New South Wales Court of Appeal CITATION : Bailey v Meredith [2001] NSWCA 149 FILE NUMBER(S) : CA 40649/99 HEARING DATE(S) : 11 May 2001 JUDGMENT DATE : 11 May 2001 PARTIES : Adam Bailey (Appellant) Gordon Meredith (Respondent) JUDGMENT OF : Beazley JA at 28; Stein JA at 1; Giles JA at 29 LOWER COURT JURISDICTION : District Court LOWER COURT DC 267/98 FILE NUMBER(S) : LOWER COURT Sidis DCJ JUDICIAL OFFICER : COUNSEL : J D Hislop QC/M Vesper (Appellant) I D Cullen (Respondent) SOLICITORS : Blake Dawson Waldron (Sydney, NSW) (Appellant) Stanger & Clarke (Newcastle, NSW) (Respondent) CATCHWORDS : PROCEDURE - Costs - Part 39A, rule 25 of the District Court Rules - offer of compromise - Calderbank offer - whether exceptional circumstances or for the avoidance of substantial injustice - ND LEGISLATION CITED : Motor Accidents Act 1988 District Court Rules 1973 Hillier v Sheather (1995) 36 NSWLR 414 Maitland Hospital v Fisher (1992) 29 NSWLR 721 CASES CITED: Morgan v Johnson (1998) 44 NSWLR 578 NSW Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100 Houatchanthara v Bednarczyk (Unreported, 14 October 1996, Court of Appeal) DECISION : Appeal allowed; Appellant to pay respondent's costs of the appeal and of the leave application; Verdict and Judgment on costs of her Honour Judge Sidis of 12 August 1999 set aside; The appellant pay the respondent's costs in respect of the claim up and including 18 June 1998 on a party and party basis; The respondent pay the appellant's costs in respect of the claim after 18 June 1998 on a party and party basis; That the entry of an order that the costs of each party be set off. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40649/99 BEAZLEY JA STEIN JA GILES JA Friday, 11 May 2001 Adam BAILEY v Gordon MEREDITH JUDGMENT 1 STEIN JA: This is an appeal brought by Adam Bailey, who was the defendant in District Court proceedings. It is brought pursuant to leave to appeal granted by the Court. In granting leave the Court included a condition that the appellant pay the costs of the appeal, including the costs of the leave application, in any event. The need for leave arose because the question involved is one of costs only. 2 I should mention initially that when the hearing of the appeal commenced this morning, counsel for the respondent sought to tender an affidavit of a Mr Stanger sworn 3 April 2001. The Court rejected the affidavit as inadmissible. Mr Cullen of counsel had submitted that it was to provide the Court with background information. The affidavit was clearly not admissible for that reason nor was it suggested that it included 'fresh evidence'. 3 Briefly the facts which are concerned with the question of costs in the District Court are that the respondent, Gordon Meredith, was the plaintiff in the District Court proceedings commenced by ordinary statement of claim on 25 May 1998 with respect to a motor vehicle accident. In terms of damages, there was an issue as to the effect that previous accidents and injuries that the plaintiff had suffered complicated the damages that he suffered as a result of the motor vehicle accident in which he was involved in the subject claim for damages. 4 That accident occurred on 22 December 1995. The plaintiff had been involved in a previous back injury whilst in the employ of BHP in March 1982, which had necessitated at least two medical procedures. He had also suffered a motor accident in September 1991 which caused an injury to his lower back and resulted in explorative surgery in October 1994. All these things happened before the subject motor vehicle accident on 22 December 1995, which also caused injury to his back. 5 As I said, the proceedings were commenced by the plaintiff on 25 May 1998 and the defendant filed a defence on 29 June 1998 in which liability was admitted. This meant that the question before the Court at any hearing was one of an assessment of damages under the Motor Accidents Act. 6 Very soon after he was served with the statement of claim, the defendant made an offer of compromise pursuant to Part 39A rule 25 of the District Court Rules. This offer was made on 18 June 1998 and held open, as it had to be under the rules, for a period of 28 days. The offer of compromise by the defendant was for a verdict in the sum of $40,000 plus out of pocket expenses and costs. The plaintiff elected not to accept this offer, thus the proceedings continued in the District Court. 7 On 19 February 1999 they were listed for hearing at Newcastle District Court. During the course of the day, while the matter was waiting to be heard, the plaintiff served on the defendant a Calderbank offer in the sum of $27,000 plus assessed costs of $15,000 and held that offer open until 4pm on that day. Unfortunately the matter was not reached on that day and the proceedings had to go over. They were then heard by the Newcastle District Court on 16 April and 5 and 6 August 1999. 8 Following the hearing, which as I have said was an assessment of damages, her Honour Judge Sidis entered a verdict for the plaintiff in the sum of $25,300. Whereupon there was an application for costs to be dealt with at the behest of the defendant in accordance with subrule (6) of rule 25 of Part 39A. Her Honour declined to accede to the defendant's request and ordered that each party pay its own costs of the proceedings. In giving brief reasons on 12 August 1999 her Honour noted the Court of Appeal authority of Hillier v Sheather (1995) 36 NSWLR 414 and referred to the strict and rigid approach taken by the Court of Appeal. Her Honour referred to the fact that the proceedings had been not reached earlier in 1999 and then part heard over a period of 3 days before they were completed. She said, and I quote, Following the expiry of the period for acceptance of the offer of compromise, the defendant made no further offers and refused to engage in any further negotiation of the plaintiff's claim, notwithstanding that the plaintiff put forward a proposal to accept a sum considerably less than that which was stated in the offer of compromise of June 1998. I am informed that the amount which the plaintiff agreed to accept was only marginally in excess of that which I have awarded to the plaintiff in my judgment. 