Murphy McCarthy & Associates Pty Limited (Administrator Appointed) v Zurich Australia Limited

Facts

1. The proceedings were commenced by statement of claim filed on 20 October 2022.
2. The offer was made on 31 July 2023 in the Supreme Court form for an offer of compromise specifying these terms: 1. The defendants, Zurich Australia Limited and OnePath Life Limited, offer to compromise the whole of the proceedings on the basis that the first defendant pays the plaintiff the sum of $1,000,000 inclusive of interest. 2. This offer is made pursuant to Rule 20.26 of the Uniform Civil Procedure Rules 2005 (NSW). 3. This offer is open for acceptance for a period of 28 days. 4. If, for any reason, this Offer of Compromise is invalid under the Uniform Civil Procedure Rules 2005, the same offer is made in accordance with the principles set out in Calderbank v Calderbank [1975] 3 All ER 333.
3. I immediately observe that the offer contained an error insofar as it referred to OnePath as second defendant. This may not have been noticed by anyone in circumstances when it was OnePath that had issued the policy (see principal judgment [3]). Zurich's solicitor swore an affidavit in support of the present application in which he explained that this error likely resulted from "copying and pasting" from another matter. Nothing turns on this error because the offer makes clear that it was Zurich that was to pay the settlement sum. To the extent that MMA's submissions complained about the error, the complaint was oblique. It was certainly not express.
4. The offer was open for acceptance until 28 August 2023. MMA never responded to the offer. I will refer to this as the non-acceptance of the offer.
5. On or around 16 October 2023, Mr Heron commenced employment with Jonishan. That employment had forensically significant consequences for the conduct of the litigation, including giving rise to surveillance videos and medical reports that assumed considerable importance in the resolution of the case. This observation may be made good by these extracts from the principal judgment (emphases added): 3 Against this background of a successful surgical outcome and a return to full employment, the central issue in this case is whether Mr Heron satisfies the definition of 'Own Occupation Total and Permanent Disability' (TPD) under an insurance policy. If he does, then the plaintiff, Murphy McCarthy & Associates Pty Limited (Administrator Appointed) (MMA) is entitled to the payment of a benefit of $2,954,908.00 from the defendant, Zurich Australia Limited, pursuant to a OnePath Life Ltd insurance policy taken out by MMA commencing on 16 July 2013 under which Mr Heron was the life insured. … 13 On 3 August 2023, the proceedings were fixed for hearing before me commencing on 30 January 2024 for three days. On 4 August 2023, I heard a motion in the proceedings sitting as Applications List Judge. However, a significant development occurred on or around 16 October 2023, when FREMS entered into a sub-contract arrangement with Jonishan Pty Ltd for Mr Heron to work as a Project Supervisor at the Badgerys Creek Airport construction site. … 121 The Court's attention was drawn to various expert reports made by Dr Robin Mitchell and Dr O'Sullivan to assist with the determination of what Mr Heron is currently able to do. The Court also had the benefit of both doctors providing evidence concurrently in the witness box. Dr O'Sullivan was called by the plaintiff. Dr Mitchell was called by the defendant. They both presented as thoughtful, well qualified and appropriately disinterested professional witnesses who were doing their best to assist the Court. 122 Both doctors had been provided with extracts of the videos depicting Mr Heron conducting activities at his home and at the site… … 160 The next issue is whether by reason of that disability, Mr Heron was disabled to such an extent as at 12 February 2022 that he was unlikely ever again to be able to engage in his "Own Occupation" as found in [101] above. The Court finds that he was not disabled to such an extent for three reasons. 161 First, Mr Heron himself accepted that even when working at MMA, whether or not he had to get into a trench depended on the particular job and not every job required it. To use the language of the parties, the Court finds that the ability to do the things the Court has found Mr Heron cannot do in [158] above is not an essential ability for him to be able to engage in his "Own Occupation" as found in [101] above. 162 Second, it is uncontroversial that the onus was on MMA to prove the facts to demonstrate that the policy should respond. There was no evidence adduced by MMA that Mr Heron would not be able to engage in his "Own Occupation" as found in [101] above by reason of his inability to undertake the activities identified in [159] above. 163 Third, the Court finds that Mr Heron is currently engaged in his "Own Occupation" as found in [101] above by undertaking his current work with Jonishan. That is a matter which is relevant to the assessment of unlikelihood for the purposes of clause 1b as at 12 February 2022 (see [143] above). 164 Based on the matters referred to in the preceding three paragraphs, the Court finds that as at 12 February 2022 the extent of Mr Heron's disability (being that identified in [158] above) was not such that it was unlikely that he would ever again be able to engage in his "Own Occupation" as found in [101] above. I add, for completeness, that I would have reached the same conclusion even if the evidence was that Mr Heron could not safely enter, work in and exit trenches at all.

