Sadi Mustafa Karabay v Malcolm Carr t/as Forshaws Neill Solicitors & Anor

Judgment ON COSTS 1In this matter I found for Mr Karabay against the 1st defendant, Mr Carr, but not against the 2nd defendant, Mr Kramer. There remains the question of costs, which raises the effect of an offer of compromise made by the defendants well before the trial. 2On 5 May 2009, the defendants' solicitor conveyed to the solicitors then acting for Mr Karabay an offer of compromise, expressed to be pursuant to UCPR r 20.26, for $400,000 "plus costs." The offer was said to be open for 28 days, and the defendants' solicitor received no response by or on behalf of Mr Karabay during that period. In the event, the sum awarded to Mr Karabay against Mr Carr is substantially less than the amount of that offer. 3Accordingly, pursuant to r 42.15, both defendants seek an order against Mr Karabay for their costs on an indemnity basis from the day after the offer was made, 6 May 2009. It is accepted that up to and including 5 May 2009, Mr Carr is to pay Mr Karabay's costs on an ordinary basis and Mr Karabay is to pay Mr Kramer's costs, also on an ordinary basis. These are the orders sought in a motion by the defendants filed on 13 February 2013. 4What is at issue is whether the offer of compromise complied with r 20.26, so as to engage r 42.15. Relevantly for present purposes, r 20.26(2) provides that an offer of compromise must be "exclusive of costs ... ." On the face of it, one would think that the offer in the present case of an award of damages "plus costs" does not offend that sub-rule, which appears to be directed at offers expressed to be inclusive of costs, as that expression is used in civil proceedings. However, there is authority to the contrary. 5In Old v McInnes & Anor [2011] NSWCA 410, the question of costs was one of a number of issues with which the Court of Appeal was concerned. The 1st defendant had made two offers of compromise whereby the plaintiff would obtain judgment against him, and he would pay the plaintiff's costs as agreed or assessed. Meagher JA, delivering the leading judgment, held at [105] that the offers did not comply with r 20.26 because neither of them was "exclusive of costs", within the meaning of sub-rule (2). 6Giles JA agreed generally with the judgment of Meagher JA, without himself addressing any of the issues raised: [42]. Beazley JA (as she then was) accepted that the offer did not comply with r 20.26 because of its reference to costs: [18]. However, after considering authorities to the effect that an offer not complying with the rule might be treated as a Calderbank offer, her Honour concluded that the circumstances justified the exercise of the court's general discretion to order indemnity costs: [22] - [36]. 7On this issue Meagher JA referred (also at [105]) to Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 at [22] - [24], and Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141, at [18] - [29]. While both of those cases were concerned with an offer of compromise which referred to costs, in neither of them was the provision for costs in the same terms as those in Old v McInnes. Indeed, in Trustee for the Salvation Army v Becker the offer was inclusive of costs: Ipp JA, with whom Mason P and McColl JA agreed, at [25]. Both decisions conveyed that the rationale of r 20.26(2) is to avoid conflict between the terms of the offer and the provisions for costs to be found in Pt 42 of the rules. Consistently with this, r 20.26(12) provides that an offer "that purports to exclude, modify or restrict the operation of rule 42.14 or 42.15 is of no effect for the purposes of this Division." 8Only a matter of months after the decision in Old v McInnes, the Court of Appeal gave judgment in Vieira v O'Shea (No 2) [2012] NSWCA 121. That was a judgment of the court, in which Meagher JA was a member of the bench along with Basten JA and Handley AJA. In that case the plaintiff had made an offer to compromise the action for a certain sum, with the defendants to pay his costs. The court noted at [7] a concession that the offer did not comply with r 20.26 because it was not "exclusive of costs." However, the court added: "It is true that the offer was not stated to be exclusive of costs: the statement as to costs could have been understood as indicating that the offer was indeed not inclusive of costs, but was otherwise otiose as the same costs consequences followed from the application of the rules. ... The UCPR are to be construed by reference to their apparent purpose. A mere reference to costs in an offer otherwise compliant with Pt 20, Div 4 will not take the offer outside the rules unless the reference operates inconsistently with the relevant costs rule: [there followed a reference to Dean v Stockland Property Management]. The offer, if accepted, entitled the offeror to his costs: the offer did not seek to vary the effect of UCPR r 42.13A [the relevant rule in that context]." 