Zhang v Harmstorf

Principles applicable

1. The relevant powers of the court as to costs are located in s 98 of the Civil Procedure Act 2005 (NSW) and Part 42 of the Uniform Civil Procedure Rules 2005 (UCPR). The appropriate order as to costs in proceedings is in the discretion of the court. The usual order is that costs follow the event and are awarded on the ordinary basis: Part 42.1 and Part 42.2 of the UCPR. Offers of compromise and Calderbank offers constitute possible exceptions to the general rule and may result in an award of indemnity costs in favour of the successful party from a certain date.
2. The rejection of a Calderbank offer by a party does not mean that indemnity costs follow as a matter of course. The applicant must demonstrate to the court that the rejection of the offer was "unreasonable" in all the circumstances of the case: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19]; Jones v Bradley (No 2) [2003] NSWCA 258 at [12]; Russell v Edwards (No 2) [2006] NSWCA 52 at [8]; Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 at [7].
3. In NRMA Insurance for the Nominal Defendant v Al-Bayati (No 2) [2019] NSWCA 14, the Court of Appeal stated in paragraph 10 as follows: "[10] The party making an offer of compromise or Calderbank offer bears the onus of satisfying the court that it should exercise the costs discretion in its favour: Evans Shire Council v Richardson (No 2) [2006] NSWCA 61; Commonwealth of Australia v Gretton [2008] NSWCA 117 at [46]; County Securities Pty Ltd v Challenger Group Holdings Pty Ltd (No 2) [2008] NSWCA 273 at [31] ..."
4. In Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344, Basten JA (with whom McColl and Campbell JJA agreed) stated as follows at paragraphs [8]-[16]: [8] The willingness of the courts to take account of a "without prejudice" offer of settlement in disposing of costs was originally tempered by the view that the practice should only be adopted where the alternative of a payment into court was unavailable: Cutts v Head [1984] Ch 290. The practice was, however, adopted in this jurisdiction without the restriction: Messiter v Hutchinson (1987) 10 NSWLR 525 (Rogers J); SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [45] (Giles JA). The expansion of formal rules providing for offers of compromise has not diminished the willingness of the courts to act upon informal offers, rather the contrary. However, there is no presumption that an offeree who does not accept an offer and does not obtain a judgment more favourable than the offer will necessarily pay indemnity costs from the date of the offer: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19] (Santow JA, Stein AJA agreeing); Jones v Bradley (No 2) [2003] NSWCA 258 at [6]-[9]; Ambulance Service of New South Wales v Worley (No 2) [2006] NSWCA 236; 67 NSWLR 719 at [18]. The approach frequently adopted in this jurisdiction has been to ask two questions, namely whether - (a) there was a genuine offer of compromise, and (b) it was unreasonable for the offeree not to accept it. Genuine offer of compromise [9] There is authority for the proposition that both an offer of compromise under the rules and an informal offer must involve "a real and genuine element of compromise": Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) [2006] NSWCA 120; 67 NSWLR 706 at [8]. While this terminology is not entirely apposite, it has been described as "serviceable": Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [25] (Spigelman CJ, Beazley and McColl JJA). To characterise an offer by reference to epithets such as "real" or "genuine" adds little to the requirement of compromise, and may imply (wrongly) that the appropriate inquiry is as to the subjective intentions of the offeror: Hancock v Arnold; Dodd v Arnold (No 2) [2009] NSWCA 19 at [23] (Ipp, McColl and Basten JJA); Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 at [17]-[18]. As explained by Giles J in Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368: Compromise connotes that a party gives something away. A plaintiff with a strong case, or a plaintiff with a firm belief in the strength of its case, is perfectly entitled to discount its claim by only a dollar, but it does not in any real sense give anything away, and I do not think that it can claim to have placed itself in a more favourable position in relation to costs unless it does so. Unreasonable refusal [10] Most cases will turn on the second element, namely whether there has been an unreasonable refusal by the offeree. This in turn involves a number of considerations. (a) timing [11] It is not in doubt that the response of the offeree must be assessed at the time it was made, and not with the benefit of hindsight resulting from a known outcome, recorded in a judgment: Regency Media at [33]. However, that factor should not entail a detailed investigation into the state of preparation or knowledge of the offeree as at the date of the offer. The expense and use of resources which settlement is intended to avoid include those involved in the assessment and preparation of a case. (b) relevant factors [12] In Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; 13 VR 435 the Court of Appeal (Warren CJ, Maxwell P and Harper AJA) identified the factors relevant to determining whether the rejection of an offer was unreasonable as including the following: (a) the stage of the proceeding at which the offer was received; (b) the time allowed to the offeree to consider the offer; (c) the extent of the compromise offered; (d) the offeree's prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; (f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it. [13] The court rejected the suggestion that an offer need set out with specificity the bases upon which it was said that the offeree should accept the compromise proffered. The relevance of such material would depend upon the extent to which the issues had already been canvassed, for example by way of pre-litigation correspondence, and whether there were circumstances with which the offeror might reasonably expect the offeree not to be conversant. In some circumstances greater leniency may be accorded to a defendant offeree at an early stage of proceedings, than to a plaintiff offeree. [14] The extent of the compromise offered will always be a relevant factor in determining the reasonableness of the offeree's rejection. In Robb Evans & Associates an offer in compliance with the UCPR, r 20.26, involved an effective amount (after deducting a sum as to which there was no dispute) of less than $2,000 to settle a claim in excess of $800,000. The court stated: [20] … If the offer were based on a legal assessment of the likelihood of success in an amount in excess of $800,000, the claim should have been struck out as frivolous and vexatious. It ultimately failed in this Court, but could not, on any view, be so categorized. It is implausible that the appellant so categorized it in quantifying his offer. [21] If the appellant had carried out a commercial evaluation, rather than a pure legal assessment of the likelihood of success, he would undoubtedly have concluded that, even if ultimately successful, he would be unlikely to recover many thousands of dollars of costs incurred if the litigation proceeded. A commercially based offer would have taken that matter into account. This offer clearly did not. … [23] … The amount offered, beyond that amount which was not in dispute, is properly characterized as trivial or contemptuous. It does not engage the costs consequences provided by r 42.15. [15] A similar approach was applied in Regency Media, where an offer of $10,000 was made in response to a claim of approximately $600,000: at [16]. The court noted at [32]: If a derisory offer, of the kind made in these proceedings, could result in an order for indemnity costs, then it is likely that many, perhaps most, contract interpretation disputes would result in an indemnity costs order, if the formality of an offer in accordance with the rules had been made at an early stage. If the appellant were to succeed in the present case, it is quite likely that such an offer would accompany most statements of claim as a matter of commercial practice. The purpose of the special order - to encourage settlement - would no longer be served. An order for indemnity costs could, in our opinion, become the normal order in many commercial disputes. (c) onus of proof [16] The general rule is that costs payable under an order of the court are to be assessed on the ordinary basis: UCPR, r 42.2. The court may otherwise order, but the burden of persuading the court will lie with the offeror: Black v Lipovac [1998] FCA 699; 217 ALR 386 at [217] (Miles, Heerey and Madgwick JJ), which has been regularly followed in the Full Court - see, eg, CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 at [75] (Moore, Finn and Jessup JJ). Again, however, the reference to onus of proof is not intended to suggest that an application for indemnity costs be turned into a mini-trial. Generally, such applications are dealt with on the papers, a practice which should be maintained. It is nevertheless correct, as a matter of principle, to say that it is the offeror which must persuade the court that the rejection of the offer was, in the circumstances at the relevant time, unreasonable.
5. The Miwa decision has been followed in numerous later cases: see Hanna v Raoul [2018] NSWCA 201 at [154] per Beazley P and Ku-ring-gai Council v Chan (No 2) [2018] NSWCA 73 at [6]. The Miwa case was relied on by both parties in their written submissions.
6. The principles applicable therefore appear to be as follows: 1. A party who is forwarded an offer who does not accept an informal Calderbank offer and thereafter obtains a judgment which is less favourable than the offer made will not necessarily be required to pay indemnity costs to the offeror from the date of the offer; 2. Whether indemnity costs should be awarded to the offeror depends on first, whether there has been a genuine offer of compromise and secondly, whether in all the circumstances it was unreasonable for the offeree not to accept the offer; 3. A number of factors are relevant. These include the following; 4. The stage of the proceedings at which the offer was received and whether the offeree was conversant with the issues in the case; 5. The extent of the compromise offered; 6. Whether the amount offered was properly characterised as trivial or contemptuous; 7. The time allowed to the offeree to consider the offer; 8. The offeree's prospects of success, assessed as at the date of the compromise; 9. The clarity of the offer; and 10. Whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.

