Supreme Court New South Wales

• Medium Neutral Citation: Bailey v Director General, Department of Natural Resources (formerly known as Department of Land and Water Conservation) (No 2) [2014] NSWSC 1227
• Hearing dates: Dealt with on the papers
• Decision date: 05 September 2014
• Before: Fullerton J

Decision

1. The plaintiffs pay the defendants' costs of the proceedings on an ordinary basis from 10 November 2006 to 13 May 2011.

2. The plaintiffs pay the defendants' costs of the proceedings on an indemnity basis on and after 14 May 2011, including all reserved costs and costs ordered to be costs in the cause, but that the costs orders made on 21 April 2011, 31 August 2011 and 17 May 2013 be undisturbed.

• Catchwords: PROCEDURE - costs - offer of compromise
• Legislation Cited: Civil Liability Act 2002 (NSW); Civil Procedure Act 2005 (NSW); Limitation Act 1969 (NSW); Uniform Civil Procedure Rules 2005 (NSW); Water Act 1912 (NSW)
• Cases Cited: Bailey v Director-General Department of Energy Climate Change and Water [2010] NSWSC 979; Bailey v Director General, Department of Natural Resources (formerly known as Department of Land and Water Conservation) [2014] NSWSC 1012; Dean v Stockland Property Management Ltd (No 2) [2010] NSWCA 141; Leichhardt Municipal Council v Green [2004] NSWCA 341
• Category: Costs
• Parties: Bruce Clyde Bailey (1st Plaintiff); Janet Beatrice Shafik-Bailey (2nd Plaintiff); Director General, Department of Natural Resources (formerly known as Department of Land and Water Conservation) (1st Defendant); Water Administration Ministerial Corporation (2nd Defendant); State of NSW (3rd Defendant)
• Representation: Counsel: PE King/FA Sinclair (Plaintiffs); NJ Williams SC/IL Harvey/JL Roy (Defendants); Solicitors: Hicksons Lawyers (Plaintiffs); Crown Solicitor's Office (Defendants)
• File Number(s): 2006/267230

Judgment

1 HER HONOUR: On 25 July 2014 I gave judgment for each of the defendants and formally reserved the question of costs. On that date I also gave directions for the filing and serving of submissions directed to that question and any evidence upon which the parties intended to rely. I made it clear at that time that it was not my intention to receive oral submissions. It did not subsequently become necessary that I do so.

2 I received the defendants' submissions on 11 August 2014. An affidavit from Ms Jane Graham, a solicitor employed in the Crown Solicitor's Office with carriage of the proceedings on behalf of the defendants, was annexed. That affidavit, in turn, annexed a schedule of costs orders made in a number of interlocutory applications and hearings from early 2007 up to and including 17 May 2013, before the proceedings commenced before me on 15 July 2013. Some costs orders were made in favour of the defendants on the usual party-party basis (the respondents in proceedings in the Court of Appeal and on an application for special leave to the High Court), one made in favour of the plaintiffs, and the balance were either reserved or ordered to be "costs in the cause".

3 Ms Graham's affidavit also annexed correspondence dated 13 May 2011, forwarded by way of facsimile transmission to the plaintiffs' solicitors on that date, enclosing, by way of service, what Ms Graham describes in her affidavit as an offer of compromise pursuant to r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"). A copy of the letter was also forwarded by means of document exchange. No response to the offer of compromise was received.

4 In her affidavit Ms Graham estimates the costs incurred by the defendants as at 13 May 2011 at approximately $500,000 (excluding the specific costs orders to that date). There was no challenge to that estimate.

5 By written submissions filed on 11 August 2014, the plaintiffs contend that the offer of 13 May 2011 is not a compliant offer of compromise within the UCPR as they stood at that time. They also submitted that it was not a genuine or reasonable offer of compromise and that r 42.15A was not engaged for that reason. The plaintiffs advanced the further submission that there should be no costs order as concerns the issue of damages or the defence of illegality first raised in the defendants' amended defence filed on 4 May 2011.

6 In the defendants' submissions in reply, each of the bases upon which the plaintiffs resist the order for costs proposed by the defendants in their filed submissions (including ordinary costs from 10 November 2006 to 13 May 2011 and indemnity costs on and after 14 May 2011, and all reserved costs and costs ordered to be costs in the cause before that date), are said to be both unsupported by authority and without any force or substance given the manner in which the plaintiffs conducted their case.