9The court went on to consider an offer by the appellant to compromise the appeal for an award of a certain amount. The first respondent submitted that the offer failed to comply with r 20.26 for a number of reasons, one of them being that it was not expressed to be "exclusive of costs." The court disposed of that argument in this way at [18]: "However, the rule does not require such a statement, but merely requires that the offer 'must be exclusive of costs': r 20.26(2). The evident purpose of that requirement is that the effect of the offer, whether accepted or rejected, will be to engage the relevant costs rule in Pt 42. The offer did not purport to be inclusive of costs and there was no reason to infer that it was, so as to invalidate its operation under r 20.26, with which it purported to comply." 10No reference was made to Old v McInnes and, with respect, it is difficult to reconcile the reasoning in the two cases. Counsel for the defendants, Mr Braham SC, fairly described the decisions as "a conundrum." 11A helpful review of the authorities and the rationale of r 20.26(2) is to be found in the judgment of Garling J in Rail Corporation NSW v Vero Insurance Ltd (No 2) [2012] NSWSC 926 at [43] ff. In that case his Honour found that an offer of compromise by the plaintiffs which included a term that the defendant pay their "costs and disbursements as agreed or assessed" complied with the sub-rule. 12At [75] - [84], his Honour referred to a number of decisions of the Court of Appeal prior to Old v McInnes involving offers of compromise for a defined sum of money which was expressed to be "plus costs", "together with costs" or words to that effect. In none of those cases was such an offer found to fall foul of the sub-rule, although his Honour noted that often they did not "involve any detailed analysis": [75]. His Honour found it "difficult to identify consistency of approach to the issue" in the various decisions of the Court of Appeal: [85], and in the absence of a "clear or consistent guideline" by which he was clearly bound, he found it necessary to "engage in a purposive construction of the relevant provisions of the UCPR": [89]. 13What his Honour then said should be set out in full: "[91] Firstly, it is obviously in the Court's interests that parties can engage in the Offer of Compromise process so as to settle the litigation in which they are engaged in a simple and straightforward way, and one which provides a certainty of outcome. [92] The real benefit of an offer of compromise made by a formal notice is that it provides a clarity to the recipient of what they are entitled to expect if they settle the case. That is because the recipient will know how much they are to receive (or pay) and can compare this to their assessed prospects in the litigation. The party making the offer seeks to be in no different position. [93] Secondly, it is manifestly desirable that an offer should contain each of two elements, namely, a monetary component (if that be the appropriate term), and a separate clause which deals with costs. It is only by specifically referring to each of these two elements that certainty can be achieved from the perspective of either the offeror or the offeree. [94] It would be a most uncertain outcome for a party to accept a monetary offer of compromise and, if, having accepted it in the belief that costs would follow the event, and that party would be entitled to costs, the opposing party could apply to the Court to 'otherwise order' without notice to the party which has accepted the offer, and after the offer has been accepted. That is one possible consequence if a separate provision with respect to costs means that the Offer of Compromise is a non-complying one, because in order to engage the UCPR costs regime, if costs cannot be mentioned, uncertainty must follow. [95] As well, where the offer does not involve any inconsistency with the UCPR, and provides that costs follow the event, that is, that the party offering a monetary judgment would also pay the costs of the opposing party, thereby merely seeking to clarify the position namely that the offering party does not propose to seek that the Court 'otherwise order', it is hard to see why such an offer is inimical to the just, quick and cheap disposal of the proceedings. [96] It is difficult to discern why including a term of that kind would cause an offer to be a non-complying offer. [97] Thirdly, when interpreting r 20.26 of the UCPR, it is my opinion that the gravamen of the rule requiring an offer to be 'exclusive of costs', is designed to prevent an offering party expressing the offer as 'inclusive of costs'. There is an obvious reason why preventing this is desirable. That is because if an offer is not accepted, and