Rickard Constructions v Rickard Hails Moretti & Ors [2005] NSWSC 481 | Case summary

1 HIS HONOUR: I gave judgment in these proceedings on 17 December 2004, in which I found for each of the defendants on the plaintiff's claim. I made orders on 7 April 2005 to reflect my conclusions. Among other things, I ordered the plaintiff (Rickard Constructions) to pay the costs of the third defendant (Allianz). 2 Allianz sought an order that its costs be paid on an indemnity basis from 13 March 2003 and on a party and party basis prior to that date. I reserved that question for further argument, and directed Rickard Constructions and Allianz to put in written submissions. They agreed that I could decide the claim for indemnity costs upon the basis of those written submissions. This I now do. Events leading up to the application 3 On 3 February 2003, an order was made by consent that Rickard Constructions pay into Court as security $50,000. That was done on 28 February 2004. 4 It appears that there was a mediation on 3 March 2003. That mediation did not lead to a settlement. 5 On 13 March 2003, Allianz made an offer to Rickard Constructions to compromise the claim against it by paying $100,000. That offer was made on the basis that the proceedings would be "withdrawn and dismissed, with each party to pay its own costs", and that Rickard Constructions and Allianz would enter into an appropriate deed of release. The offer was said to be "made in accordance with the principles enunciated in Calderbank v Calderbank" [1976] Fam 93. 6 Thereafter, Rickard Constructions sought and obtained leave to amend its claim against Allianz to include a claim for consequential loss. Allianz made plain its position that the policy contained an express exclusion of consequential loss. 7 On 9 May 2003 Allianz, having received no response to its Calderbank letter, notified Rickard Constructions that it was "now proceeding to prepare its evidence in this matter and therefore will incur significant costs as a result of this preparation". 8 On 16 September 2003, Allianz made an offer of compromise in accordance with Pt 22, r 1. That offer was in the sum of $15,000, together with $35,000, "in respect of reasonable party and party costs and disbursements". It was not accepted. 9 It would appear, although the Calderbank letter and offer of compromise are not explicit on the point, that under each Rickard Constructions would be entitled to recover, or have repaid to it, the sum of $50,000 lodged as security for Allianz' costs. 10 On 13 October 2004, Allianz reminded Rickard Constructions that its policy "expressly excludes a consequential loss claim by the insured". It notified Rickard Constructions that Allianz "will be seeking an order for indemnity costs against the Plaintiff if it continues to pursue a consequential loss claim". Relevant principles 11 In this case, the disagreement related to the application of the relevant principles; the principles themselves were not disputed. Where an offer of compromise is made pursuant to SCR Pt 22, then the costs consequences of non acceptance are provided by the rules (SCR Pt 52A, r 22). Where the alternative of a Calderbank letter is used, costs remain in the discretion of the court, but the Calderbank letter is a circumstance to be taken into account, as part of the totality of the relevant circumstances, in the exercise of the discretion: SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at para [37] (Giles JA). Failure to accept a Calderbank offer does not create a presumption as to indemnity costs, even where the party making the offer receives a result more favourable than that offered: Jones v Bradley (No 2) [2003] NSWCA 258, para [9]. 12 As Giles JA put it in SMEC at para [37], "the policy informing the regard had to a Calderbank letter is promotion of settlement of disputes". This gives rise to the question, whether "an offeree can reasonably fail to accept an offer without suffering in costs". In some cases (Jones was an example), the analysis may focus on whether the offer was reasonable, and whether it was unreasonable for the offeree to refuse it: see paras [10], [16]. 13 With an exception to which I shall turn, the cases do not suggest that there must be some special or unusual feature (or, as it was put by Gaudron and Gummow JJ in Oshlack v Richmond River Council (1998) 193 CLR 72 at 9, "some relevant delinquency") on the part of the offeree, other than that the rejection of the offer be so "unreasonable" as to justify an award of indemnity costs. At least in the case of a Calderbank offer, the question may be more narrowly focussed: requiring attention to the characterisation of the offer, and its nonacceptance. Where a reasonable Calderbank offer was made and unreasonably refused, and where the offeror achieved a better result, I do not think that the offeror's entitlement to indemnity costs depends, as well, on it showing that there was some other "relevant delinquency" on the part of the offeree. 14 The principles on which indemnity costs might be ordered, in circumstances where a Calderbank offer had been made, rejected (or not accepted) and not bettered were considered by the Court of Appeal in Leichhardt Municipal Council v Green [2004] NSWCA 341. Santow J (with whom Stein AJA agreed) analysed the cases, and the principles, in detail. One of the matters considered by his Honour was whether there was "some relevant delinquency": see paras [ 51], [52]. However, I think, it is clear that his Honour considered this question in the context of considering the wider question, namely whether the action of the unsuccessful party in rejecting the Calderbank offer was relevantly "unreasonable". 15 Santow JA also considered the question, whether a "walk away" offer could be a genuine offer of compromise. It is of course axiomatic that a "walk away" offer is peculiarly one made by a defendant (or cross-defendant); and his Honour's analysis of this question commenced by contrasting the differing cost consequences, under the rules relating to offers of compromise, where offers of compromise made by defendants were not bettered. Against that background, his Honour said:

