On or around 15 February 2021, a contract for the sale of land located at Tanja, NSW was formed between two plaintiff purchasers and a defendant vendor. Prior to the contract being completed, a notice purporting to rescind the contract was served on the plaintiffs declaring that the defendant vendor was a mentally ill person. The plaintiffs then sought to enforce the contract, seeking declaratory relief and specific performance.

On 30 November 2023, Justice Henry of the Supreme Court of New South Wales dismissed the plaintiffs’ claim. Costs were awarded in favour of the defendant vendor on an ordinary basis, subject to further application.

The principal judgment is available here Teo & Anor v Twyford bht Cunningham [2023] NSWSC 1470: https://www.caselaw.nsw.gov.au/decision/18c184ef934fceb4ea9fb57a

On 7 December 2023, the defendant made an application seeking that costs be awarded on an indemnity basis after the expiry of a Calderbank offer dated 17 September 2021. That Calderbank offer was a “walk away” offer i.e. the defendant proposed to forego its entitlement to costs in exchange for the proceedings being dismissed.

Justice Henry ultimately refused the defendant’s application for indemnity costs in his written judgment Teo & Anor v Twyford bht Cunningham (No 2) [2023] NSWSC 1626. The decision serves as a useful reminder as regarding the factors the Court considers when awarding indemnity costs and when a defendant’s offer will amount to genuine compromise so as to make the plaintiff’s refusal to accept it unreasonable.

The decision is available here: https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2023/1626.html

Judgment

Overview

Justice Henry declined to exercise the court’s discretion to award indemnity costs under s 98 of the Civil Procedure Act 2005 (NSW) on the basis that she was not satisfied that the defendant’s offer embodied genuine compromise so as to show that it was unreasonable for the plaintiff to not accept it [12].

As to the question of the reasonableness of the plaintiff’s non acceptance of the offer, Justice Henry considered factors including the stage of the proceedings at which the offer was received, the time allowed for acceptance, the extent of the compromise, the plaintiff’s prospects of success assessed at the date of the offer and whether the offer foreshadowed an application for indemnity costs [13].

Offer not reflective of genuine compromise on the defendant’s part

Whilst acknowledging that “walk away” offers are capable of engaging the principles in Calderbank, on these facts the only compromise involved on the defendant’s part was not to seek the costs he was likely to recover on an ordinary basis if the offer was not accepted. His Honour observed that those costs were not significant at the time of the letter and that the offer to forego party/party costs on the factors did not involve a “real concession or genuine compromise” and that was even in the context where the defendant was an individual litigant with a potential personal costs liability [16].

Stage of the proceedings at which the offer was made “too early” as to make its rejection unreasonable

Justice Henry concluded that at the time the defendant’s offer was conveyed, the plaintiff was unlikely to have been in a position to “properly test the defendant’s assertions” as to justify the walk away offer and make a realistic assessment of the probable outcome of the proceedings.

The offer was made after a defence had been filed, but no lay evidence had been served on behalf of the defendant, no expert evidence had been served and the plaintiff’s had not yet issued a subpoena for the defendant’s medical records [17].

Justice Henry held that the making of the offer “at an early stage in the proceedings” did not weigh in favour of the defendant on these facts [18].

Binary nature of the dispute to be determined meant that the plaintiff’s prospects of success were not unreasonable.

Justice Henry opined that the outcome of the proceedings at the time of the letter was “binary” in a sense in that it involved an “all or nothing” case based on the court’s interpretation of the relevant contractual clause entitling the defendant to rescind same.

His Honour did not characterise the plaintiff’s claim to be frivolous or vexatious such as to support an indemnity costs order against them.

It followed that Justice Henry held that the defendant failed to establish that it was unreasonable for the plaintiffs to have rejected the Calderbank offer at the time it was made [19]. She maintained his order providing for the plaintiff to pay the defendant’s costs as agreed or assessed on an ordinary basis [23].

Conclusion / take away from decision

This decision is a useful ‘refresher’ on the discretionary nature of indemnity cost orders. Litigants and their legal representatives ought to be mindful of the factors the Court considers when exercising its discretion including the extent of the compromise contained in any offer and the timing of making the offer. Strategic decisions will need to be made during the course of the proceedings concerning the when, the what and the how of the making of such offers to ensure the cost benefits are enjoyed by the offeree.

An offer made too early in the proceedings or without genuine compromise will not make a party’s rejection of it unreasonable despite the offeree’s favourable outcome. In those circumstances, the Court will decline to exercise its discretion to award indemnity costs and follow the usual rule concerning costs, being that costs follow the event on an ordinary basis unless it appears that some other order should be made: Rule 42.1 and 42.2 UCPR.

Offers of compromise and Calderbank offers remain valuable tools to ensure the just, quick and cheap resolution of proceedings when used effectively.