The defendants' offer of compromise

7 Rule 20.26 of the UCPR provides that in any proceedings a party, by notice in writing, may make an offer to any other party to compromise any claim in the proceedings on specified terms. It also provides that an offer under this rule may propose a judgment in favour of the defendant with no order as to costs such that the parties are each to bear their own costs. In Dean v Stockland Property Management Ltd (No 2) [2010] NSWCA 141, the Court of Appeal noted that the form of the rule under consideration here expressly provides that an offer must be exclusive of costs, "except where it states that it is a verdict for the defendant and the parties are to bear their own costs". An offer in these precise terms was made to the plaintiffs by the defendants on 13 May 2011. The offer read as follows:

OFFER OF COMPROMISE

In accordance with rule 20.26 of the Uniform Civil Procedure Rules 2005, the defendants offer to compromise these proceedings on the following terms:

1. Verdict for the defendants

2. The parties are to bear their own costs.

This offer of compromise is open for acceptance for 28 days from the date on which the offer is made.

8 The offer of compromise was annexed to a covering letter which noted that, for reasons of abundant caution (or, as Ms Graham expressed it, "for avoidance of doubt") the offer did not effect any final costs orders which had, to that date, been ordered in favour of either party. Contrary to the plaintiffs' submission, Ms Graham's letter did not qualify the offer of compromise such that it became an offer inclusive of the defendants' costs (save only where there was a specific costs order in their favour) and did not disengage the special indemnity costs rule provisions in Part 42 of the UCPR. The letter did no more than confirm the extant rights of the parties at the time of the offer. To put it another way, the offer of compromise did not contemplate that further orders would need to be applied for so as to vacate existing costs orders which, pursuant to r 36.11 of the UCPR, are taken to be entered when recorded in the Court's computerised records system. (It is not suggested that the existing costs orders were not so entered.) Were the offer of compromise to contain a further offer to consent to an order vacating previous costs orders, the offer would (or might) constitute a "special agreement" and would itself run the risk of being non-compliant with r 20.26(2), as it stood at 13 May 2011.

9 I am satisfied that the offer of compromise invokes the operation of r 42.15A of the UCPR. That rule provides:

(1) This rule applies if the offer is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim no less 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.

10 It cannot be disputed (and it is not) that the defendants have obtained a judgment on the claims made by the plaintiffs that is no less favourable to them than the terms of the offer of compromise. That being the case, the defendants are entitled to part of their costs on an indemnity basis unless I determine otherwise. The onus is on the plaintiffs to satisfy me that the rule should be displaced either because the offer was not a genuine offer of compromise or because discretionary considerations that inform the general exercise of the general costs power in s 98(1) of the Civil Procedure Act 2005 (NSW), including what have been described as the public and private purposes of the rule, require that it be displaced in whole or in part. While I am required to make an assessment of the merits of the offer and its characterisation as an offer of compromise at the time that it was made, I do so disregarding any evidence as to the subjective motivations or understanding of the parties, mindful that the purpose of the rule is to require the parties to give serious consideration to the settlement of proceedings as the issues clarify throughout the pre-trial phase of the litigation extending to the date of the offer. In this case, that pre-trial phase extended over many years after proceedings were commenced by the filing of the statement of claim in November 2006.

11 The plaintiffs submit that on a proper interpretation of the offer at the time at which it was made, it was nothing more than a "token offer", not made for the purpose of genuinely compromising the dispute but in the hope of obtaining a costs advantage prior to the defendants undertaking preparation of its case on the facts. It was further submitted that because the quantum of the offer was zero (in circumstances where, following a joint conference of the experts, later in the pre-trial proceedings there was general agreement as to quantum in a given amount), the offer was merely designed to trigger cost ramifications or sanctions and not made in a genuine effort to compromise the claim.

12 In Leichhardt Municipal Council v Green [2004] NSWCA 341, Santow JA drew a distinction between monetary offers of compromise by a party and a non-monetary offer by a defendant, posing the question "whether an offer by a defendant for judgment to be entered in its favour with each party to pay its own costs could constitute a genuine offer of compromise" (at [22]). Answering that question in the affirmative and acknowledging the principle that an offer "with no real element of compromise in it, which is designed merely to trigger the costs sanctions, will not be treated as a genuine offer of compromise", his Honour noted that a defendant (public authority) was in a different position from a plaintiff seeking damages:

[25] ... First, a defendant by definition is not the claiming party, and thus is not before the Court voluntarily. If it reasonably disputes liability and has a firm belief in the strength of its case, the best solution it can hope for - that the claim is dismissed - is not a monetary one. It will in economic terms be no better or worse off for its victory by way of successful defence, costs aside. Thus, unlike a plaintiff, it cannot discount its optimum return by way of compromise. It does not need the same sorts of incentive as a plaintiff does to compromise. It cannot, in the expectation of receiving $100,000, offer to compromise proceedings for $75,000 to reflect the vicissitudes and expenses of litigation.

