Supreme Court New South Wales Medium Neutral Citation: Vagg v McPhee (No 2) [2012] NSWSC 187 Hearing dates: In chambers Decision date: 07 March 2012 Jurisdiction: Common Law Before: Schmidt J Decision: 1. The plaintiffs pay the defendants costs of the proceedings on an ordinary basis from 1 March 2009 to 10 October 2011. 2. The plaintiffs pay the defendants costs of the proceedings on an indemnity basis after 11 October 2011. 3. The plaintiffs pay the defendants costs associated with this motion. Catchwords: COSTS - departing from the general rule - order for costs on indemnity basis - walk-away offer of compromise - Calderbank letters - Rule 42.15A of the Uniform Civil Procedure Rules 2005 - orders made Legislation Cited: Family Provision Act 1982 Legal Profession Act 2004 Uniform Civil Procedure Rules 2005 Cases Cited: Commonwealth v Gretton [2008] NSWCA 117 Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375 Hillier v Sheather (1995) 36 NSWLR 414 GIO General Ltd v ABB Installation and Service Pty Ltd [2000] NSWCA 118 Jones v Bradley (No 2) [2003] NSWCA 258; Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 Leichhardt Municipal Council v Green [2004] NSWCA 341 Melchior v Sydney Adventist Hospital Ltd (No 2) [2009] NSWSC 65 Miller v Cooney [2004] NSWCA 380 Miwa Pty Ltd v Siantam Properties Pty Ltd (No 2) [2011] NSWCA 344 South Eastern Sydney Area Health Service v King [2006] NSWCA 2 Vagg v McPhee [2011] NSWSC 1584 Category: Costs Parties: Margaret Doreen Vagg (First Plaintiff) Benjamin John Vagg (Second Plaintiff) Julia Lillian Vagg (Third Plaintiff) Cecilia Anne Vagg (Fourth Plaintiff) James Gregory Vagg (Fifth Plaintiff) Paul McPhee (First Defendant) Trevor Cork (Second Defendant) David Dunkley (Third Defendant) Steven Nicholson (Fourth Defendant) Representation: Counsel: Mr P Blackett SC with Mr E Young (Plaintiffs) Mr JC Kelly SC (Defendants) Solicitors: Turner Freeman (Plaintiffs) Colin Biggers & Paisley (Defendants File Number(s): 2009/29739 Publication restriction: None Judgment 1In this matter judgment was given in favour of the defendants (see Vagg v McPhee [2011] NSWSC 1584 ). The defendants had acted for the plaintiffs' mother in preparing a will. The plaintiffs claimed that the defendants had breached the duty of care which they owed them, as the beneficiaries under the will. 2The proceedings were commenced by statement of claim filed in February 2009 and were defended by a defence filed on 4 May 2009. The usual rule is that costs follow the event (see r 42.1 of the Uniform Civil Procedure Rules 2005). By motion filed in February 2012 the defendants sought the following orders as to costs: "1. An order that the plaintiffs pay the defendants costs of the proceedings on an ordinary basis from 1 March 2009 to 10 October 2011; and 2. An order that the plaintiffs pay the defendants costs of the proceedings on an indemnity basis after 11 October 2011; 3. An order that the plaintiffs pay the defendants costs associated with this motion. 4. An order that final orders be entered by the court in the form Annexed and marked ' A '. 5. Any other order the court sees fit." 3The defendants relied on the provisions of r 42.15A which provides: "42.15A Where offer not accepted and judgment as or more favourable to defendant (cf SCR Part 52A, rule 22; DCR Part 39A, rule 25; LCR Part 31A, rule 20) (1) This rule applies if the offer concerned is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim concerned as favourable to the defendant, or more favourable to the defendant, than the terms of the offer. (2) Unless the court orders otherwise: (a) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and (b) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, assessed on an indemnity basis: (i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and (ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made." The evidence 4The defendants relied on an affidavit sworn by their solicitor, Ms Slabacu, to which was annexed three offers, (although it appears that the plaintiffs also made other offers, the details of which were not referred to in the submissions advanced). There was a Calderbank offer made by the defendants on 25 May 2011, in which the defendants advised that there was no utility in the parties incurring the costs of a mediation in circumstances where: "We consider the proceedings brought by your clients are unmeritorious. The duty of care pleaded was not a duty owed to your clients. This position is supported by authorities. In addition - there was no breach. Furthermore, as outlined in the amended defence, your clients / the estate of the late Mrs Vagg may have a potential cause of action as against Carl Vagg." 5The defendants offered to allow the plaintiffs to discontinue the proceedings on the basis that each party bear their own costs. The offer remained open for acceptance 'until close of business on the day on which a hearing date is allocated'. 6There was no response to the offer. On 27 May, the matter was listed for hearing in November, with an estimate of 2 days. 7There was an offer of compromise made by the plaintiffs under cover of a letter of 12 September under r 20.26 of the Rules, proposing that the defendants pay $145,000 plus costs. It remained open for 28 days, but was not accepted. 