(4) The time limited for acceptance was reasonable, giving Rickard Constructions and its advisers sufficient time to assess the offer and the relevant strengths and weaknesses of each party's case (in circumstances where there had been a mediation in which, or at least for the purposes of which, I can infer these matters had been considered.) 22 Rickard Constructions submitted that its rejection of the Calderbank offer was not unreasonable in the circumstances. It submitted that its case against Allianz ultimately failed because the "drying back" method of rectification of the defective workmanship was rejected. It submitted that, because this method was supported by expert evidence to be adduced for Rickard Constructions, it was not unreasonable for Rickard Constructions to think that its expert might be preferred over Allianz' expert. 23 Further, Rickard Constructions submitted (as to the point made in reliance on para [215] of my earlier reasons), that it had established the cost to it of rectifying the failed pavement. 24 Allianz submitted in reply that Rickard Constructions had misstated the fundamental basis on which it failed against Allianz. I found that the pavement was affected by defective workmanship, primary responsibility for which must be attributed to Rickard Constructions (see paras [133] and [134] already referred to). Thus, the first of the exclusion clauses was engaged. As I said at para [215], that required Rickard Constructions to prove what was the loss or damage caused directly by that defective workmanship and what were the "costs" of that loss or damage. That was the starting point of the determination of its entitlement: as a matter of entitlement and not merely as a matter of quantification (see para [226]). 25 Further, as I pointed out at paras [218] and [224], the drying out process would not have rectified the defective workmanship. Thus, Allianz succeeded both because I rejected the rectification method relied upon by Rickard Constructions and because, in any event, Rickard Constructions had failed to prove what it needed to prove to succeed in circumstances where the loss or damage was caused by its own defective workmanship. 26 As to this last point: it is no answer to say that Rickard Constructions established the cost to it of rectifying the failed pavement. For the reasons that I gave in my earlier judgment at para [226], that evidence did not address the true issue. Analysis 27 Allianz submitted that these considerations suggest very strongly that Rickard Constructions did not act reasonably in rejecting the Calderbank offer. It is open to infer that the flawed and inadequate analysis now relied upon to justify the rejection demonstrates why, when the offer was made, it was rejected. 28 I accept the second point. However, it does not follow from the fact that the reasoning process relied upon to decide to reject the offer was, or may be inferred to be, wrong, that the rejection of the offer was thereby unreasonable. Rickard Constructions is correct to point out that its case on drying out was supported by its expert. 29 In this context, it is necessary to bear in mind that Rickard Constructions' case against Allianz did not fail simply because Rickard Constructions' own defective workmanship was the direct cause of the collapse of the pavement. As Allianz conceded, Rickard Constructions was still entitled, although on conditions limited by (among others) exclusion clause 1, to some measure of indemnity. Thus, it is not as though knowledge of the fact of inadequate workmanship (which must be imputed to Rickard Constructions) of itself demonstrates that rejection of the offer was unreasonable. 30 If, as decisions such as Jones establish, the failure to accept a Calderbank offer does not create a presumption as to indemnity costs when the offeror receives a more favourable outcome than that offered, then the corollary is that it is necessary to show that there exist sufficient circumstances to displace the general rule as to costs (where the offeror was a defendant and the offeree a plaintiff). In many cases - maybe most - that will be done by demonstrating that rejection of the offer was unreasonable in some way. In this context, I think, "unreasonable" may mean either that the rejection was not supported by any process of reasoning whatsoever or that the reasons for rejection that were advanced, or that may be inferred, were legally or factually (or both) inadequate. Further, where an offer on its face is reasonable, then I think that it is open to infer (absent some demonstration to the contrary) that the rejection was unreasonable. Thus, I think, where it is shown that a reasonable offer was made and rejected, and where the offeror does better than the offer, there is at least a persuasive burden on the offeree to show that its rejection of the offer was not unreasonable. 