Rule 20.26(1) of the Uniform Civil Procedure Rules 2005 (NSW) provides that “in any proceedings, any party may… make an offer to any other party to compromise any claim in the proceedings”.
Rules 42.15 and 42.15A then set out the consequences of acceptance and non-acceptance of an offer in relation to costs.
These rules stipulate that:
- If an offer is made by a party (the offeror);
- The offer is not accepted by the other party (offeree);
- The offeror obtains a result as or more favourable to the offeror than the terms set out in the offer of compromise; and then
- The offeror is entitled to costs, assessed on an indemnity basis.
In order to attract the application of this rule, the offer must involve a ‘real and genuine element of compromise’.
This becomes particularly contentious when an offer is made early in proceedings for ‘capitulation’, with a term of the compromise being that each party will pay their own costs.
When an offer is not a compromise
This issue was recently considered by Hammerschlag J in Dr Leo Shanahan v Jatese Pty Ltd [No 2]  NSWSC 1306.
In proceedings commenced in 2014 it was alleged that the conduct of a company (owned 43% by the plaintiffs and 57% by the defendants) was, amongst other things, oppressive to the interests of the members.
Whilst the Court found that there was oppressive conduct, the plaintiffs failed to establish any loss and the proceedings were dismissed.
The issue of costs was deferred and subsequently determined on 23 August 2018.
Throughout the proceedings, the defendants served two offers of compromise. The first offered to accept judgment in their favour with no order as to costs. The second mirrored those terms but included the additional term that the parties enter into mutual releases.
The offers were made early in the proceedings, before defences had been prepared.
Order as to costs
The defendants sought to rely on these offers in support of a claim for costs to be awarded on an indemnity basis from the date of the first, if not, the second offer.
The Court found that given that the offer called for ‘capitulation’, at a time when minimal costs had been incurred by the defendant (as mentioned, a defence had not been filed), the offer involved no genuine element of compromise and the defendant was not entitled to indemnity costs.
When an offer is a compromise
Notwithstanding the decision in Shanahan, ‘walk away’ offers of compromise stipulating that each party pay their own costs may still constitute a ‘real and genuine’ offer of compromise. South Western Sydney Local Health District v Gould(No 2)  NSWCA 160 is an example of this.
In Gould, an offer of compromise was served by the appellant (the defendant) slightly more than 12 months after proceedings had commenced.
The offer was to compromise the whole of the claim on terms that judgment be entered for the defendant with no order as to costs.
When the offer was made, the defendant had incurred the costs of preparing a defence and obtaining medical evidence. The Court considered that the defendant’s willingness to forego these costs (as set out in the offer of compromise) involved a genuine element of compromise. Accordingly, indemnity costs were ordered.
This decision bears similarities to the 2014 Court of Appeal decision of Taheri v Vitek  NSWCA 344. In this case, the respondents made three ‘walk away’ offers of compromise. Each offer was that the appeal be dismissed, with each party paying their own costs.
The Court determined that the first two offers were made a time when ‘virtually no costs would have been incurred’. Accordingly there was no reward to the offeror in the form of an indemnity costs order. The position was different in relation to the third offer of compromise. By the time that the third offer of compromise was made, the respondents had ‘undoubtedly incurred substantial costs’. Accordingly, the respondents were entitled to have their costs assessed on an indemnity basis from the time at which the third offer of compromise was made.
The position in relation to ‘walk away’ offers of compromise is most succinctly summarised in the 2015 decision of Fabre v Lui  NSWCA 312 in which the Court of Appeal stated:
“While the respondents’ offer to bear their own costs could constitute a compromise, that will not be so where no significant costs have been incurred“.
How to avoid an offer of compromise not being considered a compromise?
- Don’t serve the offer immediately on receipt of the Statement of Claim;
- At significant points in the litigation consider whether the landscape has changed such that an additional offer is required or a previous offer should be re-opened; and
- Stipulate in the covering letter of an offer what in fact is being compromised, ie detail the costs incurred to date in a walk away offer which will be forgone if the offer is accepted.
This article was written by Rebecca Hosking, Partner and Edward Basha, Paralegal.
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