COSTS - Indemnity costs - whether it was unreasonable to reject offers of settlement made before and during proceedings

Calderbank v Calderbank (1975) 3 All ER 333

DSE (Holdings) Pty Ltd v Intertan Inc [2004] FCA 1251; 51 ACSR 555

Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322

Evans v Braddock (No 2) [2015] NSWSC 518

Evans Shire Council v Richardson (No 2) [2006] NSWCA 61

Financial Integrity Pty Ltd v Farmer (No 4) [2014] ACTSC 145

Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) VR 435

Hillman v Box (No 5) [2014] ACTSC 150

Kemp v Ryan [2011] ACTSC 42

Miwa Properties Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344

Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15

Ofria v Cameron (No 2) [2008] NSWCA 242

Pires v DibbsBarker Canberra Pty Limited [2014] ACTSC 283

Southwell v Staite [2019] ACTSC 2

Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124

Tuggeranong Town Centre Pty Ltd v Brenda Hungerford Pty Limited (No 3) [2017] ACTSC 301; 325 FLR 436

Vizovitis v Ryan (No 2) [2014] ACTSC 301

Mark Edward Southwell and Kerry Anne Staite as executors of the estate of the late Shirley Southwell (Defendants)

1. On 29 January 2019, I delivered judgment in a proceeding concerning the proper distribution to the plaintiff, Ms Kristi Southwell, under the will of the late Shirley Southwell (the deceased), and the plaintiff's subsequent application for family provision: Southwell v Staite [2019] ACTSC 2 (Southwell).

2. The defendants were ordered to pay the plaintiff $10,000. This amount was made up of the plaintiff's then entitlement under the terms of the will of the deceased having taken account of legal expenses arising from the costs of the proceedings, or alternatively, the plaintiff's contractual entitlement arising under an agreement which I accepted had been formed between the parties.

3. The plaintiff's application for family provision was unsuccessful in light of the small value of the estate and the distribution she received under the will.

4. I ordered the defendants to pay the plaintiff's costs (presumptively on the basis that costs follow the event) but reserved liberty to the defendant to apply to vary the order. The defendants have now applied for indemnity costs from the commencement of the proceedings. The plaintiff resists that application.

5. The application for indemnity costs is based on two offers of settlement made to the plaintiff. The first was made on 7 October 2016, ten days before proceedings were commenced, for $10,000 (first offer). In this offer there was no reference to paying any legal costs. The second offer was made on 22 May 2017 for the sum of $20,000 inclusive of costs (second offer). Neither of these offers were made under r 1811 of the Court Procedure Rules 2006.

6. The defendants contend that each offer was equal to or better than the result ultimately obtained by the plaintiff, and that accordingly, the plaintiff should pay the entirety of their costs on an indemnity basis.

7. Each letter was said to be a Calderbank offer made pursuant to the principles deriving from Calderbank v Calderbank (1975) 3 All ER 333 (Calderbank).

8. Principles relevant to Calderbank offers are set out in a number of decisions of Refshauge J, including Pires v DibbsBarker Canberra Pty Limited [2014] ACTSC 283 at [97] and Financial Integrity Pty Ltd v Farmer (No 4) [2014] ACTSC 145 at [24]- [46]. The criteria that I consider when determining whether a letter constitutes a Calderbank offer are as follows:

(a) The letter must be either an open letter or marked "without prejudice save as to costs" and thus be able to be tendered at any hearing or an application for costs;

(b) The offer in the letter must be a genuine compromise;

(c) The offer must be in clear and unambiguous terms and be a final offer, not subject to any further negotiation;

(d) The letter must state expressly that, if the offer is not accepted, then a special order, such as for indemnity costs, will be sought.

9. An effective offer may be made before an action commences: Ofria v Cameron (No 2) [2008] NSWCA 242 at [27].

10. A common approach to applications of this kind is to ask two questions (Miwa Properties Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [8]; Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124 at [10]; Tuggeranong Town Centre Pty Ltd v Brenda Hungerford Pty Limited (No 3) [2017] ACTSC 301; 325 FLR 436 at [281] and the case there-cited):

(b) Was it was unreasonable for the offeree not to accept it?

11. As a matter of principle, the Court's discretion is not confined to considering only offers made exclusive of costs. An offer may be made "inclusive of costs", and accepted as a genuine assessable compromise: DSE (Holdings) Pty Ltd v Intertan Inc [2004] FCA 1251; 51 ACSR 555 at 557 and [12]-[13]; Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322 at [5] per Beazley JA (as her Honour then was), at [135] per Basten JA.

12. However, the question is whether the offer is made in terms that enable the offeree to give proper consideration to it: Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15 (Monie) at [13]. An offer made inclusive of costs may create difficulties if the Court is not readily able to determine the various components of an offer, so as to assess whether it was unreasonable not to accept it.

13. This led Refshauge J to the view that the costs component should ordinarily be isolated in a way that makes it clear and capable of proper assessment without a taxation or formal assessment of costs: Hillman v Box (No 5) [2014] ACTSC 150 at [30].

What constitutes an unreasonable rejection of an offer?

14. If it is found that a Calderbank offer was properly made, and that it was a genuine offer of compromise, the Court then asks whether the rejection of an offer was unreasonable in the circumstances.

15. The mere fact that an offer was made but not accepted does not result in an award of indemnity costs. The party seeking the order for indemnity costs bears the onus of establishing the entitlement to an award of indemnity costs based on the rejection of an offer of compromise being unreasonable: see Kemp v Ryan [2011] ACTSC 42 at [18] and Vizovitis v Ryan (No 2) [2014] ACTSC 301 at [17], each relying on Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 at [26]. See also the detailed discussion in Evans v Braddock (No 2) [2015] NSWSC 518 at [49].

