SMEC Testing Services Pty Ltd v Campbelltown City Council

54 The plaintiff alleged that the land had not been filled conformably with those specifications. It brought proceedings in the District Court against the defendant claiming damages for breaches of contract and warranty and for misleading and/or deceptive conduct based on the disclosure in the contract, such damages being for additional building costs and loss of rental, the latter allegedly arising by reason of the delay in completing the building because of the problems caused by the inadequate filling. The defendant denied that it was liable under the contractual provision and in respect of the other claims for a number of reasons. 55 The proceedings were commenced in 1996 and the defendant joined LL&H and SMEC as third parties and cross-claimed against Fordham. LL&H, SMEC and Fordham claimed against each other for contribution and indemnity. 56 The defendant sued LL&H in contract, for negligence and under the Trade Practices and Fair Trading Acts. It sued SMEC for negligence and under those Acts. It sued Fordham in contract and for negligence. 57 The following issues were thus propounded for decision:-

(a) Whether the defendant was liable to the plaintiff and, if it was, the damages to which the plaintiff was entitled; (b) If the defendant was liable to the plaintiff, whether any or all of SMEC, LL&H and Fordham was or were liable to contribute to or indemnify the defendant against such liability; and (c) If any or all of SMEC, LL&H and/or Fordham was or were so liable whether, as between themselves, any was entitled to contribution to or indemnification in respect of that liability from any other of them.

The District Court Proceedings 58 In 1998 the District Court ordered that the whole of the proceedings be referred to Mr P.R. Callaghan of Senior Counsel, pursuant to Part 28B rule 10, to provide a report. He commenced the reference on 12 October 1998. It proceeded for thirteen days and evenings and, according to the report, there were over one thousand pages of transcript and exhibits and the closing written submissions filled, "to absolute capacity", a lever arch folder. After referring to these matters in his report, the Referee said:- "The cost of the case to the parties must be most substantial and utterly disproportionate to the comparatively small amount in issue. Nevertheless, throughout the hearing, the parties steadfastly failed to reach a commercial settlement and insisted on the hearing proceeding." The observations in the first sentence are obviously correct. From my experience in hearing applications for security for costs, I would estimate the costs of the hearing of each party at about $7,000 per day. For a thirteen day hearing that amounts to some $91,000 per party, which takes no account of prior costs and the costs of written submissions. 59 The plaintiff claimed initially $160,457.93 and interest, a claim it amended in August 1997 to $176,548.25. The two major components of the second claim were $106,401.25 for extra building costs and $67,185 for three months' loss of rental. On 1 May 1998, apparently on the basis of a further expert's report, the plaintiff increased its claim for extra building costs to $203,990. 60 By virtue of concessions made during the reference the parties agreed, on the tenth hearing day, that the amount of damages for additional building costs was $75,962. 61 On 22 December 1998, the Referee, having rejected the plaintiff's claims for lost rent and damages for misleading and/or deceptive conduct, reported to the Court that in his opinion:-

1. There should be a verdict for the plaintiff against the defendant for $75,962. 2. It would be appropriate for the judgment to include interest from the end of September 1995. 3. The defendant should pay ninety per cent of the plaintiff's costs. 4. "There should be verdicts in favour of the Council against each Lean Lackenby and SMEC respectively for the sum of $75,962 plus interest to judgment date, and against Fordhams for twenty five per cent of that sum. The judgments should note that they relate to the same liability and that recovery by the Council of money on account of any such judgment would operate as a pro tanto discharge of the other judgments". 5. LL&H, SMEC and Fordham should be ordered to pay the defendant's costs, including its costs payable to the plaintiff, in the proportions of fifty per cent, twenty five per cent and twenty five per cent respectively. 62 In his report the Referee made reference to s.109ZJ of the Environmental Planning and Assessment Amendment Act, sub-s.(1) of which provides that after determining an award of damages in a building or subdivision action, the Court must give judgment against each contributing party for such proportion of the total amount of damages as it considers to be just and equitable having regard to the extent of each party's responsibility for the loss or damage. Sub-section (2) states:- "Despite any Act or law to the contrary, the liability for damages of a contributing party is limited to the amount for which judgment is given against that party by the court." 63 The Referee also made reference to contribution conformably with s.5 of The Law Reform (Miscellaneous Provisions) Act 1946 and, at p.30, said:- "Having regard to the respective omissions and acts of the parties and doing the best I can with their relative responsibilities, I have concluded that it would be just and equitable to treat them as responsible in these proportions: Lean Lackenby 50%, SMEC 25% and Fordham 25%."

