Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Barakat and others v Bazdarova [2012] NSWCA 140
• Hearing dates: On the papers
• Decision date: 18 May 2012
• Before: Bathurst CJ at 1; Whealy JA at 2; Tobias AJA at 3

Decision

The appellants to pay the respondent's costs of the appeal on the ordinary basis up to 5 August 2011 and on an indemnity basis as and from 6 August 2011.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: APPEAL - Grounds of appeal not available to be argued as were directly inconsistent with the concessions made at trial - Appeal dismissed; COSTS - Indemnity costs - Offer of compromise - Whether offer of compromise was genuine - Whether offer was "exclusive of costs" - Compliance with Uniform Civil Procedure Rules 2005
• Legislation Cited: Civil Procedure Act 2005; District Court Rules 1973; Fair Trading Act; Legal Profession Act 1987; Supreme Court Rules; Uniform Civil Procedure Rules 2005
• Cases Cited: Caine v Lumley General Insurance Limited (No 2) [2008] NSWCA 109; Dargan v United Super Pty Ltd (No 2) [2011] NSWSC 1527; Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141; George v Webb [2012] NSWSC 86; Jovanovski v Billbergia Pty Ltd (No 2) [2010] NSWSC 617; Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344; Morgan v Johnson (1998) 44 NSWLR 578; Nominal Defendant v Hawkins [2011] NSWCA 93; 58 MVR 362; Regency Media Pty Limited v AAV Australia Pty Limited [2009] NSWCA 368; Southeastern Sydney Area Health Service v King [2006] NSWCA 2; Suttor v Gundowda Pty Ltd (1950) 81 CLR 418
• Category: Costs
• Parties: Tony BARAKAT, Russell Walter KEDDIE and Scott John ROULSTONE t/as KEDDIES LAWYERS (appellants); Snezana BAZDAROVA in her capacity as Executrix of the Estate of the late Stavre Bazdarov (respondent)
• Representation: Counsel: M L BRABAZON SC/ J M MORRIS (appellants); G M WATSON SC/ G J O'MAHONEY (respondent); Solicitors: Verekers Lawyers (appellant); Firths - The Compensation Lawyers (respondent)
• File Number(s): 2011/240564

Decision under appeal

• Date of Decision: 2011-06-24 00:00:00
• Before: Ashford DCJ
• File Number(s): 2011/15729

Judgment

1 BATHURST CJ: I agree with Tobias AJA.

2 WHEALY JA: I agree with Tobias AJA.

3 TOBIAS AJA: On 27 March 2012 the Court dismissed an appeal by the appellants trading as Keddies Lawyers from a judgment of her Honour Judge Ashford of 24 June 2011 in favour of the late Stavre Bazdarov (the plaintiff). The respondent is the executrix of the plaintiff's estate, he having died on 11 July 2011. In circumstances to which I shall refer, upon the dismissal of the appeal an issue arose as to whether the unsuccessful appellants should pay the respondent's costs of the appeal on an indemnity basis. As the parties were not then in a position to adequately deal with that issue, the Court granted them leave to file written submissions upon the basis that the issue would be determined by the Court on the papers. In the meantime all questions as to the costs of the appeal were reserved. The parties have availed themselves of the leave so granted and each has filed submissions accordingly.

The history and nature of the litigation up to the conclusion of the trial.

4 On or about 22 September 2003, the plaintiff consulted and retained a solicitor employed by the appellants with respect to, relevantly, a potential claim for medical negligence arising out of his treatment for a hernia repair and the complications which followed it. On 4 December 2003 a conditional costs agreement (the costs agreement) was entered into between the appellants and the plaintiff pursuant to s 186(1) of the Legal Profession Act 1987 (the Act). Between December 2003 and November 2005 the appellants instituted proceedings in the District Court on behalf of the plaintiff claiming damages for medical negligence and took steps to prepare those proceedings for trial. On the first day of the hearing of the proceedings on 14 November 2005, the action was settled for the sum of $450,000 inclusive of costs. Of that sum the appellants deducted the amount of $290,325.01 for their costs and disbursements with respect to the prosecution of the proceedings, accounting to the plaintiff for the balance.

5 The plaintiff claimed that the amount of $290,344.01 deducted by the appellants from the settlement monies was both excessive and unreasonable. Accordingly, he instituted proceedings against the appellants for damages being, relevantly, the difference between the amount of the costs and disbursements so deducted by the appellants and an amount which the plaintiff alleged was fair and reasonable with respect to so much of the work which the appellants had appropriately performed.