9 Her Honour then turned to the relevant rule and summarised it. In doing so it appears that her Honour made an error which I think, in all the circumstances, matters not. Her Honour said that, 'Except exceptional circumstances or' - I emphasise the word 'or' - 'for the avoidance of substantial injustice'. The rule, of course, and indeed it was put to her Honour by plaintiff's counsel when the costs application was being argued, provides that: Unless the Court in an exceptional case and for the avoidance of substantial injustice otherwise orders. 10 Her Honour went on to say that she thought that the 'justice of the situation demands that I do not make the order'. She said that the defendant, having made a generous offer early in the proceedings, then ceased all negotiation and appeared to have declined to negotiate in respect of an offer which was very close to the amount ultimately awarded to the plaintiff. This was a reference to the Calderbank offer made when the matter was not reached on 19 February 1999. 11 The essence of the submission made on behalf of the respondent (the plaintiff before her Honour) is that her Honour was entitled to find that this was an exceptional case because of the refusal of the defendant to make any offer to the plaintiff at all following the refusal by the plaintiff of the offer of compromise made early in the proceedings. 12 The rule is contained in subrule (6) of rule 25. It is as follows: Where an offer is made by a defendant and not accepted by the plaintiff, and the plaintiff obtains an order or judgment on the claim to which the offer relates not more favourable to him than the terms of the offer, then, unless the Court in an exceptional case and for the avoidance of substantial injustice otherwise orders, the plaintiff shall be entitled to an order against the defendant for the plaintiff's costs in respect of the claim up to and including the day the offer was made, assessed on a party and party basis, and the defendant shall be entitled to an order against the plaintiff for the defendant's costs in respect of the claim thereafter assessed on a party and party basis. 13 It may also be noted that a similar rule exists in relation to offers made by a plaintiff in subrule (4). It may be mentioned that subrule (6) had been amended from its earlier form, which was the subject of the Court of Appeal decision in Hillier v Sheather and also the Maitland Hospital v Fisher (1992) 29 NSWLR 721. The amendment deleted what was probably a broader discretion in the Court to depart from the rule if the Court 'otherwise ordered' and substituted the words which I mentioned earlier: 'unless the Court in an exceptional case and for the avoidance of substantial injustice otherwise orders'. 14 Other amendments may be noted which also have the effect of tightening up the effect of the rules relating to offers of compromise. These were applicable as at the time that her Honour dealt with the issue of costs and at the time the offer of compromise relied on by the defendant was made. Rule 25 subrule(1A) sets out a number of objects of the rule. These include, for example: (a) to introduce an added element of risk in order to promote early settlement of actions without hearing or arbitration; (b) to compel the parties to an action under threat of possible penalties and costs to arrive at an early assessment of the amount of damages if any recoverable by the plaintiff; sub-rule (d) also provides to impart as much certainty to the imposition of cost penalties referred to in object (c) as may be imparted without substantial injustice. Subrule (1B) of rule 25 provides that the decision of the Court to make or refuse to make an order for costs under this rule must be made in pursuance of the objects of the rule. The framers of the rules were making it clear that such discretion as was provided, by for example subrule 6, was to be exercised only in accordance with the objects of the rule, which were then set forth. 15 The strictness of the rule was underlined by the judgment of the Court of Appeal in Hillier v Sheather. President Kirby explained the provision in his judgment commencing at page 419 where he said: Once the present offer was made, the cross-respondent had a limited time to decide whether to accept it or not. The refusal, or failure, to accept the offer had consequences for the operation of the rule. Thereafter, the parties were litigating at a risk that, if the cross-respondent were to obtain a judgment not more favourable to her than the terms of the offer made, the cross-appellant would be entitled to an order against the cross-respondent for his costs in respect of the claim thereafter, that is, from the day following the day on which the offer was made. Depending upon the terms of the offer, the common law doctrine might continue to attach to its availability. But that would have no consequence to the application of the rule. The operation of the rule crystallised at the moment the offer was rejected or lapsed. It is important not to confuse the operation of the law on offers and counter-offers with the operation of the rule attracting the risks of party and party costs. 16 The President went on in his judgment (at page 420) to say that: Once an offer is made which turns out to be higher than the judgment recovered, prima facie the rule applies. On the theory of the rule the litigation after that offer (which, ex post, is shown to have been a reasonable one) has been occasioned by the refusal or failure of the plaintiff to accept the offer. That is why, exempting order apart, the plaintiff must bear the costs from that time. Far from seeing any practical difficulties in such an operation of the rule, I consider that it is precisely the way in which the rule maker expected and provided that rule would apply. 