I find it strange that having reached this conclusion he made the orders to which I have referred. Prima facie his findings, if he was proceeding under The Law Reform (Miscellaneous Provisions) Act , should have been that the defendant was entitled to judgment against each of SMEC, LL&H and Fordham for the full amount with contributions in the percentages to which he referred. Alternatively, if the Referee was proceeding under s.109ZJ he should have recommended judgments for the defendant against LL&H for 50 per cent, and against each of SMEC and Fordham for 25 per cent, a course he followed when ordering costs. 64 I do not make these comments merely to point up some error that there may have been in the Referee's reasoning, but to show that the Referee was clearly of the opinion that LL&H and Fordham, as well as SMEC, were liable to the defendant. This is a matter of significance to which I shall refer later. 65 In relation to LL&H, the Referee was satisfied that there was a term of its contract with the defendant to the effect that it would give such directions to SMEC as were required to ensure that testing carried out by SMEC and monitoring of the works by SMEC would ensure that the works were performed in accordance with the defendant's requirements. The Referee was of the opinion that LL&H failed to comply with that provision. 66 So far as Fordham was concerned, the Referee was of the view that no criticism could be levelled against it, other than that it failed to achieve the result for which it had contracted, namely a dry density ratio of at least ninety eight per cent standard compaction. That, if I may say so with respect, was a substantial criticism of breach of contract. The Referee thought that Fordham was in breach of contract, but that its breach "was not a negligent one". He then proceeded to apportioin liability in the percentages to which I have referred. 67 After the Referee published his report the Court was asked to make the following orders by consent:- "1. Judgment in favour of the Council against Lean Lackenby, SMEC and Fordhams for $104,162.62 plus interest on that sum from 3rd March 1999 to date (the judgment) in the proportions of 37.5% for each of Lean Lackenby and SMEC and against Fordhams in the proportion of 25% of the judgment. 2. Note that the judgment relates to the same liability and the recovery by the Council of money on account of any such judgment operates as a pro tanto discharge of the other judgment. 3. Order that Lean Lackenby pay the Council's costs up to the time of the making of the consent orders (including the costs payable to Normak) but excluding the costs payable to any other party in the proportion of 42.5%. 4. Order that SMEC and/or Fordhams pay the Council's costs (including the costs payable to Normak) in the proportions of 32.5% and 25% respectively, subject to any application by SMEC and/or Fordhams that a different order should be made based on offers made by them. 5. Vacate all previous orders for costs. 6. As between SMEC, Lean Lackenby and Fordhams dismiss all cross-claims and third party notices and order each party pay its own costs." 68 Each of SMEC and Fordham brought Notices of Motion seeking an order that the defendant pay its costs on an indemnity or party/party basis from 8 April 1998 and 7 May 1998 respectively. 69 Taylor DCJ dismissed both Notices of Motion. SMEC seeks to challenge that order. Fordham does not.

