.

At the time the Calderbank letter was sent, the matter had been to arbitration and had been set down for hearing. The Appellant had thus incurred substantial costs. The Respondent's case was viewed by the Appellant to have been untenable, and this view, and the basis for it, was set out quite explicitly in the letter. In these circumstances, the Appellant was prepared to waive its costs if the Respondent accepted the offer. The waiver of costs incurred to the Appellant to the date of the Calderbank letter, in the circumstances of an untenable case, was a substantial offer and, it is submitted, should not be characterised as a mere demand for capitulation." 6 The respondent Mr Green claims the offer was not an offer of a real and genuine compromise sufficient to form the basis for an indemnity costs order. Rather it was one which required the plaintiff/respondent to "abandon his proceedings to avid the risk of a costs order", citing Dunford J in McKerlie v State of New South Wales (No. 2) [2000] NSWSC 1159 (8 December 2000) at [6] and [10] and [11], quoted below: "Orders for indemnity costs following the rejection of the offer of compromise pursuant to Supreme Court Rules Part 52A rule 22 and "Calderbank" letters are becoming increasingly frequent. However, in my view such order should not be made as a matter of course and certainly should not be made where there is no offer of a real or genuine compromise …".

"I dealt with a similar application on 17 November last in the matter of Bishop v State of New South Wales (unreported - Dunford J - 17 November 2000) a defamation case where the plaintiff had been wholly unsuccessful and there was no existing order for costs, but the effect of the offer required the plaintiff to abandon his proceedings and avoid the risk of an anticipated order for costs. In refusing the application I said: 'There was not in any real sense an offer to compromise the proceedings, but merely an offer to induce the plaintiff to abandon his claim; and in my view orders for indemnity costs should not be used to deter persons from bringing proceedings which they feel they are entitled to bring, even if those proceedings are ultimately unsuccessful. It is different if there is a compromise involved, such as by offering part of what the plaintiff claims or can reasonably expect to receive if successful'."

"… but I do not regard an offer in relation only to costs as an offer of a genuine compromise".

Disposition of appeal on costs 7 The principles and policy underlying the costs sanctions relating to unaccepted offers of compromise are well settled. 8 The Court has a general inherent discretion over the costs of all proceedings. That much is clear from s76 Supreme Court Act 1970 and s148B District Court Act 1973. The discretion must of course be exercised judicially and in accordance with the rules of court, as applicable. Nevertheless such rules that have been made, especially as to offers of compromise, have been expressed so that they guide and influence a Court's discretion without governing it: Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721. Such other common law principles as have developed operate merely as guides to how the discretion might appropriately be exercised. 9 The resolution of the costs application in this appeal depends upon a consideration of the public policy objectives behind the principles of law that visit unaccepted offers of compromise with significant costs consequences on the party who elects not to accept. This involves consideration of the coexistent statutory and common law frameworks, each of which may be applicable in different circumstances. 10 The common law rules of practice stem from the decisions of the English Court of Appeal in Calderbank v Calderbank (supra) and Cutts v Head [1984] Ch 290. In the former case, Cairns LJ stated (by way of obiter) that a letter making a settlement offer which was marked 'without prejudice' could be considered by the Court in making orders with respect to costs. Cutts v Head confirmed the validity of the practice (which by that time was widespread) and extended it beyond matrimonial causes. In Calderbank, Cairns LJ saw the practice as filling a procedural lacuna in the family jurisdiction where payment into court, with its attendant advantages, was not an appropriate course (at 342). 