6 The matter proceeded at trial on an amended statement of claim (ASC) filed on 21 April 2011. It first pleaded various provisions of the costs agreement alleging that they had been breached. It then alleged that the costs agreement did not comply with various provisions of ss 175 and 177 of the Act. As a consequence of those breaches and non-compliances, it was alleged that the plaintiff was under no liability to pay to the appellants any amount for costs and disbursements until such time as those costs and disbursements had been assessed under Division 6 of Part 11 of the Act.

7 The ASC then pleaded the following alternative allegations:

"22. Further, or in the further alternative, it was the duty of the [appellants] under Section 208A of the Legal Profession Act 1987, or it was an implied term of the retainer, or both, that the [appellants] would only charge the [plaintiff] for work actually undertaken and then charge only a fair and reasonable fee for that work and that the [appellants] would not overservice him.

23. In breach of the said duty, or in breach of the said implied term, or both, the [appellants] charged grossly excessive fees and incurred wholly unnecessary disbursements. "

There then followed particulars of the allegation in paragraph 23, the details of which are not presently relevant.

8 The ASC also alleged the making of false representations within the meaning of the Fair Trading Act. However, it became unnecessary for the primary judge to consider that aspect of the plaintiff's claim.

9 The trial before the primary judge commenced on 16 May 2011. Her Honour delivered her judgment on 24 June 2011. At [1] she noted that by his ASC the plaintiff "claims damages of the [appellants] for breach of contract". Her Honour then considered the expert evidence called on behalf of the plaintiff as to what was a reasonable amount for the appellants to have received for their costs and disbursements with respect to the medical negligence claim. Ultimately, she came to the view that the appellants were entitled to the amount of $135,258.40 for their costs and disbursements which, after making certain other adjustments including taking into account the amount of the settlement monies already paid to the plaintiff, left an amount of $160,010.61 in respect of which she entered a verdict and judgment in his favour together with interest on that amount calculated by reference to s 100 of the Civil Procedure Act 2005.

10 In the course of her reasons, the primary judge found that there had been a breach by the appellants of ss 175(1) and 177(1) of the Act. Accordingly, as a result of their failure to comply with the Act, she held that the appellants were only entitled to costs assessed by a cost assessor on the basis of what were fair and reasonable costs for work reasonably performed and in a reasonable manner.

11 Apart from contesting the plaintiff's allegation that they had breached the provisions of ss 175 and 177 of the Act, the only other issue litigated by the appellants at trial related to the assessment of what were fair and reasonable costs and disbursements to which they would otherwise be entitled. As her Honour noted at [49] of her reasons, the appellants submitted that

"... having cast his claim in contract, the question should be asked as to whether costs should be assessed in accordance with a fair and reasonable assessment under the [Act] or done in accordance with ordinary contractual principle."

12 The primary judge then noted (at [57]) a submission by the appellants that there had been sufficient disclosure of the matters referred to in ss 175 and 176 of the Act, in that they had advised the plaintiff in the costs agreement that he was entitled to have the charges made in the appellants' bill of costs assessed for their fairness and reasonableness by an assessor appointed by the Supreme Court. Although there was a twelve-month time limit for the making of an application for such an assessment, it was contended that the costs agreement was not required to disclose that fact. As that time limit had expired, the appellants submitted that the appellants' costs should be assessed by her Honour "on the basis of [the appellants'] contractual entitlements".

13 The primary judge in response to this submission concluded as follows:

"58. I accept the submissions of senior counsel for the [plaintiff] that clearly this is a claim for breach of contract claiming damages and as such noting the breaches of the [Act] I am satisfied that the legal consequences are that failure to comply with the [Act] are that the [appellants] is only entitled to costs which are fair and reasonable.

59. Having considered the submissions made it is my view that the [plaintiff] must succeed in his claim for breach of contract, thus I do not turn to consider the alternative breach alleged of s 42 of the Fair Trading Act 1987."

14 Her Honour found (at [60]) that the appellants had overcharged the plaintiff. She then proceeded to determine what was a fair and reasonable amount to which the appellants were entitled: see [9] above.

15 It is apparent that her Honour's findings at [58] and [59] of her reasons involved the upholding of the allegations of the plaintiff at paragraphs 22 and 23 of the ASC and which I have recorded at [7] above. It is also clear, and was ultimately accepted by the appellants on the hearing of the appeal in circumstances to which I shall refer below, that the plaintiff's case at trial proceeded upon the basis that the issue for determination was whether the appellants were in breach of their retainer insofar as they had deducted from the settlement monies an amount for costs and disbursements which exceeded what was fair and reasonable.

