The exercise of discretion
44 The Arbitrator rejected the Plaintiff's submission that the Defendant should be ordered to pay the Plaintiff's costs of the cross-claim on a solicitor and client basis (Reasons para 34). He went on to say that he did not consider "… that costs should be payable other than on a party and party basis on the cross-claim. This observation is subject to the question of the effect of the offer of settlement, which was made and rejected".
45 He expressed the view that the claim and cross-claim must be viewed as one piece of litigation (Reasons, para 35).
46 The Arbitrator considered (Reasons, para 52) that an offer requires a party to evaluate its case and to make some decisions as to the likelihood of success. He found that by the time of receipt of Mr Maxwell's letter of 5 June 2001, the Plaintiff, over a period of 18 months, had failed to prepare its case even to the stage of making an evaluation of the prospects of success.
47 He said:
"53. So far as the claim was concerned, it had been formulated originally in December 1999. Thereafter, and indeed several months before that, according to what is asserted in Mr Maxwell's letter of 5 June 2001, which was not disputed, offers of settlement had been made. By the time of the receipt of Mr Maxwell's letter of 5 June 2001, Letterbox had had some 18 months to assess its position including, of course, the damages it alleged it had suffered. Mr Hewett had had the benefit of Mr Star's views on the issue of damages. It is obvious from the history of the matter leading up to the vacating of the original hearing date that Letterbox had not given any proper attention to these matters. No acceptable explanation was given for the failure by Letterbox to do this, although there was some explanation given for its failure to be ready to proceed on the first hearing date.
54. Part of the basis for that failure was subsequently denied. Nonetheless, the simple fact is that over a period of 18 months Letterbox had failed to prepare its case even to the stage of making an evaluation of the prospects of success. As damages was the gist of the claim made, it was clearly, in my opinion, unreasonable for Letterbox to have commenced the litigation without any satisfactory evidence of that component. This conduct, in my opinion, amounted to "unreasonable conduct": Rosniak . Reasonable conduct on the part of a party contemplating commercial litigation would demand that early steps be taken to assess the various elements of its case. Subject to one matter, to which I shall refer in a moment, when all the circumstances of this case are considered, going back to the initial disputes between the parties which had manifested themselves by mid-1999 and led to the letter form Letterbox of December 1999, the failure by it to be in a position to respond to the offer, having regard to oral notice of the offer in December 2000, by June 2001, amounts, in my view, to "unreasonable conduct", which must, in my opinion, be taken into account in determining how to exercise the discretion. In my opinion the inability to better the offer when made amounted to unreasonable conduct to which I am entitled to have regard, in the exercise of my discretion in determining how costs should be awarded."
48 He proceeded as follows:
"56 …. Letterbox must have been aware that it was a serious offer and, so far as it is relevant, there can be no doubt that it was an offer put forward with a view to resolving the litigation. The terms of Mr Maxwell's letter could not, in my opinion, have been more plain.
57. The question, which then arises, is the consequence of these conclusions. So far as Letterbox's claim is concerned the result is that they provide a further basis to support the view to which I have come as to the basis on which costs of the claim should be paid.
58. The more difficult question is how the costs of the cross-claim should be adjusted, if at all.
59. In my opinion, the proper conclusion is that the cross-claim would not have been pursued, but for the claim. That would accord with the probabilities and it was stated by Mr Maxwell in his affidavit, which was not objected to nor sought to be challenged. As I have said the cross-claim was not in any way futile and Mr and Mrs Kirkham proved a substantial, although not a sufficient, amount in relation to it. I have also remarked that the litigation was, in essence, one piece of litigation.
60. Although this aspect of the matter has given me cause for concern, it seems to me that the proper exercise of discretion demands that Letterbox should pay Mr and Mrs Kirkham's costs of the cross-claim. After all, I am satisfied that it was Letterbox's failure to settle, which led to this lengthy arbitration, including the time spent in fighting the cross-claim. As, in my opinion, the conduct of Letterbox was unreasonable, I consider the costs should be paid on a solicitor and client basis".
49 The Plaintiff submits that its challenge to the award of costs to the Defendants in respect of the unsuccessful cross-claim raised the following questions of law:
"(1) Whether an offer by a party to "walk away" from a dispute with each party paying his own costs, where there is both claim and cross-claim, can be construed in respect of the determination of costs on the cross-claim as an offer without condition to abandon the cross-claim with each party paying his own costs;
(2) If a party makes an offer to settle a cross-claim by agreeing to a dismissal on the basis that each party pays his own costs does the other party secure a better outcome if the cross-claim is simply found to fail".
50 In substance the Plaintiff submitted that the Arbitrator fell into error by interpreting the Defendants' offers as consisting of two separate and distinct components, one being an offer in respect of the Plaintiff's claim, the other being one in respect of the Defendants' cross-claim. It was said that the Arbitrator proceeded on the erroneous basis that the discrete offer as to the cross-claim was capable of acceptance. It was said that, upon its proper construction, this "walk away" offer was one offer as to which the acceptance of one component was conditional upon acceptance of the other. It was put that the Arbitrator wrongly found the Plaintiff's conduct was unreasonable by reason of its non-acceptance of the offer as to the cross-claim, there being no such discrete offer capable of acceptance.
51 The Plaintiff contends that the erroneous approach of the Arbitrator is evidenced in para 52 of his Reasons, particularly by the statement:
"In the present case there was no difficulty, so it seems to me, in that part of the offer whereby Mr and Mrs Kirkham agreed to abandon their cross-claim and to pay their own costs".
52 In order to resolve the questions raised by the Plaintiff it is necessary to read the contents of para 52 in the context of the reasoning expressed in paras 53-60.
53 The thrust of the reasons in these paragraphs demonstrates that the failure of the Plaintiff to evaluate its case and to make some decision as to the likelihood of success was unreasonable. Obviously, by the expression "its case", was meant the Plaintiff's case or position in respect of the entire litigation including its claim and the cross-claim. The point made by reference to that part of the offer whereby the Defendants agreed to abandon their cross-claim and to pay their own costs was that the Plaintiff would have no difficulty in evaluating that element of the dispute. Absent explanation or excuse this was a factor taken into account in concluding that it was unreasonable for the Plaintiff to pursue the litigation when it had failed to responsibly evaluate its prospects of success.
54 Furthermore, the Arbitrator's reasons indicate to me that he kept in mind the principle that, generally, costs follow the event and that, for the purpose of this case, he treated the entire litigation as the event. The circumstances in which the litigation came to be commenced and maintained were in evidence, and entitled the Arbitrator to take a broad view of its outcome on the question of costs. He found that the Plaintiff was responsible for the litigation, the components of which were the claim and the cross-claim. Importantly, he found that the prosecution of the Plaintiff's claim was unreasonable but for which there would have been no cross-claim. I think it is fairly clear that the exercise of his discretion did not turn merely on a finding that the Plaintiff's unreasonable conduct was its rejection of so much of the offers as related to the cross-claim. (I should also observe that the Arbitrator did not overlook the fact that the offers, which were expressed to be for the settlement of the "dispute", were put on behalf of the Defendants prior to the commencement of the litigation).