Alexander, Phillipa --- "Indemnity costs update" [2015] PrecedentAULA 67; (2015) 130 Precedent 47

• In Tanious v Australian Medical Council Ltd,1 Mr Tanious sought leave to appeal from the dismissal on a summary basis of proceedings brought by him in the Supreme Court against the Australian Medical Council Limited (AMC) and the Australian Health Practitioner Regulation Agency (AHPRA). Bellow J awarded costs to AMC on the ordinary basis and to AHRPA on an indemnity basis. At an early stage of the proceedings, AHPRA had indicated in correspondence with Mr Tanious that the summons did not disclose any reasonable cause of action and had invited Mr Tanious to discontinue the proceedings on the basis that it would bear its own costs if the proceedings were discontinued by a specified date, which did not occur. The Court of Appeal held that there was no error in the exercise of His Honour's discretion in the award of indemnity costs.
• The defendants appealed, inter alia, as to the costs orders, arguing that the offers of compromise were genuine and that indemnity costs should have been awarded. Beazley P (McColl JA and Gleeson JA agreeing) held that a defendant’s offer of compromise offering to settle a claim on the basis that judgment be entered for the defendant and each party pay their own costs may be a genuine offer of compromise, noting that UCPR r20.26(3) makes specific provision for an offer in these terms.17 The court considered that one matter that is relevant in determining whether an offer of compromise is genuine is the time at which the offer is made. In this case, the proceedings had been on foot for more than nine months and the affidavit evidence had been completed some three months previously; thus, the parties were in a position to assess their likelihood of success in the proceedings. The court ordered the second respondent to pay the appellants’ costs on an indemnity basis from 9 January 2013, which was the day after the date the first offer was made. Orders made under the slip rule in Salmon v Osmond (No. 2)18 included an additional order that the second respondent pay the appellants’ costs of proceedings in the court below, on the ordinary basis up to and including 8 January 2013 and on an indemnity basis as and from 9 January 2013.

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INDEMNITY COSTS UPDATE

By Phillipa Alexander

The NSW Court of Appeal has recently determined a number of cases involving applications for indemnity costs. An order for costs on an indemnity basis can substantially increase the costs that a successful client can recover from an opposing party in the proceedings, particularly in relation to higher solicitors' hourly rates, counsel's fees, experts' report fees and disbursements generally. Costs on an indemnity basis can result in a party recovering approximately 10 per cent more in costs from an opposing party than where the order is on an ordinary basis.

Sub-section 75(2) of the Legal Profession Uniform Law Application Act 2014 (NSW) provides:

‘If a court or tribunal has ordered that costs are to be assessed on an indemnity basis, the costs assessor must assess the costs on that basis, having regard to any relevant rules of the court or tribunal and any relevant regulations.’

Rule 42.5 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) provides:

‘If the court determines that costs are to be paid on an indemnity basis:

(a) in the case of costs payable out of property held or controlled by a person who is a party to the proceedings:

(i) in the capacity of trustee, executor, administrator or legal representative of a deceased estate, or

(ii) in any other fiduciary capacity,

all costs (other than those that have been incurred in breach of the person’s duty in that capacity) are to be allowed; and

(b) in any other case, all costs (other than those that appear to have been unreasonably incurred or appear to be of an unreasonable amount) are to be allowed.’

While many orders for indemnity costs flow from the non-acceptance by the defendant of an offer of compromise made in compliance with UCPR r20.26, where the plaintiff obtains an order or judgment on the claim no less favourable to the plaintiff than the terms of the offer, in accordance with UCPR r42.15, or where a Calderbank offer was made, this is not always the case. Indemnity costs may be ordered where an offer of compromise had been made which did not comply with the UCPR or where no offer of compromise at all had been made.

In Tanious v Australian Medical Council Ltd,^[1] Mr Tanious sought leave to appeal from the dismissal on a summary basis of proceedings brought by him in the Supreme Court against the Australian Medical Council Limited (AMC) and the Australian Health Practitioner Regulation Agency (AHPRA). Bellow J awarded costs to AMC on the ordinary basis and to AHRPA on an indemnity basis. At an early stage of the proceedings, AHPRA had indicated in correspondence with Mr Tanious that the summons did not disclose any reasonable cause of action and had invited Mr Tanious to discontinue the proceedings on the basis that it would bear its own costs if the proceedings were discontinued by a specified date, which did not occur. The Court of Appeal held that there was no error in the exercise of His Honour's discretion in the award of indemnity costs.

