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Whitney v Dream Developments Pty Ltd: NSW civil procedure – offers of compromise

The value of a valid offer of compromise in litigation cannot be understated. It may turn a legal loss into a commercial win or at the very least serve to focus the attention of the parties on the settlement of a dispute at an early stage and before significant costs are incurred.

On 25 June 2013 in Whitney v Dream Developments Pty Ltd [2013] NSWCA 188, the New South Wales Court of Appeal handed down this important decision relating to the validity of offers of compromise. This decision only relates to offers of compromise made prior to 7 June 2013, before the amendments made by Uniform Civil Procedure Rules (Amendment No. 59) 2013 came into force.

Summary of decision

The court of appeal held that an offer of compromise is not valid if it includes a term about costs because it is in contravention of rule 20.26 of the Uniform Civil Procedure Rules 2005 (UCPR). The court of appeal decision overturned the decision of the primary judge and also found that an offer cannot be relied upon as a Calderbank offer if the offer does not state its intention to be relied upon as a Calderbank offer.

Background

The plaintiff brought proceedings against the defendant in the Local Court claiming $15,000 allegedly owing under a building contract. The defendant denied liability and cross-claimed $9,276.59 said to be the cost of rectifications works required because of the plaintiff’s alleged breaches of the building contract.

The offers

The plaintiff made two offers of compromise prior to the hearing. The first was dated 15 April 2010 and contained the following terms:

  1. The defendant to pay the plaintiff $12,000 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.

The second was dated 9 September 2010 and contained the following terms:

  1. Judgment for the plaintiff.
  2. The defendant to pay the plaintiff $14,000 within 28 days of written acceptance of this offer.
  3. The defendant to pay the plaintiff’s costs as agreed or assessed.
Local Court decision

The court found in favour of the plaintiff in the amount of $14,000 but made an order that the plaintiff pay “such sum as is necessary to replace the hearthstone or $1,000 whichever is the lesser” in relation to the cross-claim. The net amount awarded to the plaintiff was therefore at least $13,000 which was more than the offer of compromise made by the plaintiff on 15 April 2010. The plaintiff sought an order for indemnity costs. This application was rejected because the offer contained a term that the defendant pay the plaintiff’s costs as agreed or assessed and it was thus not compliant with rule 20.26 of the UCPR. The court found that the offer was not valid as a Calderbank offer either.

Appeal to Supreme Court

On appeal, the Supreme Court reversed the decision of the Local Court. The primary judge in the Supreme Court held that the offer of compromise was made exclusive of costs because it did not compromise on costs, and was therefore valid. Prior to the delivery of this judgment, the Court of Appeal handed down its decision in Old v McInnes and Hodgkinson [2011] NSWCA 410 (Old) in which the court held that offers containing a term that the offeree pay the offeror’s costs as agreed or assessed were noncompliant with r 20.26 because they were not exclusive of costs. The offer in Old was in these terms:

  1. Judgment for the plaintiff against the first defendant in the sum of $8,190.
  2. First defendant to pay the plaintiff’s costs as agreed or assessed.

A copy of the Old decision was given to the primary judge the day before he delivered his judgment. After judgment was delivered, the defendant filed a notice of motion to set aside the primary judge’s orders. The primary judge was referred to the passage of the Old judgment stating that an offer plus costs to be agreed or assessed was not compliant with
rule 20.26.

On 31 May 2012 the primary judge handed down a second judgment distinguishing this case from Old on the basis that in this case the offer was “cast in terms that made it clear that there was no offer that involved any compromise on the question of costs” (at [4]) whereas in Old the compromise payment could not be separately considered from the value of the offer to pay the costs.

Court of Appeal

In the Court of Appeal the defendant argued that the primary judge was bound to follow Old with respect to the validity of the offer of compromise, and the offer could not take effect as a Calderbank as a matter of construction.

On the other hand, the plaintiff argued that Old was incorrectly decided and should be overruled and that an offer containing terms “the defendant to pay the plaintiff’s costs as agreed or assessed” was an offer exclusive of costs. The plaintiff also sought to rely on the offer as a Calderbank offer if it was not a valid offer of compromise.

The Court of Appeal held that the primary judge was in error in not following Old. The Old offer was in terms relevantly identical to the offer in this case and there was no basis for a distinction to be made. The court found that rule 20.26(2) requires an offer to not deal with costs at all. This is because the subrules of rule 42 deal with the cost consequences of non-acceptance of an offer as well as the cost consequences when an offer is accepted. Rule 42.13A(2) provides for a costs order to be made in favour of the plaintiff after acceptance of the offer,  but importantly also contains a discretion for the court to make a contrary order.

Simply put, if an offer includes a term for payment of costs, it removes that residual discretion of the court, and is thus inconsistent with the system for making offers as envisioned by the rules. The Court of Appeal found that this approach is consistent with the decision in Dean v Stockland Property Management Pty Ltd (No 2)[2010] NSWCA 141.

In relation to the Calderbank submissions, the Court of Appeal found that there was nothing in the offer to indicate that the plaintiff intended to rely on the offer in relation to the question of costs should a verdict more favourable than the offer be achieved. This is a critical component of a Calderbank offer and the Court of Appeal determined that without it an offer cannot take effect as a Calderbank offer.

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