11 The procedure of payment into Court in cases where a debt or damages was claimed provided that neither the fact nor the amount, of such a payment (or whether it was made with or without an admission of liability) could be revealed to the judge trying the case until judgment had been given on all matters other than costs. Then, depending on the outcome of the trial, the payment into court became a factor relevant to the Court's discretion in awarding costs. As the NSW Court of Appeal made clear in Laguillo v Haden Engineering Pty Ltd [1978] 1 NSWLR 306, if payment had been made into court by the defendant and not accepted by the plaintiff, and the plaintiff ultimately recovered equal to or less than the sum paid into court it could fairly be said that though the defendant had failed on the issue of liability, it had succeeded on the issue of quantum. Accordingly, since costs generally follow the event, an appropriate exercise of discretion would be to award the defendant costs from the date of the payment in. The nub of the reason why the Court's discretion might be moved in one or other direction lay in the reasonableness or otherwise of the plaintiff's failure to accept the payment into court, in satisfaction of the claim. Where there is an adequate sum in court it obviously becomes less reasonable for a plaintiff to pursue its undoubted right to seek a remedy in court - a remedy involving significant costs and public expense - and thus the plaintiff should pay for its unreasonable conduct. Because the plaintiff certainly has a right to proceed to Court, any penalty for unreasonable conduct should only lie in the area of the court's general discretion on costs. 12 Such principles have consistently found expression in the case law. In Cutts v Head, Fox LJ reiterated that the purpose of the 'without prejudice' rule was to facilitate compromises of claims and expressed the view that a reservation as to costs in such a letter would not inhibit reasonable compromises. In fact, the contrary was the case (at 315): "If a party is exposed to a risk as to costs if a reasonable offer is refused, he is more rather than less likely to accept the terms and put an end to the litigation. On the other hand, if he can refuse reasonable offers with no additional risk as to costs, it is more rather than less likely to encourage mere stubborn resistance." 13 Oliver J (at 311) also referred with approval to similar comments made by Megarry V-C in Computer Machinery Co Ltd v Drescher [1983] 1 WLR 1379 at 1383: "Whether an offer is made 'without prejudice' or without prejudice save as to costs', the court ought to enforce the terms on which the offer is made so as to encourage compromises and shorten litigation. The latter form of offer has the added advantage of preventing the offer from being inadmissible on costs, thereby assisting the court towards justice in making the order as to costs." 14 It can be seen from these cases that the practice of Calderbank letters is allowed because it is thought to facilitate the public policy objective of providing an incentive for the disputants to end their litigation as soon as possible. Furthermore, however, it can be seen as also influenced by the related public policy of discouraging wasteful and unreasonable behaviour by litigants. 15 The statutory procedures for offers of compromise and the associated prospect of costs consequences upon those who fail to take them up are now to be found in the respective Rules of Court; in New South Wales Pts 19A and 39A r25 of the District Court Rules 1973 and Pts 22 and 52A r22 of the Supreme Court Rules 1970. For practical purposes, these two sets of provisions operate almost identically, subject to what follows. The current statutory framework governing offers of compromise represents a refinement of the older rules governing payment into court, making them considerably more flexible and tailored to the public policy objectives they serve, which underlay the common law principles regarding Calderbank letters. 16 Since 1998, the District Court Rules have expressly specified the objects behind visiting unaccepted offers of compromise with sanctions. It is however important to bear in mind that there is a discretion in the court to relieve a party from the imposition of a costs penalty, but it is "to be exercised only in an exceptional case and for the avoidance of substantial injustice". These objects are contained in Pt 39A r25(1A) and Practice Note 42: " Part 39A r25 (1A) The objects of this rule are: (a) to introduce an added element of risk in order to promote early settlement of actions without hearing or arbitration, (b) to compel the parties to an action, under threat of possible penalties in costs, to arrive at an early assessment of the amount of damages, if any, recoverable by the plaintiff, (c) to encourage the making and acceptance of reasonable offers of compromise by: (i) providing for penalties in costs to be imposed on a party who rejects an offer of compromise and does not at the hearing or arbitration of the action achieve a position better than he would have held if he had accepted the offer of compromise, and (ii) providing corresponding costs relief to the party making the offer, (d) to impart as much certainty to the imposition of costs penalties referred to in object (c) as may be imparted without substantial injustice, and (e) to provide a discretion in the Court to relieve a party from the imposition of a costs penalty, to be exercised only in an exceptional case and for the avoidance of substantial injustice. (1B) A decision of the Court to make or refuse to make an order for costs under this rule must be made in pursuance of the objects of this rule.