16 Of present significance is the fact that no submission was advanced at trial to suggest that because the appellants had already deducted an excessive amount for their costs and disbursements out of the settlement monies, that that fact prevented the plaintiff from suing for breach of the implied term of his retainer of the appellants as pleaded in paragraph 22 of the ASC. Nor was it suggested that breaches of ss 175 and 177 of the Act in some way prevented the plaintiff from alleging breach of that implied term or that a breach of the costs agreement had any such effect. In fact it was clear that the contract of retainer between the plaintiff and the appellants was subject to the provisions of the costs agreement. But none of those matters involved an impediment to the primary judge, once she determined that the appellants had overcharged the plaintiff, in finding breach of contract and assessing damages for that breach in the manner she had undertaken.

17 The result, therefore, was that the primary judge entered a verdict and judgment for the plaintiff in the sum of $160,010.61 together with interest up to 24 June 2011 which the parties ultimately agreed was the sum of $78,669.28. Accordingly, there was judgment for the plaintiff against the appellants in the total sum of $238,679.89.

18 As to the costs of the trial, on 16 March 2011 the plaintiff made an offer of compromise to the appellants pursuant to rule 20.26 of the Uniform Civil Procedure Rules 2005 (UCPR). He offered to compromise his claim by accepting judgment in his favour in the sum of $120,000 excluding legal costs. As the amount of the verdict far exceeded that amount, the primary judge ordered that the appellants pay the plaintiff's costs of the trial on the ordinary basis up to 17 March 2011 and on an indemnity basis thereafter, that is, up to and including 24 June 2011.

The course of the hearing of the appeal.

19 On 19 July 2011 the appellants filed a notice of intention to appeal. On 26 July 2011 it filed a notice of appeal containing eight grounds of appeal. Although ground 4 alleged that the primary judge erred in finding that the legal consequence of failure by the appellants to comply with ss 175 and 177 of the Act was that they were only entitled to costs that were fair and reasonable (as opposed to costs calculated in accordance with the costs agreement), there was no suggestion in those grounds that either breaches of the Act or a finding that the appellants had grossly overcharged the plaintiff could not, as a matter of law, give rise to a claim for damages for breach of the contract of retainer between the parties. However, early in the hearing of the appeal that became the central plank of the appellants' argument.

20 Thus the appellants submitted that an action for damages for breach of contract was not available to a solicitor's client who had received a bill, paid it but later alleged that he or she had paid too much. Although the client was not without possible remedies such as a breach of s 42 of the Fair Trading Act (if there was a relevant representation and reliance) or some form of restitutionary relief, no claim for contractual damages was available as the contract was, in effect, spent on the bill of costs being presented and paid without protest.

21 Further, although the plaintiff had available the right to an assessment of the appellants' costs and disbursements pursuant to Division 6 of Part 11 of the Act, he was barred from pursuing that remedy as he was out of time. As I have noted, the appellants conceded that no argument was advanced at trial that the plaintiff was not entitled to claim damages for breach of contract; nor was such an argument raised in the grounds of appeal as originally filed. When asked by the Chief Justice whether it was put at trial that any overcharge could not be recovered as a matter of contractual damages, senior counsel for the appellants (who did not appear at the trial) responded:

"It was not put in those terms below your Honour; it is put for the first time in that way in this Court."

22 Ultimately, senior counsel for the appellants accepted that if the proposition for which he now contended had been advanced at trial, it would have been open to the plaintiff to have further amended his statement of claim to allege some other remedy such as money had and received, breach of fiduciary duty and/or breach of trust in order to meet the defence now raised. It was in these circumstances that the Court determined that the appellants would not be permitted to raise the argument that it was not open, once the appellants had deducted their costs and disbursements from the settlement monies, for the plaintiff to assert a claim for breach of contract sounding in damages equivalent to the amount he had been overcharged. After a short adjournment, senior counsel for the appellants informed the Court that as the central plank of the appellants' case on the appeal could not be argued, there was no alternative but for the appeal to be dismissed. Hence the Court's order to that effect.

23 Before leaving the manner in which the appellants' sought to conduct the appeal, two further matters need to be referred to as they bear upon the present issue. The first concerns the response of senior counsel for the appellants when it was put to him that he should not be permitted to raise the no breach of contract remedy on the appeal. While ultimately accepting that that argument was not directly raised at trial, senior counsel did not readily embrace that fact although he did accept that it had not been advanced in the terms in which it was now presented.