[26] Therefore the only option for a defendant is not an attractive one; to 'buy off' the claim by offering to pay unmeritorious claimants a sum of money to discontinue the litigation. This practice, though it no doubt occurs, is not one which the law should encourage. The policy of the law is certainly to encourage genuine compromise, but it is no genuine compromise for a defendant to pay off a plaintiff or series of plaintiffs. Second, a defendant will know that if it loses on liability, the general rule will result in costs being awarded in favour of the successful plaintiff on a party and party basis (as set out in Division 6 of Pt 11 of the Legal Practitioners Act 1987). This means that a defendant already has less of an incentive to offer a compromise by conceding liability or quantum or both. As far as costs are concerned, a defendant who disputes liability and has a firm belief in the strength of its case will generally expect to reap no more than party and party costs in its favour. It will still be out of pocket to the tune of the difference between party and party costs and solicitor/client costs...

13 The defendants submit that by the time the offer was made the plaintiffs had undertaken an exhaustive process of discovery and were the moving party in successive (largely unsuccessful) interlocutory applications, such that by May 2011 they had sufficient information to enable a critical reassessment of their case on liability, the full parameters of which had been fully exposed by that time. The defendants emphasise that not only were the plaintiffs' joint causes of action misconceived (and the defendants' request that they be abandoned or re-pleaded ignored), the first plaintiff's malicious prosecution claim had no reasonable prospect of success or, at least, had no reasonable prospect of sounding in anything other than a judgment for nominal damages, it never having been made clear how his malicious prosecution claim, even if successful, could sound in damages referable to the loss calculated by the expert agronomists/accountants.

14 In addition, service of the amended defence filed on 4 May 2011 which raised, inter alia, the defence of illegality, dictated that a further re-evaluation of the plaintiffs' case be undertaken. The defendants submitted that it is not to the point that the defence did not, in the result, need to be decided. They also submitted that in the context of the issues in dispute at the trial on the question of liability, and the hearing time devoted to that dispute, the evidence and arguments bearing upon the defence of illegality did not occupy a great deal of Court time as a discrete issue and very little time in closing submissions (as to which see [546]-[556] of Bailey v Director General, Department of Natural Resources (formerly known as Department of Land and Water Conservation) [2014] NSWSC 1012). What is to the point, as I see it, is that a comprehensively pleaded defence was filed in response to an amended statement of claim much earlier in the proceedings, where a range of interrelated factual matters were admitted and where the primary allegations upon which liability for malicious prosecution and the economic torts was based were denied. The Limitation Act 1969 (NSW) defences to the economic torts were also pleaded as were specific statutory defences under the Civil Liability Act 2002 (NSW). I also accept that before the defendants' offer of compromise expired in July 2011, the defendants had largely complied with orders for the service of the evidence of lay witnesses upon whom they relied, and the expert reports of an agronomist and accountant. The fact that the evidence on each of those issues had not closed by that time is not the point.

15 I do not accept, as contended for by the plaintiffs, that in May 2011 the parameters of the dispute were uncertain or that the case presented at trial differed in any marked or material respect from the pleadings which were all but settled at that time. A further amended defence was filed on 31 August 2011, by leave, limited to pleading the statutory defence of good faith under the Water Act 1912 (NSW).

16 Further, the defendants submitted that under the terms of the offer and its timing it is patently clear that the plaintiffs would have no liability to pay the defendants' costs accumulated from the commencement of proceedings in 2006 (other than the unqualified costs orders in their favour) and they would continue to have the benefit of the costs order made in their favour by Studdert AJ on 6 September 2010 in respect of the defendants' (unsuccessful) motion for a split trial on the issues of liability in damages. As of 13 May 2011, as noted above, the defendants' costs were substantial, a matter which must have been well known to the plaintiffs on advice from their legal representatives. No issue has been taken with the costs estimate.