Practice Note 42 "Offer of compromise depends for its effectiveness [as an aid to the settlement of actions before hearing] on a reasonable degree of certainty in both parties that rejection of an offer that should have been accepted will have serious consequences in costs." 17 There is no direct counterpart in Pt 52 r22 of the Supreme Court Rules to DCR Pt 39 r25(1A) or to Practice Note 42. 18 The New South Wales Court of Appeal appears to have accepted that a Calderbank offer is a legitimate alternative to an offer of compromise under the statutory rules. That conclusion is implicit in the reasoning of the Court in Jones v Bradley (No 2) [2003] NSWCA 258 at [5]. Thus a party may elect between the two procedures in making an offer of compromise. 19 There are some distinctions between the two procedures in their attendant costs consequences. A key difference is that where an offer of compromise has been made under the Rules, a prima facie entitlement arises in the relevant party to have costs awarded in accordance with the appropriate Rule. This entitlement, though subject to the Court's discretion to prevent substantial injustice in exceptional cases, will rarely be interfered with: District Court - Practice Note 42; Supreme Court - Hillier v Sheather (1995) 36 NSWLR 414 and Morgan v Johnson (1998) 44 NSWLR 578. By contrast, the costs consequences attendant under general law upon an offer of compromise made in a Calderbank letter lie within the discretion of the Court, to be exercised having regard to all the relevant circumstances of the case: SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37] per Giles JA; affirmed in Jones v Bradley (No 2) (supra) at [9] per curiam. It is not the case that unaccepted offers of compromise by Calderbank letter should give rise to a prima facie presumption of indemnity costs if the offer is not bettered. 20 Despite such differences, the two procedures should be regarded as being directed to the same ends. It is relevant for a Court considering a Calderbank offer to consider the various Rules of Court concerning offers of compromise when exercising its discretion regarding costs, although the Court's discretion is not constrained by those rules: Jones v Bradley (No 2) at [13] per curiam. 21 In the case of Calderbank offers in an appeal context, the question of whether an offer is characterised as a genuine offer of compromise is almost the same as the question of whether costs sanctions should flow from such an offer. There is little appreciable difference between saying that an offer should not in the court's discretion attract costs sanctions in the circumstances and saying that an offer is not a genuine offer of compromise in the circumstances. Both depend upon a value judgment of the offer and the conduct of the parties in the circumstances of the claim. In the case of offers of compromise under the rules, however, the question may take on a larger significance as has been seen, because of the stronger prima facie entitlement entailed. Thus, it is appropriate to treat the two questions separately. 22 The question here posed is whether an offer by a defendant for judgment to be entered in its favour with each party to pay its own costs could constitute a genuine offer of compromise. 23 It is clear that an offer with no real element of compromise in it, which is designed merely to trigger the costs sanctions, will not be treated as a genuine offer of compromise. Thus an offer by a plaintiff demanding the full amount claimed was held not to be an offer of compromise attracting costs penalties: Tickell v Trifleska Pty Ltd (1991) 25 NSWLR 353. Rogers CJ Comm D concluded that the test was: "… whether in the totality of the circumstances, the offer by the plaintiff represented any element of compromise or whether it was merely, yet another, formally stated demand for payment designed simply to trigger the entitlement to payment of costs on an indemnity basis." (at 355) 24 Similarly in Hobartville Stud v Union Insurance Co (1991) 25 NSWLR 358, Giles J commented (at 368): "The answer to the plaintiff's questions is, in my view, that the scheme for offers of compromise and their costs consequences was intended to promote compromise - what Gleeson CJ in Baltic Shipping Co v Dillon "The Mikhail Lermontov" (1991) 22 NSWLR 1 at 9 called the '… particular policy of the law to encourage resolution of litigation by settlement …'. Compromise connotes that a party gives something away. A plaintiff with a strong case, or a plaintiff with a firm belief in the strength of its case, is perfectly entitled to discount its claim by only a dollar, but it does not in any real sense give anything away, and I do not think that it can claim to have placed itself in a more favourable position in relation to costs unless it does so. It follows that I respectfully agree with the approach of Rogers CJ Comm D in Tickell v Trifleska Pty Ltd. In particular cases it may be difficult to decide whether or not a purported offer of compromise is truly a compromise …" 25 However both Rogers CJ Comm D and Giles J (as he then was) were speaking in the context of an offer of compromise by a plaintiff. The position of a defendant without a cross-claim is analytically quite distinct. First, a defendant by definition is not the claiming party, and thus is not before the Court voluntarily. If it reasonably disputes liability and has a firm belief in the strength of its case, the best solution it can hope for - that the claim is dismissed - is not a monetary one. It will in economic terms be no better or worse off for its victory by way of successful defence, costs aside. Thus, unlike a plaintiff, it cannot discount its optimum return by way of compromise. It does not need the same sorts of incentive as a plaintiff does to compromise. It cannot, in the expectation of receiving $100,000, offer to compromise proceedings for $75,000 to reflect the vicissitudes and expenses of litigation. 