Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Whitney v Dream Developments Pty Ltd [2013] NSWCA 188
• Hearing dates: 15 March 2013
• Decision date: 25 June 2013
• Before: Bathurst CJ at [1]; Beazley P at [46]; McColl JA at [47]; Barrett JA at [48]; Emmett JA at [62]

Decision

1 Appeal allowed.

2 Orders 2, 3, 4 and 5 of the orders made by Adams J on 23 February 2012 be set aside.

3 Orders 1, 2, 3 and 4 of the orders made by Adams J on 31 May 2012 be set aside.

4 In lieu of the orders made by Adams J, order:

(a) The respondent's summons for leave to appeal from the Local Court of NSW be dismissed.

(b) The respondent to pay the appellant's costs of the proceedings.

5 The respondent to pay the appellant's costs of the application for leave to appeal and the appeal.

[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: COSTS - indemnity costs - offer of compromise - Uniform Civil Procedure Rules 2005 (UCPR) r 20.26 - compliance with UCPR - whether an offer including "costs as agreed or assessed" is an offer exclusive of costs.; COSTS - indemnity costs - offer of compromise - Uniform Civil Procedure Rules 2005 (UCPR) r 20.26 - whether a non-compliant offer can take effect as a Calderbank offer.
• Legislation Cited: Uniform Civil Procedure Rules 2005, r 20.26, r 42.13A, r 42.14, r 42.15, r 42.15A
• Cases Cited: Ambulance Service of New South Wales v Worley (No 2) [2006] NSWCA 236; (2006) 67 NSWLR 719; Barakat v Bazdarova [2012] NSWCA 140; Calderbank v Calderbank [1975] 3 WLR 586; Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141; Dream Developments Pty Ltd v Whitney (No 2) [2012] NSWSC 339; Egan v Mangarelli (No 2) [2012] NSWSC 1226; Erect Safe Scaffolding (Australia) Pty Ltd v Sutton (No 2) [2008] NSWCA 289; Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2008] NSWCA 85; Macquarie Radio Network Pty Ltd v Arthur Dent (No 2) [2007] NSWCA 339; Mid-City Skin Cancer & Laser Centre Pty Ltd v Zahedi-Anarak [2006] NSWSC 684; Milich v The Council for the City of Canterbury (No 3) [2012] NSWSC 1280; Old v McInnes and Hodgkinson [2011] NSWCA 410; Rail Corporation NSW v Vero Insurance Ltd (No 2) [2012] NSWSC 926; San v Rumble (No 2) [2007] NSWCA 259; (2007) 48 MVR 492; Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194; Uniting Church v Takacs (No 2) [2008] NSWCA 172; Vieira v O'Shea (No 2) [2012] NSWCA 121; Ziliotto v Dr Hakim (No 2) [2012] NSWSC 1079
• Category: Principal judgment
• Parties: Samuel Whitney (Appellant); Dream Developments Pty Ltd (Respondent)
• Representation: Counsel: D P Robinson SC (Appellant); R S Bell (Respondent); Solicitors: Carroll & O'Dea Lawyers (Appellant); Bay Legal (Respondent)
• File Number(s): 2012/90692
• Publication restriction: No

Decision under appeal

• Jurisdiction: 9111
• Citation: [2012] NSWSC 108; [2012] NSWSC 339
• Before: Adams J
• File Number(s): 2010/412999

JUdgment

1 BATHURST CJ: This appeal raises two issues which have troubled courts in dealing with offers of compromise under r 20.26 of the Uniform Civil Procedure Rules 2005 (r 20.26):

1 Whether an offer expressed as plus costs as agreed or assessed or containing similar terms is compliant with r 20.26.

2 If such an offer is not compliant with r 20.26 can it take effect as a Calderbank offer (Calderbank v Calderbank [1975] 3 WLR 586) for the purpose of considering whether a special order as to costs should be made.

Background

2 The respondent brought proceedings in the Local Court against the appellant claiming $15,000 said to be monies due under a building contract plus interest and costs. The appellant denied liability and cross-claimed for $9,276.59, representing the cost of repairs and rectification work occasioned by alleged breaches of the building contract by the respondent plus interest and costs.

3 On 15 April 2010 the solicitors for the respondent made an offer of compromise in the following terms:

"This offer is made in accordance with Rule 20.26 of the Uniform Civil Procedure Rules 2005

The Defendant offers to settle the Plaintiff's claim against the Defendant on the following basis:

1. The Defendant to pay the Plaintiff $12,000.00 within 28 days of written acceptance of this offer.

2. The Defendant to pay the Plaintiff's costs as agreed or assessed.

3. These proceedings will be dismissed.

This offer is open for acceptance until 5.00pm Friday, 14 May 2010, being at least 28 days from the making of this offer of compromise, after which it will lapse."

The offer was delivered under a covering facsimile which read as follows:

"Please find the plaintiff's offer of compromise following."