ultimately the offeree obtains a more beneficial result, or at least contends that it has, then a court will not be in a position to make such a judgment without engaging in an assessment of the costs due at the time the offer was made. This is an expensive, and an unnecessary and unproductive exercise in determining, hypothetically, something for which there is no obvious benefit. [98] By making the monetary verdict exclusive, that is, not inclusive, of costs, the UCPR facilitates the later comparison of whether or not a party is 'better off' as a consequence of the ultimate judgment when compared with the offer that was made." 14Since the decision of Garling J, the same approach has been adopted by Davies J in Ziliotto v Dr Hakim (No 2) [2012] NSWSC 1079, by Hoeben J (as he then was) in Egan v Mangarelli & Ors (No 2) [2012] NSWSC 1226, and by Harrison J in Orcher v Bowcliff Pty Ltd [2012] NSWSC 1429. 15Mr Braham referred me to two cases in the Equity Division in which Old v McInnes was followed: the decisions of Ward J (as she then was) in In the matter of Cheal Industries Pty Ltd - Fitzpatrick v Cheal [2012] NSWSC 932 at [67] ff, and of Rein J in JKB Holdings Pty Ltd v de la Vega (No 2) [2012] NSWSC 1238. However, Ward J's decision in Cheal Industries was handed down a few days before the judgment of Garling J in Rail Corporation v Vero Insurance, and her Honour did not have the benefit of Garling J's comprehensive analysis of the authorities. Nor, as Davies J noted in Ziliotto v Dr Hakim at [28], was her Honour referred to any of the other Court of Appeal decisions cited by Garling J, including Vieira v O'Shea. In JKB Holdings v de la Vega, Rein J was referred to the relevant recent authorities, including Vieira v O'Shea and Rail Corporation v Vero Insurance. However, his Honour considered himself bound by Old v McInnes, noting at [12] that it had not been overruled in Vieira v O'Shea or any subsequent decision of the Court of Appeal. 16In the present case counsel for Mr Karabay, Mr Stephens, submitted that I should consider myself bound by Old v McInnes, as Rein J had. However, I find the careful analysis of Garling J persuasive, and I am fortified in that view by the decisions of my brother judges who have adopted his Honour's approach. On this issue Old v McInnes does appear to be anomylous. Although the Court of Appeal has not revisited the matter, I am satisfied that I also should adopt Garling J's approach. The defendants' offer of compromise of 5 May 2009 complies with r 20.26 and, accordingly, r 42.15 is engaged. 17The offer of compromise was not expressed in the alternative as a Calderbank offer if it were found not to comply with the relevant rule, and Mr Braham did not argue that it should be seen as such. 18Apart from his primary submission that I should follow Old v McInness, Mr Stevens also argued that the terms of the offer of compromise were not clear and, for that reason, the offer was not reasonably capable of acceptance. He referred to Vieira v O'Shea at [10] where, in the context of a Calderbank offer, the court noted that the enquiry whether it was unreasonable for a party to have rejected such an offer "assumes that the offer was capable of acceptance by the offeree ... ." The court later added at [22]: "It may be accepted that lack of clarity in terms of the offer is a relevant consideration in determining whether the rejection of a Calderbank offer is unreasonable ... . However, it would require a significant element of uncertainty to render the offer one which did not comply with r 20.26." (References to authority omitted.) 19In this context Mr Stephens noted that two subsequent offers of compromise were made, in May and August 2011. Each of those offers specified an award of damages plus costs, but also included "an indemnity for costs of Torrac Nominees Pty Ltd and UWS Macarthur Sports and Recreation Association Inc", presumably a reference to their costs of the proceedings in the District Court and the Court of Appeal. No such indemnity was spelled out in the offer of 4 May 2009, and Mr Stephens argued that it was unclear whether that offer was intended to embrace those costs. 20I see no such ambiguity. Whatever might have been the terms of later offers, the expression "plus costs" in the relevant offer is readily understood as the costs of the proceedings before me. Mr Karabay's liability for costs of the District Court and Court of Appeal proceedings was part of the damages sought in his case. 21Of course, the defendants' entitlement to their costs on an indemnity basis under r 42.15 is subject to the power of the court to order otherwise. No other matter was raised by Mr Stephens which might invoke that discretion. Accordingly, the defendants are entitled to the special orders they seek. I make the orders for costs sought in their motion of 13 February 2013.