Respondent: Morgan v Johnson: C T BARRY QC / L BABB

Costs - District Court - offer of compromise - discretion to "otherwise order" - rehearing of action referred to arbitrator - Arbitration (Civil Actions) Act 1983 - District Court Rules 1973, Pt 39A, r25, r31.

Costs - District Court - practice - departing from general rule - offer of compromise - offer not less than sum recovered by judgment - discretion to "otherwise order" - District Court Rules 1973, Pt 39A, r25

Costs - District Court - practice - rehearing of action referred to arbitrator - costs of arbitration and rehearing - evidence withheld from arbitrator - offer of compromise - offer not less than sum recovered by judgment - discretion to "otherwise order" - Arbitration (Civil Actions) Act 1983 - District Court Rules 1973, Pt 39A, r25, r31

Three appeals were heard concurrently. In each case a plaintiff injured in a motor accident obtained a modest verdict following a hearing in which liability was not or had ceased to be in issue. Each verdict fell well below the sums previously offered by the defendant by way of settlement offers and (in two cases) well below the amount previously awarded in arbitrations under the Arbitration (Civil Actions) Act 1983. In each case the trial judge declined to make the costs order stipulated in the District Court Rules 1973, Pt 39A, r25, and (in one case) that stipulated in Pt 39A, r31, exercising the exceptional power to "otherwise order".

(1) In determining the appropriate costs order under Pt 39A, r25, District Court Rules 1973 (formerly Pt 19A r9) the following principles apply:

(a) The purpose of the rule is to encourage the proper compromise of litigation and oblige the offeree to give serious thought to the risk involved in non-acceptance of an offer of compromise.

(b) The prima facie consequence of non-acceptance is that the rule will be enforced against the non-accepting party. The mere fact that it was reasonable for the litigant to take the view that he or she did in rejecting the offer is not enough to displace the rule.

(c) The discretion to displace the rule is a judicial one, requiring the private and public purposes of the rule to be borne in mind. Reasons must be given for "otherwise ordering".

Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721; New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100; Hillier v Sheather (1995) 36 NSWLR 414; Quach v Mustafa (Court of Appeal, unreported, 15 June 1995); Houatchanthara v Bednarczyk (Court of Appeal, unreported, 14 October 1996), applied.

(2) In determining the appropriate costs order under Pt 39A, r31, District Court Rules 1973 the following principles apply:

(a) A judge is entitled to have regard to information about what did or did not occur at the arbitration.

(b) (By Mason P, Sheller JA; Powell JA dissenting) If a party frustrates the process of settlement by withholding evidence at the arbitration, such conduct will be a key factor in the ultimate costs discretion.

Quach v Mustafa (Court of Appeal, unreported, 15 June 1995); Houatchanthara v Bednarczyk (Court of Appeal, unreported, 14 October 1996); MacDougall v Curlevski (1996) 40 NSWLR 430, applied.

[Briefly, a summary of the facts. A settlement offer to pay $35,000 plus costs was made one month prior to trial. Mahoney DCJ entered verdict for the plaintiff in the sum of $8,185. His Honour held that it might have taken a considerable time after the offer was made for the plaintiff to fully assess the consequences of not accepting it. On this basis, the plaintiff was ordered to pay the costs of the defendant as and from the date of hearing, and the defendant was ordered to pay the plaintiff's costs up to that time.]

There was no basis upon which the mandate of the costs rule could be displaced. Even if the plaintiff had acted reasonably in rejecting the offer - and there was no evidence of this - it would have been insufficient to displace Pt 39, r25.

(4) In the second appeal, GREEN V LOVATT (by Mason P, Sheller JA; Powell JA dissenting),

[An arbitration took place under the Arbitration (Civil Actions) Act 1983. The arbitrator made an award in favour of the plaintiff in the sum of $83,964 plus costs. Prior to the arbitration, video film was taken of the plaintiff acting in a manner inconsistent with his alleged injuries. This film was not presented to the arbitrator.

The plaintiff applied for a rehearing. The defendant offered $100,000 inclusive of costs, increasing that offer to $112,000 plus costs two months later. None of the defendant's offers were accepted. On 4 March 1997, judgment was entered against the defendant in the sum of $14,819. The defendant was ordered to pay the plaintiff's costs.]

(a) The existence of a "reasonable reason" for rejecting the settlement offer of August 1994 is not sufficient to displace Pt 39A, r25(6).

(b) Where the defendant refrains from tendering material at arbitration which would destroy the plaintiff's credibility, the defendant will have primary responsibility for the costs of the arbitration and rehearing. However, where it is the plaintiff and not the defendant who seeks a rehearing, it may be appropriate to displace only partially the costs order stipulated in Pt39A, r31(4).

[An arbitration took place under the Arbitration (Civil Actions) Act 1983. It resulted in an award of $51,226 plus costs in favour of the plaintiff. The defendant applied for a rehearing. One month prior to the rehearing, the defendant filed an offer of compromise in the sum of $20,000 plus costs which was not accepted by the plaintiff.

At the rehearing, the defendant called four witnesses who had not been called at the arbitration. Both parties were aware of the existence and evidence of these witnesses prior to the arbitration. Judgment was entered against the defendant in the sum of $17,607. The defendant was ordered to pay the plaintiff's costs of the arbitration and rehearing.]

Despite the failure of the defendant to tender critical evidence at the arbitration, its existence was known to both parties prior to the arbitration. The plaintiff had no justification for rejecting the subsequent settlement offer made. Part 39A r25(6) should not have been displaced.

2. Set aside the costs orders of Mahoney DCJ made on 11 February 1997.

(a) the defendant to pay the plaintiff's costs in respect of the claim up to and including 20 November 1996, assessed on a party and party basis;

(b) the plaintiff to pay the defendant's costs in respect of the claim thereafter, assessed on a party and party basis.

4. Respondent to pay appellant's cost of the appeal and to have a certificate under the Suitors' Fund Act if qualified.

2. Set aside costs orders of Solomon DCJ made on 4 March 1997.

3. In lieu thereof, order the defendant to pay the plaintiff's costs of the proceedings (including the costs of the arbitration hearing) except that each party is to bear his or her own costs incurred by reason of the rehearing following the arbitration.

4. Respondent to pay appellant's costs of the appeal and to have a certificate under the Suitors' Fund Act if qualified.

2. Set aside the costs orders of Mahoney DCJ made on 3 February 1997.

(a) the defendant to pay the plaintiff's costs in respect of the claim up to and including 6 November 1996, assessed on a party and party basis;

(b) the plaintiff to pay the defendant's costs in respect of the claim thereafter, assessed on a party and party basis.

4. Respondent to pay appellant's cost of the appeal and to have a certificate under the Suitors' Fund Act if qualified.

MASON P: These three appeals were heard concurrently. In each case a plaintiff injured in a motor accident obtained a modest verdict following a hearing in which liability was not or had ceased to be in issue. In each case the verdict fell well below the sums previously offered by the defendant by way of settlement offers and (in two cases) well below the amount previously awarded in arbitrations under the Arbitration (Civil Actions) Act 1983. In one of the latter two cases it was the plaintiff who applied for the rehearing, in the other it was the defendant. In each case the trial judge declined to make the costs order stipulated in the District Court Rules, exercising the exceptional power to "otherwise order". Each defendant appeals by leave.