4 On 9 September 2010 the solicitors for the respondent made what was described as a final offer of compromise in the following terms:

"This offer is made in accordance with Rule 20.26 of the Uniform Civil Procedure Rules 2005

The Defendant offers to settle the Plaintiff's claim against the Defendant on the following basis:

1. Judgement for the Plaintiff.

2. The Defendant to pay the Plaintiff $14,000.00 within 28 days of written acceptance of this offer.

3. The Defendant to pay the Plaintiff's costs as agreed or assessed.

This offer is open for acceptance until 5.00pm Tuesday, 14 September 2010, which given this matter is listed for hearing on Friday 17 September 2010 is a reasonable time from the making of this offer of compromise, after which it will lapse."

The covering letter enclosing the offer provided as follows:

"Please find following the plaintiff's final offer of compromise which is open until 5.00pm Tuesday 14 September 2010.

Following the above time, if the plaintiff's offer of compromise is not accepted, we are instructed to immediately engage and prepare a brief for counsel.

In that event, further costs in engaging counsel and preparing for hearing will immediately accrue.

Please disregard the prior offer of compromise sent to you by facsimile on even date which erroneously included order 4 which has been removed from the attached offer of compromise."

5 It was common ground that the reference to the defendant offering to settle the plaintiff's claim in paragraph 2 of each offer of compromise was a typographical error. The offer was to be read as an offer by the respondent to settle its claim in the respective amounts set out in the offers of compromise. No issue was taken in respect of this error.

6 Neither offer was accepted.

7 The learned magistrate who heard the case found for the respondent in the sum of $14,000, but on the cross-claim made an order in favour of the appellant that the respondent pay "such sum as is necessary to replace the hearthstone or $1,000.00, whichever is the lesser".

8 The net amount received by the respondent was thus more than the amount for which it offered to settle in its first offer of compromise. The respondent in those circumstances sought an order for indemnity costs. The application was rejected by the learned magistrate on the grounds that the relevant offer contained a term that the defendant pay the plaintiff's costs as agreed or assessed and it was thus not complaint with r 20.26. She also held that the offer could not operate as a Calderbank offer.

The judgment of the primary judge

9 The decision of the learned magistrate was reversed on appeal. In his first judgment delivered on 23 February 2012, the primary judge held that the offers were made exclusive of costs because they did not compromise on costs. He concluded that this was consistent with the judgment of McDougall J in Mid-City Skin Cancer & Laser Centre Pty Ltd v Zahedi-Anarak [2006] NSWSC 684 and what was said by this Court in Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141.

10 Subsequent to the hearing before the primary judge but prior to delivery of his first judgment, this Court delivered its decision in Old v McInnes and Hodgkinson [2011] NSWCA 410 (Old). In that case Meagher JA held that offers containing a term that the offeree pay the offeror's costs as agreed or assessed were not offers which complied with r 20.26 because they were not exclusive of costs: Old at [105]. Each of Beazley P and Giles JA agreed with Meagher JA on this issue: Old at [18], [42].

11 Although the primary judge referred to Old, he only did so in relation to the issue of whether the offer could operate as a Calderbank offer if, contrary to the opinion he expressed, it was not compliant with r 20.26. His Honour did not seem to reach a concluded view on this issue.

12 The primary judge ordered that the parties file short minutes to give effect to his orders.

13 A copy of this Court's decision in Old was provided to the primary judge on 22 February 2012 prior to delivery of the first judgment. Subsequent to the first judgment, the appellant filed a notice of motion to set aside the primary judge's orders. The primary judge was referred to the passage of the judgment of Meagher JA which stated that an offer plus costs to be agreed or assessed was not compliant with r 20.26. In a further judgment delivered on 31 May 2012, the primary judge distinguished Old from the case before him on the basis that "the offer was markedly different to that which was made in this case". The difference he identified was that the offer in Old involved two payments: first, payment of a specified sum and, in addition, payment of the plaintiff's costs as assessed or agreed. He stated that in Old, the extent to which the specified amount was a compromise payment could not be separately considered from the value of the offer to pay the costs. He stated that unlike Old, in the case before him the offer was "cast in terms that made it clear that there was no offer that involved any compromise on the question of costs": Dream Developments Pty Ltd v Whitney (No 2) [2012] NSWSC 339 at [4].

14 In the result, the primary judge ordered that the appellant pay the respondent's costs in the Local Court as agreed or assessed on an ordinary basis up to 15 April 2010 and thereafter on an indemnity basis.

Leave to appeal

15 On 6 July 2012 the appellant was granted leave to appeal. The Court was constituted by a bench of five because the respondent wished to contend that Old was incorrectly decided and should be overruled.

The parties' submissions on appeal

16 The appellant submitted that the primary judge was bound by the decision of this Court in Old and was in error in not following it. The appellant also submitted that as a matter of construction the offer could not take effect as a Calderbank offer.

17 The respondent did not seek to uphold the reasoning of the primary judge. Rather, it submitted, that Old was incorrectly decided and should be overruled. The submission was based on three related propositions. First, as a matter of construction an offer containing a term "the defendant to pay the plaintiff's costs as agreed or assessed" was an offer exclusive of costs. In this regard the respondent placed particular reliance on a number of first instance decisions where judges chose not to follow Old. Second, the respondent submitted that Old was inconsistent with the subsequent decision of this Court in Vieira v O'Shea (No 2) [2012] NSWCA 121. Third, the respondent submitted that the decision was inconsistent with a number of earlier decisions of this Court.