31 Where the question to be considered is whether an offer was reasonable, or whether its rejection was unreasonable, the analysis and answer require attention to the objective rather than subjective circumstances. It is for the party asserting reasonableness to show, by reference to the relevant circumstances objectively considered, that the offer was reasonable. Equally, if there is a persuasive burden cast on an offeree to show that its rejection was not unreasonable, that must be shown by an objective analysis of the relevant circumstances. 32 An offeree may not be compelled to disclose its advice, where to do so would infringe legal professional privilege. However, whilst its failure to show what its advice was in respect of an offer may not lead to an inference being drawn against it (and in some cases at least it may be possible to infer that the advice given was consistent with the course taken), nonetheless a failure to disclose advice means that one circumstance that is possibly relevant to the characterisation of the rejection as reasonable or unreasonable is not available. 33 The case involved very many difficult issues. It was hard fought (taking some 19 hearing days). I do not think that the ultimate conclusion, as between Rickard Constructions and Allianz, of itself shows that the rejection of the Calderbank offer was unreasonable. 34 The Calderbank offer was not a reasoned offer, in the sense that it did not set out, in detail, in summary or at all, the basis upon which it was made or the considerations that, looked at reasonably, would justify its acceptance. However, I do not think that it is in all cases necessary for a Calderbank offer to take this form, in particular where (as here) the offer is made following an unsuccessful attempt at mediation during which, it may safely be inferred, those considerations were canvassed. 35 The offer was for $100,000 inclusive of costs to date. (Neither party submitted that any different principles applied where an offer was inclusive rather than exclusive of costs; and, at least where the offeree is a plaintiff who has failed completely, I do not think that any difference of analysis is required to accommodate those variations). It was made some three years after the litigation had commenced and at a stage when, I assume, very substantial preparation had occurred. I infer that the parties did not proceed to mediation until each was substantially aware both of its own case and of the case to be made against it. This inference is supported by a letter dated 2 March 2005 from Allianz' solicitors, Moroney Betts, to Rickard Constructions' solicitors, Maurice Blackburn Cashman, setting out the costs and disbursements incurred by Allianz. A relatively brief perusal of that letter shows that Allianz had incurred some hundreds of thousands of dollars of costs and disbursements (including for expert witnesses) by September 2003. I infer that, similarly, Rickard Constructions had incurred some hundreds of thousands of dollars in costs and disbursements by that time. 36 In the circumstances, it is reasonable to infer that the offer would not have recouped the costs incurred to date by Rickard Constructions, let alone given it an increment of the very substantial damages claimed. I think that this is a circumstance which may properly be taken into account in considering whether or not it was unreasonable for Rickard Constructions to reject the Calderbank offer; and, if it was, whether that unreasonable conduct in context justifies the award of indemnity costs. 37 The offer was not a "walk away" offer, but in reality it was not far removed. It did not require total capitulation; but, even accepting that $100,000 is a substantial amount of money, it did not offer a significant increment of Rickard Constructions' claim. Indeed, the second inference to which I have referred in para [35] above shows that the offer would be likely to recoup part only of the costs incurred by Rickard Constructions at the time it was made, and to give no increment of the damages claimed. 38 Thus viewed, the offer may be regarded as one the acceptance of which would require near total capitulation; or, to put it another way, as an optimistic offer. But whether the offer was genuine, or involved a real element of compromise, requires assessment of the position of the offeror as well as that of the offeree. Allianz' position was, clearly, that its case was strong. I infer that the reasons for this position had been canvassed at the mediation and in the steps (including preparation and exchange of position papers) leading up to it. (Indeed, in one respect, there is no need to rely on inference. The evidence shows clearly that Allianz had indicated to Rickard Constructions the basis upon which the amendment to claim consequential losses would fail.) Allianz had incurred very large sums by way of costs at the time the offer was made. The offer required it to bear those costs, and to give up its opportunity to recover some relatively small percentage of them out of the security for costs paid into Court. Further, acceptance of the offer would require Allianz to pay a further $100,000: a sum that, even in the context of Rickard Constructions' claims, I would not be so bold as to regard, or characterise, as trifling. The offer may undoubtedly be described, in the context of this litigation, as "optimistic"; indeed, in the language of the marketplace, it may be described as "bullish". But that does not mean that it lacked any genuine element of compromise. 