The applicable principles were not seriously in dispute. It is convenient to summarise them before addressing each appeal.

The general principle that costs shall be in the discretion of the Court is subject to the District Court Rules: District Court Act s148B. Part 39A r9 provides that, if the Court makes an order as to costs, the Court shall, subject to that Part, order that costs follow the event, except where it appears to the Court that some other order should be made as to the whole or any part of the costs.

Part 19A of the District Court Rules permits unaccepted offers of compromise to affect the ultimate costs order. The offer must contain certain information (r1), and be made at the proper time (rr2, 3). The party making the offer may express that it is limited for acceptance as to any time, so long as the time expressed shall be not less than 28 days after it is made (r3(3), (4)). The time within which an offeree may accept the offer by serving notice of acceptance on the offeror is limited to the sooner of:-

(a) the expiration of the times specified in the offer or, if no time is specified, the expiration of 28 days after the offer is made; or

(b) the time prescribed by r3(8) in respect of the claim to which the offer relates (r3(4)). (Rule 3(8) prescribes a time which effectively brings forward the time of acceptance to a time before an arbitration or trial reaches its culmination.)

Until 18 October 1996 it was Part 19A r9 that spelt out the consequences of non-acceptance of an offer. On that date r9 was repealed and effectively replaced by Part 39A r25. So far as presently relevant, r25 stood in the following form when the proceedings involved in these three appeals were heard:

(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 otherwise orders, the plaintiff shall, subject to rule 12, 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.

(Rule 12 limits costs in actions which could have been brought in the Local Court.)

It will be seen that the mandate of subrule (6) applies "unless the Court otherwise orders". Since 1 January 1998 the corresponding provision has been "unless the Court in an exceptional case and for the avoidance of substantial injustice otherwise orders". These cases arose under the earlier form.

Since Part 19A r9(6) was not materially different to Part 39A r25 (as it stood before 1998) it is legitimate to apply the case law in respect of the former rule. It is also legitimate to have regard to judicial exegesis of corresponding provisions in the Supreme Court Rules (Part 52 r17(5) and Part 52A r22(6)).

The leading cases on the Supreme Court rule are Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 and New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100 ("Reeve"). The leading cases on the corresponding provision in the District Court rules are Hillier v Sheather (1995) 36 NSWLR 414, Quach v Mustafa (Court of Appeal, unreported, 15 June 1995) and Houatchanthara v Bednarczyk (Court of Appeal, unreported, 14 October 1996). The following principles can be extracted:

(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 at 725-6; Hillier at 421, 431.

(2) The aim is to oblige the offeree to give serious thought to the risk involved in non-acceptance: Maitland Hospital at 724.

(3) The prima facie consequence of non-acceptance will be that the rule will be enforced against the non-accepting party: Reeve at 102; Hillier at 422. 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 at 724; see also Hillier at 420.

(4) Lying behind the rule is the common knowledge that "litigation is inescapably chancy": Maitland Hospital at 725. For this reason, the ordinary provision is expected to apply in the ordinary case: ibid; Reeve at 102-3. The mere fact that it was reasonable for the litigant to take the view that he or she did in rejecting the offer is not enough to displace the rule: Reeve at 102. As Clarke JA expressed it in Houatchanthara at p4:

"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 at 725-6. Reasons must be given for "otherwise ordering": Hillier at 419; Quach.

COSTS AND THE ARBITRATION (CIVIL ACTIONS) ACT 1983

Pursuant to the combined operation of s63A of the District Court Act 1973 and the Arbitration (Civil Actions) Act 1983, proceedings may be referred for determination by an arbitrator. The arbitrator must give reasons (s15(1)). Absent an application for rehearing, the award is declared "final and conclusive" (s18(1)) with certain presently irrelevant exceptions. However, s18(2) permits a person aggrieved by the award of an arbitrator to obtain an order for a rehearing of the action, provided certain requirements are complied with. The court that hears and determines an action by way of rehearing may make an order for the payment of costs in respect of the hearing before the arbitrator in addition to the costs of the action itself (s18(4)).

As two of the present appeals illustrate, references to arbitration and subsequent rehearings in the District Court may be accompanied by settlement offers which engage the principles discussed in the earlier section of this judgment.

Part 39A r 31 deals with situations where the outcome of the proceedings is not "substantially more favourable" to the applicant for rehearing than the award: see also District Court Practice Note No 14. These include r31(4) and (5) which provide:

(4) Subject to subrule (5), where proceedings are heard and determined under section 18(3)(b) of the Arbitration Act, and the determination of the Court is not substantially more favourable to the applicant than is the determination of the arbitrator, the Court:

(a) shall not make any order for the payment by any other party of the applicant's costs incurred by reason of the rehearing; and

(b) shall order the applicant to pay the costs of every other party incurred by reason of the rehearing.

(5) The Court may in respect of a rehearing certify that the special circumstances of the case require the Court:

(a) to make an order referred to in subrule (4)(a), in which case the Court may make that order; or

(b) to refrain from making an order referred to in subrule (4)(b), in which case the Court may refrain from making that order.

It should be noted that these subrules deal only with costs incurred by reason of the rehearing fruitlessly sought by the applicant. They are not the source of any duty or power to order the general costs of the proceedings against that party. That is not to deny that it may be proper to do this under other rules (such as r25) or the general costs discretion.

Judicial guidance as to the application of this rule and its interaction with the rules dealing with settlement offers is found in at least three earlier decisions of this Court: see Quach, Houatchanthara and MacDougall v Curlevski (1996) 40 NSWLR 430.

In Quach, the defendants made a settlement offer of $25,000 plus costs. (At that time the defendants held video film of the plaintiff damaging to the plaintiff's claim, but the plaintiff was unaware of this.) The offer was not accepted within the time fixed. Later, the plaintiff obtained an order for a reference to arbitration. The arbitration produced an award of $76,022 and it carried costs because it represented an improvement on the defendants' settlement offer. The defendants sought a rehearing and produced the video films for the first time, with dramatic effect. The verdict was $20,206, with an order for costs in the plaintiff's favour. The judge was then informed of the settlement offer and told that the arbitration award was "considerably more" than the verdict. However the judge declined to vary the costs order in the plaintiff's favour.

In the Court of Appeal the defendants relied upon the non-acceptance of the settlement as the basis for an "otherwise order" under Pt 19A r9(6). Maitland Hospital was cited.