18 By Notice of Contention the respondent also contended that the judgment of the primary judge should be upheld on the basis that if the offer was non-compliant with r 20.26, then it was effective as a Calderbank offer.

Consideration

19 The offer considered in Old was in the following terms:

"The First Defendant offers to compromise the Plaintiff's claim against him on the following terms:

1. Judgment for the Plaintiff against the First Defendant in the sum of $8,190.00.

2. First Defendant to pay the Plaintiff's costs as agreed or assessed.

This offer is made pursuant to Rule 20.26 of the Uniform Civil Procedure Rules 2005.

This offer is open for acceptance for 28 days."

20 The offer was on terms relevantly identical to the offers in the present case. There was no basis for the distinction drawn by the primary judge. He was in error in not following Old.

21 It is necessary, however, to deal with the bases on which it was said that Old was incorrectly decided.

(a) Old misconstrued r 20.26

22 At the relevant time r 20.26 was in the following terms:

"(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, except where it states that it is a verdict for the defendant and that the parties are to bear their own costs.

(3) A notice of offer:

(a) must bear a statement to the effect that the offer is made in accordance with these rules, and

(b) if the offeror has made or been ordered to make an interim payment to the offeree, must state whether or not the offer is in addition to the payment so made or ordered.

(4) Despite subrule (1), a plaintiff may not make an offer unless the defendant has been given such particulars of the plaintiff's claim, and copies or originals of such documents available to the plaintiff, as are necessary to enable the defendant to fully consider the offer.

(5) If a plaintiff makes an offer, no order may be made in favour of the defendant on the ground that the plaintiff has not supplied particulars or documents, or has not supplied sufficient particulars or documents, unless:

(a) the defendant has informed the plaintiff in writing of that ground within 14 days after receiving the offer, or

(b) the court orders otherwise.

(6) An offer may be expressed to be limited as to the time it is open for acceptance.

(7) The following provisions apply if an offer is limited as to the time it is open for acceptance:

(a) the closing date for acceptance of the offer must not be less than 28 days after the date on which the offer is made, in the case of an offer made 2 months or more before the date set down for commencement of the trial,

(b) the offer must be left open for such time as is reasonable in the circumstances, in the case of an offer made less than 2 months before the date set down for commencement of the trial.

(8) Unless the notice of offer otherwise provides, an offer providing for the payment of money, or the doing of any other act, is taken to provide for the payment of that money, or the doing of that act, within 28 days after acceptance of the offer.

(9) An offer is taken to have been made without prejudice, unless the notice of offer otherwise provides.

(10) A party may make more than one offer in relation to the same claim.

(11) Unless the court orders otherwise, an offer may not be withdrawn during the period of acceptance for the offer.

(12) A notice of offer that purports to exclude, modify or restrict the operation of rule 42.14 or 42.15 is of no effect for the purposes of this Division."

23 In considering the rule it is also necessary to have regard to rr 42.13A, 42.14, 42.15 and 42.15A. At the relevant time these rules provided as follows:

"42.13A(1) This rule applies if the offer concerned:

(a) is made by the plaintiff and accepted by the defendant, or

(b) is made by the defendant and accepted by the plaintiff.

(2) The plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made, unless:

(a) the offer states that it is a verdict for the defendant and the parties are to bear their own costs, or

(b) the court orders otherwise."

"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 or 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."

"42.15(1) This rule applies if the offer concerned is made by the defendant, but not accepted by the plaintiff, and the plaintiff obtains an order or judgment on the claim concerned as favourable to the plaintiff, or less favourable to the plaintiff, than the terms of the offer.

(2) Unless the court orders otherwise:

(a) the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and

(b) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, 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."

"42.15A(1) This rule applies if the offer concerned is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim concerned as favourable to the defendant, or more favourable to the defendant, than the terms of the offer.

(2) Unless the court orders otherwise:

(a) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and

(b) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, 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."

24 Two matters may be noted. First, r 20.26(2) goes further as a matter of language than simply excluding offers expressed to be inclusive of costs. The use of the phrase "exclusive of costs" suggests that what is intended is that a compliant offer will not deal with costs at all.

25 The reason for this is that the cost consequences are dealt with in the relevant subrules of r 42 to which I have referred above. Importantly, these rules not only deal with the cost consequences of non-acceptance of an offer but also the cost consequences when an offer is accepted. Although r 42.13A(2) provides for an order for costs in favour of the plaintiff after the time the offer is accepted, the court has power to make a contrary order. An offer providing for payment of costs removes that residual discretion. It is thus inconsistent with the scheme for the making of offers of compromise laid down by the rules at the relevant time. Whilst it would not be of significance in all cases, there are instances where a plaintiff or defendant may wish to argue that the costs order which generally follows acceptance of an offer, is not the appropriate order. An offer containing a term that the offeree pay the costs of the offeror takes away that right which was part of the scheme of the rules at the time.