17 The President continued (at page 423) that it was important that Courts not approach the exercise of the discretion to 'otherwise order' (now changed into the words I have indicated earlier) in a mechanical way. Further, that even skilled legal practitioners did not have the gift of prophecy and that calculating damages verdicts was inescapably inexact because of the many imponderables which have to be taken into account. His Honour added: Yet the general considerations of chance and risk would have been known to the rule maker when part 19A, rule 9, of the District Court Rules was introduced into the District Court rules. 18 Kirby P further added that: If this puts the plaintiff's legal representatives in an impossible position and, in practice, forces the settlement of cases for sums less than they are worth because the costs of litigation cannot be wagered against their risks, the complaint must be against the terms of the rules and the apparently narrow provision for exempting orders. 19 I should say that, as I mentioned earlier, the rule has changed since its consideration in Hillier v Sheather and, if anything, has been tightened up. Cole JA in Hillier succinctly said at page 431: Subject to the Court's power to make a contrary order, once an offer is made and not accepted, [the rule[ operates upon that offer. It lies alive yet dormant awaiting the decision of the court in that action. If the decision is less favourable to the plaintiff than an offer made by the defendant in accordance with [the rule] is immediately enlivened in respect of that offer. 20 Statements also abound in that case, and in earlier cases, as to the rationale and reason for the rule. See, for example, the judgment of the Court in Maitland Hospital v Fisher. The judgment of the Court comprising the Kirby P, Mahoney and Samuels JJA said at 725 that: Litigation is inescapably chancy. The purpose of the rule is to put a premium on realistic assessment of cases. It is not to demand perfect foresight which is denied even to the judges. That is why a discretion is retained under the rule, for the Court to order otherwise than as the rule provides. But the ordinary provision is expected to apply in the ordinary case. It has added a new duty to the functions of legal practitioners advising litigants. It is a duty which is both protective of the interests of litigants and of the public interests in the prompt and economical disposal of litigation. 21 The issues arising under the particular rule were considered more recently in the Court of Appeal in Morgan v Johnson (1998) 44 NSWLR 578 where Mason P reviewed the authorities, some of which I have referred to. His Honour indicated, in extracting the principles to be applied, that: The prima facie consequence of non-acceptance will be that the rule will be enforced against the non-accepting party. (at 581) 22 His Honour cited New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100 and Hillier at 422. The President went on to say that this was because from the time of non-acceptance, notionally the real cause and occasion of the litigation is the attitude adopted by [the party] which has rejected the compromise. 23 Mason P also referred to and quoted from an earlier decision of the Court of Appeal of Houatchanthara v Bednarczyk, an unreported decision of the Court of Appeal of 14 October 1996. This was a case where the difference between the offer of compromise and the verdict was only $750. Clarke JA said as follows: It is clear that if the rule operates, the plaintiff will be significantly disadvantaged, but that disadvantage flows naturally from the risks of litigation. The idea behind the rule is to encourage settlement or compromise of proceedings, and more specifically, to encourage litigants to give serious consideration to the settlement of proceedings. 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. Whereas, as here, the claim was a very small one, the risk was very great indeed. 24 Handley JA, in agreeing with the order proposed by Clarke JA, referred to the rule as establishing a prima facie rule which should be applied unless the unsuccessful party is able to point to special factors which justify departure from that rule in the particular case. His Honour went on: General factors which apply in most, if not all cases, such as hardship, and difficulty in predicting the result of the trial cannot support an exercise of the discretion in favour of the unsuccessful party. 25 Santow J agreed with the judgment of Clarke JA. 26 It seems abundantly clear that the discretion that her Honour had in relation to costs, and specifically under subrule (6), miscarried. There was no material before her Honour from which she could come to the conclusion that this was an exceptional case and that for the avoidance of substantial injustice, an order other than that provided for by the rule should occur. It follows, in my view, that the appellant must succeed in the appeal. 27 The orders which I would propose are as follows: 1. The appeal be allowed 2. The appellant is to pay the respondent's costs of the appeal and of the leave application. 3. The verdict and Judgment on costs of her Honour Judge Sidis of 12 August 1999 be set aside. 4. That an order be made that the appellant pay the respondent's costs in respect of the claim up to and including 18 June 1998 on a party and party basis. 5. That the respondent pay the appellant's costs in respect of the claim after 18 June 1998 on a party and party basis. 6. That the entry of an order that the costs of each party be set off. 28 BEAZLEY JA: I agree. 29 GILES JA: I agree. 30 The respondent argued that there were exceptional circumstances because the appellant did not respond to the Calderbank letter but refused to negotiate following the delivery of that letter. Neither in logic nor on the authorities to which Stein JA has referred can that amount to exceptional circumstances. 31 BEAZLEY JA: The orders of the Court will be those proposed by Stein JA. I thank counsel for their assistance. oOo DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.