26 Therefore the only option for a defendant is not an attractive one; to 'buy off' the claim by offering to pay unmeritorious claimants a sum of money to discontinue the litigation. This practice, though it no doubt occurs, is not one which the law should encourage. The policy of the law is certainly to encourage genuine compromise, but it is no genuine compromise for a defendant to pay off a plaintiff or series of plaintiffs. Second, a defendant will know that if it loses on liability, the general rule will result in costs being awarded in favour of the successful plaintiff on a party and party basis (as set out in Division 6 of Pt 11 of the Legal Practitioners Act 1987). This means that a defendant already has less of an incentive to offer a compromise by conceding liability or quantum or both. As far as costs are concerned, a defendant who disputes liability and has a firm belief in the strength of its case will generally expect to reap no more than party and party costs in its favour. It will still be out of pocket to the tune of the difference between party and party costs and solicitor/client costs. What can such a defendant offer by way of compromise, in furtherance of the policy of the law of early settlement of disputes? 27 It is trite law that, whether or not an offer is a genuine offer of compromise or merely a demand to capitulate depends upon an assessment of all the circumstances of the case at the time. In this case, as the Council points out, the Calderbank letter was sent at a time after the matter had been to arbitration (presumably unsuccessfully) and set down for trial. Thus significant costs had been incurred by both parties at the time the offer was made. The Council was a defendant which disputed liability and had a firm belief in the strength of its case. It could expect to obtain no more, if the matter proceeded to trial and its beliefs were vindicated, than a verdict in its favour and an award of party and party costs for the whole of proceedings. 28 To analyse this more closely, let the (solicitor/client) costs incurred by the Council thus far equal $x, the (solicitor/client) costs incurred thus far by Mr Green equal $y. Further let the remaining (solicitor/client) costs to be incurred by the council be $x2 and the remaining (solicitor/client) costs to be incurred by Mr Green be $y2. Lastly, let an award of party and party costs at the end of the proceedings be $z. From the Council's point of view it was offering Green, a not insignificant concession, given its belief in the strength of its case. It is assumed that party and party costs will be less than solicitor/client costs (thus $x+$x2 > $z). The following table shows the net increase or decrease in each party's economic position from the Council's point of view: If Council does not make offer, and wins If Council makes offer, and is accepted Council's net loss ($x + $x2)- $z $x Green's net loss ($y + $y2 +$z) $y

29 It is clear from this that Green will be in economic terms be ($y2 +$z) better off in accepting the offer rather than going to trial and losing (it is not relevant that Green will still be in real terms $y poorer). This will always be the case for plaintiffs. Conversely, Council (and defendants) will in economic terms be worse off by offering the compromise as long as $x+$x2-$z is less than $x. This will sometimes be the case (and sometimes not) depending upon the numerical values involved. It is very difficult if not impossible to formulate any general rule for when the costs incurred so far will exceed the net costs liability (total solicitor/client costs minus party and party costs) of a successful defendant at the end of proceedings. Obviously, however, the further into proceedings that settlement offers of this kind are made, the greater the likelihood that an actual economic loss will be incurred. 30 That much would be true of almost all 'walk-away' offers where a defendant offers a plaintiff the opportunity to walk away from litigation without penalty as to costs. It cannot be denied that the offer was from the Council's (subjective) point of view a substantial offer, convinced as it was of the strength of its case. But that does not, in itself, answer the question of whether the offer contains an element of "compromise", as referred to above. The fact of the matter is that the Council was not really compromising its position at all - it maintained it was not liable and that the law clearly justified the rightness of its cause. Its attitude was not one of compromise in the sense of strict give and take, but it was made in a bona fide attitude designed to reach settlement, which accords with the policy of the law in encouraging early termination of litigation. It is certainly arguable that its letter was not a mere demand for capitulation; it was a reasoned suggestion of capitulation which alerted the plaintiff to what the Council saw as the deficiencies in the plaintiff's case. Given the position in which the Council as defendant found itself (see above), it is difficult in the circumstances to conceive what it otherwise could have done by way of affirmative step towards ending litigation (aside from 'buying off' the plaintiff). It is submitted that there are compelling reasons for treating a defendant's 'walk-away' offer such as this in these circumstances as different from a plaintiff's offer to settle for the full sum claimed. However, it does not follow from this that costs sanctions should follow as a matter of course. 