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The ups and downs of making or rejecting an offer of compromise

Feature Articles

Cite as: (2006) 80(9) LIJ, p. 40

The court has an unfettered discretion to vary or withhold the costs penalties for rejecting a realistic offer of compromise.

By Dr Sharon Korman

The court has an unfettered discretion to vary or withhold the costs penalties for rejecting a realistic offer of compromise.
By Dr Sharon Korman

The usual exercise of the court’s general discretion as to costs[1] is to order the unsuccessful litigant to pay the costs of the successful litigant. However, if the successful litigant rejected an offer of compromise which turns out to have been as favourable to it as the judgment of the court, the usual costs order is ousted by rls 26.08(2) and 26.08(3) of the Supreme Court (General Civil Procedure) Rules 2005.[2] 

The rules define the costs consequences of failure to accept an offer of compromise which complies with the requirements of O.26 as to form, content and timing. Yet the rules also give the court a discretion to order otherwise, that is, to refrain from penalising in costs the party on whom the offer of compromise was served[3] or to vary the costs order in some other way.

The costs penalties

Under r26.08(3), if a plaintiff rejects an offer that was more favourable to it than the judgment, then, unless the court otherwise orders, the defendant is entitled to an order against the plaintiff for its costs, taxed on a party/party basis, from the day after the offer was made. The result can be harsh for the plaintiff. Where the claim is small, much, if not all, of the plaintiff’s damages may have to be paid out in costs to the defendant. That should be an incentive to respond realistically to an offer.

Under r26.08(2), if a defendant rejects an offer that was less favourable to the plaintiff than the judgment, then, unless the court otherwise orders, the plaintiff is entitled to an order against the defendant for its costs, taxed on an indemnity basis (a higher basis than would ordinarily apply) from the commencement of the proceeding if the claim is for damages for death or bodily injury; or on a party/party basis up to and including the day of the offer and thereafter on an indemnity basis, in the case of any other claim.

It has been held that “an order otherwise should not be lightly made”.[4] Litigants who reject a good offer of compromise therefore do so at their peril.

The discretion

In exercising the discretion, the court must give effect to the purpose of the rules.[5] That purpose is:

  • to encourage the saving of private costs and the avoidance of the inherent risks of litigation;
  • to save the public costs incurred in unnecessary litigation; and
  • to indemnify the party which has made a well-judged offer against the costs thereafter incurred.[6] 

The power given under the rules to order “otherwise” confers on the court an unfettered discretion.[7]  “But the ordinary provision is expected to apply in the ordinary case.”[8] It follows that the discretion may be exercised only in an extraordinary case.

Hardship to the offeree

General factors which apply in most, if not all, cases, such as hardship to the offeree if the penalty is imposed or difficulty in predicting the result of a trial, will not support an exercise of the discretion. This was illustrated in Houatchanthara v Bednarczyk.[9] 

The defendant had made an offer ($10,000 plus costs) that was better than the judgment obtained by the plaintiff (damages totalling $9224). The defendant was therefore prima facie entitled to its costs from the day after the offer was served. The trial judge ordered “otherwise” and required the defendant to pay the plaintiff’s costs. Three reasons were given. First, the costs burden might have exceeded the plaintiff’s damages. Second, the judgment was only $750 less than the amount offered. Third, unless the court made a special order, the tortfeasor would profit from the damaged plaintiff.

On appeal it was held that these were not valid reasons for exercising the discretion. As Clarke JA explained: “Where an offer is made by a defendant to a plaintiff, the latter is put on notice that unless he or she accepts that offer, there is a significant risk that the order provided for by the rule may follow. In declining to accept the offer, the plaintiff undertakes the risk and the consequences that flow naturally from that risk. Where, as here, the claim was a very small one, the risk was very great indeed”.[10] 

Breach of rules affecting disclosure of information

If a party fails to disclose information which is relevant to the consideration of an offer or voluntarily discloses material which turns out to be misleading, then that is a special factor which might affect the exercise of the discretion if the offeree could not be expected to make a proper assessment of the offer at the time the offer was made.[11] 

In Simonovski v Bendigo Bank,[12] the plaintiffs obtained a judgment that was not more favourable to them than the terms of the defendant’s offer. Thus, the defendant was prima facie entitled to an order for party/party costs from the day after the offer was served, pursuant to r26.08(3). But the defendant had failed to serve expert evidence statements on the plaintiffs as required by r44.03(1) and had failed to make discovery of relevant documents at the time the offer was made.