A case in which a Calderbank offer was pivotal to costs being awarded on an indemnity basis was Prospect Resources Ltd v Molyneux.^[2] In this case, McDougall J held that a Calderbank offer for $50,000 (being 1.25 per cent of the amount claimed by the plaintiff) was a genuine offer of compromise, and ordered costs on an indemnity basis from the date on which the Calderbank offer was made. On appeal,^[3] the appellant argued that McDougall J had erred in ordering costs on an indemnity basis particularly as no defence had been filed at the time of the offer. The plaintiff's counsel characterised the offer as being ‘derisory' that would involve ‘a near capitulation by the plaintiff’.^[4] McDougall J held it was unreasonable to ignore the Calderbank offer, given that it referred to a previous letter that [correctly] pointed out why the plaintiff's claim would not succeed. In the Court of Appeal, Ward JA (Beazley P and Leeming JA agreeing) held that His Honour had not erred in the exercise of his discretion and that the offer, albeit for a very small percentage of the amount sought by the plaintiff, did represent a genuine element of compromise.^[5]

Ward JA considered McDougall J had accepted the defendants' submission that characterisation of the offer as derisory or as one involving a near capitulation was not determinative and that the circumstances known to the plaintiff at the time in determining the reasonableness or otherwise of its response to the Calderbank offer was of primary relevance.^[6] The appeal was dismissed.

In Davis v Swift (No. 2, ^[7] the Court of Appeal refused to make an order that the appellant pay the respondent’s costs of the proceedings at first instance on an indemnity basis from the day following the day on which the offer was made. The appellant/plaintiff had claimed damages for injuries sustained in a motor accident which claim was unsuccessful at first instance. On appeal, the appellant succeeded in reducing the finding of contributory negligence from 100 per cent to 80 per cent and thus recovered judgment for $37,343. At first instance, the defendant/respondent had made an offer of compromise in the sum of $58,000, which included terms providing for the repayment by the respondent's insurer from the judgment sum of Medicare and Centrelink payments, the date on which the respondent was to pay the judgment sum, and the date from which interest was payable. The respondent claimed that she was entitled to an order that the appellant pay her costs of the proceedings at first instance from the day following the day on which the offer was made on an indemnity basis. The appellant contended that the offer did not comply with UCPR r20.26 (as then in force) as the respondent had made interim payments to the appellant and the offer of compromise did not state whether the offer was made in addition to those payments as required by UCPR r20.26(3)(b). The respondent alternatively relied upon a Calderbank offer made 12 working days before the commencement of the hearing.

Meagher JA (Leeming JA and Adamson J agreeing) held that the offer of compromise was not in accordance with UCPR r20.26 and therefore did not attract the operation of the costs rule in UCPR r42.15.^[8] The respondent's submission that the offer could be relied upon as a Calderbank offer was also rejected as there was nothing in the terms of the offer or the accompanying letter which indicated that it was to be relied on in relation to costs otherwise than under the rules.^[9]

In relation to the Calderbank letter, which was held to be a realistic offer to compromise the claim, Meagher JA held that there was no statement in the letter that the respondent would rely upon its non-acceptance as justifying a claim to indemnity costs from the date the offer expired, only that it would be relied upon in support of an ‘application for costs’. The absence of the reference to ‘indemnity costs’ proved fatal and an order was made that the appellant pay the respondent's costs of the trial from the date the Calderbank offer lapsed on an ordinary basis only.

In Curtis v Harden Shire Council (No. 2),^[10] the husband of a driver killed in a country road single-vehicle accident sued the local council for failing to erect signage warning of the loose gravel associated with road works. The driver’s car had skidded and struck a tree at high speed. The plaintiff claimed damages in respect of nervous shock and compensation to relatives for himself and his children and was unsuccessful on liability at first instance which decision was overturned on appeal. At first instance, the plaintiff had made offers of compromise in each proceeding on a ‘plus costs as agreed or assessed’ basis which did not comply with UCPR r20.26(2) (as then in force).^[11] On appeal, the appellant requested the court to exercise its discretion under s98 of the Civil Procedure Act 2005 (NSW) to award costs of the first instance proceedings on an indemnity basis, on the ground that his offers represented a genuine compromise in contrast to the conduct of the respondent council which would settle only on the basis of a verdict in its favour. Applying Whitney v Dream Developments Pty Ltd^[12] the Court noted:

