Supreme Court New South Wales Medium Neutral Citation: The State of NSW v UXC Limited (No 2) [2011] NSWSC 685 Hearing dates: 30 May 2011 to 1 June 2011 Decision date: 06 July 2011 Before: Ball J Decision: The defendant pay the plaintiff's costs of the proceedings (including the costs of the cross-summons) on the ordinary basis. Catchwords: COSTS - indemnity costs - offer of compromise by plaintiff - whether genuine compromise - defendant abandoned cross claim for rectification - whether had no reasonable prospect of success - no indemnity costs ordered Cases Cited: Calderbank v Calderbank [1975] 3 All ER 333; 3 WLR 586 Commonwealth of Australia v Gretton [2008] NSWCA 117 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 Jones v Bradley (No 2) [2003] NSWCA 258 Manly Council v Byrne (No 2) [2004] NSWCA 227 Rosniak v Government Insurance Office (1997) 41 NSWLR 608 State of New South Wales v UXC Limited [2011] NSWSC 530 Category: Procedural and other rulings Parties: The State of New South Wales (Plaintiff) UXC Limited (Defendant) Representation: E A Collins SC (Plaintiff) R M Higgins (Plaintiff) J R Clarke (Defendant) V A Thomas (Defendant) Clayton Utz (Plaintiff) Blake Dawson Waldron (Defendant) File Number(s): 2010/394648 Judgment Introduction 1I delivered judgment in this matter in relation to the substantive issues in the case on 15 June 2011: State of New South Wales v UXC Limited [2011] NSWSC 530. This judgment concerns the costs of those proceedings. 2Before dealing with the question of costs, it is necessary to say something about the substantive proceedings. The issue in the proceedings concerned the correct construction of a dispute resolution clause in a contract between the plaintiff, represented by the NSW Registry of Births, Deaths and Marriages unit of the Attorney-General's Department ( BDM ), and the defendant for the replacement of BDM's core computing system. The disputed clause is described in some detail in my earlier judgment. It is not necessary to repeat that description here. It is sufficient to observe that the provisions of the agreement relating to dispute resolution required any dispute between the parties that could not be resolved by negotiation to be referred to an expert for determination. The disputed clause provided that, if the expert determined that one party must pay the other an amount exceeding the amount specified in what was referred to as the "Agreement Details", then either party may commence litigation, but only within 56 days after receiving the determination. Otherwise, the expert's determination was binding. However, no amount was specifically referred to in the Agreement Details, although an item in the Agreement Details did place a maximum liability on each party under the agreement of $5 million. 3A dispute arose between the parties which was referred to Mr Bathurst QC (as the Chief Justice then was). Mr Bathurst determined that UXC was liable to pay BDM $2,594,000.63. UXC commenced proceedings challenging that determination. BDM then commenced these proceedings alleging that UXC was not entitled to do so. Up until shortly before the hearing, its principal argument was that the disputed clause should be read as referring to the amount specified as the parties' maximum liability under the agreement (that is, $5 million). However, at the hearing, BDM's principal submission was that, since no amount was specified in the Agreement Details in relation to the disputed clause, the clause should be interpreted as not permitting litigation at all. UXC, on the other hand, submitted that when the contract was read as a whole it was apparent that the parties intended to specify a limit in respect of the disputed clause and that limit (which was $250,000) could be found in a user guide concerned with a related contract. That user guide had been referred to in one of the documents which formed part of the original tender for the contract and which was identified in the final contract as forming part of it. Originally, UXC also filed a cross-claim seeking an order that, in the event that the disputed clause did not have the meaning for which it contended, the clause should be rectified. That cross-claim was abandoned on the second day of the hearing. I accepted BDM's principal argument advanced at the hearing. As a result, I awarded judgment in BDM's favour in the sum of $2,594,000.63 plus interest. 4BDM now seeks an order that part of its costs be paid on an indemnity basis. It does so on two grounds. First, it relies on a letter dated 9 February 2011 from Clayton Utz, its solicitors, to Blake Dawson, UXC's solicitors, in which BDM offered to settle the proceedings on the basis that UXC paid it the sum of $2,594,000.63 (that is, the total amount of its claim without interest) and each party bear its own legal costs and that offer was rejected by UXC. Secondly, BDM says that it should be entitled to recover the costs of the cross-claim seeking rectification on an indemnity basis given that that cross-claim was abandoned without explanation. 