Since the trial judge had given insufficient reasons, the discretion came to be exercised afresh in the Court of Appeal. The Court declined to overturn the plaintiff's favourable costs order. I have already indicated that the defendants in Quach had not used in the hearing before the arbitrator video films then available which, when tendered at the later rehearing, were very damaging to the plaintiff's credibility and case. The defendants had feared that the plaintiff would tailor his evidence at the trial if offered a dress rehearsal at the arbitration. Nevertheless, it was held to be "clear" that the defendants were not entitled to any relief based upon their early offer of compromise. Sheller JA and Powell JA agreed with Kirby P who held that, had the film been shown before the arbitrator, it was likely that the arbitrator would have brought in a much lower award:

"Had this been done, the entire proceedings might have terminated at the arbitration. Instead, the appellants indulged in a form of litigious charade before the arbitrator. They hinted at, but did not reveal, their telling evidence. They exposed the respondent to a futile proceeding which made no real sense. They thereby escalated the costs and now seek to take advantage of their own earlier action to recover the costs incurred since their earlier offer .... (at 10)

Kirby P acknowledged the forensic reasons behind the decision of the defendants not to use the film before the arbitrator:

"But if a party elects that course, it cannot later expect to benefit from it. It is now impossible to know what reaction the arbitrator might have had, had the films been shown before him. It seems likely, from his description of the respondent's complaints during the arbitration, and Karpin DCJ's description of the film, that the award entered by the arbitrator would have been for a sum substantially less. As a matter of principle, to secure the operation of arbitration proceedings as the Act appears to contemplate (as a true alternative to a hearing in the District Court and to relieve that court of the burden of hearings) the failure of the appellants to show their film has a consequence. There has been a considerable waste of public and private time and cost. The process of settlement which it is the object of Pt19A r9 DCR to promote is frustrated. At least in the circumstances of this case, where the films were obviously most significant, the failure to show them before the arbitrator should have cost consequences. Those consequences are sufficient to sustain an order of this Court providing otherwise than Pt19A r9(6) DCR would ordinarily require."(at 11)

MacDougall applied these principles to an arbitration where the defendant elected not to call a crucial witness.

It is not that a party is bound to call all available evidence at an arbitration. Rather, as Priestley JA pointed out in MacDougall at 434:

"... if that course either caused or might have caused waste of public and private time and cost, then the fact that the party had chosen that course was something proper to take into account in considering the costs of the arbitration and the rehearing; that is, a party adopts such a course at the party's risk as to the costs consequences. Further, in my opinion, the court considering the costs questions is entitled to take into account, in deciding what the consequences of such a course should be, the desirability of actions referred to arbitrators for determination being determined once and for all by the arbitrator."

See also per Cole JA at 438, per Simos AJA at 442-3.

MacDougall confirms that the judge deciding what costs orders should be made following the determination of the action may have regard to information about what did or did not occur at the arbitration.

The second passage from Quach quoted above refers to the frustration of the process of settlement as one of the undesirable consequences of the defendants' conduct in keeping cards up their sleeve at the arbitration. See also MacDougall at 433, 442-3; Houatchanthara at p4 (passage quoted above). The reason is obvious, and underscored by the arbitrator's duty to give reasons. A reasoned award that follows a genuine contest in which each side puts its best foot forward is more likely to determine the litigation finally. If a party is dissatisfied and decides to seek a rehearing, with the costs sanction thereby involved (cf Pt 39A r 31), there is an informed choice. Quach indicates the primacy of the defendant's conduct at the arbitration as a key factor in the ultimate costs discretion.

The Court was informed by Mr Barry QC, who appeared for two of the respondents, that it is commonplace for personal injury cases to be referred by the District Court to arbitration over the objection of the parties. Section 63A of the District Court Act provides that such an order must not be made if the action involves complex questions of law or fact, or the hearing of the action is expected to be lengthy. Most arbitrations take less than one day. It is far from clear that the actions in the second and third appeals were appropriate for arbitration, judged by the time ultimately taken to resolve them on rehearing.

The references to arbitration were not challenged in the appeals, and for this reason alone doubts about whether the matters were suitable for arbitration cannot affect the costs issues. Nevertheless, the recent comments of the former Chief Justice bear repetition. In Troulis v Vamvoukakis (Court of Appeal, unreported, 27 February 1998) Gleeson CJ (with the concurrence of Stein JA and myself) observed that:

"It is ... a matter of concern that, against the wishes of the parties, the proceedings at first instance were substantially extended by what turned out to be a six day warm-up in front of an arbitrator. The power under s63A is not to be exercised where the hearing of an action is expected to be lengthy (s63A(3)(c)). The term "lengthy" is imprecise, and relative, but it is difficult to accept that the procedure of compulsory arbitration was intended to be invoked in a case where the amount in issue was small compared to the legal costs likely to be involved in the arbitration and any subsequent litigation."

The issues in the three appeals can now be addressed.

Joanne Johnson (the plaintiff) was injured in a motor vehicle accident on 18 August 1994. She sued the driver of the other vehicle (the defendant) by Ordinary Statement of Claim filed in the District Court on 14 August 1995. Liability was not in issue.

On 20 November 1996 the defendants made a settlement offer to pay $35,000 plus costs.

The trial was heard by Mahoney DCJ on 18 and 19 December 1996. There was contest between the medical witnesses called by each party. And the defendant relied on video film of the plaintiff taken in February 1995 to mount a substantial and successful attack on the reliability of the plaintiff's evidence concerning the severity of the whiplash she suffered. The plaintiff's injuries were purely soft tissue, which meant that her credibility was critical. In a reserved judgment delivered on 3 February 1997 the learned judge entered a verdict for the plaintiff in the sum of $8,185. He indicated that he was disposed to order the defendant to pay the plaintiff's costs, but reserved liberty to apply.

On 11 February 1997 the defendant sought an order that there be no order as to the costs of the action.

Although the defendant had satisfied the primary requirement of r25(6) by the close of the first day of hearing, Judge Mahoney QC made an order displacing that subrule. In his reasons the judge stated that the trial involved a very difficult medico legal issue, and a very simple factual issue (the credibility of the plaintiff). The plaintiff had "failed abysmally". She had been "caught out cold" by video film evidence. This was "a clear case of the plaintiff being thoroughly unreliable and setting out to mislead the Court".

"... it seems to me to be a thoroughly appropriate case for the plaintiff to be ordered to pay the defendant's costs as and from a reasonable time after 20 November 1996.

The dimensions of the case were such that it would have taken a significant amount of time for the plaintiff to be able to take aboard all the ramifications and the innuendos involved in the offer of $35,000 plus costs. I would imagine that having been offered that amount of money she might have been tempted to think that she has been able to mislead successfully the defendant's and her own doctors and might be able to do so successfully before the Court.

Had the offer, made on 20 November 1996, been closer to the verdict I brought in she may well have been compelled to, if I may use the expression, come to her senses before the hearing date. It seems to me that the size of the offer may have been such as would give her a considerable degree of confidence that she had got away with the exercise upon which she had embarked many months beforehand.

These reasons lead me to the view that it might have taken a considerable time after 20 November for her fully to assess the consequences of not accepting the offer from the insurer.

The hearing date was 19 December [sic] and bearing in mind that I think she was a resident in Sorrento in Queensland and would have been in a long distance communication with her Sydney solicitors, I think it is appropriate that the plaintiff pay the costs and disbursements of the defendant as and from the date of hearing, 19 December 1996 and the defendant pay the plaintiff's costs and disbursements at the appropriate scale up to that time."