‘that an offer expressly made pursuant to r20.26 would not of itself take effect as a Calderbank offer unless there was something in it or in the surrounding circumstances that indicated the offeror intended to rely on the rules offer on the question of costs, regardless whether the offer complied with UCPR r20.26. In the present case, there was nothing in the communications between the parties that indicated that the appellant intended that his offers should be treated as offers to settle regardless of whether they complied with the rules. Nor was there anything in the conduct of the respondent that would compel the court to exercise the discretion to make an order other than that costs be assessed on the ordinary basis. In particular, he did not forewarn the respondent that he intended to make an application for indemnity costs other than by way of his purported rules offer.^[13]

The Court held that the respondent should not be penalised by indemnity costs ordered as a matter of the court’s discretion when it was not put on notice of any such application.

The appellant had also served offers of compromise in respect of the appeal proceedings two days before the appeal hearing on 23 September 2013,^[14] which provided for ‘plus costs as agreed or assessed’. The respondent again disputed that the offers were validly made in accordance with UCPR r20.26. The Court of Appeal held that the offers were compliant with the amended UCPR r20.26, as they did not contain an actual amount for costs and were not expressed as ‘inclusive of costs’ and therefore the appellant could rely on the operation of UCPR r42.14. The onus then fell on the respondent as to why the court should exercise its discretion to ‘otherwise order’ under UCPR r42.14. The respondent argued it was not unreasonable for it to refuse the offers as they were made only 48 hours before the appeal hearing commenced and they were not accompanied by an assessment of damages or an estimate of the incurred costs to that date. These submissions were rejected, as under UCPR r42.14(2)(b)(ii) the making of ‘late’ offers is permitted and there is nothing in the rules which requires assessments of damages or costs to be provided.^[15] No evidence was adduced by the respondent as to why the time allowed for consideration was unreasonable or that it was not reasonably possible to give proper consideration to the offer. As the appellant had obtained an order that was no less favourable than the terms of his offers served in the appeal proceedings, the court ordered indemnity costs against the respondent council in respect of the appeal proceedings from the date after the date of each offer.

A compromise on costs may be a sufficient compromise to attract an indemnity costs order. In Salmon v Osmond,^[16] Ball J had dismissed a claim of one of the parties under the Succession Act 2006. Two offers of compromise which had been made by the defendants to settle the claim on the basis that judgment be entered for the defendants and an order that each of the party and the defendants pay their own costs of the proceedings insofar as the proceedings concerned that party, were held not to be genuine offers of compromise, and on that basis His Honour refused the defendants’ claim for indemnity costs.

The defendants appealed, inter alia, as to the costs orders, arguing that the offers of compromise were genuine and that indemnity costs should have been awarded. Beazley P (McColl JA and Gleeson JA agreeing) held that a defendant’s offer of compromise offering to settle a claim on the basis that judgment be entered for the defendant and each party pay their own costs may be a genuine offer of compromise, noting that UCPR r20.26(3) makes specific provision for an offer in these terms.^[17] The court considered that one matter that is relevant in determining whether an offer of compromise is genuine is the time at which the offer is made. In this case, the proceedings had been on foot for more than nine months and the affidavit evidence had been completed some three months previously; thus, the parties were in a position to assess their likelihood of success in the proceedings. The court ordered the second respondent to pay the appellants’ costs on an indemnity basis from 9 January 2013, which was the day after the date the first offer was made. Orders made under the slip rule in Salmon v Osmond (No. 2)^[18] included an additional order that the second respondent pay the appellants’ costs of proceedings in the court below, on the ordinary basis up to and including 8 January 2013 and on an indemnity basis as and from 9 January 2013.

In Leach v The Nominal Defendant (QBE Insurance (Australia) Ltd) (No. 2),^[19] the Court of Appeal upheld Kearns DCJ’s decision to refuse an indemnity costs order, notwithstanding a verdict for the respondent. The respondent’s offer of compromise had provided for a verdict for the respondent with each party to pay their own costs. His Honour had exercised his discretion to ‘otherwise order’ under UCPR r42.15A because he considered the issue in the case ‘was not a straightforward one, even with all the facts determined in favour of the plaintiff’. Kearns DCJ also considered that the court should not apply principles as to costs in a manner which might unduly deter parties from bringing or defending proceedings ‘for fear that they will retrospectively be found to have not been justified in doing so’.^[20] His Honour considered that it was not unreasonable in the circumstances for the plaintiff to have rejected the defendant's offer of compromise.