39 Further, the offer offered another very significant advantage: avoidance of an adverse order for costs. That, of course, was an advantage that would apply to both Allianz and Rickard Constructions (if the latter accepted the offer); but, again, the fact that there was a benefit to Allianz does not mean that there was no element of genuine compromise. The balancing of these factors is not easy; and the outcome may be thought to be more an instinctive synthesis of the factors, paying proper regard to the guidance given by the decisions to which I have referred, than a strictly logically reasoned process. (As Bryson JA pointed out in Leichhardt Council at para [59], an "application for an order for costs to be assessed on the indemnity basis raises the discretionary question the answer to which is not … susceptible of much detailed exposition.") 40 In the present case, I think, the circumstances to which I have referred demonstrate that the offer did involve a genuine element of compromise, even though it may have offered no monetary return to Rickard Constructions over and above the costs incurred; indeed, as I have pointed out, the offer is unlikely to have defrayed more than some proportion of those costs. 41 For essentially similar reasons (and similarly difficult of precise exposition) I conclude, to the extent that a different test may be involved, that the offer was reasonable. It was reasonable because it made allowance for the fact that, although Allianz' case was strong (as my conclusion shows) there was still a risk of loss. It offered, among other things, an end to the substantial current and prospective costs. I do not think that the offer loses its reasonable quality simply because, compared to the amount of Rickard Constructions' claim, and the likely amount by then incurred by Rickard Constructions on costs, it was relatively small. If nothing else, the offer provided a mechanism for Rickard Constructions to bring to an end its dispute with Allianz, on terms that meant neither party would continue to be liable for costs. 42 There may be some conceptual difference between framing the question, as to characterisation of the offer, as one involving genuine compromise or as one involving the concept of the reasonableness. In the former case, both the nature of the compromise and the rejection of it are part of the circumstances to be considered. In the latter case, they remain part of the circumstances; but there may be a shifting of at least the persuasive burden. In other words, if analysis is focussed on the reasonable quality of the offer and it is concluded to possess that quality, the offeree who has rejected it may bear at least the persuasive burden of showing that the rejection was not unreasonable. 43 If, as I think, the offer was reasonable, then it may follow that rejection of that offer was unreasonable. The considerations to which Rickard Constructions point do not suggest otherwise; and they certainly do not discharge any persuasive burden of showing otherwise. They show that Rickard Constructions may have had reasons - commercial, legal or otherwise - for rejecting the offer. They do not show that those reasons were reasonable in the relevant sense, so that the rejection of the offer was not unreasonable in the relevant sense. In so far as Rickard Constructions' reasons are known (see paras [18] to [22] above), they do not qualify as reasonable. 44 In this context, I think that it is relevant to have regard to what I found in my first judgment were fundamental flaws in the case put by Rickard Constructions against Allianz. In particular, the circumstances that I canvassed in the paragraphs of those reasons referred to in para [17] and, to some extent, paras [20] to [22] above, suggest that the case for Rickard Constructions misconceived, in serious and fundamental ways, what it had to prove if it were to succeed against Allianz in its claim under the policy. In circumstances where, as I infer is more likely than not, those matters were pointed out to Rickard Constructions prior to and in the course of the mediation, the failure to address them thereafter (including in considering Allianz' Calderbank offer) is strongly indicative of unreasonable behaviour; and not by way of hindsight only. 45 Further, I think, some insight into the reasonableness, or