Before us, the plaintiff conceded that the judge made a slip and that the defendant was intended to have her costs from 18 December 1996, because the offer remained open for acceptance throughout the first day of the trial. A challenge to the displacement of r12 is not pursued.

However, the defendant submitted that the learned judge's reasoning discloses error in relation to the displacement of r25(6). I agree. Nothing relied upon in the reasons provided a proper basis for displacing the mandate of the costs rule, which is intended to operate from the date the unaccepted offer was made. The plaintiff's residence in Queensland did not preclude her from communicating with her legal advisers, especially since it was during the month immediately preceding the trial date. The rule, as explained in the cases, gives an offeree 28 days to make up his or her mind, with unfavourable costs consequences if the offer is not accepted and the later verdict is less favourable. If it was more than unusually difficult for this plaintiff to make up her mind because she may have been ignorant or uncertain of the fact that the defendant had incriminating video films, that is not to be laid at the defendant's door.

The plaintiff was in the better position to assess the true strength of her case. She had no right to rely upon the size of the defendant's settlement offer and then contend that her conduct in rejecting it was reasonable. The plaintiff's verdict came in well below the defendant's settlement offer. Even if the plaintiff had acted reasonably in rejecting the offer - and there was no evidence of this - that would have been insufficient to displace the rule: see s(4) above.

The plaintiff/respondent sought by Notice of Contention to uphold the costs decision on an alternative ground, namely the late service of medical reports upon which the defendant relied. During the 28 days covered by the settlement offer the defendant obtained medical reports from Dr Spira and Dr Stevenson. Dr Spira is a specialist neurologist who saw the plaintiff on 29 November 1996 and produced a report on 10 December 1996. It challenged evidence of the plaintiff's expert, Dr Champion, on the issue of pain and pain management. The plaintiff received this report on about 11 December 1996, ie one week prior to the hearing. At this stage the plaintiff would have been at her residence in the Gold Coast, Queensland. Dr Stevenson is a specialist physician who examined the plaintiff on 11 December 1996 and reported that day.

Relying on this material the respondent sought to uphold the costs order. Unless the Court otherwise orders, expert medical reports are required to be served at least 28 days before trial: Pt 28 r 8(3). It was submitted that among the "ramifications and ... innuendos involved in the offer of $35,000 plus costs" which the trial judge considered relevant to the reasonableness of her conduct were issues arising out of these late-served medical reports.

In my view this contention is amply met by the affidavit of the defendant's solicitor, Ms Allan, which was read in the appeal. She points out that arrangements had been made in October 1996 for the plaintiff to see Dr Stevenson on 6 November 1996 and Dr Somerville on 7 February 1997. On 11 October 1996 the matter was listed for a status conference before a Registrar. The trial was fixed for 18 December 1996, with the defendant being allowed short service of medical reports. Following a request by the plaintiff's solicitors to reschedule the medical appointments to 28 and 29 November 1996, the appointment with Dr Somerville was cancelled and a replacement appointment was arranged with Dr Spira on 29 November 1996; and Dr Stevenson's appointment was changed to 27 November 1996. These amended appointments were confirmed in writing to the plaintiff's solicitors. The plaintiff apparently failed to attend the appointment with Dr Stevenson that had been scheduled for 27 November. A further appointment was arranged for 11 December and the plaintiff's solicitors were again notified in writing. As soon as the reports from Dr Spira and Dr Stevenson were at hand they were served. The reports were tendered at trial, apparently without objection or application for adjournment.

The Registrar's direction gave permission for late service of the reports. They were served as soon as they were at hand and received by the plaintiff's legal advisers well within the 28 day period of the settlement offer. The plaintiff and her advisers had the opportunity to consider the offer in the light of those reports. She chose not to accept the offer due, I infer, to ignorance that the defendant had obtained the incriminating video films: it had nothing to do with the complicated medical issues being debated in the reports. In any event, the plaintiff was required to assess her prospects in the light of what those reports disclosed.

2. Set aside the costs orders of Mahoney DCJ made on 11 February 1997.

(a) the defendant to pay the plaintiff's costs in respect of the claim up to and including 20 November 1996, assessed on a party and party basis;

(b) the plaintiff to pay the defendant's costs in respect of the claim thereafter, assessed on a party and party basis.

4. Respondent to pay appellant's cost of the appeal and to have a certificate under the Suitors' Fund Act if qualified.

The costs issues in this appeal are affected by two matters: there was a rehearing after an arbitration under the Arbitration (Civil Actions) Act 1983; and subsequent offers of compromise from the defendant were refused.

Mr Lovatt (the plaintiff) was injured in a motor accident on 30 August 1990. By Ordinary Statement of Claim filed in the District Court on 24 February 1992 he sued the driver of the other vehicle involved. Liability and damages were put in issue.

On 27 September 1993 the Registrar of the District Court listed the matter for arbitration. On the same day the plaintiff offered to settle for $240,000 inclusive of costs. The first of a series of video films without the plaintiff's knowledge was taken about 2 weeks later. Some films were taken before the arbitration, others afterwards. On 18 March 1994, the day of the arbitration, the defendant offered $90,000 inclusive of costs. However, this offer lapsed the next day when the arbitrator made an award in favour of the plaintiff in the sum of $83,964 plus costs: see Pt 19A r 3(8).

On 6 April 1994 the plaintiff applied for a rehearing. On 2 May 1994 the defendant offered $100,000 inclusive of costs, increasing that offer to $112,000 plus costs on 1 August 1994. None of the defendant's offers were accepted.

The rehearing commenced before Solomon DCJ on 5 June 1996. Evidence was given over 7 days in June and August 1996. Final addresses were on 5 December 1996. During the hearing liability was admitted.

Reasons were delivered on 3 March 1997. The learned judge noted that the plaintiff sought damages with respect to pain in the neck, lower back and left knee. X-rays revealed no fractures or dislocations. The plaintiff's claim for damages in relation to severe and continuing back pain depended essentially upon the credibility of the plaintiff's own evidence. He faced the difficulty of having told three examining doctors that he had no back pain. The judge noted that he could only believe the plaintiff if satisfied as to his credit. He made reference to observation of the plaintiff during the course of his evidence, absence of frankness and prevarication during cross-examination, and instances where the plaintiff appeared to be making up the evidence to suit his case. Later in the judgment reference was made to exaggeration by the plaintiff of the treatment received following his accident. Most importantly there were video films taken of the plaintiff in February, March and July 1994 and June 1996. Four hours of these films revealed to the judge that the plaintiff was able to perform fairly heavy manual work on occasions without the appearance of any limitation whatsoever, and that the plaintiff did not require a stick to assist him in walking. One such incident occurred when the plaintiff helped his neighbour, a clergyman, in doing paving work. On this basis, the judge rejected the plaintiff's evidence about his back problems. Although that evidence had been corroborated to a degree by the plaintiff's wife, the judge rejected her evidence also, based on observation of her in the witness box.