31 There is, however, authority apparently to the contrary. In Singh v Singh (No 2) [2004] NSWSC 225, Barrett J held that a 'walk-away' offer was not a genuine compromise which could found the basis for an indemnity costs order. Singh is clearly distinguishable from the present case since the 'offer' in that case in addition required the plaintiff to bear the defendant's costs to date. It was a true situation of a demand to capitulate. 32 In Bishop v State of NSW (Dunford J, 17 December 2000, unreported), the defendant had made a 'walk-away offer' requiring the plaintiff to abandon proceedings and thus avoid the risk of an anticipated order for costs. The plaintiff was wholly unsuccessful and the defendant sought indemnity costs from the date of the offer: Dunford J stated: "There was not in any real sense an offer to compromise the proceedings, but merely an offer to induce the plaintiff to abandon his claim; and in my view orders for indemnity costs should not be used to deter persons from bringing proceedings which they feel they are entitled to bring, even if those proceedings are ultimately unsuccessful. It is different if there is a compromise involved, such as by offering part of what the plaintiff claims or can reasonably expect to receive if successful." 33 The precise terms of the offer in Bishop do not appear from the record. Dunford J reapplied this principle in McKerlie v NSW (No 2) [2000] NSWSC 1159 in a case in which it appears the offer included a release from an already existing costs order as well as an escape from the risk of anticipated future costs orders. Dunford J appears to endorse the view that only a cash settlement offer representing part of the plaintiff's claim can be a true offer of compromise. With respect, that does not seem to be entirely consistent with the policy of the law in encouraging early settlement of disputes. 34 Nor is the line of authority in this area uniform. In GIO General Ltd v ABB Installation & Service Pty Ltd [2000] NSWCA 118, the issue arose tangentially before the Court of Appeal in the following circumstances. The defendant to a mesothelioma suit (ABB) cross-claimed against GIO, who were the insurers on risk in 1986 (at the time when the plaintiff was found to have been last employed by ABB in an employment of the nature of which the disease was due). TGI had been the insurer on risk at the time of the negligent exposure to asbestos (1963-69) and GIO contended that TGI (rather than it) was liable to indemnify ABB since it was the only insurer on risk during the period of causative exposure. 35 This argument was unsuccessful, the Court holding that s151AB of the Workers' Compensation Act applied, which at the time provided that "any liability of that … is taken to have arisen when the worker was last employed … by that employer in an employment to the nature of which the disease was due." Thus GIO was liable. TGI claimed indemnity costs based upon Calderbank offers it had made to ABB prior to the cross-claim proceedings. Those offers were that TGI be let out of the proceedings on the basis it would meet its own costs to that point. In its letters it pointed out to ABB that it considered that s151AB of the Workers' Compensation Act would operate as a defence to its liability. Solicitors for ABB declined the offer. The trial judge rejected the application for indemnity costs and ordered GIO to indemnify ABB and pay all the costs of all parties on the insurance issue on a party-party basis. The trial judge stated: "In the circumstances when all later insurers denied, and one would have thought on instructions and for good cause, liability to indemnify, I do not regard the actions for the solicitors for ABB, in declining to accept the Calderbank offer as unreasonable. I decline to make such an order." 36 Clearly the trial judge was proceeding on the basis that the offer of compromise was a valid and genuine offer of compromise, but one which should fail in the exercise of discretion. The Court of Appeal declined to interfere with this discretionary decision on costs, as no appellable error had been shown. Thus, it evidently concluded that no error of legal principle exists in holding that a 'walk-away' offer can in a particular case be a "genuine offer of compromise". There is no reason to doubt the correctness of that conclusion. It follows the approach of Dunford J should, if understood as stating a universal, non-discretionary rule to the contrary, not be followed. 37 In the circumstances of this case it is difficult to characterise the defendant's offer as merely a tactical step designed to secure the benefits which flow from whatever incentives there are. It should not, with respect, be seen as involving no realistic or genuine attempt to resolve the dispute by agreement, without going to the expense and time involved in court proceedings. Since the circumstances of the case are important, and in this case the Council's case was a strong one, it was appropriate for the offer to reflect the degree of optimism and confidence felt by the Council. In some cases a plaintiff's offer which allows only a small discount from 100% success on the claim can be genuine and realistic always depending upon the circumstances. The same is true of defendant's offers: in some cases it will not be necessary to offer any monetary proportion (however slight) of the plaintiff's claim. 38 That leads to the question was the offer in these circumstances a "genuine" offer of compromise? 39 Accepting that such an offer as was made is capable of being a genuine offer of compromise, the next step is to consider whether the particular offer in the circumstances represented a genuine attempt to reach a negotiated settlement, rather than merely to trigger any costs sanctions. 