Attempts At Settlement 70 On 7 April 1998 SMEC made an Offer of Compromise to the defendant in the sum of $110,000 plus costs. Part 19 rule 2A(1) provides that a costs' offer comprises any claim by the party to which the offer is made "for his costs incurred in the action up to the date of acceptance of the offer". The offer was purportedly made pursuant to Part 19A, but not in terms which would attract the prima facie consequences of Part 39A rule 25 in the event of the defendant's not obtaining a better result than the offer. The reason for that was that the offer did not comply with Part 19A rule 10. 71 Part 19A is headed "Offer Of Compromise". Rule 1 provides for the making of such an offer. Rule 7 provides for disclosure to the Court at an appropriate time of such an offer, which has not been accepted, for the purposes, relevantly, of Part 39A rules 25(4), (4A) or (6) or as provided by Part 39A rule 25(9). Part 19A rule 10 provides that where two or more defendants are alleged to be jointly or jointly and severally liable to the plaintiff, (it being conceded that in this case, by virtue of the definitions the defendant was a plaintiff and SMEC, LL&H and Fordham were defendants for the purpose of the rule), an offer in the terms of that sub-rule must be made to make Part 39A rule 25 applicable. It was not in issue that SMEC's Offer of Compromise did not achieve that result. 72 Part 39A rule 25(6) provides that where an offer is made by a defendant, which is not accepted, and the plaintiff obtains an order or judgment on the claim to which the offer relates, which is no more favourable than that offer, then, unless the Court in an exceptional case and for the avoidance of substantial injustice otherwise orders, the defendant shall be entitled to an order for costs against the plaintiff from the date the offer was made on a party and party basis. 73 It was not in issue that the Offer of Compromise was made under Part 19A, nor that it could attract the provisions of Part 39A rule 25(6). 74 On the same day SMEC's solicitors wrote to the defendant's solicitors on a without prejudice basis save as to costs, which was stated to be a "Calderbank letter", making an alternative offer, namely that it would pay fifty per cent of the plaintiff's claim, plus fifty per cent of both the plaintiff's and the defendant's costs. The evidence was that no response was received to either offer. 75 Fordham made an Offer of Compromise on 7 May 1998. SMEC addressed no argument to this Court in reliance on it or its terms or any of the facts relating to it. Whilst it seems to me that the only reasonable inference is that it was for payment of a monetary sum either expressed in dollars or as a percentage of the ultimate judgment, without knowing the terms of the offer and in the absence of any submissions, I do not think it appropriate to take into account, in determining the appeal, the fact that some offer was made by Fordham. 76 The defendant's attitude was made clear in letters its solicitors wrote to the solicitors for SMEC, Fordham and LL&H on a without prejudice basis save as to costs and in identical terms on 17 March and 28 April 1998:- "We refer to the conference between the defendant parties at our offices on 12 March 1998. As discussed, it is our client's view that whatever judgment may be made against it in contract, it will be successful in passing all of its liability on to the other Defendant parties. Our client does not believe the disagreement between the other Defendant parties concerning apportionment of liability between them should prejudice its position and force it to incur costs greater than those already incurred. In an effort to reach an early resolution of this matter and to minimise costs we are instructed to ask the other Defendant parties to grant indemnity to our client in the proportion to which they themselves are found liable in these proceedings to our client. Our client seeks full indemnity with respect to its costs which are as follows: (Details of the costs totalling $57,284.32 were then given). Please advise your client's instructions on the granting of an indemnity to our client as soon as possible. We note this matter is listed for a directions hearing on 19 March 1998 and would be grateful if an indication could be made to us on that date."

77 This letter made clear that the defendant regarded itself as legally entitled, as against each of SMEC, LL&H and Fordham, to a full indemnity in respect of liability and to costs on an indemnity basis. It was written at least fifteen months after the commencement of the litigation at a time when the defendant had had an ample opportunity to consider its position. It expressed no doubt as to its view of its entitlement against each of those parties. 78 The letter of 28 April 1998, which post-dated SMEC's offers, stated:- "We refer to our letter dated 17 March 1998. In our view, no evidence has been presented in this matter which allows a conclusion other than that Council's liability to the Claimant, if any, will be passed on to the Other Parties in full. In order to avoid incurring unnecessary costs, we believe the Other Parties should grant indemnity to our client in respect of its costs and liability to the plaintiff in the proportion to which the Other Parties are found liable for the damage claimed by the Plaintiff. This proposal allows the Other Parties to continue their debate with respect to the apportionment of liability and will not prejudice their position with respect to each other. At the same time it reduces costs for which they will ultimately be liable. We will be grateful if you will advise your client's urgent instructions with respect to indemnity."

79 This letter reinforced the strong view the defendant was taking against each of SMEC, LL&H and Fordham. 80 The solicitors for SMEC, probably in reliance upon the offers made, did not respond and Fordham's only answer seems to have been its offer of 7 May 1998. There is no evidence that LL&H commented. 81 It is, in my opinion, necessary to consider with some care the letters written by the solicitors for the defendant. Whilst the defendant may have been confident that in the event of its being found liable to the plaintiff it would be successful in passing all of its liability on to the other defendant parties, there was a very real question as to the damages, "if any", to which the plaintiff was entitled. Presumably the defendant had in mind seeking to settle the matter with the plaintiff, although it did not state on what terms it proposed to do so. No other reasonable inference can be drawn from the letters of 17 March and 28 April 1998. 82 What, in substance, the defendant was seeking was, as Counsel for SMEC put it, a "blank cheque" from the other parties to enable it to settle, because had they agreed to the defendant's proposal there was no suggestion that they would have any control over the amount for which it might settle with the plaintiff. Rather the issue for them, as propounded in the defendant's correspondence, was the contribution each should make among themselves. In those circumstances it does not seem to me that SMEC, Fordham and LL&H acted unreasonably in rejecting that stance. They were entitled to know, in my opinion, the maximum amount for which the defendant was prepared to settle with the plaintiff before agreeing to indemnify the defendant against any liability to the plaintiff. 83 The only reasonable inference I can draw from the sequence of events is that after receipt of the letter of 17 March 1998 SMEC and Fordham decided to make Offers of Compromise and offers of settlement, although they were not able to do so in terms which would bring into operation Part 39A rule 25 because of the disagreement as to the proportions between themselves and, it would appear, the failure of LL&H to agree to contribute to a settlement figure.