17 While I am not required to find that the plaintiffs' failure to accept the offer of compromise was unreasonable (or that it was reasonable to reject it), the plaintiffs' failure to explain why the offer was considered unacceptable supports a finding, by inference, that the plaintiffs made a considered and informed decision to undertake the risk of continuing with the litigation.

18 In the exchange of submissions the plaintiffs' contend that the defendants' conduct viz the issue of damages and the defence of illegality disentitles them from recovering the costs referable to those issues. In so far as the issue of damages is concerned I do not regard it as either appropriate or necessary to embark upon any dissection of the various arguments advanced by the plaintiffs in circumstances where, before the extended date on which the acceptance of the offer of compromise expired (29 July 2011), Studdert AJ had dismissed the defendants' notice of motion for orders separating the issues of damages and liability (Bailey v Director-General Department of Energy Climate Change and Water [2010] NSWSC 979) on the plaintiffs' urging. In the result, the damages component of the plaintiffs' claim for the economic torts remained in issue from that date until it was settled in the course of the hearing after the expert agronomists had given their evidence in concurrent session. Although the plaintiffs indicated on 30 May 2008 their intention to seek orders for a split trial (with quantum to be heard separately from liability), they subsequently resiled from that position. Otherwise than noting the lengthy exchange of correspondence bearing upon that issue in Ms Graham's affidavit of 18 August 2014, and what might be, on one view of it, a constantly shifting position on the issue by the plaintiffs, there is no utility in setting out the lengthy exchange of correspondence or to revisit the considerations that may have influenced the plaintiffs to resist the orders sought by the defendants. I am satisfied, however, that the defendants awaited service of the plaintiffs' initial evidence on damages to assess whether there was a clear demarcation between liability and damages and that their application for a separate trial on liability was informed by service of that material. Because Studdert AJ declined to make the order sought by the defendants, they had no choice but to prepare for a trial on both liability and damages. As I see it, the fact that quantum was agreed in the course of the hearing, after the testing of the evidence of the experts in a concurrent session directed at identifying the points of agreement and disagreement, was simply an incident of that forensic exercise. The fact that after the plaintiffs had closed their case the defendants relied upon part only of the evidence that had been served is yet another incident of the forensic judgment of senior counsel in assessing the case the defendants had to answer at that time.

19 In considering whether the plaintiffs have persuaded me that the indemnity costs rule should be displaced, I do not propose to entertain the most recent description of the defence of illegality by plaintiffs' counsel as "tenuous" or to dilate on the issues to which the defence may have given rise were it to have been necessary to consider it. The plaintiffs' contention that raising the defence was contrary to the public interest or that it has proved harmful to the farming community is either unfounded, argumentative and/or irrelevant. The submission that the defence of illegality "changed the landscape of the proceedings" or that it caused the proceedings to "go off at a tangent" is a very considerable overstatement of the position as at May 2011. True it is that the further amended defence called for very careful consideration of the issue, but, as I have noted above, by May-June 2011 there was a clear joinder of issue on each of the causes of action pleaded, each of which failed because the first plaintiff failed to prove his malicious prosecution claim and/or because the economic torts suffered from evidential and legal deficiencies. The defence of illegality would not have been unimportant should it have arisen for consideration but the fact that it did not is no reason to deprive the defendants of the costs of preparing for it, even less to require the defendants to pay the plaintiffs' costs of doing the same.

20 I am satisfied that by July 2011 (the extended date for acceptance of the offer) the plaintiffs could have been in no doubt as to the defendants' position on the issues of damages and, to the extent that the plaintiffs made out a case on liability for any of the economic torts, the defences that would be advanced. In particular, they could have been in no doubt that their own evidence raised a question as to whether Mr Bailey had a legal right or entitlement to harvest floodwaters and that with the defence of illegality pleaded, they would need to be in a position, if necessary, to meet that case. I am satisfied that the offer of compromise was a genuine and reasonable offer and that there are no discretionary considerations that displace the operation of the rule allowing the defendants indemnity costs from the date of the offer.

Orders

21 Accordingly, I make the following orders:

1. The plaintiffs pay the defendants' costs of the proceedings on an ordinary basis from 10 November 2006 to 13 May 2011.

2. The plaintiffs pay the defendants' costs of the proceedings on an indemnity basis on and after 14 May 2011, including all reserved costs and costs ordered to be costs in the cause, but that the costs orders made on 21 April 2011, 31 August 2011 and 17 May 2013 be undisturbed.

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Decision last updated: 22 September 2014