Legal principles

1. UCPR Part 42 r 42.15A provides (emphasis added): 42.15A Where offer not accepted and judgment no less favourable to defendant (1) This rule applies if the offer is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim no less favourable to the defendant than the terms of the offer. (2) Unless the court orders otherwise - (a) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and (b) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, assessed on an indemnity basis - (i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and (ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made.
2. There was no dispute that the most recent, authoritative exposition of the applicable principles in relation to that provision is the judgment of Ward P (with whom Kirk JA agreed) in Langdon v Carnival PLC [2024] NSWCA 168, in which her Honour said: 187 At the outset, it should be noted that a rule such as r 42.15A has been treated as conferring a conditional entitlement to indemnity costs subject to the discretion to order otherwise (see Hillier v Sheather (1995) 36 NSWLR 414). Exercise of the discretion to order otherwise does not necessarily require that there be "exceptional circumstances" (see Barakat v Bazdarova (No 2) [2012] NSWCA 140 at [42]-[49] per Tobias AJA, Bathurst CJ and Whealy J agreeing). More recently, it has been said that "the prima facie position should only be departed from for proper reasons which, in general, only arise in an exceptional case", rather than the Court's discretion being impermissibly fettered by a requirement of exceptional circumstances (see Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 (Perisher Blue) at [36]-[37] per Gleeson JA and Tobias AJA, citing Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) [2004] FCA 1437; 212 ALR 281 at [17] per Hely J). 188 What is required is that the Court be satisfied that in the particular circumstances of the case a departure from the rule is justified. Courts have declined to define exhaustively the factors that may justify displacing this entitlement (see New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100, at 102 per Gleeson CJ). However, what has been accepted is that the reasonableness of the rejection or non-acceptance of the offer is a relevant (though not determinative) consideration (see The Uniting Church in Australia Property Trust (NSW) t/as Northaven Retirement Village v Takacs (No 2) [2008] NSWCA 172 at [15] per Hodgson JA, McColl JA agreeing). When considering the reasonableness or otherwise of a party's rejection of the offer, there are again a number of factors that may be taken into account (see Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298 at [25] per Warren CJ, Maxwell P and Harper AJA (approved by Basten JA in Miwa Pty Ltd v Siantian Properties Pte Ltd (No 2) [2011] NSWCA 344 at [12])). Those may include the offeree's prospects of success assessed at the date of the offer (which in turn may depend on the state of awareness by the offeree of adverse material evidence). … 193 The matters that her Honour was entitled to take into account in determining whether in the present case it was appropriate to make an order otherwise than that which would have followed under r 42.15A include whether, in all the circumstances, it was not unreasonable for Mr Langdon not to accept the offers at the time they were made (relevantly, in circumstances where the medico-legal reports on causation, other than that of Dr Samuell, had not been served). However, her Honour treated this as being determinative without addressing whether there was something in the circumstances of the case that took it out of the ordinary and warranted departure from the rule which would otherwise have applied as to costs. 194 The discretion to make an "otherwise order" is broad. It must, as with all judicial discretions, be exercised judicially and having regard to the purposes for which the discretion is conferred. However, in the present case I consider that it miscarried.