Ashley J held that dilatory provision of expert witness statements and dilatory discovery were special factors justifying a decision to order “otherwise” in the particular circumstances of the case:

“There is no reason why an offeror which is in breach of rules or orders requiring it to provide information to the offeree should have the advantage of a Rule as to costs when the offeree by reason of the defendant’s breach is less equipped than it should be to evaluate the offer. The contrary is the case”.[13] 

Offers made early in the proceedings

When an offer is made early in the proceedings, there may be insufficient information available to the offeree to make a realistic assessment of the offer.

In Ross v Suncorp Metway Insurance Ltd,[14] the plaintiff’s offer was served with the statement of claim, when most of the medical reports pertinent to the litigation were not available to the defendant. This, coupled with the closeness of the amount awarded to the amount that had been offered, led the court to conclude that awarding the plaintiff indemnity costs was not appropriate.

Conversely, but on the same principle, Smith J in Freemantle’s Pastoral Pty Ltd v Hyett[15] refused to award the defendant indemnity costs, rather than the party/party costs stipulated in r26.08(3), because the defendant’s offer was made at the outset of the proceeding. Although the amount offered was double the amount awarded, in the circumstances known to the plaintiff at the time it was not unreasonable to reject the offer.

Offers made late in the proceedings

In claims for damages for death or bodily injury, a plaintiff who is entitled to the benefit of the rule will generally recover costs on an indemnity basis for the entire proceeding, even if the offer was served so late that it was unlikely that further substantial legal costs would be incurred at the trial. As Smith J noted in Broomhall v NRMA Insurance Ltd (No 2),[16] there are good policy reasons why this should be so:

“It must not be forgotten that there is still a considerable benefit in resolution of an injuries claim even at the late stage of this proceeding. It avoids the possibility of further costs and expenses being incurred in appeals and the taking up of court time in such appeals. In addition, provided there is a quiet response there is the potential to save the trial judge’s time and enable the trial judge to deal with other cases or other judgments or both. The writing of a judgment such as the judgment in the present case is a matter that takes many days of judicial time. Thus, there are still benefits to be had from an offer made at a late stage as this one was”.

But where the lateness of the offer is such that the offeree was not given a reasonable period of time to contemplate and respond to the offer, then that is a special factor which might warrant an exercise of the discretion.

In Connolly v Skratulja,[17] McDonald J was satisfied that sufficient time had been given, if only because the offer that was communicated at 9.50am on the last day of the trial had been rejected approximately one hour and 40 minutes later. All that had to be considered in assessing the offer was the claim for damages, which had been simplified and limited by the agreements reached about the various matters relevant to the assessment of pecuniary loss.

In Broomhall,[18] Smith J was also satisfied that the defendant had ample time to consider the offer. First, the case had proceeded as an assessment and agreement had been reached on several factual matters relevant to that assessment. Second, the defendant had highly competent counsel and instructing solicitors who could be expected to advise relatively quickly. Finally, the offer was a cautious and reasonable proposal and the defendant should have seen it as such. Here too, therefore, there was no basis to exercise the discretion in favour of the defendant.

Offeror’s carelessness leads to a retrial

Where a plaintiff fails to present appropriate and sufficient evidence at the first trial, and that unsatisfactory evidence is responsible for a second trial, then that could be regarded as a special circumstance warranting departure from the general rule. Authority for that proposition is Fagenblat v FGT Custodians Pty Ltd (No 2),[19] although Habersberger J did not need to decide the issue.

Inadequate preparation by offeror

In Simonovski,[20] Ashley J considered (without deciding) that there was merit in the submission that the defendant’s conduct in persisting with allegations of fraudulent conduct despite inadequate preparation might constitute special circumstances warranting an order “otherwise”. Counsel for the plaintiff instanced the late emergence of witnesses called by the defendant, some of whom had been located by the defendant after the plaintiff’s side had done the work.

Late changes in position by offeror

Where a defendant substantially amends its case after the period for acceptance of its offer has expired, such that the full dimensions of the plaintiff’s entitlement could not possibly have been foreseen before the hearing commenced, then that might warrant an exercise of the discretion in the plaintiff’s favour.[21]

Unreasonable rejection of offer

Imprudent or unreasonable rejection of an offer of compromise might constitute a special factor warranting departure from the general rule.

It was argued in Hyett[22] that the plaintiff’s rejection of the offer made at the outset of the proceeding was unreasonable or imprudent because:

  • the amount offered was twice the amount recovered by the plaintiff in damages; and
  • substantial legal costs would have been saved if the plaintiff had accepted the offer.