8There was then an offer of compromise made by the defendants under r 20.19 of the Rules on 10 October 2011, proposing judgment for the defendants and that each party bear their own costs. It remained open until 31 October, but was also not accepted. As it later transpired, the plaintiffs failed to establish their case at trial. The defendants' case 9The defendants submitted that the orders which they sought should be made under r 42.15A of the Rules, the end result of the proceedings being at least as favourable as the terms of the offer of compromise which they had made on 10 October. The plaintiffs' cases 10The orders sought were opposed by the plaintiffs. Their case was that even if the Court was of the view that the defendants' offer of compromise did involve a sufficient element of compromise, nevertheless, pursuant to s 98 of the Civil Procedure Act 2005 the Court would not make an order for costs otherwise than on an ordinary basis. This was because whilst the defendants succeeded on some defences, they failed on others, namely the question of whether the plaintiffs' claim was apportionable if there was a claim made under the Family Provision Act 1982. It was also submitted that in the circumstances, the discretion to award costs on an indemnity basis should be exercised in favour of the plaintiffs. 11The plaintiffs relied on their offer of compromise, that the matter be settled for payment of $145,000 plus costs. The effect of that offer was that the plaintiffs waived any claim for interest on the damages which they were pursuing in the proceedings, $145,000 representing half that the value of the property which they claimed the defendants should have ensured passed to them under their mother's will. That was argued to have been a significant offer in circumstances where their case was arguable and where the Court had later concluded that a number of aspects of the conduct of the matter by Ms Woodward-Brown, the solicitor who had advised Mrs Vagg, were unsatisfactory. It followed that the plaintiffs' case was not frivolous, hopeless or vexatious, with the result that the orders now here sought by the plaintiff would be refused (see Bryson JA in Leichhardt Municipal Council v Green [2004] NSWCA 341 at [59] and Miwa Pty Ltd v Siantam Properties Pty Ltd (No 2) [2011] NSWCA 344 at [19]). 12It would also be considered that the interrogatories filed for the defendants were inconsistent with the evidence later given by Mrs Woodward-Brown, with the result that there was a substantial departure at the trial from the case which the plaintiffs understood was being advanced at the time the offer of compromise was served. In the circumstances, the plaintiffs were not unreasonable in making their own offer and refusing the defendants' offer that they capitulate. 13It was also submitted that while the case was small in monetary value, it involved an extension in the duty of care owed by solicitors in the circumstances. It was defended on the basis that it had ramifications beyond the simple facts of the matter and was thus effectively run as a 'test case'. In the circumstances, the ramifications of defending the case went beyond vindication of the plaintiffs. Pursuant to statutory arrangements, it involved Law Cover under the Legal Profession Act 2004. In those circumstances, it would be concluded that the defendants' invitation to surrender was simply an offer made in order to trigger the costs consequences under the Rules and not a real and genuine offer of compromise. It followed that under s 98 of the Civil Procedure Act, the Court would not make the orders sought, particularly given the plaintiffs' success on some of the defences argued. No order may be made in favour of the plaintiffs 14The plaintiffs' submissions may not be accepted. The usual order as to costs is that they should follow the event. The plaintiffs have not established circumstances which would warrant a departure from the usual rule. To the contrary, having refused the defendants' October offer of compromise and having not succeeded at trial, there must be an indemnity costs order in favour of the defendants. 15An offer which involves a waiver of interest that would otherwise be payable on a judgment sum may also result in an order for indemnity costs if the offerer succeeds in the proceedings. That is not this case. 16When the plaintiffs' did not succeed, having rejected the offer of compromise made under the Rules, under r 42.15A an onus fell upon them to establish that the Court should depart from the consequences of the Rule, the defendants having obtained a judgment at least as favourable to them as the terms of their offer. That onus has not been met. 17The defendants relied on Leichhardt Municipal Council v Green where Bryson JA observed at [59]: "I agree with the conclusions reached by Santow JA. The application for an order for costs to be assessed on the indemnity basis raises a discretionary question the answer to which is not in my view susceptible of much detailed exposition. The settlement offer was made before trial and was no longer available while the appeal was pending. The respondent's case did not succeed, but it was not a case which could not reasonably be argued and it succeeded at first instance. The only element of compromise in the offer was as to costs: otherwise it was a call on the respondent to capitulate and give up: the element of compromise was slight, and the respondent's ultimate lack of success does not to my mind demonstrate that the reasonable course for the respondent was to capitulate, nor does anything show that the respondent was delinquent in going on with the trial or in resisting the appeal." 