Wednesday, March 6, 2013

Offers of compromise and 'cost inclusiveness': Victorian Education Foundation Ltd v AC Hall Airconditioning Contracting Pty Ltd [2013] VSCA 32

Late last year I presented a seminar on Offers of Compromise and Calderbank offers with Daryl Williams, S.C., to the Victorian Bar. I was going through that paper again today and, whilst trawling through AustLII, happened to see a fresh judgment in the Victorian Supreme Court of Appeal which discussed 'cost inclusive' offers of compromise.

The matter of Victorian Education Foundation Ltd v AC Hall Airconditioning Contracting Pty Ltd [2013] VSCA 32 was a leave to appeal application (Neave and Priest JJA) from a costs order made by a Judge of the County Court of Victoria (Ginnane J). There were orders made by the County Court that VEF pay AC Hall the sum of $131,430, and costs of $34,254.68 were awarded to AC Hall based on an offer of compromise made by AC Hall on 12 October 2011 for $145,000 plus costs. Costs were ordered to be paid on a party-party basis to the date of the offer, and thereafter on a solicitor-client basis. An issue arose because there were earlier offers made including:
  • A purported offer of compromise on 8 July 2010 by VEF for $165,000 expressed to be 'in full and final settlement of its claim', purportedly pursuant to Order 26 of the County Court Rules; and
  • A purported offer of compromise on 29 November 2010 by AC Hall for $165,000 expressed to be 'in full and final settlement' of its claim.
The County Court held that VEF's offer was an 'all in' offer and fell foul of the Rules, following Aquatec-Maxon Pty Ltd v Barwon Region Water Authority (No 8) [2007] VSC 363. The County Court also held that it was not a 'Calderbank' offer as it was impossible to determine whether VEF achieved a more favourable outcome than was offered. The County Court held that the offer of AC Hall for $145,000 was more favourable to VEF than the judgment sum, and AC Hall was entitled to costs under Order 26. 

VEF clearly would not be happy with this outcome, since the order plus costs was around $165,000, which was the amount first offered by it to AC Hall. 

The Rule surrounding the controversy is Rule 26.03 which provides as follows:
(7) Upon the acceptance of an offer of compromise in accordance with paragraph (4), unless the Court otherwise orders, the defendant shall pay the costs of the plaintiff in respect of the claim up to and including the day the offer was served.
(8) If an offer of compromise contains a term which purports to negative or limit the operation of paragraph (7), that term shall be of no effect for any purpose under this Part.
I have discussed two interesting aspects of the judgment below, being the re-iteration by the Court of Appeal that an offer of compromise cannot be expressed to be costs inclusive, and whether the meaning of an offer of compromise is to be determined objectively or subjectively.

Priest JA, with Neave JA agreeing, refused the application for leave to appeal. Priest JA held that since the offer was expressed as being in 'full and final settlement' the County Court was correct in interpreting the offer of compromise as being inclusive of costs, and therefore was proscribed by Rule 26.03(8) (at [24] to [25]). Priest JA considered the reasoning of Giles J in Associated Confectionery (Aust) Ltd v Mineral and Chemical Traders Pty Ltd (1991) 25 NSWLR 349. In that case, an offer of compromise was expressed to be 'inclusive of costs'. Giles J held that this took the offer outside of the operation of the Rules, which Priest JA noted was almost precisely the same terms as Rule 26.03(8). 

Priest JA then considered whether the term concerning inclusiveness of costs could be severed from the offer. His Honour held that it would be impossible to do so and leave any part of the offer salvageable (at [29]).

VEF argued that the County Court should have held that AC Hall was under no misapprehension as to what the offer meant, particularly where AC Hall made a later offer in similar terms. Priest JA held that this argument was without substance as (first) it was not possible to determine what the offer actually meant, and (secondly) in determining what an offer means it falls to be construed objectively according to its terms and not according to a subjective belief that a party might have harboured as to its terms. Priest JA referred to Theiss Contractors Pty Ltd v SCI Operations Pty Ltd (Unreported, 21 September 1990, Sup Crt NSW, Rogers CJ Comm D) in support of this latter proposition.

This case serves as an important reminder that offers of compromise must be prepared pursuant to the rules to avoid this sort of harsh outcome for an offeror.

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