HRNG ADELAIDE, 1 August 1991 #DATE 6:9:1991 Counsel for Appellant: Ms. E.F. Nelson QC

with Mr. E.G. Reinboth Solicitors for Appellant: Stanley and Partners Counsel for Respondent: Mr. M.L. Robertson QC with Mr. B.D. Amey Solicitors for Respondent:
Stratford and Co.

ORDER Order for costs made by the trial judge set aside.

JUDGE1 KING CJ When judgment was delivered allowing this appeal, the appellant applied for the costs of the appeal and for a variation of the order for costs made by the trial judge so as to allow costs on a solicitor and client basis from the date of the filing of an offer pursuant to Rule 41.02 offering to accept a stated percentage of liability. Counsel for the respondent did not oppose an order for the costs of the appeal but opposed the application for variation of the order for costs made by the trial judge. 2. The appellant sued the respondent for damages for injury sustained in a collision between a motor cycle ridden by the appellant and a motor car driven by the respondent. The trial judge apportioned responsibility as to 75% against the respondent and 25% against the appellant. He ordered the respondent to pay the appellant's costs of action to be taxed on the usual party and party basis. The Full Court allowed an appeal and varied the apportionment to 90% against the respondent and 10% against the appellant. 3. On 27th March 1990, approximately ten weeks prior to the commencement of the trial, the appellant filed an offer pursuant to Rule 41.02 offering to accept judgment for 90% of damages to be assessed together with costs of action. This offer was not accepted. I quote Rule 41.02 (1) and 41.05:- "41.02 (1) A plaintiff may at any time before trial lodge with the Registrar and serve on all other parties a notice in writing offering to accept a stated percentage of liability or to accept a stated sum after giving credit to the defendant for any set-off counterclaim or cross-demand claimed by the defendant against the plaintiff, and in each case stating whether the offer requires the defendant to pay the whole or some stated proportion of the plaintiff's costs of action and that the offer so made is in satisfaction in the first case of the plaintiff's claim as to liability and in the second case in satisfaction of all nominated liabilities by the plaintiff and the defendant to each other. .... 41.05 If the Judge is of opinion that the defendant's refusal of, or lack of reply to, the plaintiff's notice was in all the circumstances unreasonable, he may order the defendant to pay the plaintiff's costs of action to be taxed as between solicitor and client." 4. A trial judge's discretion as to costs includes in certain circumstances a power to order that they be taxed on a solicitor and client basis: See Casley-Smith and Others v. F.S. Evans and Sons Pty Ltd and District Council of Stirling (No. 6) (1989) 148 LSJS 483, at 487-9 and the cases there cited. Where, however, the basis upon which solicitor and client costs are sought is non-acceptance of an offer made under Rule 41, the criterion for the existence of the power to grant such costs is stated in the Rule itself and is the unreasonableness of the defendant's failure to accept the filed offer. If that criterion is satisfied, the power to make the order exists and is to be exercised in the discretion of the judge: Kirilakis v. McMurray and State Government Insurance Commission (No. 2) (Matheson J) (1989) 155 LSJS 125, at 128; Devries and Another v. Australian National Railways Commission and State Transport Authority (No. 2) (Costs) (Legoe J) unreported, delivered 13th June 1991. 5. The test of unreasonableness is an objective test. It is concerned with the response that a reasonable defendant would have made to the plaintiff's offer. An offer once made under the Rule remains open until withdrawn in accordance with Rule 41.03. It is therefore open throughout trial and until judgment. The reasonableness of the defendant's non-acceptance of the offer is therefore to be determined in the light of "all the circumstances" including what is disclosed by the evidence at the trial. 