Zurich's submissions in chief

1. Relying on the offer, Zurich sought an order that MMA pay Zurich's costs of the proceedings: 1. Incurred up to and including 31 July 2023, assessed on the ordinary basis; and 2. Incurred from 1 August 2023 assessed on the indemnity basis.
2. Zurich's submissions may be summarised as: 1. The offer complied with the UCPR; 2. Zurich had obtained judgment on the claim no less favourable to Zurich than the terms of the offer; 3. Zurich therefore had a conditional entitlement to indemnity costs subject to the discretion to order otherwise; 4. There were no or insufficient reasons to order otherwise. At the date of the offer MMA was seriously at risk of not being able to establish its case, in particular because it had failed to serve evidence to authenticate properly the "Position Description" (see principal judgment [73 - 75] and [109]) and it had not served any medical evidence as to the nature of Mr Heron's disability; 5. It followed that the Court should make the special costs order set out in [13] above to give effect to the offer in accordance with the UCPR.

MMA's submissions

1. MMA's submissions may be summarised as: 1. The offer did not comply with the UCPR because it failed to identify the proceedings properly (although in what respect was not specified) and its terms did not set out what would or may otherwise have been available for further litigation; 2. If the offer did comply with the UCPR, the case had been affected by an "extra-ordinary" circumstance, being Mr Heron's returning to work after the time the offer had lapsed, being work which the Court ultimately accepted demonstrated that he was working in his "Own Occupation". This submission was (emphases in original): "In the present case the Court found that by reason of work obtained by Mr Heron, long after the offer of compromise had expired, he was working in his own occupation. The Court proceeded on the finding that due to that work being available to Mr Heron and him being capable of the discharge of those duties with that employer, despite his total hip replacement and his inability to re-enter trenches as obliged by the performance of tasks with MMA, then he could engage in his "own occupation"…. Nevertheless, it was not information within the knowledge of the insured, the Plaintiff, at the time that the offer was made, nor could it have ever been, as the material facts had not occurred until late 2023. This is a case informing conclusion that something extra-ordinary occurred…. The Plaintiff was unaware of the health status of the key man at the time that the offer was made save as to his contention that he could no longer participate in the tasks of his occupation with MMA. Moreover, an assessment of that capacity was not, in practical terms, capable of being undertaken until Mr Heron had obtained alternate and different employment, which occurred well after the offer had expired."

Zurich's submissions in reply

1. Zurich's submission in reply may be summarised as: 1. The offer complied with the UCPR because: 1. The offer identified the proceedings including the court, the division, the list, the registry, the case number and the plaintiff, Zurich, Zurich's legal representative and Zurich's legal representative's reference; 2. There was no need to "set out what would or may otherwise have been available for further litigation" because in its express terms the offer was one "to compromise the whole of the proceedings". It was therefore unnecessary to specify "as to whether the balance of the proceedings will be defended or conceded" (see UCPR Part 20 r 20.26(2)(b)(ii)); 1. The fact that MMA was unaware of Mr Heron's health status at the time of the offer or that Mr Heron subsequently returned to work was not a sufficient basis to find that it was reasonable for MMA not to have accepted the offer; 2. MMA had not established why its prospects of success assessed at the date of the offer (referring to Ward P in Langdon at [188]) were such that MMA's non-acceptance of the offer was reasonable; 3. Once the offer was made, MMA should have taken all reasonable steps to make itself aware of Mr Heron's health status, not least because it had not served any medical reports about his condition; 4. Even if it was reasonable for MMA not to have accepted the offer, that was not determinative as to whether the Court should order otherwise; 5. That fact that Mr Heron returned to work was not "extra-ordinary" merely because MMA contended that they were unaware of Mr Heron's health status at the time that the offer was made.