How Should The Discretion Be Exercised? 84 Prima facie costs follow the event. That result may be changed by an Offer of Compromise in which event the Court's discretion to make some other order is quite limited; or by the making of an offer by way of a Calderbank letter, in which event the Court has a greater degree of discretion as to whether it will follow the usual rule. The offer SMEC made under Part 19A should be treated as such an offer, it not having the more stringent consequences flowing from Part 39A rule (6). The rules in relation to Offers of Compromise were obviously introduced to give effect to the aims and objectives stated in Part 39A and, in my opinion, the Court, when exercising the wider discretion may have some regard to those aims and objectives, which are very important in the conduct of litigation. 85 It seems to me that in considering, in any particular case, the way in which the discretion, either in relation to an Offer of Compromise or a less formal offer, is to be exercised, the Court must have regard to the specific facts of the case. It is not, in my opinion, sufficient to simply rely upon a general observation that the position of the parties or the state of the litigation caused difficulty in determining whether an offer should or should not be accepted. One of the major difficulties in litigation is determining the result. Indeed one of the questions most frequently asked of legal advisers is what the likely result will be. The whole process of offers involves the parties' speculating, at least to some extent, on the answers to the questions whether liability will be established and, if it is, what will be the amount of damages. The earlier the offer is made, the less likely it will be that the parties can receive a confident answer to that question. The reason for that is that most litigation is now conducted on the basis of exchange of evidence in chief and experts' reports, so that the further prepared it is, the more likely it is that a reasonably accurate answer can be given. 86 Further, the rules providing for Offers of Compromise do not state that any such offer must be made at a time when the offeree is in the best, or even a good, position to assess its prospects in the case. Nor is an offer by way of a Calderbank letter necessarily governed by those considerations. Indeed, there is much to be said for making offers at an early stage before the parties take entrenched positions and before the costs expended make it very difficult, if not impossible, for a commercial settlement to be reached. The making of an early offer is also consistent with the aims and objectives of the rules. 87 In this case the plaintiff was suing the defendant. No question of multiple defendants affected any Offer of Compromise between those parties. The defendant should, in my opinion, have been in a position by April/May 1998 to form an assessment of its prospects of successfully defending the plaintiff's claim and of the likely range of damages to which the plaintiff would become entitled and to make a further assessment of any discount, which should be made, on the basis that the plaintiff would not succeed on liability. 88 I say that based on the facts that the litigation had been proceeding for at least fifteen months, i.e. at the shortest since the end of 1996; that the defendant was well aware of what steps had been taken in respect of the filling and must have been aware of the development proposed by the plaintiff, it being the relevant consent authority for it; and that it had instructed experienced commercial solicitors over some period. On the basis of the information it had, the defendant was able to make the assertions in the letters of 17 March and 28 April 1998, which I construe to be letters predicating that the defendant would offer to settle with the plaintiff provided it had a full indemnity. Where, in my opinion, the defendant failed, at least in the first instance, was by not advising those it was suing of the amount for which it proposed to settle, but rather seeking an unlimited indemnity. 89 Nor was the defendant was simply offering to hand over the conduct of the litigation to those it had sued in return for the full indemnity because, in the absence of any settlement between it and the plaintiff, it necessarily remained a party to the proceedings. 90 Accordingly, it seems to me that the correspondence of 17 March and 28 April 1998, properly construed, required a complete indemnity from those joined by the defendant to the defendant, which would enable the defendant to settle with the plaintiff and then leave those which the defendant had joined to fight out the question of contribution as between themselves. 91 In my opinion, having received the offer from SMEC, the defendant was not entitled to retreat to its position of only being prepared to negotiate on the basis of a complete indemnity. It was then bound, at the very least, to explore the prospect of settlement, it being pivotal to an overall settlement. However, it did not do so. 92 SMEC's principal submission was that an obvious course open to the defendant, which it should have taken, was to accept the offer of SMEC and pass it on, by way of Offer of Compromise, to the plaintiff. That would not have led to any complication in the litigation, because if it had taken it, and on the assumption that the offer was not accepted, SMEC would not have been removed from the litigation. As between it and the defendant, the proceedings would have been resolved, but it would have remained a party by virtue of the claims for contribution and indemnity made against it by Fordham and LL&H. Thus, in the case against the plaintiff its evidence would have been available and, of course, SMEC had a real interest in keeping the plaintiff's damages down and in contesting the amount of contribution for which it was liable. 