The judge concluded that the plaintiff had not proved that any back pain was referable to the accident. It was not the responsibility of the defendant. And, although a bursitis condition was found to be a result of the accident, the judge concluded that the plaintiff was not suffering from any significant impairment as a result of the accident. Accordingly while certain wages and medical expenses were recoverable, there was no award of damages for non-economic loss pursuant to s79 of the Motor Accidents Act.

The parties were invited to confer about what damages flowed to the plaintiff in the light of these findings. On 4 March 1997 judgment was entered against the defendant in the sum of $14,819.

Towards the end of his judgment on liability, Solomon DCJ indicated that, in the event of the award of damages being substantially less than the award made by the arbitrator, he would consider an application for indemnity costs to be paid by the defendant to the plaintiff from the time of the arbitration hearing to date:

"The reason for that is that the defendant chose, apparently for forensic reasons, not to present to the arbitrator films collected by them through Mr Chung which indicated the plaintiff's ability and capacity to assist in the building of a road.

I am satisfied that the arbitrator would have been assisted in seeing those films."[He referred to MacDougall v Curlevski and Quach v Mustafa .]

His Honour was then informed that the defendant had not sought a re-evaluation following the arbitration. Rather it was the plaintiff's application for a rehearing in the District Court. (In Quach and McDougall the defendants had been the applicants for rehearing.) The issue of costs was then debated at length. The defendant informed the judge that the plaintiff had recovered a "mere fraction" of the arbitration result. The defendant also relied upon the fact that the plaintiff had rejected the defendant's settlement offers in 1994.

Nevertheless the defendant was ordered to pay the plaintiff's costs. The judge said:

"The reality of the situation is that the films which the defendant had were not shown to the arbitrator at the time of the arbitration. I am confident that had the films been shown to the arbitrator that the credit of the plaintiff would have been destroyed, and that the arbitrator would have brought in a much lesser figure on arbitration than he did.

The defendant I note made an offer of settlement at the arbitration of ninety thousand dollars inclusive of costs. I further note that following the arbitration, on 1 August 1994 the defendant increased the figure to one hundred and twelve thousand dollars and filed an offer of compromise in the court to that effect. The offer was rejected.

The matter was listed before me on 5 June. I was informed that the case in the first instance would take one and a half days. I am sure that I was later informed that the case would certainly finish within three days. We are now nine days down the track. I was not informed by Mr Williams, who first appeared before me because Mr Poulos was otherwise engaged that there were films which were to be shown to doctors.

Coming back to the offer of compromise, the offer of compromise lasted for twenty-eight days. It was not accepted. It was not accepted I find for a reasonable reason, that is that the plaintiff was being examined by a neurosurgeon for the purpose of consideration of treatment.

I do not know whether, what the plaintiff put to the neurosurgeon was bona fide. I am not in a position to test that as the plaintiff has not been called and has not been sought to be called in relation to the question of costs.

I am of the view that the films could have been shown to the arbitrator, and had they been shown that a much lesser figure than the arbitration figure of eight three thousand one hundred and sixty-four dollars would have been made. For that reason the case proceeded before this court to a full extended hearing.

In the exercise of my discretion and applying the principles as set out in Quach v Mustafa ... I order the defendant pay the costs of the plaintiff in respect of these proceedings."

Counsel for the appellant/defendant were correct to point out that the defendant had a prima facie entitlement to a favourable costs order on two alternative bases:-

1. The verdict was not "substantially more favourable" than the arbitration award. (See Pt 39A r 31(4).)

2. The verdict was "not more favourable" than the terms of each of the settlement offers made by the defendant in May and August 1994. (See Pt 39A r25(6).)

The trial judge refused to make the order indicated in either rule. He ordered "otherwise" in favour of the plaintiff. In my view, the discretion miscarried. It was found that the plaintiff had a "reasonable reason" for rejecting the settlement offer of August 1994 because he was being examined by a neurosurgeon for the purpose of consideration of treatment. But, at its highest, this seems to go no further than suggesting that the plaintiff may have believed himself entitled to higher damages than the sum offered. This is not enough to displace Part 39A r25(6) for the reasons I have already given: see esp s(4). The plaintiff's injuries did not disable him from making an informed decision (with legal assistance). Furthermore, there was no evidence that the plaintiff was being examined by his neurosurgeon during the critical 28 day period. All that happened was that one of several opinions was received during the 28 day period stemming from the August settlement offer. In any event, it had been shown that the neurosurgeon's opinions were tainted by the fabricated symptoms ultimately exposed at trial with the use of the video films.

Senior counsel for the defendant also submitted that error is shown in the judge's failure to have regard to the fact that his credibility findings were not based exclusively on the video films. I do not consider this to be a ground for distinguishing Quach. After all, even the most damning video material needs to be weighed with the totality of the evidence, including the plaintiff's explanation when confronted with it. In my view it is unrealistic to quarantine the impact of film material. Seldom will it stand alone. Had it been clear that the judge was confining himself to the pre-arbitration film I would have found no error on this account.

I also reject, with considerable hesitation, the submission that the reasons do not entail the certifying of special circumstances as required by Pt 39A r 31(5). The judge gave reasons for the costs order he made, in a context where it is clear that r31(4) had been invoked by the defendant. I hesitate to find error based solely upon the absence of the language of the subrule. It is however unfortunate that the reasons do not address separately the impact of the plaintiff's dismal failure in bettering his arbitration award.

To establish error in the exercise of a discretion does not reverse the result. It leads to a fresh exercise of the discretion by the appellate court unless it is necessary to return the matter for further hearing in the court below.

The respondent/plaintiff submits that the principles in Quach and MacDougall still apply. The appellant/defendant seeks to distinguish these two cases.

Unlike Quach, the plaintiff rejected what turned out to be very generous offers made after the arbitration. And, unlike Quach, it was the plaintiff who chanced his arm disastrously after obtaining a very generous award. Nevertheless the reasoning to which I have drawn attention emphasises that one function of a fully contested arbitration is to promote informed decision-making as regards settlement, and that a defendant that keeps compelling evidence up the sleeve can seldom complain if r31(4) is displaced on that account.

It is therefore necessary to determine the impact of the film taken some weeks before the arbitration. A letter from the defendant's solicitors (AB 796) described it as showing the plaintiff acting in a manner inconsistent with his alleged injuries. This is a neutral description of what was obviously fairly damning evidence. The video evidence was taken by Mr Cheung an inquiry agent. He identified the occasions on which he observed and photographed the plaintiff (AB 449ff). The first such occasion was on 14 October 1993 when he followed the plaintiff to Penrith. Forty two minutes of video film showing the plaintiff driving his motor vehicle and walking around a car yard were taken. This film obviously indicated no problems with the plaintiff's back, legs or shoulders (AB 450G). The next sighting occurred on 19 February 1994 when 2 hours and 30 minutes of video was exposed (AB 450T). It was on this occasion that the plaintiff commenced helping his next door neighbour do paving work.