Consideration

1. The Court immediately accepts two submissions made on behalf of Zurich.
2. First, the Court does not accept that the offer was deficient as to form in either of the respects contended for by MMA (and assuming that within the general complaint about the identification of the proceedings is an implicit reference to the inadvertent inclusion of OnePath as second defendant). The Court accepts Zurich's submissions set out in [16(1)] above.
3. Second, looking at the evidence and what might be called the forensic landscape at and during the time the offer was open, the Court accepts that MMA has not shown that its non-acceptance of the offer was reasonable. However, as I will next consider, that is not the end of the matter.
4. As I understand MMA's submissions, their essential point is that an important part of the Court's reasoning in the principal judgment was that by reason of his return to work, Mr Heron was demonstrating that he was capable of working in his "Own Occupation". That return to work occurred after the offer had expired and represented a fundamental change of circumstances.
5. In that regard, I do not accept Zurich's submission that MMA should have made enquiries about Mr Heron's health status as dispositive in the facts of this case. That is because had MMA done so, I am satisfied Mr Heron would have given the answer he gave in the witness box: that he was not able to do the work he had done for MMA. It might be thought that a more pertinent inquiry, if one was called for, was whether Mr Heron had returned to work. However, the answer would have been "no". He did not return to work until around 16 October 2023, some six weeks after the offer had expired.
6. Where an unsuccessful plaintiff can point to circumstances which significantly affected the outcome that were not present at the time of the offer, this can provide the Court with a powerful discretionary reason to make orders otherwise than the usual orders as to costs pursuant to the UCPR. In approaching the exercise of the Court's discretion, I have borne firmly in mind that there is a strong public policy in favour of encouraging the settlement of litigation and that the conditional entitlement created by UCPR Part 42 r 42.15A is not lightly to be displaced, not least because the offer of compromise scheme depends upon certainty of outcome. This certainty encourages offers to be made and enables parties to be given reliable advice when considering when and on what terms to make an offer.
7. While recognising that the conditional entitlement created by an offer of compromise is a much weightier consideration than the discretionary calculus engaged by non-acceptance of a Calderbank offer, the approach the Court has taken where there has been a change of circumstances when considering the non-acceptance of a Calderbank offer can provide some instruction by way of analogy. An authoritative example is the decision of Stein JA (with whom Davies AJA agreed) in Rolls Royce Industrial Power (Pacific) Ltd v James Hardie and Coy Pty Ltd (2001) 53 NSWLR 626; [2001] NSWCA 461 (overturned by the High Court on other grounds unrelated to the consideration of the Calderbank offer: Amaca Pty Ltd v NSW (2003) ALJR 1509; [2003] HCA 44).
8. In Rolls Royce, the Court of Appeal did not disturb the trial judge's conclusion that a significant change in circumstance after the time for acceptance of a Calderbank offer had expired was a proper basis not to give effect to the Calderbank offer. Stein JA said (emphases added): 93 His Honour said that overall Rolls Royce was the successful party. Accordingly, James Hardie was to pay its costs, excluding those relating to the contract claim. James Hardie argue that his Honour should have given effect to the Calderbank offer which Rolls Royce did not 'better'. In rejecting James Hardie's submission, his Honour said that Rolls Royce did not receive notice of the cross-claim by James Hardie in respect of the Pacific Power judgment until after the time for acceptance of the Calderbank offer had expired. This was a change of circumstance relevant to the discretion. 94 His Honour said that before the Calderbank offer expired, Rolls Royce did not have an informed opportunity to assess its chances because the cross-claim was brought at a later point of time. 95 I can see no error in his Honour's decision on the failure of the Calderbank offer. The cross-claim by James Hardie was late and was not a circumstance at the time of the offer of 4 June 1999. Surely what must be relevant is the circumstances which exist at the time the offer is made? The cross-claim produced a change of circumstance which, if in existence as at 4 June 1999, would have been likely to have produced a different complexion to the litigation so far as Rolls Royce was concerned. 