Practical considerations for NSW practitioners arising from the above decisions

1. Ensure that the offer of compromise complies with UCPR r20.26. An offer on a ‘plus costs as agreed or assessed’ basis is acceptable (see Curtis v Harden Shire Council (No. 2),^[21] but the offer must not include an amount for costs or express the offer as ‘inclusive of costs’.

2. Ensure the offer is a genuine compromise. This may only require that each party pay their own costs depending on timing in terms of the the evidence known to the parties and the costs incurred to date (see Salmon v Osmond).^[22]

3. Ensure sufficient time has been given for consideration of the offer. However, late offers may still be effective noting UCPR r42.14(2)(b)(ii) specifically provides for offers that are made on or after the first day of the trial (see Whitney v Dream Developments Pty Ltd).^[23]

4. Indicate that the plaintiff intends to rely on the offer on the question of costs, regardless of whether the offer complies with UCPR r20.26 and that ‘indemnity costs’ will be sought (see Davis v Swift (No. 2).^[24]

5. If the offer is compliant with UCPR r20.26, the plaintiff is entitled to an order for indemnity costs in accordance with UCPR r42.14 unless the court orders otherwise. The onus is on the offeree to demonstrate why the court should order otherwise (see (see Curtis v Harden Shire Council (No. 2).^[25]

UPDATE TO DISCLOSURE OF ESTIMATES Sub-section 174(9) of the Legal Profession Uniform Law (NSW) which provided: ‘For the purposes of this section, the total legal costs in a matter do not include GST and disbursements' has been repealed. Accordingly, disclosure of an estimate of the total legal costs under s172 must now include disbursements by virtue of the definition of ‘legal costs’ in s6, which includes disbursements.

Phillipa Alexander is a specialist in legal costs with Costs Partners. PHONE [phone] EMAIL [e-mail].

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^[1] [2015] NSWCA 189 (8 July 2015).

^[2] Prospect Resources v Molyneux (No. 2) [2014] NSWSC 1448 (27 October 2014).

^[3] Prospect Resources Ltd v Molyneux [2015] NSWCA 171 (at [94]) per Ward JA (Beazley P and Leeming JA agreeing) (25 June 2015).

^[4] Prospect Resources v Molyneux (No. 2) [2014] NSWSC 1448 (27 October 2014) at [11].

^[5] Prospect Resources v Molyneux [2015] NSWCA 171 (at [96]) per Ward JA (Beazley P and Leeming JA agreeing).

^[6] Ibid at [97].

^[7] Davis v Swift (No. 2) [2015] NSWCA 137 (21 May 2015).

^[8] Ibid at [12].

^[9] See Whitney v Dream Developments Pty Ltd [2013] NSWCA 188.

^[10] Curtis v Harden Shire Council (No. 2) (2015) NSWCA 45 (16 March 2015).

^[11] UCPR, r20.26 was amended as from 7 June 2013 to enable an offer to be made on a plus costs basis. However, the offer must not contain a reference to a monetary amount for costs and must not state that the offer is inclusive of costs.

^[12] Whitney v Dream Developments Pty Ltd [2013] NSWCA 188.

^[13] Curtis v Harden Shire Council (No. 2) (2015) NSWCA 45 (16 March 2015) at [14-15].

^[14] The offer was served after the amendments to UCPR, r20.26, which took effect on 7 June 2013.

^[15] The court also noted that had a breakdown of costs been provided it would have required care to avoid contravening UCPR, r20.26 in terms of the offer not including an amount for costs or being expressed to be inclusive of costs (at [30]).

^[16] Salmon v Osmond [2015] NSWCA 42 (10 March 2015).

^[17] Ibid per Beazley P at [167].

^[18] Salmon v Osmond (No. 2) [2015] NSWCA 131 (18 May 2015).

^[19] Leach v The Nominal Defendant (QBE Insurance (Australia) Ltd) (No. 2) [2014] NSWCA 391 (14 November 2014).

^[20] Ibid, per McColl JA at [23].

^[21] Curtis v Harden Shire Council (No 2) (2015) NSWCA 45 (16 March 2015).

^[22] Salmon v Osmond [2015] NSWCA 42 (10 March 2015).

^[23] Whitney v Dream Developments Pty Ltd [2013] NSWCA 188.

^[24] Davis v Swift (No. 2) [2015] NSWCA 137 (21 May 2015).

^[25] Curtis v Harden Shire Council (No. 2) (2015) NSWCA 45 (16 March 2015) at [27].