These two sets of films were available to the defendant before the arbitration which took place on 18 March 1994. It is clear that the judge considered the film showing the plaintiff assisting his clerical neighbour in laying pavers to be significant in his assessment of the issue as to the plaintiff's credibility and the extent of his injury. He noted that, so far as that work was concerned, the plaintiff was seen to carry pavers, to shovel dirt to assist his neighbour in laying pavers, to stoop, lift, bend and twist. This satisfies me that the films would (if tendered) have had the significant impact upon the arbitration that cases such as Quach and MacDougall address. There were later films, taken after the arbitration, which had an impact on the final assessment of the plaintiff's case. They were taken into account in the rehearing. However, it is clear that those available to the defendant at the time of the arbitration were effective and important in their own right.

In my view it is tolerably clear that, had such film been disclosed at the arbitration, then the award would have been significantly lower than it was, and the plaintiff would have thought long and hard before either seeking a rehearing or rejecting the defendant's two offers in May and August 1994.

Senior counsel for the defendant relied strongly upon the fact that his client was happy with the result of the arbitration. He submitted:

"We had a view that the plaintiff was exaggerating his condition and we had some film that might have suggested that, but we hadn't used that at the arbitration. But the award that was made by the arbitrator was one that we thought was in the range. It's very difficult to draw from that ... any suggestion that there was an endeavour by us to lull the respondent into any false sense of security ..." (appeal transcript page 9)

In my view this does not provide a sufficient answer to the reasoning in Quach. Examination of the subjective views of offeror or offeree is generally unhelpful if their conduct did not contribute to the proper disposition of disputes by litigation or settlement. For costs purposes at least, the parties' obligations (generally speaking) are to fight toe to toe at the arbitration and to make accurate responses to settlement offers if armed with material enabling them to make an informed choice about ultimate prospects. It was submitted that the film was not withheld for the forensic reasons adverted to in Quach and MacDougall, as evidenced by the fact that the defendant elected to accept the arbitrator's award. (Evidence to this effect appears in a letter from the defendant's solicitor to its insurer (AB 796).) Reliance was placed upon the comment of Priestley JA in MacDougall (at 434) that:

"the scheme is not one designed to provide successive hearings by arbitrator and judge as a regular matter in which the first trial is to be regarded as a practice run, but rather one where the first trial is intended to be the final run, subject to the re-hearing safeguard in the occasional, out of the ordinary, case. It seems to me therefore, quite legitimate for courts in making costs orders, to promote, in appropriate cases, the use of the referred action system in what in my opinion is the intended way."

I do not see that one can infer from the defendant's conduct post-arbitration what was the effect of his conduct in the arbitration itself upon the plaintiff. This submission gives too little weight to the role which a genuinely fought arbitration hearing has in the context of settlement negotiations, including settlement offers ensuing therefrom.

It is true that the plaintiff's case became unstuck at the trial because of the view taken by the judge as to his credit. But that view was influenced in significant part by films available to the defendant at the time of the arbitration which were not then used. Had they been used then the arbitration may well have been the end of the matter. Certainly the plaintiff's conduct thereafter in (a) seeking a rehearing and (b) rejecting the defendant's subsequent settlement offers would have been based on a more fully informed choice stemming from what happened at the arbitration.

Despite these considerations, there is the distinguishing feature that (unlike Quach) it was the plaintiff who sought the rehearing at a time when he knew or must be taken to have known that there was a distinct possibility that he had deceived the defendant about his true condition. It would be unrealistic to pay no regard to the fact that plaintiffs and their legal advisers may be aware or at least suspect that defendants have kept some of their powder dry at the arbitration. True, Quach and MacDougall warn that defendants may well be penalised in costs if they do this. But in this world of spy versus spy it would be quite unrealistic to treat a plaintiff as having been lulled into a sense of false security by reliance upon the defendant's conduct in a situation where the plaintiff's own deceptiveness was not publicly exposed until the trial.

Senior counsel for the defendant sought to have placed in the balance the plaintiff's own deception at the arbitration in that he withheld from the arbitrator the fact that his reliance upon a walking stick was fraudulent. To ignore this entirely, would (as Mr Jackson QC submitted) leave the Court giving more significance to the defendant's non-disclosure of evidence than to the plaintiff's fabrication of evidence at the arbitration and his or her false claims in the court process such as particulars filed in the pending action. The unfairness is heightened where (as here) the defendant was "prepared to wear the result of the arbitration, but the person who is engaged in the fabrication is not" (Mr Jackson at Tr 68).

As Mr Jackson points out, the defendant made two offers following the arbitration, each of which were significantly greater than the award secured by the plaintiff. He submits that, if the arbitration had gone off the rails (costs wise) in the sense discussed in Quach, the making of such offers represented a reasonable step on the defendant's part designed to put the rolling stock back on the rails. Why then cannot the costs rule referable to rejection of settlement offers apply?

If the defendant held in its hand the means of destroying the plaintiff's credibility based upon use of the films, then the principle discussed in Quach and the cases following it lay primary responsibility at the defendant's door in the costs equation. However, there is some force in the submission that Quach and MacDougall are distinguishable because they involved nothing more than defendants that sought a rehearing after they had kept the incriminating film material up their sleeves. I take this into account in the partial displacement of the costs order stipulated in r31(4).

The costs order sought by the appellant was that the defendant be ordered to pay the plaintiff's costs of the District Court proceedings, save that the plaintiff should pay the defendant's costs occasioned by the rehearing (Tr 68).

Exercising the discretion afresh I think that this is a case where it is appropriate to displace r31(4), but only in part. Rule 31(5) contemplates that this may occur. I would certify that the special circumstances of the case require the Court to refrain from ordering the defendant to pay the plaintiff's costs incurred by reason of the rehearing. But I would not go so far as to order the plaintiff (as applicant for the rehearing) to pay the costs of the defendant incurred by reason of the rehearing.

As to the costs of the arbitration itself, s18(4) of the Arbitration (Civil Actions) Act 1983 gives to the Court that hears and determines the action by way of rehearing the power to make an order for the payment of costs in respect of the hearing before the arbitrator. I think that the defendant bears the primary responsibility for the arbitration not achieving its intended effect. The defendant should pay the costs of the arbitration hearing.

In his reasons on costs Solomon DCJ was critical of the time taken in the hearing. I think that it is difficulty to attribute blame for the overrun in the initial estimate of a 1½ day hearing. Obviously some of the overrun was attributable to the time taken in confronting the plaintiff with the video film, proving the video film and viewing it. But this film was ultimately significant in exposing a false claim. It is therefore not proper to lay at the defendant's door any blame on this account relevant to the proper exercise of the costs discretion.

The plaintiff also relied upon the fact that the trial had originally been listed for hearing on 16 September 1994. On 8 September the hearing date was vacated (presumably on the plaintiff's application) on the basis that the plaintiff was to undergo surgery. His condition required time to stabilise. This was the period during which the second offer of compromise was running. Since, however, the condition did not impair the plaintiff's capacity to make an informed estimate of his ultimate prospects of success, I do not see how this matter takes the case outside the principles touching the usual chanciness of litigation discussed in Maitland Hospital and Reeve.