otherwise, of Rickard Constructions' approach may be gleaned from its decision to pursue the claim for consequential loss. It is not insignificant that this claim was abandoned at the hearing. Allianz pointed out to Rickard Constructions the hopeless nature of that case. No explanation has been offered for the decision. The inference that I draw is that the claim was pursued in an attempt to force a more substantial settlement from Allianz. I do not regard that as a reasonable approach; on the contrary, I think, it is an approach that can only be characterised as unreasonable. It is unreasonable because it sought to advance the resolution of the dispute not by the deployment of sound, or even arguable, factual and legal reasons, but by the application of commercial pressure. 46 There is another matter that I think is relevant. It became apparent that the litigation had been funded by Port Botany Container Park Pty Ltd or a related entity (that company's role is described in para [2] of my earlier reasons). Container Park (as I called it) is a creditor of Rickard Constructions. It is a reasonable inference that the litigation was conducted for the benefit of Container Park. It is a reasonable inference that the decisions to reject the Calderbank offer and the offer of compromise were taken by Container Park. There was no evidence of the reasoning process supporting, or leading to, those decisions; but it may be that the circumstance referred to in para [36] may have played some, if not a leading, part in the decision. In the absence of any evidence or submission as to the reasons of the likely real decision maker, I do not think that it is open to me to conclude that the decision to reject the offers was reasonable. 47 So far, the analysis has proceeded on the basis that there may be a persuasive burden on Rickard Constructions, and has suggested that Rickard Constructions has not discharged that persuasive burden. However, I do not decide the question by reference to considerations of onus. I have concluded that the offer was a genuine offer of compromise, and that it was a reasonable offer of compromise. The circumstances in which it was made, and the circumstances to which I have referred, demonstrate, in my view, that the rejection of the offer was unreasonable. At the time the offer was made, the parties must be taken to have been fully apprised of the strengths and weaknesses of their respective cases. This is so partly because of the advanced stage of preparation at the time when the offer was made, and partly because preparation for the mediation must have required each party to consider its own position both in the light of its own analysis of the relevant facts and circumstances and in the light of its analysis of the positions advanced by the opposing parties in their mediation position papers and at the mediation. 48 In those circumstances, particularly given my findings in my first judgment referred to in paras [17] and [20] to [22] above, and to the inference referred to in para [23] above and accepted in para [24] above, I conclude that the rejection of the offer was relevantly unreasonable. To put it another way, I conclude that those circumstances (including the rejection of the offer) demonstrate a sufficient basis for departure from the ordinary rule as to costs. 49 It is therefore not necessary for me to deal with the alternative case based on the offer of compromise. I will however note that, since the outcome was not one contemplated by Pt 52A r 22 (because the defendant offeror wholly succeeded), the decision would turn on considerations essentially similar to those that I have discussed in relation to the Calderbank offer. Conclusion 50 Allianz is entitled to an order that its costs be paid on the party and party basis up until a time referable to the Calderbank offer and on the indemnity basis thereafter. Since (on the evidence) there was no express rejection of the Calderbank offer, I think that indemnity costs should be allowed from the expiry of a reasonable time to consider that offer. In all the circumstances (including that the offer was made after a mediation in which, no doubt, the respective positions of the parties were canvassed), I think that it is appropriate to allow a period of one month for consideration of the offer. Order 51 I order that the costs payable by the plaintiff to the third defendant, pursuant to the orders made on 7 April 2005, be paid on the party and party basis up until 13 April 2003 and on the indemnity basis thereafter. 52 For the avoidance of doubt, the costs so payable are to include the costs of the defendant's application for indemnity costs.

Rickard Constructions v Rickard Hails Moretti & Ors

At a glance

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Decision date

Before

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Judgment (22 paragraphs)

Parties

Cases Cited (5)

Cited By (27)