6. The test of the unreasonableness of a party's conduct as a criterion for determining a question of costs, has its difficulties. They were referred to by Judge Lunn, in relation to the Local Court Rules' counterpart of Rule 41, in Miller v. Hannagan (1989) 154 LSJS 385, at p 388: "The first approach, which in effect was argued by the defendant, is that the Rule only requires what is an essentially subjective inquiry about whether it was unreasonable for the defendant to have acted as it did on what was known to it, and possibly on what should have been known by it, at the time before trial at which it should have responded to the R88 offer. On this possibility the Court would have to put itself in the position of the defendant at that point in time and decide what the reasonable defendant in that position should have done in response to the R88 offer. This would be a very difficult exercise. There may be all sorts of tactical considerations which might properly operate on a defendant's mind at that time. It would necessitate the Court inquiring into what expectations the defendant had, and should have had, at that time about whether its witnesses and arguments would be accepted by the Court. It may involve the Court considering whether the defendant's solicitors had properly prepared the defendant's case for trial and whether any legal advice given to the defendant was adequate. Questions of privilege may arise in this context which a defendant may properly not wish to waive. Such an inquiry may be as long and as expensive as the trial itself. As the plaintiff probably would not know all of the factors which had subjectively induced the defendant to act as it did, the plaintiff would possibly not want to embark on an application under R88 without further discovery of documents and, possibly interrogatories, on the relevant issues." 7. Like Judge Lunn I am not prepared to hold that Rule 41.05 has a meaning which requires such an inquiry. The Rule must be interpreted in the light of its intended scope and manifest purpose. It relates to the costs of proceedings. The question of the costs of proceedings is ancillary to the decision of the substantive issues in the proceedings and incidental to such decision. It does not give rise to a lis between the parties which is separate from the substantive proceedings. I think that these considerations operate to limit the scope of the inquiry into the unreasonableness of the defendant's response to the plaintiff's offer, which is necessitated by Rule 41.05. 8. The question of costs should be determined ordinarily by reference to the pleadings, the evidence at trial and any other information on the Court file which is properly put before the Court. That information may be supplemented by additional evidence as to such matters directly relevant to costs as the course of negotiation between the parties and the adequacy and accuracy of the disclosure made by a plaintiff of facts relating to damage. I think, however, that the judge should limit strictly the additional material which he is prepared to receive. He should not allow the question of costs to assume a disproportionate dimension. 9. In Miller v. Hannagan supra, Judge Lunn, at pp 387-8, referred to factors bearing upon the issue of unreasonableness in a passage with which I agree: "The first consideration in deciding upon the reasonableness of the defendant's conduct in not accepting the R88 offer is whether the plaintiff allowed it sufficient time to do so. There is no time limit imposed by the Rules for the lodging and serving of such an offer. However, clearly it must be within a reasonable time before the trial, and in sufficient time for the defendant to assess its position and respond to it. If the defendant is not given such reasonable time, its conduct cannot be construed as being unreasonable, and no further inquiry is then necessary. However, on this aspect of the matter the earlier offer lodged on 5 April 1989 has some significance because it may be taken into account in deciding whether the defendant had a reasonable opportunity to resolve the matter on just terms. If it is necessary to go further, the next consideration in looking at the reasonableness of the defendant's conduct is whether the plaintiff gave the defendant a proper opportunity to assess the worth of the claim. The Rules require plaintiffs by adequate pleading, discovery of documents, disclosure of medical reports, answers to interrogatores, R88A Particulars and in other ways to give defendants adequate notice of the cases which they will have to meet at trial both so that defendants can properly prepare themselves for trial and so that they can assess what offers they should make to settle actions. If plaintiffs do not act honestly, openly and reasonably in disclosing the substance of their cases, and insofar as is required