Submissions of the parties

1. The plaintiff in his written submissions dated 14 March 2019 submitted: 1. The terms of the Calderbank offer in the present case contained a real and genuine element of compromise in that the plaintiff was prepared to forego a part of his claim plus costs and interest; 2. The defendant must have been aware of the legal and evidentiary problems in the matter as the offer was made shortly before the trial when all the evidence in the matter had been served and the case of the plaintiff was clear to the defendant; 3. The defendant was represented by a large, reputable law firm and accordingly had the ability to make informed forensic decisions based on advice. The defendant elected to proceed to a final hearing; 4. The resolution of the ultimate dispute did not turn on issues of credit but on the proper construction of the contract drafted by or at the direction of the defendant; 5. The limited answer to the Notice to Produce (Exhibit B) and the defendant electing not to give evidence must have been known to the defendant at the time the offer was made; 6. The defendant ought to have been aware of the deficiencies in his case as he was aware of the information relating to it. He also did not explain the absence of production of relevant documents pursuant to Exhibit B; 7. While the offer was open for less than two days, the period was reasonable having regard to the final hearing commencing five days later with preparation required and a similar offer period being made by the initiating offer of the defendant.
2. The defendant in his written submissions dated 4 April 2019 submitted as follows: 1. There should be no indemnity costs order in favour of the plaintiff; 2. The purpose of an order for indemnity costs "is to fully compensate a successful party in circumstances where the Court considers it unreasonable for the successful party to have subjected the successful party to the expenditure of costs" (submissions paragraph 4); 3. Indemnity costs should not be awarded to punish an unsuccessful party; 4. The offer was made on 7 February 2019 "one month before the start of the hearing" (submissions paragraph 6(a)) - this is clearly wrong as was accepted in oral submissions. The final hearing was to start on 13 February 2019; 5. The offer was open for only one day; 6. The offer made no mention of the liability for interest or costs; 7. The plaintiff's offer should be seen as a "knee jerk reaction" to the defendant's earlier offer made the previous day; 8. The principles to apply were set out by the Court of Appeal in Miwa, above; 9. In particular, the offeror must persuade the court that the rejection of the offer was in the circumstances existing at the time of the offer, unreasonable; 10. It was not unreasonable to reject the offer - there was sufficient doubt as to the correct interpretation of the contract. See the Judgment at [12]. A different judge could have reached a different view as to the correct contractual construction; 11. The offer was uncertain as it did not deal with interest or costs; 12. The offer did not specifically foreshadow a claim for indemnity costs although reference was made to Calderbank v Calderbank (1975) 3 All ER 333.

Consideration

1. As stated above, the general rule is that costs payable by an order of the court are to be assessed on the ordinary basis: UCPR Part 42.2. The court may order otherwise but the onus of proof rests on the offeror in a Calderbank offer to establish that appropriate circumstances exist to make a special costs order. The offeror must persuade the court that the rejection of the offer was in the circumstances at the relevant time, unreasonable.
2. Considering the matters indicated in the authorities referred to above and in the submissions of the parties, in my view the following is the position: 1. There was a real and genuine element of compromise in the offer made. The element of compromise was significant. There is nothing to suggest that it was not genuine. I reject the defendant's submission that the offer should be seen as a "knee jerk reaction" to the defendant's earlier offer. The plaintiff's offer was for a considerably greater sum than the defendant's offer. The defendant says that nothing was said about interest and costs in the email letter and thus it was vague. However, first, the offer said that on receipt of the $125,000 sought, "orders would be filed dismissing the proceedings." To me this clearly indicates that costs and interest would not be sought. Secondly, the offer was for $125,000 but the orders made on 26 March 2019 were for the payment of $199,564.95 (not including interest). Therefore, apart from interest and costs, the compromise was still substantial. Thirdly, the defendant and his solicitors did not seek to clarify the offer if they were confused by it; 2. The offer was made shortly before the final hearing and at a stage where the plaintiff had served his affidavit. The defendant was also aware of the important email sent by him on 4 November 2014. By this time the defendant was fully aware of the issues in the case and the plaintiff's served evidence; 3. The defendant was aware of the limited production by him pursuant to the Notice to Produce (Exhibit B) of documents and thus was in a good position to assess the likely outcome of the proceedings; 4. The defendant was a solicitor admitted in this State and thus was a sophisticated party able to assess the case properly. He also had the benefit of able legal advisers; 5. Although the time allowed to consider the offer was less than two days, I accept the submission of the plaintiff that the period was reasonable in all the circumstances having regard to the trial date and the need for intensive preparation to commence. The amount allowed was somewhat more than one day, contrary to the defendant's written submissions; 6. The case principally involved a question of construction of the contract prepared by the defendant or at his direction. Email correspondence known to the defendant was also relevant. The defendant knew that there had been limited production in relation to the Notice to Produce of documents concerning the establishment of branches in mainland China; 7. The plaintiff was successful on the factual issue as to branches in mainland China which was a separate issue to the construction issue; 8. The offer in the email dated 7 February 2019 expressly foreshadowed an application for costs. Whilst the word "indemnity" was not used in the offer, the clear inference in the email by the reference to Calderbank v Calderbank was that it would be used in an application for indemnity costs. No reasonable lawyer could take a contrary view; 9. Whilst aspects of the cross-examination of the plaintiff were a factor in the court's decision, they were not decisive.
3. In the light of all of the above matters and the submissions made, in my view it was unreasonable for the defendant not to accept the offer in the circumstances. In relation to prospects of success, assessed as at the date of the offer of compromise, some of the defendant's construction points were barely arguable, for example the argument that the contract had terminated at the expiry of three years. The case of the plaintiff as to construction of the contract was in my view clear when the contract was viewed as a whole. Accordingly, it is appropriate to make an indemnity costs order as sought by the plaintiff.

Orders

1. I make the following orders: 1. Vacate Order (3) made on 8 March 2019; 2. Order the defendant to pay the plaintiff's costs of the proceedings on the ordinary basis up to and including 8 February 2019 and on an indemnity basis thereafter.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 April 2019