24 Thus, when the issue was first raised with him, senior counsel submitted that the matter had been adequately covered by the pleadings in that the allegation of breach of contract in the ASC had been denied in the filed defence. A simple traverse of the allegation was sufficient, so it was contended, as it was not incumbent on the appellants to make the plaintiff's case at trial (see Appeal Tscpt.p 15).

25 Further, when it was pointed out to senior counsel that the case at trial was conducted by both parties as one of breach of contract and that the fact that the appellants had extracted their costs and disbursements from the settlement monies had not been raised as an impediment to a claim for damages for breach of contract, senior counsel's response was that the matters so raised occurred in submissions after the case was closed when, in effect, it was too late for the plaintiff to further amend his statement of claim to allege other causes of action.

26 After referring to Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, senior counsel said:

"... an important question is whether the [plaintiff] would have seen the case differently. When one gets to the point of final submissions, and there was no need to raise it before then, the case is closed. It has not been suggested so far that there is evidence for example that could have been adduced."

27 The point of raising the foregoing is not to criticise senior counsel's responses to questions from the Court. Rather it is to illustrate that had the respondent, when she received the Outline and/or the amended grounds of appeal, informed the appellants' legal representatives that the proposition that the plaintiff could not recover damages for breach of contract had not been run at trial and that objection would be taken at the hearing of the appeal if the issue was maintained, it is unlikely that the appellants would have then abandoned the issue, let alone the appeal.

28 The second matter concerns the respondent's reaction to the appellants' new case. Leaving to one side the response in her written submissions on the appeal to grounds 6 and 7 referred to at [32] below, senior counsel for the respondent (who appeared at the trial for the plaintiff) accepted that he had not appreciated until the day before the hearing of the appeal was to commence, that the appellants' case "would be put so directly against his client". Rather, he felt that the appellants' case was "being put a different way" which he later identified as being whether or not there had been a breach of the Act. However, he assured the Court that had the issue been raised directly at the trial, it is very likely he would have responded by amending the pleadings. Nevertheless, in essence, senior counsel for the respondent simply accepted that he had failed to appreciate the new thrust of the appellants' case.

The respondent claims indemnity costs with respect to the appeal

29 It will be recollected that the appellants' notice of appeal containing the grounds of appeal was filed on 26 July 2011. On 5 August 2011 the respondent served an offer of compromise purportedly pursuant to the provisions of UCPR r 20.26 in which she offered to compromise "the claim" in the following manner:

"Judgment for the [respondent] in the sum of $225,000 excluding legal costs of the appeal plus costs of the trial on the ordinary basis up to 17 March 2011 and on an indemnity basis thereafter"

The offer remained open for twenty-eight days which expired on 2 September 2011. The offer was not accepted by the appellants.

30 On 14 September 2011, the appellants filed their Outline of Submissions (the Outline). At paragraph 3 of the Outline it was stated that the plaintiff had sued the appellants for damages on two bases of which one was for breach of contract. It was asserted that the contract on which the plaintiff sued was the costs agreement. This was not entirely accurate given the matters alleged at paragraphs 22 and 23 of the ASC (see [7] above).

31 At paragraph 14 of the Outline it was submitted that non-compliance with s 175 and/or s 177 of the Act did not constitute a breach of contract and did not give rise to a cause of action in damages for breach of contract. Even if this be so, it was only part of the plaintiff's case at trial. This was recognised by the appellants who under the heading "Overcharging in contract", submitted (at paragraphs 24 and 25 of the Outline) that the plaintiff's complaints of overcharging did not support a claim for damages for breach of contract, and that although an overcharged client was not without remedy, that remedy did not lie in damages for breach of contract. As already noted, those submissions did not accord with the grounds of appeal as they then existed. Thus on 19 September 2011 the appellants filed a further amended notice of appeal which contained the following grounds of appeal which had not appeared in the original notice of appeal:

"6. The learned Judge erred in concluding that the charging of amounts greater than could have been sustained on a solicitor/client assessment under the [Act] amounted to breach of contract.

7. The learned Judge erred in finding that the [appellants] had charged the [plaintiff] more than they were contractually entitled to charge."

32 On 19 December 2011, the respondent filed her written submissions on the appeal. It was noted that there were now eleven grounds for appeal but that not all grounds had been addressed in the Outline so that it was not presently clear whether all were pressed. The structure of the submissions was then to address each of the eleven grounds. With respect to grounds 6 and 7 described as "Excessive charging and breach of contract", the respondent's written submissions stated the following:

32. These two grounds of appeal are unavailable now because they are directly inconsistent with concessions made at trial.

