Offer of Compromise Silent as to Costs – Accepted liability for Costs – Beware of consequences

28/03/2022

Parties should try and settle disputes.  Part of the avenues available offers are “without prejudice” offers including offers of compromise.  Courts encourage the settlement of disputes in particular, at an early stage when the parties are aware of the issues and the nature of the disputes.  The Supreme Court in the case of Clarkes Pty Ltd [2019] NSWSC 1693 (29 November 2019) before Slattery J, provides insight into some of the issues that can arise between the parties who attempted to settle the matter which was considered by the Court.

One way in which parties involved in a Court case is by an Offer of Compromise pursuant to the Rules of the Court relating to offers of settlement which are objectively reasonable, in circumstances where one party makes an offer and the other side does not accept the offer and the offering party then proceeds to a hearing, and obtains a “better result” from the Court.  In those circumstances, a higher proportion of costs usually would be ordered than would otherwise be the case.

Those rules also have provisions dealing with costs that follow from acceptance of an offer of compromise made in accordance with those Rules for example, where thereafter is silent as to costs.

Uniform Civil Procedures r. 42.13A, provides as follows:

“Where offer accepted and no provision for costs”

1. This rule applies if the offer –
   1. is accepted by the Offeree; and
   2. does not make provision for costs in respect of the claim.
2. If the offer proposed a Judgment in favour of the Plaintiff in respect of the claim, 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.
3. If the offer proposed a Judgment in favour of the Defendant in respect of the claim (including a dismissal of a summons or a statement of claim), the Defendant is entitled to an order against the Plaintiff for the Defendant’s costs in respect of the claim, assessed on the ordinary basis up to the time when the offer was made.”

In a decision of Justice Slattery in the Supreme Court of New South Wales, in the matter of Clarkes Pty Ltd [2019] NSWSC 1693 (29 November 2019), the background facts were:

• A company was wound up, it being the corporate entity through which two brothers had conducted an accounting partnership.
• Prior to the liquidation, the Plaintiff and First Defendant had acted as co-directors of the company.
• A Liquidator was appointed to the company. After the liquidation, the Plaintiff (one of the brothers) took an assignment from the Liquidator of the company’s causes of action against the First Defendant (the other brother).  These causes of action were for breach of director’s duties and breach of fiduciary duty.  The claim stemmed from the alleged misappropriation of the company’s funds by the First Defendant and misuse of his director’s position.
• When the proceedings were commenced in the Supreme Court initially the sum of $87,000 was claimed which was ultimately amended to $105,000.
• The First Defendant denied the allegations and the matter was set down for hearing.

Settlement negotiations then took place as follows:

• First, the First Defendant offered to pay the Plaintiff the Settlement Sum of $50,000 albeit not offering to have Judgment entered against him.
• That offer was in turn met by an offer of compromise by the Plaintiff, offering to compromise the whole of the proceedings for a Judgment against the First Defendant in the sum of $10.
• The offer of compromise did not make provision for costs in respect of the claim.
• However the solicitors for the First Defendant knew the general rule as set out above as to costs, and made enquiry as to the level of the Plaintiff’s costs prior to a decision being made as to acceptance.  They were informed that those costs may be as much as $109,031.85: [9].
• The First Defendant then accepted the offer of compromise in the sum of $10.

What was the consequential Costs Order?

The Plaintiff moved the Court by Motion for entry of a Judgment for $10 which the Court then entered.  The Plaintiff also in his Motion sought an order that the Defendant pay the Plaintiff’s costs in respect of the claim up until the day before acceptance of the offer.

The First Defendant opposed the Order for Costs and relied on an argument that Rule 42.34 also applied which relevantly provided that in a case of the type brought, where the Judgment obtained is less than $500,000 and the Plaintiff would be entitled ordinarily to an Order for Costs, such an Order for Costs:

“may be made, but will not ordinarily be made, unless, the Supreme Court is satisfied that….For proceedings that could have been commenced in the District Court, the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted….”

The Court proceeded to determine the matter as follows:

• It found that this was a case where the proceedings could have been commenced in the District Court, falling within the District Court’s equitable jurisdiction conferred by s134(h) of the District Court Act: [22].
• It found that although commencement of the matter in the Supreme Court was appropriate, the proceedings should have been transferred to the District Court before trial: [30].  In finding this, it referred to an apparent difference between District Court costs and Supreme Court costs, observing that if the proceedings had been transferred to the District Court, “that would have stopped the Supreme Court levels of costs being incurred”: [32].
• Having found those two matters, the Court considered it appropriate to exercise its discretion under Rule 42.34 to make an order for costs capped at $40,000.

Although the basis for the Court’s conclusion at [32] (differentiating between District Court and Supreme Court costs) is not immediately apparent, the decision nonetheless serves as a salient reminder to properly appreciate the rules relating to offers of compromise and consequential orders for costs.

Watson & Watson Lawyers know that Offers of Compromise and Calderbank offers are important tools in either settling cases or obtaining better results for clients who are unable to settle them.  Please contact Richard Watson or his Personal Assistant Shereen Da Gloria if you wish to discuss your matter and if you wish to obtain advice how they could be deployed or responded to in a given matter.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011.