In these circumstances, it was submitted, an exercise of the discretion in the defendant’s favour, by way of an order that its costs be assessed at a higher level than the party/party costs envisaged in r26.08(3), would support the policy objectives of the rules on offers of compromise by encouraging acceptance of reasonable offers.

Smith J found that the rejection of the offer was not unreasonable or imprudent as a reasonable person in the plaintiff’s position at the time the offer was made was entitled to consider it was not being offered enough.[23] Accordingly, the defendant’s costs were taxed on a party/party basis. This suggests that unreasonable rejection of the offer, if established, might have warranted an exercise of the discretion to order otherwise.

Contrary legislative intent

The discretion to vary or withhold the usual costs order contemplates that regard will be had to any contrary legislative intent disclosed by any legislation. In Murphy v Harney,[24] the question was whether s93(12)(b)(ii) of the Transport Accident Act 1986 (Vic) disclosed such a contrary legislative intent.

The plaintiff sought damages for personal injuries arising out of a motor vehicle accident. Separate assessments were made for pecuniary loss damages, and pain and suffering damages. The latter could not be awarded as they were in a sum less than the statutory minimum for recovery under s93(7)(b).

Under s93(12)(b)(ii), if damages are assessed but cannot be awarded, each party bears its own costs in relation to that claim. But the defendant had made an offer of compromise which far exceeded the jury’s assessment of the plaintiff’s damages and so, under r26.08(3), was entitled to all of his costs from the day after the offer was made.

Both provisions give an unfettered discretion to the court as to costs. The question was which rule was paramount. Eames J decided as follows:

“It seems to me that Parliament did not intend that the terms of s93(12) should have reduced the effectiveness of the weapon available to a litigant of a well judged offer of compromise. The public interest in the compromise of litigation and the discouragement of inappropriate claims, suggests to me that a party making an offer of compromise should gain the fruits of its tactical victory unless good reason is shown for the contrary result. Whilst I am sympathetic to the plaintiff’s position, and to the fact that he will gain no benefit of the $15,000 assessment made for pain and suffering damages, it does not seem to me that that fact is sufficient in itself to deny to the defendant the benefit of the offer of compromise”.[25] 

Conclusion

Two broad categories of circumstances would appear, in light of the decided cases, to warrant an exercise of the discretion given under the rules. The first is where the offeree could not be expected to make a proper assessment of the offer at the time the offer was made. The second is where unmeritorious conduct on the part of the offeror adds to the offeree’s legal costs, causes delays in the litigation, or wastes judicial time and resources.

That the offeree would suffer if the costs penalty were imposed is not a valid reason for exercising the discretion. Any hardship that may result flows from the offeree’s acceptance of the risks of proceeding and declining to accept what has been proved to be a well-judged offer.

The clear moral for litigants is to respond sensibly to offers of compromise. For legal practitioners who advise them, it is to discharge with care the duty to make a realistic assessment of cases.


DR SHARON KORMAN, LLM(LP) candidate at Monash University, is a Rhodes Scholar and the author of The Right of Conquest.


[1] Conferred by s24(1) of the Supreme Court Act 1986 (Vic) and r63.02 of the Supreme Court (General Civil Procedure) Rules 2005.

[2] Rule 63.16 of the Supreme Court (General Civil Procedure) Rules 2005.

[3] Victoria v McIver (2005) 11 VR 458, 468-9.

[4] Simonovski v Bendigo Bank [2003] VSC 139, [17].

[5] Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721, 725.

[6] Fisher, note 5 above, at 724.

[7] Murphy v Harney [2001] VSC 386, [12]; Baxter v Newell (unreported, SCV, 10 March 1998).

[8] Fisher, note 5 above; Freemantle’s Pastoral Pty Ltd v Hyett [1999] VSC 188, [12].

[9] Unreported, NSWCA, 14 October 1996.

[10] Bednarczyk, note 9 above.

[11] Simonovski, note 4 above; Shaw v Jarldorn (1999) 76 SASR 28, [8].

[12] Note 4 above.

[13] Simonovski, note 4 above, at [19].

[14] Unreported, CA(Qld), 22 March 2002.

[15] Note 8 above.

[16] [2004] VSC 366, [17].

[17] Unreported, SCV, 2 March 1993.

[18] Note 16 above.

[19] [2004] VSC 213.

[20] Note 4 above.

[21] Simonovski, note 4 above, at [31] (obiter).

[22] Note 8 above.

[23] Hyett, note 8 above, at [18], [20].

[24] Note 7 above.

[25] Harney, note 7 above, at [15].

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