the evidence which they have to support them, defendants would not usually be held to have acted unreasonably in not accepting R88 offers. If the plaintiff has succeeded up to this point, there is a further inquiry which the Court must make under R88 which presents grave difficulties in the interpretation and the application of that Rule." 10. The further inquiry referred to by Judge Lunn relates to the defendant's assessment of the extent of his just liability to the plaintiff. The just liability must be measured by the determination of the Court at trial or ultimately on appeal. A failure by a defendant to accept an offer which is as favourable or more favourable to it than the liability determined by the Court, is, in my opinion, prima facie unreasonableness for the purposes of the Rule. There will be cases in which the course of trial indicates that there have been new developments which could not reasonably have been foreseen by the defendant and his advisers, but those cases are likely to be unusual. In such unusual cases it would be proper to take that circumstance into account in assessing the reasonableness of the defendant's response. I do not think that a Court should be influenced by the fact that the margin between the amount or percentage recovered and that offered is slight, nor by the fact that the case has given rise to differences of opinion between the appellate Court and the trial judge or between the members of the bench of the appellate Court. Nor do I think that the Court should embark upon an inquiry into the state of information in the possession of the defendant prior to trial. I consider that the reasonableness of a defendant's assessment of his just liability should be determined in ordinary circumstances in conformity with the decision of the Court determining that liability. 11. It follows from what I have said that, in my opinion, where a plaintiff has made full, honest and proper disclosure before trial in conformity with the Rules and has made the offer in sufficient time to enable the defendant to give it proper consideration, the defendant's non-acceptance of an offer made in accordance with the Rules which is as favourable or more favourable to it than the liability adjudged by the Court, will be regarded, in the absence of unusual circumstances, as unreasonable. 12. The discretion which arises when the defendant's non-acceptance is unreasonable should be exercised, of course, in the light of the purposes of the Rule. They are well described by Judge Lunn in Miller v. Hannagan supra, at pp 389-90: "R88 was introduced into the Rules as part of a general scheme to facilitate settlements well before trial through pre-trial conferences. The success of such a pre-trial conference system requires that all of the parties should as far as reasonably possible make their best offers at the conferences, and certainly well before trial. To ensure that this occurs there are sanctions in costs made available against those parties who do not make sufficient offers. Rule 83A provides penalties in costs against plaintiffs who do not accept offers made by defendants where those offers are not bettered at trial unless there are special circumstances. Although R83A is not particularly directed to pre-trial conferences, it is clearly contemplated that it will be used in conjunction with them. (In relation to similar Supreme Court procedures this is embodied in Practice Direction No.12 para 16.) The complementary provision to R83A dealing with offers made by plaintiffs is R88. It is only through the use of R88 that plaintiffs can enforce any sanction in costs against defendants who do not make sufficient and proper offers at pre-trial conferences: Re Vitch (No. 2) (1988) 147 LSJS 279. Although R83A is somewhat different in its terms from R88, they are sufficiently common in their purpose for any ambiguity in R88 to be resolved in favour of the approach quite clearly adopted in R83A, i.e. subject to an overriding discretion it is the amount of the ultimate judgment, based on the objective facts as they are found to be at the trial, which is the prime factor in determining whether a party has not made a sufficient offer and so should be penalised in costs. If to facilitate settlement of actions prior to trial plaintiffs are required to run the gauntlet of R83A offers if they believe their claims are worth more than has been offered, it is a proper construction of the Rules as a whole that defendants should likewise