40 This was an offer made, as the Council points out, five weeks prior to trial and after quite lengthy pre-trial proceedings, including a (presumably unsuccessful) arbitration. The Council made an offer reflecting their own confidence in the strength of their case. The offer seems to have also expressly directed the plaintiff's legal advisors to the perceived evidentiary difficulties with the plaintiff's case. There is no rule to the effect that an optimistic offer is not a genuine offer. Whether or not it was reasonable to reject an offer is a question that may figure in the discretionary balance, but it is not a question which affects the genuineness or otherwise of the offer. 41 That leads to the final question, should a discretion to order indemnity costs be exercised in favour of such a defendant in these circumstances? 42 The first thing to be noted is that under the Rules of Court, indemnity costs are not the stipulated costs sanctions for unaccepted offers of compromise by defendants. As indicated above, the rules of court provide for different costs consequences to flow from unaccepted defendant offers than from unaccepted plaintiff offers. In the Supreme Court Rules, the relevant rule after 30 June 1994 is Pt 52A r22(6) (which in this respect is not materially different from the predecessor Pt 52 r17(5)). SCR Pt 52A r22 is mirrored with minor differences in the District Court Rules Pt 39A r25(6). This version of the rule came into force on 1 January 1998 and was accompanied by Practice Note 42 (above). Under the District Court rule, an unaccepted offer by a defendant has the following consequences: " DCR Pt 39A r25(6) [c.f. SCR Pt 52A r22(6)] Where an offer is made by a defendant and not accepted by the plaintiff, and the plaintiff obtains an order or judgment on the claim to which the offer relates not more favourable to him than the terms of the offer, then, unless the Court in an exceptional case and for the avoidance of substantial injustice otherwise orders, the plaintiff shall be entitled to an order against the defendant for the plaintiff's costs in respect of the claim up to and including the day the offer was made, assessed on a party and party basis, and the defendant shall be entitled to an order against the plaintiff for the defendant's costs in respect of the claim thereafter assessed on a party and party basis." [emphasis added] 43 The rule provides basically that a defendant will be entitled to party and party costs from the date of an unaccepted offer of compromise, if the plaintiff obtains a result no better than the offer. This incentive only really has any effect when the plaintiff is successful, which is not the case here. It is important to note that this is not really anything over and above what the defendant would recover if it had been totally successful in the case. Unlike with the case of offers by a plaintiff, the rules of Court do not provide any entitlement to indemnity costs for a defendant. The rules do not have anything at all to say in a situation such as the present. 44 Given that this is the case under the Rules, it would be a curious thing if a different result were to prevail if a defendant makes its offer by way of Calderbank letter. Although the rules do not constrain a Court's discretion as to costs when dealing with a Calderbank letter (Jones v Bradley (supra)) it should not be forgotten that policy objectives behind the two procedures remain wedded. Furthermore, it would be incorrect to assume that policy cannot move forward. Thus Practice Note 42 and the new DCR Pt 52A r25(1A) reveal quite clearly a more refined articulation of the policy objectives underlying the offer of compromise procedure in the District Court Rules. It is difficult to accept that the fact that a Calderbank offer by a defendant was not accepted gives rise to a prima facie entitlement to costs on an indemnity basis, when the course of authority in this area has been so overwhelmingly to the contrary. Such a large disparity between the result flowing from an offer of compromise under the Rules and a Calderbank offer can serve no useful purpose. Rather it would tend to increase the mischief which the 1998 DCR amendments sought to rectify - that is that enduring uncertainty as to the effect of offers of compromise on costs reduces their general effectiveness as incentives to litigants to settle early. 45 Costs on an indemnity basis are awarded following unaccepted plaintiff offers, as a necessary incentive to defendants to settle. The defendant will be liable for costs on a party and party basis anyway, if it loses. By contrast, depriving a successful plaintiff of costs, and awarding them in favour of a defendant should ordinarily be sufficient sanction against a plaintiff's failing to give adequate consideration to a defendant's offer. The fact that the defendant may ultimately have a verdict in its favour does not alter the incentive scheme. A successful defendant will generally receive party and party costs when it wins. No additional sanction is ordinarily necessary to make a plaintiff consider the defendant's settlement offer over and above that. A plaintiff will ordinarily have regard to any defendant's offer without need for additional incentives, because a plaintiff as initiator of the action, primarily bears the risk of the claim. If the plaintiff's claim fails, the plaintiff's own investment (in costs) will be lost and the plaintiff will carry the burden of the investment it has forced the defendant to make in costs also. Defendant offers are thus treated differently in the Rules than plaintiff offers for good reason. 