5In response, UXC concedes that it is liable to pay the costs of the cross-claim, but says that those costs should be assessed on the ordinary basis. As to the costs relating to the question of construction, UXC's primary position is that BDM should only recover a proportion of its costs because it ultimately succeeded on a construction of the disputed clause which was only raised shortly before the hearing. Alternatively, it says that BDM should only recover its costs on the ordinary basis. 6In my opinion, BDM should recover its costs on the ordinary basis. 7There is no dispute that the court can take into account the offer of compromise in determining an appropriate order in relation to costs in accordance with the principles that have their genesis in the decision of Calderbank v Calderbank [1975] 3 All ER 333; 3 WLR 586. According to those principles, the court may, in the exercise of its discretion, make a costs order in favour of a party who has made an offer of compromise that is more favourable than the order the party would normally obtain if that party can establish that the offer represented a genuine compromise of the dispute and that it was unreasonable for the offeree to have rejected it: see Commonwealth of Australia v Gretton [2008] NSWCA 117 at [38] per Beazley JA; Jones v Bradley (No 2) [2003] NSWCA 258 at [8] per Meagher, Beazley and Santow JJA. 8In my opinion, BDM's offer did not represent a genuine offer of compromise. The only element of compromise it involved was foregoing a small amount of interest and its own legal costs. In some cases, having regard to the strength of the plaintiff's case, an offer to forego interest and legal costs may be a genuine offer of compromise: see Manly Council v Byrne (No 2) [2004] NSWCA 227. However, I do not think it represents a genuine offer of compromise in this case. In my opinion, it was open to UXC to argue that something had gone wrong with the drafting of the disputed clause and that, in those circumstances, the court should seek to find elsewhere in the contract the amount to which the disputed clause referred. BDM's primary case before the hearing commenced accepted UXC's starting point, but involved a contention that the amount that should be inserted should be found elsewhere in the Agreement Details and did not affect the outcome of the case. Although I rejected UXC's submissions, I do not think that BDM's case was so strong that the offer it made represented a genuine compromise of it. In addition, I think it was reasonable of UXC to reject that offer in circumstances where it believed that the case being advanced by BDM was one which ultimately was not accepted by the court. 9On the other hand, BDM succeeded in its claim. The general principle is that costs should follow the event: UCPR rule 42.1. In some cases, the court will depart from that general principle where the case involves distinct issues and a party is only successful in relation to some of those issues: see Rosniak v Government Insurance Office (1997) 41 NSWLR 608. Here, however, there was only one issue which concerned the correct construction of the dispute resolution clause. BDM succeeded on that issue and consequently should have its costs of doing so. 10In my opinion, BDM should also fail in relation to its application for costs on an indemnity basis in relation to the cross-claim. The relevant principle is that the court will award costs on an indemnity basis where a party has acted unreasonably in bringing a claim. That will, for example, occur where a party has brought a claim that has no prospects of success: see Rosniak v Government Insurance Office (1997) 41 NSWLR 608; Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401. 11I do not accept that UXC's claim for rectification had no prospects of success. BDM does not explain why the cross-claim should never have been brought. It simply asserts that the court should draw that conclusion from the fact that the cross-claim was abandoned on the second day of the hearing without explanation. However, I do not think that it follows from that that the claim had no prospects of success. It is not uncommon for parties to abandon claims during the course of the hearing. There are a number of reasons why that could happen. For example, particular witnesses may not come up to proof in the witness box. Alternatively, it may become apparent in the light of evidence that emerges during the course of the case or arguments raised for the first time by the other side that the abandoned claim will fail or adds nothing to other claims made in the case. As I have said, in this case, it was arguable that something had gone wrong with the drafting of the disputed clause. There was at least some basis for saying that the parties had intended to insert the amount referred to in a user guide for a related contract as the amount to which the disputed clause referred. In my opinion, UXC was entitled to investigate that possibility. Its claim for rectification was not so hopeless that it should never have been brought. 12The defendant should pay the plaintiff's costs of the proceedings (including the costs of the cross-summons) on the ordinary basis. ********** 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. Decision last updated: 07 July 2011