26 This approach is consistent with authority. In Dean v Stockland Property Management Pty Ltd (No 2) supra the Court made the following remarks:

"[25] However, there are also arguments for the meaning that an offer of compromise can not involve costs at all.

[26] The governing reasoning is inconsistency between an offer of compromise and the provisions of the rules with respect to costs. An offer of compromise involving costs will not necessarily be of no effect by force of r 20.26(12), because the costs will not necessarily be inconsistent with a plaintiff's (or defendant's) entitlement to an order for costs. But even in cases not involving payment of a money sum, such as the present case, there will be the inconsistency. And the language of the rule does not confine exclusivity to only some kinds of offers of compromise. The phrase "exclusive of" means "excluding, not compromising of"; "that excludes"; or "so as to exclude" (Colonial Mutual Life Assurance Society Ltd v Australian and Overseas Telecommunications Corporation Ltd (1993) ANZ Conv R 347). On a natural reading, the requirement that an offer of compromise be exclusive of costs means that it may not involve costs at all.

...

[29] Rule 20.26(2) may have a broader operation than either inconsistency between an offer of compromise and the provisions of the rules with respect to costs, or the rationale to which we have referred, would justify. However, in the absence of submissions in opposition to the second respondent's reliance on r 20.26(2), we consider that we should follow Trustee for the Salvation Army (NSW) Property Trust & Anor v Becker (No 2). The offer was of no effect for the purposes of the offer of compromise regime under the UCPR."

27 Although the Court did not have to finally decide the issue because the point was not taken, it expressed a preference for the construction to which I have referred.

28 For these reasons, in my opinion, the conclusion reached by this Court in Old was correct.

(b) Inconsistency with Vieira v O'Shea (No 2)

29 The relevant passages in Vieira v O'Shea (No 2) supra said to give rise to inconsistency with Old are as follows:

"[7] In written submissions in support of the motion, the appellant conceded that the offer did not comply with the UCPR because it was not "exclusive of costs". It is true that the offer was not stated to be exclusive of costs: the statement as to costs could have been understood as indicating that the offer was indeed not inclusive of costs, but was otherwise otiose as the same costs consequences followed from the application of the rules. (Somewhat opportunistically, the solicitors for the first respondent submitted that a later offer of compromise did not comply with the rules because it was not stated to be exclusive of costs and therefore should be presumed to be inclusive.) The UCPR are to be construed by reference to their apparent purpose. A mere reference to costs in an offer otherwise compliant with Part 20, Div 4 will not take the offer outside the rules unless the reference operates inconsistently with the relevant costs rule: Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141, (Giles JA, Handley AJA, Whealy J) at [26]-[29]. The offer, if accepted, entitled the offeror to his costs: the offer did not seek to vary the effect of UCPR r 42.13A.

...

[18] The first respondent disputed that the offer complied with the relevant rule for three reasons. First, it was said that the offer failed to state that it was 'exclusive of costs', as it was required to be by UCPR 20.26. However, the rule does not require such a statement, but merely requires that the offer 'must be exclusive of costs': r 20.26(2). The evident purpose of that requirement is that the effect of the offer, whether accepted or rejected, will be to engage the relevant costs rule in Pt 42. The offer did not purport to be inclusive of costs and there was no reason to infer that it was, so as to invalidate its operation under r 20.26, with which it purported to comply.

[19] The purpose of requiring an offer under the UCPR to be exclusive of costs is to allow the rules with respect to costs to operate according to their terms. Thus, where an offer is made by a plaintiff and not accepted by the defendant and the plaintiff obtains a judgment which betters the offer, the plaintiff is entitled to an award of costs assessed on the indemnity basis from the day following the day on which the offer was made, unless the Court otherwise orders: r 42.14. With respect to appeals, the rules merely pick up with appropriate modifications the provisions of Pt 20, Div 4: r 51.47. The costs rules in Pt 42, Div 3, are also subject to modifications: r 51.48."

30 What is apparently relied on to demonstrate inconsistency is the statement by the Court that a mere reference to costs in an otherwise compliant offer will not take the offer outside the rules unless the reference operates inconsistently with the relevant costs rules. An offer providing for the payment of costs as agreed or assessed does operate inconsistently because it removes the court's discretion contained in r 42.13A.

31 There is a material difference between an offer expressly making provision for costs as in Old and the present case, as compared with an offer which is silent as to costs. As a matter of language an offer which is silent as to costs is exclusive of costs. In these circumstances, the relevant rule in UCPR Part 42 would take effect according to its terms. There is no inconsistency between Old and Vieira v O'Shea (No 2) either in the reasoning or in the result.