46 It is respectfully submitted that there is no principle of law or persuasive policy reason why a defendant's unaccepted offer of compromise made by Calderbank letter should give rise to costs sanctions on any basis different to that provided by the Rules. Under the rules, such costs would only be awarded in exceptional circumstances if the Court "otherwise orders". For the Court to depart from the general rule there must be particular grounds on which the Court can exercise its discretion: Hillier v Sheather (1995) 36 NSWLR 414. A defendant must resort to showing that the plaintiff's rejection of the offer was "unreasonable" under the general law: Multicon Engineering Pty Limited v Federal Airports Corp (1996) 138 ALR 425. That discretion is to be exercised in all the circumstances of the case: SMEC Testing Services Pty Limited (supra) at [37] per Giles JA affirmed in Jones v Bradley (supra) at [9]. Indemnity costs do not flow as a matter of course from unaccepted defendant offers. 47 The conclusion that indemnity costs should not be viewed as a necessary or automatic consequence of not accepting a defendants offer does not in any way deny the general discretionary power of the Court regarding costs in such circumstances. It merely recognizes that, influenced but not bound by the rules, a Court will be reticent to award such indemnity costs following defendant offers of settlement. It cannot be forgotten that the power to award indemnity costs is within the Court's general discretion in any event (see s148AB District Court Act 1973, s76(1)(c) Supreme Court Act 1970). It is preferable to consider applications for indemnity costs following unaccepted offers of compromise by defendants as being applications for a favourable exercise of the Court's general discretion to award indemnity costs. As far as Calderbank offers go there is very little difference, the costs consequences of these lying entirely within the Court's general inherent discretion on costs. Nothing said in GIO General Ltd v ABB Installation & Service Pty Ltd (supra) derogates from this conclusion. The Court there merely held that the trial judge's discretion not to award indemnity costs was not appellably erroneous. The decisions of Dunford J in Bishop (supra) and McKerlie (supra) can be regarded likewise. The authorities (especially Jones v Bradley) emphasise the width of the discretion and the unusual nature of an award of indemnity costs in relation to Calderbank letters. 48 The circumstances warranting favourable exercise of the discretion were considered by Sheppard J in Colgate Palmolive v Cussons (1993) 118 ALR 248 to include: "(a) The making of allegations of fraud knowing them to be false, and the making of irrelevant allegations of fraud; (b) Evidence of particular misconduct that causes loss of time to the court and the other parties; (c) The fact that proceedings were commenced for some ulterior motive; (d) The fact that the proceedings were commenced in wilful disregard of known facts or clearly established law; (e) The making of allegations that ought never to have been made or the undue prolongation of a case by groundless contentions; (f) An imprudent refusal of an offer of compromise; (g) Am award of costs on an indemnity basis against a contemnor." 49 In the course of judgment, Sheppard J said: "2. The ordinary rule is that, where the court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on a party and party basis. In this court the provisions of ) 62, rr 12 and 19, and the Second Schedule to the rules will apply to the taxation. In many cases the result will be that the amount recovered by the successful party under the Order will fall short of (in many cases well short of) a complete indemnity. 3. This has been the settled practice for centuries in England. It is a practice which is entrenched in Australia. Either legislation (perhaps in the form of an amendment to rules of court) or a decision of an intermediate Court of Appeal or of the High Court would be required to alter it. No doubt any consideration would require the resolution of the competing considerations mentioned by Devlin LJ in Berry v British Transport Commission [[1962] 1 QB 306] and Handley JA in Cachia v Hanes [(1991) 23 NSWLR 304] on the one hand and by Rogers J in Qantas [Airways Ltd v Dillingham Corporation (SCNSW, 14 May 1987, unreported)] on the other … 4. In consequence of the settled practice which exists, the court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the court in departing from the usual course." (at 250-1) [emphasis added] 50 The competing considerations referred to are (1) the view (of Devlin LJ and Handley JA) that the current costs rules providing a limited indemnity is a compromise between the interests of successful and unsuccessful litigants and (2) the view (of Rogers J) that the interests of justice require that a successful party always be fully indemnified given that the gap between recoverable costs and solicitor and client costs is so large as to have a large impact on all but the most wealthy. 51 Since Sheppard J heard Colgate, the matter has been considered by the High Court in Oshlack v Richmond River Council (1998) 193 CLR 72 which confirmed that in the absence of special circumstances, the general rule should be applied by the court in awarding costs to the successful party. Nothing said by the Court suggests that costs are to be generally awarded on anything other than the accepted party and party basis. Gaudron and Gummow JJ stated (at 89): "There is no absolute rule with respect to the exercise of the power conferred by a provision such as s69 of the Court Act that, in the absence of disentitling conduct, a successful party is to be compensated by the unsuccessful party. …

Nor, before or since the introduction of the Judicature system, has there been any absolute proposition that the sole purpose of a costs order is to compensate one party at the expense of another …