33. At trial Keddies conceded that they had breached the contract by charging amounts greater than those agreed, and by charging for work not carried out ..."

The relevant provisions of the UCPR relating to offers of compromise

33 An offer of compromise made before trial must accord with UCPR r.20.26 which, relevantly, provides as follows:

"(1) In any proceedings, any party may, by notice in writing, make an offer to any other party to compromise any claim in the proceedings, either in whole or in part, on specified terms.

(2) An offer must be exclusive of costs, ... "

34 With respect to offers of compromise after judgment at first instance but where an appeal has been filed, the following provisions of UCPR r.51.47 relevantly apply:

"(1) In any proceedings in the Court, any party may, by notice in writing, make an offer to any other party to compromise any claim in the proceedings, in whole or in part, on specified terms.

(2) The provisions of Division 4 (Compromise) of Part 20 apply to any offer of compromise made under subrule (1), subject to the following modifications:

(a) a reference to a court is a reference to the Court,

(b) a reference to proceedings is a reference to proceedings in the Court,

...

(h) such other modifications as are necessary."

35 Division 3 of UCPR Part 42 deals with the consequences of the non-acceptance of an offer of compromise, depending upon the ultimate outcome of the proceedings. With respect to the position at first instance, where an offer of compromise is made by a plaintiff but not accepted by the defendant, the relevant rule is 42.14 which is in the following terms:

"42.14 (1) This rule applies if the offer concerned is made by the plaintiff, but not accepted by the defendant, and the plaintiff obtains an order of judgment on the claim concerned no less favourable to the plaintiff than the terms of the offer.

(2) Unless the court orders otherwise, the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim:

(a) assessed on the ordinary basis up to the time from which those costs are to be assessed on an indemnity basis under paragraph (b), and

(b) assessed on an indemnity basis:

(i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and

(ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made. [emphasis added]

36 With respect to offers of compromise made for the purposes of an appeal, the applicable rule is r 51.48 which, relevantly, provides as follows:

"51.48 (1) If an offer of compromise is made under rule 51.47, Division 3 of Part 42 applies, subject to subrule (2), rule 51.49 and the following modifications:

...

(b) a reference to a court is a reference to the Court,

(c) a reference to proceedings is a reference to proceedings in the Court,

...

(h) such other modifications as are necessary."

The parties' submissions

(a) The respondent's submissions

37 The respondent's submissions may be summarised as follows:

(i) The respondent's offer of compromise of 5 August 2011 complied with the combined provisions of UCPR rr 20.26 and 51.47;

(ii) The respondent offered to compromise the appeal some six weeks after the original notice of appeal was filed for $225,000 in circumstances where the judgment at first instance was the sum of $238,679.89, a difference of $13,680; it was therefore a genuine attempt at compromise;

(iii) As the offer was made more than eight months before the appeal was heard, its acceptance by the appellants would have avoided both sides incurring the bulk of their costs in respect of the preparation and hearing of the appeal;

(iv) As the Court of Appeal ordered that the appeal be dismissed, then interest has accrued from 24 June 2011 to 27 March 2012 thus increasing the judgment amount payable by the appellants to the respondent to the sum of $258,081.62. I interpolate that the judgment sum of $238,679.89 would also have increased by the additional amount of approximately $2,882 being post-judgment interest which would have accumulated thereon from 24 June 2011 to 5 August 2011;

(v) As the respondent obtained an order or judgment of the Court of Appeal which was no less favourable to her than the terms of the offer, it followed that subject to the Court ordering otherwise, she was entitled to indemnity costs of the appeal as and from 6 August 2011;

(vi) The Court could only otherwise order if there were exceptional circumstances justifying it doing so;

(vii) No such circumstances arise in the present case, particularly where the "thrust" of the appellants' case on appeal was conceded by their senior counsel in oral argument to be one which had not been advanced below in the terms now adopted and which was not properly understood by the respondent at the time of preparation of her written submissions in December 2011;

(viii) The appellants' case on appeal was only clearly identified by their senior counsel in the course of oral argument and was not plainly articulated in either the original or amended grounds of appeal or the appellants' written submissions.

(ix) In any event the appellants should not be allowed to benefit from the manner in which the appeal was prosecuted for the purpose of the present application in circumstances where they sought to agitate on appeal a point not taken below and which was inconsistent with the position the appellants had adopted throughout the proceedings at first instance.

(x) Furthermore, the new point raised by the appellants that the plaintiff had no contractual cause of action because the bill of costs he received from the appellants had been paid and he was out of time to invoke the assessment provisions of Division 6 of Part 11 of the Act, lacked merit.