18That was a case concerned with a Calderbank offer, as was Miwa Pty Ltd v Siantam Properties Pty Ltd (No 2), on which reliance was also placed. The Rules in relation to offers of compromise operate differently to the principles which apply to Calderbank offers. In the case of a Calderbank offer an onus falls on the offeror to convince the Court that it should exercise its discretion in the offeror's favour, the offeree having acted unreasonably in rejecting the offer (see Jones v Bradley (No 2) [2003] NSWCA 258; Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 per Giles, Ipp and Tobias JJA at [26]. ) The offeror must also show that the offer was a genuine compromise (see Leichhardt Municipal Council v Green , at [21] - [24], [36] per Santow JA (Stein JA agreeing) and Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375 at [4] - [5] per Handley, Beazley and Basten JJA). In considering a Calderbank offer, the Court strives to achieve fairness in the result (see the discussion in Commonwealth v Gretton [2000] NSWCA 118). 19The provisions of Rule 42.15A operate quite differently, even though it should be noted, that even in the case of a Calderbank offer a "walk-away" offer can be a "genuine offer of compromise" (see Leichhardt Municipal Council v Green [2004] NSWCA 341 at [36]; and GIO General Ltd v ABB Installation and Service Pty Ltd [2000] NSWCA 118 at [36];) 20Having refused the defendants' offer the plaintiffs had to establish circumstances which, as a matter of justice, warrant a departure from what the Rule contemplates will be the usual result of refusal of the offer. The defendants are entitled to an order in accordance with the Rule, unless the plaintiffs establish that the Court should order otherwise. 21The exercise of that discretion in favour of the plaintiffs requires that they establish that 'exceptional circumstances' exist, as discussed in South Eastern Sydney Area Health Service v King [2006] NSWCA 2 per Hunt AJA (Mason P and McColl JA agreeing): "83 Part 52 rule 22 provides that, where a plaintiff who has made an offer of compromise in accordance with Part 22 (Division I) which is not accepted by the defendant, and where the plaintiff obtains a judgment no less favourable than the terms of the offer, then, unless the Court otherwise orders, the plaintiff will be entitled to an order against the defendant for costs on an indemnity basis in relation to his costs incurred from the day after the offer was made. The onus is on the defendant to persuade the Court that indemnity costs should not be ordered. He must demonstrate the basis on which an order should be made denying the plaintiff's entitlement to indemnity costs. He must establish that he had given serious thought to the risk involved in non-acceptance of the offer, and that he had assessed the plaintiff's case properly and in the context of the rule and the achievement of its purpose - to encourage the proper compromise of litigation, in the private interests of the litigants and in the public interest of the prompt and economical disposal of litigation. Generally, exceptional circumstances are required to justify such an order denying the plaintiff's entitlement. See, generally, Fowdl v Fowdl , Court of Appeal, 4 November 1993, unreported, per Kirby P at 12, 16; Hillier v Sheather (1995) 36 NSWLR 414 at 422-423; Morgan v Johnson (1998) 44 NSWLR 578 at 581-582. 84 Although the Court may take into account the particular features of a case and the difficulty of putting an accurate estimate on its value in advance of the litigation, those considerations do not provide a basis by themselves for denying the party making the offer an order for indemnity costs: Hillier v Sheather (at 423). In Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721 at 725, it was said that a miscalculation in a case with large imponderables, where the course taken by the party to whom the offer was made may have been perfectly reasonable, would provide a basis for denying an order, but the subsequent decision in Hillier v Sheather suggests that, whilst "large" imponderables may be a relevant factor in the particular case in denying an order for indemnity costs, in the general case a party's reasonable belief as to his own chances of success does not alone provide a basis for denying an order for indemnity costs." 22In Hillier v Sheather (1995) 36 NSWLR 414 it was also observed (at 423) that: "Secondly, it might be thought that the rule operates rather unfairly upon plaintiffs. They may be subjected to risk by early offers which are judged to be unrealistic. Plaintiffs may not be able to afford the risks of litigation with the added risk as to costs. The transference of the risk of costs to them (even if they succeed generally) imposes upon ordinary plaintiffs a burden which few can afford to bear. It is important that the courts should not approach the exercise of the discretion to "otherwise order" in a mechanical way: cf, Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721 at 725. Even skilled legal representatives do not have the gift of prophecy. Calculating damages verdicts is inescapably inexact because of the many imponderables which must be taken into account. The present is a case in point. So much depended upon the view which would be taken concerning the significance (if any) of pre-injury spinal and neck pain. In exercising the discretion, courts will not overlook the particular features of a case and the difficulty of putting an accurate estimate on its value in advance of the litigation. Yet the general considerations of chance and risk would have been known to the rule-maker when Pt 19A, r 9 of the District Court Rules was introduced into the District Court Rules . Without more, they could not provide a basis for ordering otherwise than as the rule will ordinarily provide. If this puts plaintiffs' 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. The complaint cannot be against a court which merely gives effect to the purpose of the rule as expressed in its plain language." 