96 There is English authority which supports this - Gaskins v British Aluminium Co Ltd [1976] 1 QB 524 and Preotta v Times Newspaper Ltd [1991] 4 All ER 46. A similar stance was adopted by Mahoney AP in Fowdh v Fowdh (Unreported, NSWCA, 4 November 1993) cited by Curtis J. 97 Mahoney AP noted that after expiry of the offer and the time in which to accept it, two things emerged which significantly changed the situation. 98 He said: … It is one thing for a plaintiff to present her evidence, make an offer of compromise, and to succeed at the trial on that evidence. In such a case, indemnity costs may be warranted. It is another thing for the plaintiff to present a case and make an offer of settlement, and then to succeed at the trial upon a relevantly different case. A plaintiff who has done that may not readily receive indemnity costs. I do not mean by this that minor differences between the case at offer and the case at trial will be of significance or that, if the difference be significant, a discretionary judgment for indemnity costs may not be given. But where the difference between the position at offer and the position at trial be as the Master assessed it to be, a decision to refuse indemnity costs may readily be understood. 99 See also Van Doore v Mendez (Unreported, NSWSC, 30 June 1997).
9. In the present case, it is not just the fact that Mr Heron had returned to work which enabled the Court to make the finding it did that was the relevant change of circumstance. The consequence of his return to work was the introduction of a large body of new evidence constituted by the surveillance footage, the doctors' reports and Mr Heron's own evidence about his work with Jonishan.
10. Applying the language of Stein JA in Rolls Royce at [95], Mr Heron's return to work and the fresh evidence that this generated produced a change of circumstances which, if in existence during the life of the offer, would have been likely to have produced a different complexion to the litigation as far as MMA was concerned. These matters "significantly change[d] the situation" (Rolls Royce at 97).
11. I have set out in [10] above references to the principal judgment to demonstrate just how significant the matters referred to in the preceding paragraph were to the outcome. Based on its own assessment and experience, the Court has no doubt that if all of that information were available to MMA during the life of the offer, MMA would have been confronted with a quite different, and considerably more disadvantageous, forensic landscape. Even if viewed through MMA's understandably partisan eyes, that Mr Heron had returned to work which could at least be said to resemble substantially his former employment, the new information would have given MMA's experienced legal advisors considerable pause for thought. MMA may well have taken a different view of its prospects and chosen to accept the offer.
12. A very substantial component of what resulted in Zurich's successful defence of the proceedings (being the fact of Mr Heron's return to work and the evidence that subsequently generated) was not in existence during the life of the offer. The Court finds that change in the evidence between the time of the offer and the hearing to be exceptional or extra-ordinary, or simply to be the particular circumstances of this case which justify a departure from Zurich's conditional entitlement to indemnity costs. Because of those particular circumstances it would be unfair to visit on MMA what would otherwise be the consequences of its non-acceptance of the offer (see Langdon at [188]).

Conclusion

1. For these reasons, Zurich's application for an indemnity costs order in reliance on the offer is rejected.
2. While Zurich is entitled to its costs on the ordinary basis of the entire proceedings, it has failed in this discrete application. Zurich will be ordered to pay MMA's costs of Zurich's special costs application (subject to affording Zurich a short period of time to be heard against this outcome, if it wishes).
3. The orders of the Court are: 1. Vary order 2 made on 25 September 2024 by inserting the prefatory words "Pursuant to UCPR Part 42 r 42.15A(2) the Court orders otherwise such that it". 2. Subject to order 3, and notwithstanding any other order as to costs, the defendant is to pay the plaintiff's costs of the defendant's application for indemnity costs. 3. Order 2 will take effect on and from 8 November 2024 unless by email to the Associate to Kunc J on or before that date the defendant has applied to relist these proceedings in relation to that order.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 November 2024