(b) The appellants' submissions

38 The appellants' submissions may be summarised thus:

(i) The respondent's offer of compromise did not comply with UCPR r 20.26(2) as it was not "exclusive of costs" as it included the costs awarded at trial;

(ii) Even if the offer was, relevantly, one which was exclusive of costs, the Court should otherwise order for the following reasons:

exceptional circumstances were not required before the Court could otherwise order;

in their outline the appellants submitted at paragraph 14 that non-compliance with ss 175 and/or 177 did not give rise to a breach of contract and did not give rise to a cause of action in damages for breach of contract;

at paragraph 24 it had submitted that complaints of overcharging could not support a claim for damages for breach of contract;

amended grounds of appeal 1, 3 and 4 sufficiently covered the point;

(iii) In any event although it must be accepted that the argument had not been made at first instance, the respondent did not object to the point being argued on appeal in her written submissions filed on 19 December 2011. It was only when the respondent successfully objected to the argument being raised for the first time on the hearing of the appeal that its advancement became untenable;

(iv) Although the present was not a case where a successful party's significant change of case after the making of an offer can justify refusal of indemnity costs, nevertheless the failure of the respondent to clearly object to the raising of the issue which was sought to be advanced by the appellants on the appeal at an earlier point of time and her late objection to it being raised on the appeal, was analogous to a change of case on her part;

(v) Finally, although the degree of compromise ($13,680) was "not nothing", it was nevertheless "modest".

Was the respondent's offer of compromise "exclusive of costs"?

39 In my opinion the answer to this question is in the affirmative. By the combined operation of UCPR rr 20.26(1) and 51.47(1) and (2), the relevant proceedings in respect of which the respondent offered to compromise her claim were the proceedings in the Court of Appeal. An offer is required to be "exclusive of costs" so as to preserve, and not impinge upon, the costs provisions provided, relevantly, in r 42.14(2)(b). Thus in Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141 at [26] this Court (Giles JA, Handley AJA, Whealy J) observed that the governing reason why an offer of compromise cannot involve costs at all was to avoid inconsistency between an offer of compromise and the provisions of the rules with respect to costs when such an offer has been made but not accepted.

40 In the present case, the relevant offer was expressly made exclusive of the costs of the appeal: that is, the costs of the proceedings in this Court. In my view that was sufficient for the offer to comply with the mandatory requirement that it be exclusive of costs. As a matter of construction the reference in UCPR r 20.26 to the offer being "exclusive of costs" must refer to it being exclusive of the costs of the proceedings in the court in respect of which the offer of compromise is made. It cannot in a case such as the present require that the offer be exclusive of costs which were already the subject of an order of the court at first instance. The amount of the verdict and judgment in that court as well as the order for costs constituted the totality of the "claim" of the respondent in the appeal proceedings in respect of which she was prepared to offer a compromise albeit that that compromise related to the amount of the judgment rather than the amount of the ordered costs.

41 It therefore follows that in my view the appellants' submission that the respondent's offer of compromise did not comply with UCPR r 20.26(2) cannot be sustained.

Should the Court "otherwise order"?

42 The respondent submitted that the Court can only otherwise order where there are exceptional circumstances. The appellants submitted that such circumstances were no longer required. They relied for that proposition on the decision of this Court in Regency Media Pty Limited v AAV Australia Pty Limited [2009] NSWCA 368. In that case, the Court (Spigelman CJ, Beazley and McColl JJA) after noting that UCPR rr 42.14, 42.15 and 42.15A were in different terms to the rules relating to offers of compromise under Pt 39A r 25(6) of the District Court Rules 1973, observed (at [15]):

"Part 39A, r 25(6) [as did r 25(4) and (4A)] expressly provided that the adverse costs consequences following a failure to accept an offer of settlement applied "[u]nless the court in an exceptional case and for the avoidance of substantial justice otherwise [ordered]". Rules 42.14, 42.15 and 42.15A are in different terms. They provide that, when the relevant costs rule is engaged, a party is entitled to indemnity costs from a specified time (usually one day after an offer of compromise is made), 'unless the court orders otherwise' (emphasis added). The relevant provisions of these Rules do not specify that exceptional circumstances or the avoidance of substantial injustice must be established before the court will make a different order to the prima facie order for which the Rules provide and, in our opinion, the Rules should not be so construed. Rather, the discretion is one that has to be exercised having regard to all the circumstances of the case".