(c) Inconsistency with earlier Court of Appeal decisions

32 The respondent submitted that Old was inconsistent with a number of earlier Court of Appeal decisions which held that offers of compromise were valid notwithstanding they contained terms providing for payment of costs to be agreed or assessed. However, of the cases referred to, the issue was not raised at all in Ambulance Service of New South Wales v Worley (No 2) [2006] NSWCA 236; (2006) 67 NSWLR 719; Macquarie Radio Network Pty Ltd v Arthur Dent (No 2) [2007] NSWCA 339; San v Rumble (No 2) [2007] NSWCA 259; (2007) 48 MVR 492; Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2008] NSWCA 85 or the Uniting Church v Takacs (No 2) [2008] NSWCA 172.

33 It remains to say something about two other cases decided by the Court of Appeal. An additional case to those referred to in par [32] above said by the respondent to be inconsistent with Old was Erect Safe Scaffolding (Australia) Pty Ltd v Sutton (No 2) [2008] NSWCA 289. In that case at par [25] Giles JA, with whom Basten JA and McClellan CJ at CL agreed, expressly alluded to the fact that no submission was made that the offer was ineffective because it was "plus costs as agreed or assessed". In the circumstances this case does not provide any support for the contention that Old was incorrect.

34 Although not relied upon by the respondent in support of the contention that Old was incorrect, it should be noted that Barakat v Bazdarova [2012] NSWCA 140 is not inconsistent with Old. The offer was to settle a case after trial and prior to the hearing of an appeal. The relevant offer was in the following terms:

"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".

35 The offer was thus to settle an appeal exclusive of costs of the appeal. The fact that it included costs of the proceedings appealed from did not take it out of the ambit of r 20.26. Tobias AJA, with whom Whealy JA and I agreed, expressly noted that the offer to settle proceedings must be exclusive of costs of the proceedings sought to be settled. His Honour made the following remarks:

"[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."

36 These remarks could not be said to be in any way inconsistent with Old.

37 There are thus no cases in this Court inconsistent with Old where the point was raised. To the contrary, those cases which touch upon the question expressly left it open or proceeded in a manner consistent with Old.

38 It follows that the supposed inconsistency between Old and earlier cases in the Court of Appeal does not provide grounds for stating that Old was incorrectly decided.

The first instance cases

39 Although it is strictly unnecessary to say anything about the first instance cases which reached a result contrary to Old, as reliance was placed upon them some brief comment should be made.

(a) The first case was Rail Corporation NSW v Vero Insurance Ltd (No 2) [2012] NSWSC 926. In that case the trial judge concluded that the decision in Old was inconsistent with Vieira v O'Shea (No 2) supra and the other Court of Appeal cases to which I have referred. As I have indicated that conclusion is incorrect. His Honour then concluded that, having regard to the underlying principles of statutory construction and the purpose of the legislative intention in facilitating compromise, "exclusive of costs" should be taken only to prohibit offers inclusive of costs. The difficulty is that is not what the rule says and it ignores the costs regime in UCPR Part 42.

So far as the purposive construction is concerned, the purpose of the rule is undoubtedly to encourage settlement. In doing so it has laid down a particular regime for offers of compromise. The purpose of the rule does not provide a basis to extend it beyond that regime.

(b) The decisions in Milich v The Council for the City of Canterbury (No 3) [2012] NSWSC 1280 and Ziliotto v Dr Hakim (No 2) [2012] NSWSC 1079 adopted the reasoning in Rail Corporation NSW v Vero Insurance Ltd (No 2) supra. For the same reasons, they were incorrectly decided.

(c) In Egan v Mangarelli (No 2) [2012] NSWSC 1226 the judge adopted the reasoning in Rail Corporation NSW v Vero Insurance Ltd (No 2) supra. To that extent, with respect, he was incorrect. He also suggested Old was not supported by the authority referred to by Meagher JA, namely, Dean v Stockland Property Management Pty Ltd (No 2) supra and Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194. As I indicated above, the first case does lend support to the conclusion reached by Meagher JA. Whilst the latter was referring to an offer "inclusive of costs" and was thus not directly relevant to the issue in the present case, that fact does not render it inconsistent with the conclusion reached by this Court in Old.

In those circumstances Egan v Mangarelli (No 2) supra was also decided incorrectly.

Conclusion on the appeal

40 For these reasons the primary judge was in error. The offer was not one compliant with r 20.26.

The Notice of Contention - The offer taking effect as a Calderbank offer

41 In Old, the majority held that an offer in similar terms could not take effect as a Calderbank offer and thus be taken into account on the question of the appropriate costs order to be made in the proceedings. Beazley P dissented on this point, concluding that a Calderbank offer provides a readily recognisable basis for a court to exercise its costs discretion on terms more favourable than that provided by r 42.1. She concluded that given the court's discretionary power as to costs and the desirability as a matter of policy of encouraging parties to settle litigation, the fact that a failed offer has not strictly conformed with a normal Calderbank offer does not preclude a court from considering whether it should exercise its discretion to make a costs order other than as provided by r 42.1: Old at [32]-[34]. In that case she found that such circumstances existed.

42 In the present case all that there was, were the offers of compromise, the second seeking a greater amount by way of settlement than the former. There was nothing in either of the offers to indicate that they were intended to have effect other than as offers under r 20.26. Further, there was nothing in the correspondence with which the offers were enclosed or in the surrounding circumstance to indicate they would be relied on in relation to the question of costs should a verdict more favourable than the offer be achieved. Such an indication, in my opinion, is the essence of a Calderbank offer.