16. An offer to compromise involves an assessment, both by the offeror and the offeree, of the prospects of success of the claim, together with an assessment of the damages that may be awarded. So far as an offeree is concerned, that party must have available sufficient material to enable that assessment to be made: Monie at [9].

17. Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) VR 435 contains a non-exhaustive list of relevant factors relevant to assessing whether it was unreasonable to reject an offer at [25], including:

(a) the stage of the proceedings at which the offer was received;

(b) the time allowed to the offeree to consider the offer;

(d) the offeree's prospects of success, assessed at the date the offer was made;

(e) the clarity with which the terms of the offer were expressed; and

(f) whether the offer foreshadowed an application for indemnity costs in the event the offer was rejected.

Was it unreasonable to reject the first offer?

18. It seems clear that, subject to the first offer being a genuine compromise, it fulfilled the criteria set out above to operate as an effective Calderbank offer. It was made without prejudice save as to costs. It indicated that the defendants would pay the plaintiff a further $10,000, said to be in payment of the plaintiff's agreed entitlement under the will. It said nothing about the payment of any legal costs as part of that sum. It referred to relying on the contents of the letter in support of an application for indemnity costs in the event that litigation was pursued.

19. That being the case, I have concerns about whether the first offer was a genuine compromise. In the contents of the first offer, the defendants explained how they had reached the offer of $10,000. They relied on an agreement they had entered into with the plaintiff, which they contended limited her entitlement to $70,000. Of that amount, $10,000 had yet to be paid. The terms of the agreement were set out in Southwell at [22].

20. All the defendants were offering was to pay what they had promised to pay (and what they were ultimately ordered to pay) and not a cent more by way of family provision. That does not appear to represent any compromise on the proposed family provision aspect of the claim, with the defendants arguing the plaintiff was out of time and therefore had no entitlement to make such a claim.

21. However, it is unnecessary to go further, because even if I had found there was a genuine compromise offered, I am not persuaded that at the time the first offer made, it was unreasonable for the plaintiff to reject it.

22. There are two reasons for this view: the early stage of the litigation (where legal costs had not been incurred), and the stage of administration of the estate of the deceased (where the final value of the estate was not yet known).

23. As to the first, at the time the first offer was made, the proceedings brought by the plaintiff had not yet commenced. The executor defendants had not yet incurred any legal costs in defending the proposed proceedings. Those legal costs for the defendants ultimately amounted to $72,342.77 (see Southwell at [51]). This meant that, at the time the first offer was made, the estate was greater in value by at least that amount than it was by the time the proceedings had concluded. The plaintiff may well have been entitled to a larger sum before proceedings were commenced and money of the estate was spent on lawyers.

24. As to the second matter, at the stage the letter was sent, the plaintiff did not yet know what her proper entitlement under the will was, nor did she know the final value of the estate. This was because the main asset of the estate was a residential property which had not yet been sold, as is clear from the terms of the first offer.

25. The plaintiff had no means of assessing whether the $10,000 offered, in addition to the $60,000 already paid to her, represented her true entitlement under the will or whether it fell considerably short. Nor was she able to assess whether the estate could bear even a small amount by way of further provision on an application for family provision.

26. As the plaintiff did not have sufficient material to enable her to assess the terms of the offer, and on the findings in Southwell the offer may have at that stage been less than the plaintiff's entitlement under the will, it was not unreasonable for her to reject the first offer.

Was it unreasonable to reject the second offer?

1. That [the plaintiff] be paid the sum of $20,000.00 from the estate inclusive of her legal costs and disbursements in full and final settlement of her claim consisting of:

(b) $6,000 in full and final payment of her costs and disbursements;

2. That [the plaintiff] retain all estate property in her possession; and

3. That [the plaintiff] enters into consent orders dismissing ACT Supreme Court proceedings SC 472 of 2016 with no order as to costs.

28. Similar issues arise in relation to this second offer.

29. At the time the second offer was made in May 2017, the house had been sold for just over $420,000. It is not clear from the material submitted on the costs application whether that had been communicated to the plaintiff. Further, the plaintiff does not appear to have been privy to the amount of the defendants' costs up to that stage of the hearing. This was relevant to her considerations as it was likely that the defendants' costs would first need to be paid out of estate funds before any of the parties received their one third share of the estate.

30. All those matters affect the plaintiff's ability to assess the value of the estate, the plaintiff's prospects and as a consequence, the value of the offer. Through the proceedings, the plaintiff was primarily seeking distribution of her entitlement to a one third of the estate under the will.

31. As at May 2017, the plaintiff's entitlement may well have been more than $74,000 (being the $60,000 that had been paid as an advance distribution and the $14,000 offered by the defendants in the second offer). If that was the case, the offer may have been viewed as no compromise at all.

32. In circumstances where the defendants were in possession of the relevant knowledge regarding the value of the estate, but failed to provide the plaintiff with sufficient information to enable her to appreciate its size and make an informed assessment of the offer, it was not unreasonable for the plaintiff to reject the offer.

33. The evidence on the costs application discloses that on 6 and 14 July 2017, the plaintiff was provided with the legal costs and disbursements of the estate. However, no further offer after that date is relied upon to support the application to vary the costs order.

34. As I have not found that either offer relied upon was unreasonably rejected, there is no reason to vary the costs order made on 29 January 2019. The application to vary order 4 of the orders made on 29 January 2019 is dismissed.

I certify that the preceding thirty-four [34] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Associate Justice McWilliam.