23In this case, there was no evidence led or explanation given for the plaintiffs, as to why the offer wasn't accepted. Exceptional circumstances warranting a departure from the effects of r 42.15A have not been established. 24What was in issue in the proceedings included the scope of the defendants' retainer and the advice given to Mrs Vagg; a claimed significant expansion of the duty which a solicitor is recognised to owe a beneficiary under a will, beyond that discussed by the High Court in Miller v Cooney; and that the wider duty had been breached. 25The plaintiffs' submissions as to the inadequacy of the defendants' response to interrogatories of 23 November 2009 must be accepted, given the departure from the answers there given, in the account which Ms Woodward-Brown later gave in her affidavit of 2 August 2011, as to her instructions and the advice which she gave Mrs Vagg. That affidavit raised the prospect that if Mrs Woodward-Brown's evidence were accepted, the plaintiffs' case as to the inadequacy of the advice given Mrs Vagg was weaker than the answers given to the interrogatories suggested. However, it follows that given that at the time of the offer made in October 2011, Mrs Woodward-Brown's affidavit had already been served, its impact on the plaintiffs' case, if the evidence was accepted, had to be considered. 26The plaintiffs also had to consider that they not only had to establish that the defendants gave Mrs Vagg inadequate advice, but also that solicitors owed beneficiaries under a will such as them, wider duties than have to date been recognised, and that this wider duty had been breached. The difficulties which Mr Vagg's position created for that aspect of their case also had to be considered. Those difficulties were such that eventually, the plaintiffs called no evidence from Mr Vagg, even though a statement had been taken from him. That led to arguments at the hearing as to the drawing of adverse inferences against their case, arguments which were accepted. 27It is in that context that the question of whether or not the defendants' walk-away offer was a true compromise must be considered. As Hoeben J discussed in Melchior v Sydney Adventist Hospital Ltd (No 2) [2009] NSWSC 65: "17 It is always difficult to evaluate the genuineness of a "walk away" offer. As the second defendant submitted, there was a real benefit for the plaintiffs contained in the offer, i.e. they would if the offer were accepted have no liability for the second defendant's costs. As of 13 March 2008 those costs would already have been substantial. I have concluded that in the circumstances of this case the second defendant's Offer of Compromise of 13 March 2008 was genuine." 28The hearing was fixed for November. The offer expired on 31 October. At that time, it must have been apparent that there was a considerable risk that the plaintiffs' claim would not succeed, particularly having in mind Mr Vagg's position. It was in that context that the plaintiffs had to consider whether the defendants' walk-away offer should be accepted, given the dispute as to the claimed expanded duty. In the circumstances, it clearly offered a real benefit, given the costs which the defendants had obviously incurred to that point, for which the plaintiffs would have liability, if their case failed. In the circumstances the walk-away offer was clearly a genuine offer of compromise. 29That the claim which the plaintiffs advanced was not hopeless, frivolous or vexatious, is not a basis upon which the exceptional circumstances required to permit a departure from the Rule can be established. Perhaps the plaintiffs' prospects were difficult to assess. No doubt they felt very strongly about the claims which they advanced. These are not reasons, however, why the defendants' offer of compromise should not be given effect under the Rule, given the result of the proceedings, which vindicated their view, as advised in the May Calderbank offer, that they did not owe the plaintiffs the claimed duty. 30It is evident that the plaintiffs' claim always contained speculative elements and that in the circumstances, the walk-away offer of compromise made in October reflected a genuine compromise. Its rejection triggered the operation of the Rule. The plaintiffs have not established exceptional circumstances permitting the Court's discretion to be exercised in their favour. It follows that the orders which the defendants sought must be made. Order 31For the reasons given, I order that: 1. The plaintiffs pay the defendants costs of the proceedings on an ordinary basis from 1 March 2009 to 10 October 2011. 2. The plaintiffs pay the defendants costs of the proceedings on an indemnity basis after 11 October 2011. 3. The plaintiffs pay the defendants costs associated with this motion. ********** 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 March 2012