43 That is not to say that the conduct of the parties during litigation, including the making of open offers, may not in certain circumstances be relevant to the appropriate manner in which a court's discretion as to costs should be exercised. However, an offer made expressly pursuant to r 20.26 will not of itself take effect as a Calderbank offer unless there is something in it or in the surrounding circumstances to indicate that it is proposed to be relied upon on the question of costs, irrespective of its effectiveness as an offer under r 20.26.

44 In the present case neither the correspondence nor the surrounding circumstances provide any such indication. It follows that the offer cannot take effect as a Calderbank offer.

Conclusion

45 In the result I would make the following orders:

1 Appeal allowed.

2 Orders 2, 3, 4 and 5 of the orders made by Adams J on 23 February 2012 be set aside.

3 Orders 1, 2, 3 and 4 of the orders made by Adams J on 31 May 2012 be set aside.

4 In lieu of the orders made by Adams J, order:

(a) The respondent's summons for leave to appeal from the Local Court of NSW be dismissed.

(b) The respondent to pay the appellant's costs of the proceedings.

5 The respondent to pay the appellant's costs of the application for leave to appeal and the appeal.

46 BEAZLEY P: I agree with Bathurst CJ and with the additional remarks of Barrett JA.

47 McCOLL JA: I agree with the Chief Justice's reasons and the orders his Honour proposes. I also agree with Barrett JA's reasons.

48 BARRETT JA: The matters arising on this appeal and the relevant facts and provisions appear from the judgment of Bathurst CJ and need not be repeated. In the discussion that follows, I refer to the parties according to the roles they played in the Local Court proceedings, so that the present respondent is described as "the plaintiff" and the present appellant as "the defendant". In addition, I note that the appeal falls to be decided by reference to the provisions of the Uniform Civil Procedure Rules 2005 set out in the judgment of the Chief Justice, unaffected by Uniform Civil Procedure Rules (Amendment No 59) 2013 which took effect on 7 June 2013. I refer to those unamended provisions as if they were still in force.

49 In my respectful opinion, the primary judge fell into error in deciding that, although the plaintiff's offers of 15 April 2010 and 9 September 2010 contained a term concerning costs, each offer was, in substance, "exclusive of costs" (as referred to in r 20.26 of the Uniform Civil Procedure Rules) because the term concerning costs merely reflected the usual costs consequence of a plaintiff's success.

50 Division 3 of Part 42 of the rules (containing rr 42.13 to 42.17) prescribes various outcomes, in terms of costs, of "proceedings in respect of which an offer of compromise . . . is made under rule 20.26 with respect to a plaintiff's claim . . ." (these are the words in r 42.13). In such a case, several alternative outcomes as to costs are specified according to certain variables: which party made the offer, whether the offer was accepted and, if it was not, a comparison of the outcome in the proceedings with the terms of the unaccepted offer.

51 The rules operate on the clear basis that, if an offer is made under r 20.26, it is the provisions within Division 3 (including aspects of those rules that envisage modification by order of the court) - and those provisions alone - that will determine the position as to costs; and that this will be so both where the offer is accepted (r 42.13A) and where it is not accepted (rr 42.14, 42.15 and 42.15A).

52 An essential characteristic of any r 20.26 offer, therefore, is that it accommodate and abide by the regime with respect to costs laid down by Division 3. The requirement in r 20.26 that an offer be "exclusive of costs" dictates that essential characteristic. In providing that an offer must be "exclusive of costs", r 20.26 requires that the offer not attempt to deal with the matter of costs at all (that is, it must say nothing about that matter) and, in that way, leave the Division 3 rules to operate untrammelled by any apparent contractual qualification, supplement or contradiction.

53 I respectfully do not share the primary judge's view (at [8]) that the term of each offer requiring that the defendant pay the plaintiff's costs as agreed or assessed sought to introduce a harmless contractual qualification that reflected "the usual order as to costs to be made in the event of the plaintiff's obtaining judgment in its favour". Any such qualification would have cut across r 42.13A(2)(b) as it applied in consequence of acceptance of the offer.

54 It follows from what I have said about r 20.26 and the meaning of "exclusive of costs" that the construction of that rule adopted by this Court in Old v McInnes [2011] NSWCA 410 is, in my view, correct.

55 Of course, a party is quite free to make a settlement offer that seeks to deal not only with the substantive claim but also with costs. The significant point, for present purposes, is that such an offer can only be made outside the scheme based on r 20.26. If such a non-complying offer is not accepted, the fact that it was made and not accepted may be relevant to the exercise of the court's jurisdiction with respect to costs. Whether it is so relevant will depend in part on whether it has the characteristics associated with Calderbank v Calderbank [1975] 3 WLR 586.

56 This leads to the question raised by the notice of contention, that is, whether the purported r 20.26 offers made by the plaintiff should have been regarded as Calderbank offers. In my opinion, the answer is "no".