2. Set aside costs orders of Solomon DCJ made on 4 March 1997.

3. In lieu thereof, order the defendant to pay the plaintiff's costs of the proceedings (including the costs of the arbitration hearing) except that each party is to bear his or her own costs incurred by reason of the rehearing following the arbitration.

4. Respondent to pay appellant's costs of the appeal and to have a certificate under the Suitors' Fund Act if qualified.

On 27 March 1992 Ms Cook (the plaintiff) was injured in a motor vehicle accident. On 5 April 1995 she filed an Ordinary Statement of Claim in the District Court claiming damages from the driver of the other vehicle involved in the accident. The defendant admitted negligence.

There was an arbitration under the Arbitration (Civil Actions) Act on 4 September 1996. It resulted in an award on 26 September 1996 in the sum of $51,226 plus costs in favour of the plaintiff. The defendant applied for a rehearing. On 6 November 1996 the defendant filed an offer of compromise in the sum of $20,000 plus costs. The rehearing took place before Mahoney DCJ on four days in December 1996, commencing 4 December.

On 3 February 1997, in a reserved judgment the learned judge assessed damages in the sum of $17,607. He noted that the assessment of damages was complicated by three factors:

1. the plaintiff had been injured in a subsequent motor vehicle accident (when she was at fault) and a subsequent work incident;

2. a substantial part of the plaintiff's claim was for damages for loss of employment promotion prospects. To counter this claim, the defendant had called witnesses who gave evidence that, even without the various accidents, the plaintiff would not have been successful in any of the job promotion applications from which she claimed to have been precluded from obtaining by the consequence of the first car accident;

3. the extent of the plaintiff's claimed injuries was challenged on the basis of video film taken in November 1996, a matter of weeks before the hearing.

These issues were canvassed along with the conflicting medical opinions. The learned judge gave instances of evidence given by the plaintiff which affected her credibility adversely. He did not consider the video film to be very dramatic. ("In short, the defendant has not made the sort of headway with the film that his advisors might have hoped would be achieved.")

The judge concluded that the severity of the injuries sustained by the plaintiff after the first accident caused her to lose no more than the odd day or two from work after the first week. He was satisfied that there was no continuing interference with the ability to earn income. He concluded that the plaintiff had failed in her attempt to prove that the car accident should be blamed for any loss of employment promotion opportunities.

The plaintiff's non-economic loss was assessed at $16,550, based upon a finding of 15% of a most severe case. When out-of-pocket expenses and past economic loss were added there was a verdict of $17,607.

The defendant then sought an order that the plaintiff pay the defendant's costs from 6 November 1996 on a party and party basis. He relied upon the rejection of the higher settlement offer made on that date.

The plaintiff opposed this order, relying upon the fact that the trial had been listed as a two to two and a half hour case, which subsequently extended over three days. Much of this time was occupied in various ways with the video film, which was ultimately far from determinative. The plaintiff also relied upon the fact that the defendant did not call the four witnesses who gave evidence for the defendant on the loss of promotion issue at the arbitration.

The defendant was ordered to pay the costs of the proceedings. The nub of the learned judge's reasons was as follows:

"From the point of view of the trial judge faced with the task of making an order for costs I am caught in a cleft stick. I have to have regard to the fact of the defendants not having called witnesses at a stage when they ought to have been called in accordance with the expressions of practice [or] principle adumbrated or laid down by the Court of Appeal in Mustapha and in Curlevski. But at the same time there are other cases where it is abundantly clear that plaintiffs tailor their evidence after they are, if I can use the inelegant expression, chopped about in cross-examination before the arbitrator, once film is exposed before arbitrators. By the time they come up to the District Court on a rehearing all of the thrust and forensic punch is lost to the defendant from the film. That having been stated as the trial judge's dilemma however, the fact remains that I have to apply the law as it is laid down by the Supreme Court and despite the fact that it has been urged upon me that these four witnesses were not available to the defendant in the present case when the matter came on for hearing before the arbitrator, and that preparations for hearing before arbitrators are conducted upon the basis that they will be, if I can use the expression, a shorthand form of hearing rather than a fully contested forensic battle, it seems to me that if the matter had been more fully prepared before the hearing in front of the arbitrator, then those four witnesses would have been available. If they had been available then, according to the law as laid down in Mustapha and in ... Curlevski, those four witnesses should have been called before the Arbitrator. That being the case the application for costs as and from a reasonable time after the letter of 6 November 1996 is refused. As nothing has been put to me to disturb the proposition that the ordinary course of events should be followed, the costs should follow the event."

The plaintiff's Statement of Particulars pursuant to Pt 12 r4A is dated 6 February 1996, ie well before the date of the arbitration. These particulars contain a claim based on economic loss flowing from failure to obtain promotion in employment. The defendant does not suggest that promotion prospects were not a live issue in the arbitration. But the defendant relied solely on cross-examination of the plaintiff at the arbitration in seeking to meet this part of the claim. He certainly did not call the four witnesses whose evidence was ultimately critical on that issue. The arbitrator's award was as follows:

The rehearing before Mahoney DCJ resulted in only a slightly higher component for non economic loss ($16,550). Out of pocket expenses remained unchanged. The critical difference between the award and the verdict was that Mahoney DCJ awarded $580 for past economic loss and nothing for future economic loss. His Honour's reasoning makes it plain that the failure of the case based upon lost promotion prospects was the critical component.

This was not a case where the plaintiff had been caught out for having told a lie or deliberately exaggerating the extent of injuries. She had been apparently passed over for promotion because she was temperamentally unsuited for the position or positions sought. She believed, and apparently asserted under cross-examination, that she had been passed over because of unsatisfactory capacity to perform work, this stemming from the first accident. However, the trial judge accepted the evidence of four witnesses who said that the reason lay elsewhere, in the plaintiff's difficulty relating to people and poor administrative skills.

The defendant certainly obtained a substantially more favourable determination in consequence of the rehearing which he had sought. Accordingly, Pt 39A r31 had no application. In the appeal the defendant made it clear that reliance was placed solely upon the plaintiff's rejection of the settlement offer made subsequent to the arbitration. Since the plaintiff recovered a verdict she was entitled prima facie to an order for costs in her favour (Pt 39A r9). But she had failed to obtain a verdict better than the settlement offer made more than 28 days earlier (cf r25(6)).

Unlike Quach, MacDougall or Green v Lovatt the video film used at the rehearing in the present case was taken after the arbitration. But it was not the video film but the four witnesses as to promotion prospects that are referred to in the learned judge's reasons on the issue of costs.

The defendant seeks to distinguish Quach and MacDougall on the basis that the defendant did not elect to withhold available evidence from the arbitration. It is submitted that the defendant simply chose to run his case on the rehearing in a different manner than it was run before the arbitrator. The defendant submits that the four witnesses were as unavailable to him at the arbitration as the later obtained video film. They had not been located at the time of the arbitration and the need to locate and call them was only identified because of the nature of the evidence given by the plaintiff at the arbitration and because of the size of the arbitration award.

