Offers of Compromise

Legal Directions

The New South Wales Court of Appeal has addressed the recent judicial uncertainty regarding the requirements of a valid offer of compromise under the Uniform Civil Procedure Rules 2005 (NSW) (‘UCPR’). However, the decision will only affect offers made before 7 June 2013 which marked the commencement of amendments to the UCPR offer of compromise regime.

Background

Dream Developments Pty Ltd brought proceedings in the Local Court claiming $15,000 said to be owing to it pursuant to a building contract. Interest and costs were also sought.

Two offers of compromise were served by the plaintiff under the rules. The first offered to settle for $12,000 and the second offered to settle for $14,000. Both offers contained the term, ‘the defendant to pay the plaintiff’s costs as agreed or assessed.’

The Magistrate awarded damages that amounted to more than what had been offered in the first offer. An application for indemnity costs was refused on the basis that the relevant offer contained a term that the defendant pay the plaintiff costs and was therefore not compliant with rule 20.26 UCPR. Additionally, Her Honour held that the offer could not operate as a Calderbank offer in the alternative.

The Magistrate’s decision was reversed on appeal to Adams J in the Supreme Court of NSW. His Honour viewed the offers as exclusive of costs because they did not compromise on costs. Therefore the offers were compliant with the rules.

Prior to delivering judgment, his Honour’s attention was directed to the decision of the Court of Appeal in Old v McInnes and Hodgkinson in which Meagher JA held that an offer of compromise containing a term that the offeree pay the offeror’s costs was not a valid offer because it was not exclusive of costs. Notwithstanding, Adams J distinguished Old and ordered indemnity costs.

The Appeal

On appeal, it was submitted by Whitney that Adams J was bound by Old, and ought not have found the relevant offer to be valid under the UCPR. The respondent did not seek to uphold the primary judge’s reasoning, but rather submitted that Old had been incorrectly decided. It was also advanced that if the offer was non-compliant, it was effective as a Calderbank offer.

Disposition

The primary judge’s reasoning for distinguishing Old was dismissed by the bench of five on the basis that there was no discernible difference in the offers made in the present case and those made in Old. The Court then sought to deal with the submission that Old was incorrectly decided.

The Court confirmed that the use of the word ‘exclusive’ in the rules did not simply mean the opposite of ‘inclusive’. In fact, ‘exclusive’ was intended to mean that a compliant offer would not deal with costs at all [24]. This was because although rule 42.13A(2) provides for a costs order in favour of the plaintiff after the time the offer is accepted, the court has the power to make a contrary order. An offer providing for payment of costs was said to remove that residual jurisdiction of the Court. On that basis, the Court confirmed that Old was correctly decided.

The Court pointed out, by reference to apparent inconsistencies with both earlier and subsequent Supreme Court and Court of Appeal decisions, that only Old dealt with the issue directly and it was therefore the relevant authority on the point.

In relation to whether an invalid offer of compromise under the rules could operate as an effective Calderbank offer in the alternative, the Court of Appeal confirmed that unless there is something in the correspondence enclosing the offers, or in the surrounding circumstances to indicate that they would be relied on in relation to the question of costs, the offers could not operate as a Calderbank offer in the alternative.

Amendments to the UCPR

On 7 June 2013, the Uniform Civil Procedure Rules (Amendment No 59) 2013 took effect. Amongst other changes, the new rule 20.26(2) states that an offer ‘must not include an amount for costs and must not be expressed to be inclusive of costs.’

Additionally, rule 20.26(3) now provides that an offer may propose a judgment in favour of the defendant, with no order as to costs or ‘despite subrule (2)(c), with a term that the defendant will pay to the plaintiff a specified sum in respect of the plaintiff’s costs’. Additionally, an offer under the rules may propose ‘that the costs as agreed or assessed up to the time the offer was made will be paid by the offeror…’.

Comment

The Whitney decision puts to rest the uncertainty facing parties who had made offers prior to 7 June 2013. Similarly, the amendments have removed the ambiguity that surrounded the use of the term ‘exclusive of costs’ in the previous version of the rules.

Any offer made prior to 7 June 2013 must not make reference to costs, unless it is an offer of a verdict for the defendant with each party to bear their own costs.  Unfortunately, the result is that offers made prior to this recent clarification will likely be deemed non-compliant, depriving the offeror of a potentially significant period of indemnity costs especially in lengthy litigation. In those circumstances, it would be advisable to re-make the offer in terms that would be compliant with the post-amendment regime.

Offers made after 7 June 2013 must comply with the new conditions set out in rule 20.26(2) UCPR which stipulates that there ought not be an amount for costs nor should the offer be expressed to be inclusive of costs. Where a reference to costs is made, care should be taken to ensure compliance with rule 20.26(3).

The new regime expands the manner in which defendants, in particular, can make offers of compromise. The provisions of rule 20.26(3) now allow a defendant to offer to pay the plaintiff’s costs, thereby placing significant costs pressure on plaintiffs in cases where there is a significant liability dispute.

Additionally, it is now settled that a clear intention for a defective offer to operate as a Calderbank must be evinced at the time of making the offer, in order for the Calderbank principles to apply to that offer.

*Whitney v Dream Developments Pty Ltd [2013] NSWCA 188

Authored by Charlie Williams, Partner, Sydney.


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