It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a "solicitor and client" basis or an indemnity basis. The result is more fully or adequately to compensate the successful party the disadvantage of what otherwise would have been the position of the unsuccessful party in the absence of such delinquency on its part." 52 The question before this Court is whether there are sufficient circumstances to displace the general rule that only party and party costs can be recovered by the successful defendant on appeal. The Council's submission poses the following questions: (1) should indemnity costs be awarded because Green should have known that the action would fail, in the sense that the plaintiff had no regard to the facts or to the law: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; (2) should indemnity costs be awarded because the plaintiff unreasonably refused an offer of compromise? 53 As far as the first question is concerned, the Council submitted that it had in its Calderbank offer brought to the attention of the plaintiff the evidentiary difficulties surrounding the expert reports (which on appeal were found to have been wrongfully accepted into evidence by the trial judge). The Council also submitted that the proceedings were brought after the enactment of the Civil Liability Act and after the 'road cases' (RTA v McGuinness [2002] NSWCA 210; Byrnes v Burwood Council [2002] NSWCA 343; Richmond Valley Council v Standing [2002] NSWCA 359 and Brodie v Singleton Shire Council; Ghantous v Hawkesbury City Council (2001) 206 CLR 512) had delineated the nature and extent of duties incumbent upon road authorities. The Council claims that the case had obvious difficulties. 54 This first submission amounts to a claim that indemnity costs should flow from maintaining a claim without reasonable prospects of success. If so, one asks rhetorically why no motion to strike out the plaintiff's claim was made. But in any event this question merges into the second, dealt with below. 55 As far as the second question is concerned, it is arguable that it was unreasonable for the plaintiff to refuse the offer of compromise in the circumstances. The plaintiff is under a duty to give careful consideration to any offers of compromise made by a defendant, but having done so may proceed to court nonetheless. The Council pointed out evidentiary deficiencies. It is true that some of these in fact proved (on appeal) to exist, and the plaintiff proceeded to trial without in any way seeking to rectify what was found on appeal to be the evidential problems. Thus the inference is open that the plaintiff did not give sufficient consideration to the offer made by the defendant in the circumstances of the case. Of course this is now in hindsight. The plaintiff, mistakenly may well quite genuinely have considered that the deficiencies indicated by the Council were more apparent than real. Moreover, it could not be said that the plaintiff's case was hopeless or that it must follow that the plaintiff failed genuinely to consider the offer of compromise. It was not simply rejected out of hand, though it appears the offer was simply left unaccepted. 56 In Multicon (supra) Rolfe J expressed the view that unreasonableness was prima facie found in the failure by the offeree to accept the offer which was not bettered on judgment. Rolfe J did emphasise, however, the primacy of the facts in the circumstances of each case. Subsequent decisions of this Court, principally Jones v Bradley (supra) have emphasised that these are all-important and that there is no presumption of indemnity costs in situations such as this (which the reasoning of Rolfe J seems to imply). The question of reasonableness in rejecting an offer is not answered by a presumption; it depends on the circumstances of each case. 57 Furthermore, there is no apparent "general delinquency" (Oshlack (supra)) on the part of the plaintiff sufficient to move the Court to displace the general rule on costs. Such costs orders should be reserved for the most unreasonable actions by unsuccessful plaintiffs. An instance would be peremptorily dismissing an offer of compromise (however small) such that an inference can be drawn that no bona fide consideration was given to early settlement of the claim. That was not the case here. This was a small offer by the defendant, albeit in a genuine effort to settle proceedings at an early stage. Given all the circumstances including the nature of the offer, I do not think it can be said that it was unreasonable for the plaintiff to have refused it.

CONCLUSION AND ORDERS 58 I would therefore conclude that there is no sufficient basis to order costs on any basis other than the partial indemnity which the general rule provides, that is, costs on a party and party basis. The offer was made moreover before trial and not made in relation to the appeal. It was not available while the appeal was pending. I would propose that the application for indemnity costs should therefore be dismissed with costs. 59 BRYSON JA: I agree with the conclusions reached by Santow JA. The application for an order for costs to be assessed on the indemnity basis raises a discretionary question the answer to which is not in my view susceptible of much detailed exposition. The settlement offer was made before trial and was no longer available while the appeal was pending. The respondent's case did not succeed, but it was not a case which could not reasonably be argued and it succeeded at first instance. The only element of compromise in the offer was as to costs: otherwise it was a call on the respondent to capitulate and give up: the element of compromise was slight, and the respondent's ultimate lack of success does not to my mind demonstrate that the reasonable course for the respondent was to capitulate, nor does anything show that the respondent was delinquent in going on with the trial or in resisting the appeal. 60 In my judgment justice is done by awarding the appellant costs orders for the trial and the appeal on the usual basis of assessment. 61 STEIN JA: I agree with Santow JA. **********

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