43 In their submissions, the appellants at paragraph 8 record the passage from [15] of Regency Media but wrongly attribute Pt 39A, r 25(6) to the (now repealed) Supreme Court Rules (SCR) rather than the (now repealed) District Court Rules. The equivalent SCRs to UCPR r 42.14 and 15 were SCR Pt 52A.22(4) and (6) all of which are essentially in the same terms: that is, there is no reference in any of those rules that before a court otherwise orders there must be "an exceptional case" or "the avoidance of substantial injustice". As [15] of Regency Media was concerned with the change in wording between the old District Court Rules and the new UCPR, it might be said that, prima facie, that that part of the Court's decision is confined to offers of compromise in the District Court.

44 However, there would be difficulty in so confining Regency Media given that the relevant UCPR now apply to offers of compromise in both the District Court as well as the Supreme Court.

45 Furthermore, there are recent authorities in this Court which confirm the requirement for exceptional circumstances before the Court can otherwise order. Thus in Southeastern Sydney Area Health Service v King [2006] NSWCA 2 at [83], Hunt AJA, with the agreement of Mason P and McColl JA, when dealing with an offer of compromise made pursuant to SCR Pt 22, observed with respect to the application of SCR Pt 52A, r 22(4), that, generally, exceptional circumstances were required to justify an order denying the plaintiff's entitlement to indemnity costs where an offer of compromise has not been accepted by the defendant.

46 In Caine v Lumley General Insurance Limited (No 2) [2008] NSWCA 109 McColl JA, with the agreement of Mason P and McClellan CJ at CL, after referring at [34] to what Mason P, with whom Sheller JA agreed, had said in Morgan v Johnson (1998) 44 NSWLR 578 at 581-582 as to the rationale for the rules relating to offers of compromise, continued in the following terms:

"35. The onus is on the respondent to demonstrate why the Court should not order the respondent to pay the appellant's costs on an indemnity basis. In particular, the respondent must establish that it had given serious thought to the risks involved in not accepting the offers, had assessed the appellants' case properly and in the context of the relevant rules and the achievement of their purpose as outlined in Morgan. Generally, exceptional circumstances are required to justify such an order denying the appellants' entitlement: Southeastern Sydney Area Health Service v King [2006] NSWCA 2 (at [83]) per Hunt AJA (Mason P and McColl JA agreeing)."

It should be noted that this case was decided upon the basis that the relevant rule was SCR Pt 52A, r 22(4).

47 In Nominal Defendant v Hawkins [2011] NSWCA 93; 58 MVR 362 Hodgson JA, with whom Beazley JA agreed, and with whom, on this issue, Sackville AJA also agreed, after referring to what McColl JA had said in Caine, noted at [54] the submission on behalf of the respondent that there were no exceptional circumstances in the case and no justification to order otherwise, and at [55] a submission of the Nominal Defendant that the determination of the question of indemnity costs was a discretionary evaluated decision requiring consideration of facts and circumstances specific to the case. However, at [56] his Honour accepted the respondent's submission that

"despite the change of wording in the rule, it is not enough to justify ordering otherwise for a person who refused an offer of compromise to show that he/she acted reasonably in doing so. Generally, exceptional circumstances are required."

His Honour's reference to a change of wording in the rule was a reference to the change in wording of the old District Court rule expressly requiring "an exceptional case and ... the avoidance of substantial injustice" before the court could otherwise order. It may also be noted that in Hawkins there was no reference to the decision in Regency Media.

48 There appears therefore, to be a conflict of opinion in this Court as to whether a court can otherwise order for the purpose of the indemnity costs rule in the absence of exceptional circumstances. The textual difference between the old District Court rule in Pt 39A, rule 25(4), (4A) and (6) and the current UCPR r 42.14(2), 42.15(2) and 42, 5A(2) highlighted in Regency Media would seem to favour the appellants' submission in the present case. But the exceptional circumstances requirement was adopted with respect to SCR Pt 52A.22(4) which is essentially in identical terms to UCPR r 42.14(2).

49 I note that the issue has been flagged in three first instance decisions, namely, by Davies J in Jovanovski v Billbergia Pty Ltd (No 2) [2010] NSWSC 617 at [5]; Gzell J in Dargan v United Super Pty Ltd (No 2) [2011] NSWSC 1527 at [4]; and by Ward J in George v Webb [2012] NSWSC 86 at [39] - [40]. However, each of those cases was able to be decided without having to deal with the issue. Regency Media has also been referred to in this Court on three recent occasions but not with respect to the issue raised at [15] of the judgment in that case.