93 In my opinion SMEC's submission should be accepted. The question to be asked was whether, as matters stood when it made its offer under Part 19A, it was reasonable for the defendant not to have passed it on by way of an Offer of Compromise to the plaintiff. I consider that it could only have been reasonable for it not to do so, if that left the defendant in a position of risk in the litigation. I do not believe, viewed as at April 1998, it did. 94 This conclusion must be tested by looking at the various results, which could have been foreseen as at April 1998, if such Offer of Compromise had been made. 95 Firstly, the plaintiff may have accepted it, in which case the defendant would have paid it out with money received from SMEC and had its costs substantially paid by SMEC. Any residual dispute about contribution between SMEC, LL&H and Fordham could not have adversely affected the defendant. Indeed that is what the defendant was suggesting in the correspondence should occur. 96 Secondly, the plaintiff may not have accepted the offer. In that case two situations can be hypothesised, viz that the plaintiff would have received a less favourable or a more favourable result than the Offer of Compromise. 97 In the first situation the defendant would have been able to meet the judgment from the offer made by SMEC; it would have received from SMEC its costs to the date of making the offer and it would have been entitled to an order under Part 39A rule 6 that the plaintiff pay its costs on a party and party basis from the date of the offer. One can see no basis why the ameliorating provisions of that rule would have led to any other conclusion. Thus the defendant would not have suffered any prejudice. 98 In the second situation the defendant would have had SMEC's contribution to the judgment and its costs to the date of the offer. As the parties it joined would have still been in the litigation, it could have claimed the additional amount from them, the defendant believing and asserting in very strong terms that it was entitled to recover a full indemnity against each of them. So far as the costs payable to the plaintiff, the defendant could have recovered them from LL&H and Fordham. The only possible prejudice was if the Court was to apportion costs between SMEC, LL&H and Fordham in a way which made SMEC liable for some costs which the defendant could not recover because of the settlement. But this was not a concern the defendant was expressing in 1998. As I have said several times it was demanding a full indemnity from each. However, more significantly, as s.109ZJ did not apply, any judgment against LL&H and Fordham would have been for the full amount of indemnity to which the defendant was entitled against each. Contribution would have remained an issue as between LL&H and Fordham, but would not have affected the entitlement of the defendant to recover the whole amount from either. 99 On this analysis the defendant would not have, in any of the situations which could have occurred, suffered any prejudice. It would have left the litigation without having to make any payment save for its own solicitor and client costs, for which it was liable in any event. 100 Accordingly, I consider that the defendant's retreat to the position it took in its letter of 28 April 1998 and its failure to pass on SMEC's offer to the plaintiff, it being the only party which could settle with the plaintiff, was completely unreasonable.

Conclusions 101 In these circumstances, if the defendant had taken the simple step of passing on the offer it would have been, on the material before this Court, in a "no lose" situation. By its failure to do so, however, it has exposed SMEC to significant costs and, as matters turned out, costs which would never have been recoverable against SMEC in any event. However, one cannot look at the matter with the benefit of hindsight, but rather as it existed at April/May 1998. 102 In these circumstances, I consider that the proper exercise of discretion demands that the defendant pay SMEC's costs on a party/party basis as from 1 June 1998, being a date by which the defendant would have had a reasonable opportunity to consider the position and make any necessary decisions. 103 The defendant filed a Notice of Contention in which it sought to argue that his Honour erred in holding that Part 19A rule 10(1) did not apply to SMEC's Offer of Compromise and in applying Part 39A rule 25(6). In my opinion Part 39A rule 25 was not activated by SMEC's Offer of Compromise. Accordingly, it is not necessary to consider this.

(a) Leave to appeal granted. (b) Appeal allowed with costs. (c) In lieu of the order made in the District Court order that the Campbelltown City Council pay SMEC Testing Services Pty Limited's costs of the proceedings on a party/party basis from 1 June 1998 and its costs of the Notice of Motion in the District Court for a special order for costs.

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