57 An offer is of the Calderbank type only if the maker of it is shown to intend that the fact of its non-acceptance may be deployed as a basis for seeking a special costs order in the event of that party's ultimate success in the action. Everything therefore depends on the message conveyed by the offer itself and any covering letter or other attendant circumstance.

58 The possibility that an ineffective or deficient offer purportedly made in accordance with the rules might take effect as a Calderbank offer has been recognised in several cases. It is sufficient to refer to Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 in which Ipp JA (with the concurrence of Mason P and McColl JA) said (at [27]):

"Calderbank offers are simply offers that do not comply with the relevant rules of court relating to the making of offers of compromise: Jones v Bradley (No 2) [[2003] NSWCA 58] (at [5]). Whether an offer, intended to be an offer under the Uniform Civil Procedure Rules but which is ineffective because it does not comply with those Rules, operates as a Calderbank offer, depends upon the intention of the offeror as revealed by the terms of the offer. The offer may disclose an intention that it should take effect only if it complies with the Uniform Civil Procedure Rules. On the other hand, it may disclose a general intent to make an offer, irrespective of whether it takes effect under the Uniform Civil Procedure Rules or no."" (emphasis added)

59 As this passage makes clear, the crucial matter is the manifested intention of the offeror. In the present case, the message conveyed by the making of each offer in the context in which it was made was that the plaintiff intended to have resort to the r 20.26 regime. In the absence of any intimation (for, example, in a covering letter) that the plaintiff intended its offer expressly founded on r 20.26 to have some secondary or alternative significance, the fact that the plaintiff's attempt to act under r 20.26 miscarried neither required nor justified any assumption of intended secondary or alternative significance. Faced with an offer that purported to have significance under r 20.26 (and not otherwise) but which, on its face, exhibited a feature inconsistent with that rule, the correct course for the defendant to adopt was to regard the purported offer as having no force at all. The defendant was not required to speculate about some alternative intention on the part of the plaintiff; nor was the defendant justified in doing so.

60 The plaintiff did not indicate, either expressly or by implication, that, if the offer did not take effect under the rules, the plaintiff still reserved the right to rely on it on the question of costs. An essential ingredient of a Calderbank offer was therefore absent: see Calderbank v Calderbank (above) at 596. The correct characterisation in this case corresponds with that which, in Old v McInnes (above), commended itself to Meagher JA (at [106]) and Giles JA (concurring).

61 Orders should be made as the Chief Justice proposes.

62 EMMETT JA: The question in this appeal is whether two offers made by the respondent, Dream Developments Pty Ltd (Dream Developments), to the appellant, Mr Samuel Whitney, were exclusive of costs, within the meaning of r 20.26(2) of the Uniform Civil Procedure Rules. A judge of the Court held that the offers were exclusive of costs. Mr Whitney has been granted leave to appeal from that decision.

63 Rule 20.26(1) provides that, in any proceeding, any party may make an offer to any other party to compromise any claim in the proceeding. Under r 20.26(2), an offer must be exclusive of costs, except where it provides that there is to be a verdict for the defendant and that the parties are to bear their own costs. The consequences of making such an offer differ according to whether or not the offer is accepted.

64 Rule 42.13A(2)(b) provides that, if the plaintiff makes an offer of compromise under r 20.26 that is accepted by the defendant, then the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, assessed on the ordinary basis, up to the time when the offer was made, unless the Court orders otherwise. Under r 42.14(1), if the offer is not accepted by the defendant, and the plaintiff obtains an order for judgment on the claim concerned no less favourable to the plaintiff than the terms of the offer, then the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim on the basis specified in r 42.14(2). Relevantly for present purposes, r 42.14(2) provides that the costs are to be assessed on the indemnity basis as from the beginning of the day following the day on which the offer was made, and on the ordinary basis up to that time.

65 Dream Developments commenced a proceeding against Mr Whitney in the Local Court of New South Wales. It claimed $15,000 for the provision of goods and services under a building contract, plus interest and costs. Mr Whitney resisted the claim on the basis that Dream Developments had failed to perform certain works and services or supply goods in accordance with the contract. He claimed a set off of $14,882. He also filed a cross-claim for $9,277 in respect of repairs and rectification work that he claimed had been undertaken.

66 Dream Developments made two offers to Mr Whitney (the offers). The first was made on 15 April 2010. The second was made on 9 September 2010. Both offers provided that Mr Whitney pay Dream Developments' costs as agreed or assessed. Neither of the offers was accepted.

67 Ultimately, the Local Court entered judgment for Dream Developments on its claim against Mr Whitney for the sum of $14,000, less $1,000. The Local Court also entered judgment on the cross-claim for $1,000. It is common ground that that is a result no less favourable to Dream Developments than its offer of 15 April 2010. However, the Local Court determined that that offer was not made under r 20.26(2) because it was not exclusive of costs.

68 A judge of the Common Law Division of the Court granted leave to appeal from the decision of the Local Court and subsequently ordered that the costs order made by the Local Court be quashed. His Honour ordered Mr Whitney to pay Dream Developments' costs in the Local Court as agreed or assessed on the ordinary basis up to 15 April 2010 and thereafter on the indemnity basis.