50 In my view it is unnecessary in the circumstances of the present case to confuse the issue further by determining which line of authority to follow, that is, whether exceptional circumstances are required before the Court may "otherwise order", for the purpose of UCPR r 42.14(2). This is because I do not accept that any of the circumstances relied upon by the appellants constitute exceptional circumstances or, for that matter, circumstances which, even though not exceptional, would justify depriving the respondent of indemnity costs.

51 In so concluding I have taken into account the following factors:

(a) No attempt has been made by the appellants to suggest that it was reasonable for it to reject the respondent's offer of compromise; in fact, there is no evidence that the appellants even gave any thought to the offer or to the risks involved in not accepting it;

(b) Nor was it suggested that the respondent had failed to demonstrate that it was unreasonable for the appellants not to have accepted the offer;

(c) Given the grounds of appeal as they stood at the date the offer was made, and accepting that the question of acceptance or non-acceptance must be determined at that date and without the benefit of hindsight, it seems to me that it was unreasonable for the appellants not to accept an offer which, after taking into account interest accumulated on the judgment to the date of the offer, involved a discount on the amount then payable of $16,562 or nearly 7%;

(d) The prospects of the respondent succeeding on its then grounds of appeal I would have thought was, at most, low. The appellants did not have merit on their side in the circumstances found at trial. In this respect the parties at the appeal stage were in a different position from that in which they were in prior to or at trial: Regency Media at [40]. Findings had been made which reflected poorly on the appellants. Their prospect on appeal would depend on their ability to avoid the merits and to find some technical argument upon which to rest their case;

(e) In these circumstances it could not be said, and it was not suggested, that the offer was otherwise than a genuine offer of compromise and involved "a real and genuine element of compromise": Dean v Stockland Property Management at [14]; Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [9] per Basten JA with whom McColl and Campbell JJA agreed.

(f) Thus the offer was not derisory. It did not require capitulation by the appellants. It may have been modest but, as I have said, it nevertheless was genuine, and contained a real element of compromise. Again, no submission to the contrary was made. It follows that in my view the principles referred to in Dean v Stockland Property Management Pty Ltd at [14] were satisfied;

(g) Although it may be accepted for present purposes that grounds 6 and 7 of the Further Amended Notice of Appeal raised the issue more directly relied on by the appellants in oral argument in the appeal, it did so in a somewhat oblique fashion;

(h) It may also be accepted that paragraphs 24 and 25 of the appellants' written outline asserted that the plaintiff's complaints of overcharging did not support a claim for damages for breach of contract. However, the reasons for that assertion were not identified, notwithstanding the earlier submission that a breach of s 175 of the Act did not affect the validity or legal effect of the costs agreement.

(i) Of significance, when dealing with the appellants' grounds 6 and 7, the respondent asserted at paragraph 32 of her written submissions, that neither of those grounds were available to be argued on the appeal as they were directly inconsistent with the concessions made at trial, namely, that there had been a breach of contract. That submission was supported at paragraph 33 by the contention that the appellants had explicitly conceded that a claim against them, based upon breach of contract for overcharging, remained open to the plaintiff and that the only issue was the quantification of damages. In my view paragraphs 32 and 33 of the respondent's written submissions were a perfectly apt response to the appellants' submissions.

(j) I would accept the explanation of senior counsel for the respondent that he did not appreciate until the day before the hearing when he was looking more closely at the matter, the real thrust of the appellants' case on appeal. This concession was probably unnecessary given what I have said at (i) above;

(k) Finally, even if the appellants had made it clear both in its amended grounds of appeal and written outline that the primary judge had erred in permitting a claim for damages for breach of contract, there is no evidence, or for that matter submission, that had the 'point' been taken in the respondents' written submissions filed in December 2011 or earlier, the appellants would have then and there consented to the appeal being dismissed and/or that it would have been prepared to pay indemnity costs from 6 August 2011 to the date of any such dismissal. It is in this context that the attempt by senior counsel for the appellants to assert that the issue was raised at trial albeit not in the terms advanced in oral argument on the appeal, becomes relevant: see [23]-[27] above.

Conclusion

52 In my opinion, the appellants have failed to demonstrate either that the respondent's offer of compromise of 5 August 2011 did not conform with the provisions of UCPR r 20.26(2) in that it was not "exclusive of costs" in the relevant sense or that the circumstances are such that the Court should "otherwise order" for the purpose of UCPR r 42.14(2). I would therefore propose that the appellants pay the respondent's costs of the appeal on the ordinary basis up to 5 August 2011 and on an indemnity basis as and from 6 August 2011.

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Decision last updated: 18 May 2012