have to face similar, although not identical, penalties in costs if they do not settle on proper terms when plaintiffs give them the opportunity to do so under R88. It is not fair that a plaintiff who gives a defendant a proper opportunity to resolve the case on just terms should have to incur personally the difference between the solicitor and client and party and party costs of the action because the defendant has unreasonably required him to go through a trial to get what he is entitled to. It is in the interests of the administration of justice that wherever possible the resources of the Court should be made available to resolve those matters where there can be no proper settlement. To achieve this end the Rules now encourage such settlements wherever possible. If the prospect of paying solicitor and client rather than party and party costs will induce defendants to take a more realistic approach to settlements well before trial, then R88 should so far as proper be

interpreted to promote such settlements. If plaintiffs are too greedy in what they seek in their R88 offers, defendants have their remedy under R83A. Indeed, if the pre-trial settlement procedures in the Rules are working effectively, in a majority of cases special orders for costs should be made under either R83A or R88." 13. The intention of the Rule is penal. That is evident from the power which it confers to order the defendant to pay the plaintiff's "costs of action", that is to say the costs of the whole action. An offer under the Rule can never be made before the action is instituted and the defendant's failure to accept, which is characterized as unreasonable, can never occur until the action has progressed to some extent. Any order for the payment of the costs of the whole action must be penal to some degree. The purpose is to encourage plaintiffs to make offers and to deter defendants from non-acceptance of offers which are commensurate with the defendant's just liability. It is an incentive to the settlement of litigation: Kirilakis v. McMurray and State Government Insurance Commission (No. 2) supra, at p 127. 14. No doubt the power to order payment of the costs of action includes power to order payment of a portion of those costs. Devries v. ANR and STA supra; Miller v. Hannagan supra, at p 391. In the latter case Judge Lunn stated that there needed to be "special reasons" to justify an order for less than the full costs of actions. Legoe J disagreed with that view in Devries v. ANR and STA supra. I do not think that a legal test of "special reasons" can be imported into the Rule, but I doubt whether Judge Lunn intended that. The discretion is unfettered except by the consideration that it must be exercised for the purpose for which the Rule exists. The "penal" or "incentive" purpose ought to be kept in mind when exercising the discretion. As Judge Lunn in Miller v. Hannagan at p 391 correctly said: "The difference between party and party and solicitor and client costs for the period of the few weeks before the trial and during a trial is not likely to be very great. Under the complementary R83A a plaintiff runs the risk of losing party and party costs, and of paying party and party costs to the defendant, which normally would be far more than any difference between party and solicitor and client costs for any like period. If R88(6) is to be as an effective a sanction as R83A, and if it is to induce defendants to make realistic and reasonable offers at pre-trial conferences, then it is not unreasonable that they should have to pay the difference between party and party and solicitor and client costs of the whole action in the absence of special considerations." 15. In the present case, the respondent failed to accept an offer which was equal to the percentage of liability adjudged by the Court. There was nothing unusual about the course of trial. The respondent placed before the Court a solicitor's affidavit proving that the solicitors were in possession before trial of a statement by the passenger in the respondent's car to the effect that the appellant was travelling at a higher speed than that to which he deposed and which was found by the trial judge. As I have already said, I consider that the Court should not embark upon an inquiry into the state of the information in the possession of the party prior to trial. That aside, the witness gave the same evidence at trial. There was no surprise or new development. The true facts must be taken to be those found by the trial judge and accepted by the Full Court. Moreover the respondent, if he had been keeping a proper look out, would have seen the appellant's motor cycle and observed its true course and speed as found by the trial judge. 16. The offer was made in ample time and no issue of non-disclosure arises. I am clearly of the view that the respondent's non-acceptance was in all the circumstances unreasonable. A proper exercise of the discretion in accordance with the purposes of the Rule requires that there be an order for solicitor and client costs. The appellant seeks solicitor and client costs only from the date of the filing of the offer. 17. Counsel for the respondent argued that as the offer related only to liability and not to damages and as most of the time of trial was occupied by the damages issue, the order should be limited to the issue of liability. It seems to me, however, that bearing in mind the "penal" or "incentive" purpose of the Rule and the fact that the order is to operate only from the date of the filing of the offer, it should apply to all costs incurred after that date. 18. In my opinion, the order for costs made by the trial judge should be set aside. In lieu thereof there should be an order that the defendant pay to the plaintiff his costs of action to be taxed as between party and party up to and including 27th March 1990 and as between solicitor and client thereafter. The respondent must pay to the appellant the costs of the appeal to be taxed.

JUDGE2 MOHR J I agree with the judgment of the Chief Justice in this matter.

JUDGE3 OLSSON J I agree with what has fallen from the Chief Justice and concur in the order which he proposes.