69 The question in the appeal is whether the inclusion as a term of the offer of 15 April 2010 that Mr Whitney pay Dream Developments' costs as assessed or agreed has the consequence that the offer was not exclusive of costs within the meaning of r 20.26(2). Mr Whitney contends that neither of the offers was exclusive of costs because each provided that Mr Whitney should pay Dream Developments' costs as assessed or agreed. He contends that, to satisfy the requirements of r 20.26(2), an offer must exclude costs in the sense that the offer must not involve costs at all.

70 Rule 20.26(1) refers to an offer "to compromise any claim in the proceedings". On one view, Dream Developments' claim for costs was separate from its claim for money owing. On that view, each of the offers was an offer by Dream Developments to Mr Whitney to compromise its claim for money owing for the provision of goods and services. The first of the offers was to settle the claim for money owing for $12,000. The second of the offers was to settle that claim for $14,000.

71 On that view, each offer to compromise the claim for money owing was exclusive of costs. That is to say, the reference to the requirement that Mr Whitney pay Dream Developments' costs as assessed or agreed was quite independent of the offer to compromise the claim for money owing for the provision of goods and services. There was no element of compromise in the statement that Dream Developments required Mr Whitney to pay its costs as assessed or agreed. In so far as it had a separate claim for costs, there was no offer to compromise that claim.

72 Where a plaintiff offers to compromise a proceeding by specifying a sum of money that it would accept in full settlement of its claim, there are various possibilities as to costs. There has been a long-standing practice whereby offers of compromise or settlement are expressed to be made "inclusive of costs" or "exclusive of costs". Where an offer is made inclusive of costs, a figure is proposed under which the plaintiff will receive that figure and will also pay its costs out of that figure. Where an offer is made exclusive of costs, the defendant agrees to pay an additional amount in respect of the plaintiff's costs. That additional amount may be the subject of a specific offer. Alternatively, the defendant may agree to pay costs in such amount as is agreed, or such amount as the plaintiff is determined on assessment to be entitled to receive. Such an offer is clearly an offer exclusive of costs, in that the plaintiff knows that it will receive the amount of the offer and an additional amount for costs.

73 If the offer were inclusive of costs, the plaintiff would not be entitled to any further amount for costs. Such an offer may indicate that part of that sum was intended to be attributable to costs. If the offer were that each party pay its own costs, the net effect would be no different from the first. However, such an offer may indicate that the sum offered was to be in settlement of the claim, without any part being attributable to costs. Thirdly, the offer might provide that the defendant is to pay the plaintiff's costs as agreed or assessed. That would require agreement between the parties as to the costs or determination of the amount for costs by a third party. Finally, the offer might be completely silent as to the question of costs. Unless r 42 applied, the offer would have the same effect as if the offer were inclusive of costs , namely, that the defendant would pay the amount specified and would pay no separate amount towards the plaintiff's costs. However, if r 42.13A or r 42.14 were applicable, the plaintiff would be entitled to costs as determined in accordance with those rules.

74 Some significance must be attached to r 42.13A. Thus, there is an assumption that, in the ordinary course, if an offer made under r 20.26 is accepted, the plaintiff will be entitled to costs up to the date of acceptance. However, under r 42.13A(2)(b), there is a residual discretion for the Court to order otherwise.

75 If an offer of compromise were made by a plaintiff that did not satisfy the prerequisites of r 20.26, acceptance of the offer would give rise to a binding and enforceable agreement, unless the language of the offer made it clear that compliance with r 20.26 was a condition precedent to the creation of an enforceable obligation. Absent such a condition, the making of an offer under which the defendant was to pay the plaintiff's costs as agreed or assessed would involve departure from the scheme contemplated by r 42, since it would oust the residual power of the court to order otherwise under r 42.13A(2)(b). That is sufficient basis for concluding that the meaning of the phrase "exclusive of costs" that is suggested above is displaced. That is to say, the offers were not made under r 20.26 and r 42 was not applicable.

76 In its Notice of Contention, Dream Developments also argued that the offers should be taken into account in the exercise of discretion as to costs, notwithstanding that they were not made under r 20.26. The fact that an offer is made and not accepted may bear on the exercise of the court's discretion as to costs, even if the offer is not made under r 20.26 (see Calderbank v Calderbank [1975] 3 WLR 586). In that regard, a significant matter is the intention of the offeror as manifested in the relevant offer.

77 The form of the offers made clear that it was intended to have resort to the regime described above. There was nothing in the offers or their covering letters to suggest that Dream Developments intended that the offers might have been intended to have some secondary or alternative significance. In circumstances where the offers did not comply with r 20.26, Mr Whitney and those advising him were entitled to assume that the offers were not intended to have any other significance. There was no need to speculate whether they were intended to have any effect other than under the regime described above.

78 I have read the reasons of the Chief Justice in draft form. I agree with the orders proposed by his Honour, for the reasons given by him.

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Decision last updated: 25 June 2013