In argument before Mahoney DCJ, counsel for the defendant conceded that the four witnesses had been employed in the Health Department for a number of years and that their identity (and presumably the substance of their evidence) was revealed in material that had been subpoenaed "just immediately before the arbitration". The submission before the trial judge was that:

"... it was only after the arbitration award was so high that we located the witnesses to give evidence. It wasn't a matter of concealing the witnesses, we simply didn't know who they were. We didn't try to find them before the arbitration because it looked to us that this was a very small case. Certainly not one where you'd bother in the normal course of events to call four witnesses. Because of the evidence that the plaintiff gave at the arbitration we looked further to find witnesses who would counter that." (AB 30)

However, counsel for the defendant informed us that the subpoena issued by the defendant which revealed the identity of the four critical witnesses was returnable 12 months before the arbitration. I understand that this is not in issue.

Before us the defendant submitted that there is a significant difference between the situation of a defendant who makes a deliberate tactical decision not to call available evidence at an arbitration (as in Quach and MacDougall) and the situation in the present case where the importance of the additional evidence, or the need to call additional evidence, was not appreciated until during the hearing of the arbitration and after it had concluded. This is said to be quite a different situation to a party deliberately holding back evidence which it knows to be important in such a way as to render the arbitration a "a form of litigious charade" (Quach at p10 per Kirby P). I agree that there is a distinction, although ultimately it is a matter of degree. In any event it would be wrong to treat Quach and MacDougall as establishing that the relevant rule must invariably be displaced whenever available evidence was not used.

It is certainly true that the parties are entitled to conduct the rehearing in such manner as they think fit but, as Quach and MacDougall point out, there may be costs consequences. If a party tenders evidence at an arbitration that is wholly unexpected then the other party can scarcely be criticised for not anticipating it or responding to it at the arbitration. Nor can the party necessarily be criticised for not seeking an adjournment at the arbitration, given that arbitrations are usually expected to finish in one day. But in the present case the issue of the plaintiff's prospects of promotion was at all times a live one, and there is no reason other than the apparent inefficiency of the defendant or his legal advisers for the matter not being dealt with vigorously at the arbitration. Due diligence would have seen the calling of some at least of the ultimately critical witnesses.

In saying this I would not preclude taking into account, in a proper case, evidence that there was an actual consensus between the parties to the arbitration that they would contest in the arbitration on some limited basis. But this was not such a case.

It can therefore be seen that the ultimately critical evidence was not at hand at the time of the arbitration, but could with reasonable diligence have been available and called. This distinguishes the present case from Quach, MacDougall and Green v Lovatt, but not in a degree that I consider relevant. The duty (costs wise) to put the best foot forward at arbitration in the absence of special circumstances remained.

There is however, a critical distinction between this and the three cases mentioned in the previous paragraph. The ultimately critical evidence was not a film known only to the defendant, but witnesses whose existence and evidence became known to both parties at least by the time of the arbitration. Each side had access to the Health Department files that had been subpoenaed which showed the true reason why the plaintiff ultimately failed in her promotion applications. In these circumstances the plaintiff's rejection of what, ex hypothesi, was a reasonable settlement offer made on 6 November 1996 lacked justification. The principles relating to unaccepted settlement offers should have been applied. Part 39A r25(6) should not have been displaced.

2. Set aside the costs orders of Mahoney DCJ made on 3 February 1997.

(a) the defendant to pay the plaintiff's costs in respect of the claim up to and including 6 November 1996, assessed on a party and party basis;

(b) the plaintiff to pay the defendant's costs in respect of the claim thereafter, assessed on a party and party basis.

4. Respondent to pay appellant's cost of the appeal and to have a certificate under the Suitors' Fund Act if qualified.

POWELL JA: I have read, in draft, the Judgment which has been prepared by Mason P.

I agree with the orders which his Honour has proposed in relation to the appeals in Morgan v. Johnson and Gambrill v. Cook. I am, however, unable to agree with Order 3 which his Honour has proposed in relation to the appeal in Greene v. Lovatt. On the contrary, it seems to me that the order which, in this respect, should be made is that the Appellant pay the costs of the proceedings in the District Court up to and including 18 March 1994 - that is, the date of the first offer of compromise served by the Appellant - and that the Respondent should pay the Appellant's costs of those proceedings thereafter; or, at the very least, that the Appellant pay the Respondent's costs of the proceedings in the District Court up to and including 1 August 1994 - that is, the date of the last offer of compromise served by the Appellant - and that the Respondent should pay the Appellant's costs of those proceedings together.

With great respect to Mason P, with whom I understand that, in relation to this matter, Sheller JA agrees, it seems to me, first, that his Honour has concentrated, almost entirely, upon the arbitration to the exclusion of the offers of compromise which were made by the Appellant but not accepted by the Respondent; and, second, that, in all the circumstances of the case, it is not correct to say that "the (Appellant) bears the primary responsibility for the arbitration not achieving its intended effect.

So far as the first of these matters is concerned, it is to be observed, first, that DCR Pt 39A r 25(6) lays down the general principle to be applied, and that, as the authorities make clear, that principle - even before the amendment which came into force on 1 January 1998 - was, as it now is, only to be departed from for proper reasons, which in general arise only in an exceptional case; second, that, in the light of subsequent events - in particular, the fact that Solomon DCJ, in effect, held that the Respondent was a fraud - each of the three offers of compromise which were made is revealed as having been overly generous; third, that, as the authorities demonstrate that the fact that it may have been reasonable for a litigant to reject an offer of compromise is not sufficient to displace the general rule, the rejection by one held to be a fraud of overly generous offers can hardly justify a court exercising in that litigant's favour any discretion not to apply the general rule; and, finally, that, in this case, the real reason for the litigation being protracted, and significant costs incurred, after 18 March 1994 - or, 1 August 1994, if one prefers that date - was that a greedy fraud decided to chance his arm.

So far as the second matter is concerned it should be noted, first, that this was a matter which should never have been referred to arbitration, if only because later events make it clear that, if conducted in the way in which Mason P seems to think that it should have been conducted, then, contrary to what appears to be expected in such matters, the arbitration could not conceivably have been concluded in a day, but would necessarily have been protracted and would have attracted comments such as those made by Gleeson CJ in Troulis v. Vamvoukakis. At trial, the Respondent was cross-examined for two days and the viewing of the video films appears to have occupied the better part of another day, the evidence of the Respondent's wife and of two medical practitioners called on behalf of the Respondent appears to have occupied the better part of another two days, while the balance of the seven days' hearing time appears to have been occupied by the evidence called on behalf of the Appellant and the submissions of the Appellant's counsel - the submissions of the Respondent's counsel were made in writing later.

More to the point, however, it was the greedy fraud, the Respondent, who was not satisfied with the arbitrator's award, who sought the rehearing, and who rejected the further offers of compromise, who was ultimately responsible for the proceedings not having been finalised by the arbitrator's award and who caused the additional costs of the rehearing to be incurred. With great respect to those who may be of another view, it seems to me that neither Quach v. Mustafa nor MacDougall v. Curlevski has anything relevant to say about a case such as this was.

In my view, both DCR 39A r 25(b) and r 31(4) should have been applied so as to require the Respondent to pay, at least, the costs of the rehearing.