Recent Victorian Offer of Compromise reform: costs inclusiveness, claim failure, pre-litigation offers and other changes

The Magistrates' Court General Civil Procedure (Offers of Compromise Amendments) Rules 2014 bring the rules on offers of compromise in the Magistrates' Court of Victoria ("MCV") largely into alignment with the Supreme Court of Victoria ("VSC") and County Court of Victoria ("CCV") rules on offers of compromise. This amendment commenced on 1 August 2014. The VSC and CCV rules were amended on 1 September 2013 and 7 October 2013 respectively.

Summary of the reform

By way of summary, the rule amendments for all Victorian Courts implement the following significant changes to Order 26 which concerns offers of compromise:

• Offers of compromise shall be either expressed to be inclusive of costs, or costs are to be paid or received in addition to the offer (r26.02(3)). 
• An acceptance of an offer of compromise may may be withdrawn if the money is not paid within the time specified in the offer or within 28 (SCV/CCV)/30(MCV) days after acceptance of the offer and the court gives leave to do so. A party seeking leave may also seek orders to restore the parties to their position at the time of acceptance and as to the further conduct of the proceeding (r26.07)
• If a party defaults in complying with the offer after its acceptance, a non-defaulting party may apply to the court for an order giving effect to the offer, an order staying or dismissing the proceeding if the plaintiff is in default, an order striking out the defendant's defence if the defendant is in default or an order that a claim, not the subject of the offer, shall proceed (r26.07.1). Where there are multiple defendants this rule is limited to where the offer is made to compromise the claim against all defendants (r26.07.2).
• The consequences of non-acceptance commence at 11am on the second business day after the offer was served, instead of the day after the offer was served (r26.08).
• Where an offer of compromise is made by a defendant and the plaintiff "unreasonably fails to accept the offer" and the claim is dismissed or judgment is entered in favour of the defendant, then, unless the court otherwise orders, the defendant shall be entitled to costs on the usual basis up until 11am on the second business day after the offer was served, and thereafter on an indemnity basis (CCV/SCV)/25% increase on the applicable scale (MCV) (r26.04(4)). The operation of this rule has already been considered, noted below.
• The court can take into account pre-litigation offers in exercising its discretion as to costs, provided the offer was open to be accepted for a period of at least 7 days after the offer was made and the offeror obtains an order no less favourable to the offeror than the terms of the offer (r26.08.1).
• Offers of compromise are extended to "contributor parties" that may be held liable to contribute towards an amount of debt or damages. A contributor party may make an offer to another contributor party to contribute, to a specified extent, to the amount of the debt or damages. If the offer is made and not accepted, and the offeror obtains an order against the offeree more favourable than the terms of the offer, then unless the court otherwise orders, the offeror is entitled to an order that the offeree pays the offeror's costs on the usual basis up until 11am on the second business day after the offer was served, and thereafter on an indemnity basis (SCV/CCV)/25% increase on the applicable scale (MCV) (r26.10).
• Transitional provisions provide that the amendments do not have retrospective effect, and the previous provisions apply to offers of compromise served when the previous provisions were applicable (r26.11).

Click here for the VSC amending legislation (Supreme Court (Chapter I Offers of Compromise Amendments) Rules 2013), here for the CCV amending legislation (County Court (Chapter I Amendment No. 8) Rules 2013) and here for the MCV amending legislation (Magistrates' Court General Civil Procedure (Offers of Compromise Amendments) Rules 2014) from the Victorian Parliament website.

These amendments follow the suggestion by the Victorian Law Reform Commission in its 2008 "Civil Justice Review" Report for the Costs Council to review the rules relating to offers of compromise, and a 2012 consultation process between the Civil Procedure Advisory Group and various industry stakeholders.

Consequences on failure of a claim where there is an offer by a defendant

In Smith v Jovanoska & Anor (No. 2) [2013] VSC 714 the Supreme Court of Victoria considered the new r26.04(4), which provides for cost consequences on a dismissal of a claim where an offer was served by a defendant and the plaintiff unreasonably fails to accept the offer. There, an offer of compromise was served by the first defendant offering to pay the plaintiff $40,000 inclusive of costs. It is not made clear from the decision, but it can be reasonably assumed, that the outcome of the case is that the plaintiff failed in the claim. 

There, Zammit AsJ held that the considerations for "Calderbank" offers (see Calderbank v Calderbank [1975] 3 WLR 586) set out in the matter of Hazeldene’s Chicken Farm v Victorian WorkCover Authority (No 2) [2005] VSCA 298 ("Hazeldene's") are applicable to an offer of compromise under this new provision, and ordered that the plaintiff pay the first defendant's costs from the second business day after the offer was served on an indemnity basis. By way of recap, the matters a court is to have regard to, from Hazeldene's, are as follows:

(a) the stage of the proceeding at which the offer was received;
(b) the time allowed to the offeree to consider the offer;
(c) the extent of the offer of compromise;
(d) the offeree’s prospects of success as assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed;
(f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.

In Smith, the offer was served late in the proceeding, after mediation and before trial. These facts were decisive in the outcome.

Discussion

Since the reform allows cost inclusive offers, this may have the effect of displacing the "Calderbank" offer as the offer of first resort, since a "Calderbank" offer has the disadvantage of requiring the offeror to prove that the rejection of the offer was unreasonable. However, there is still a benefit in making an offer "plus costs", because where an offer is made "plus costs" it is much easier for the court to assess whether the result is more or less favourable than the offer. This is because where an offer is made "plus costs" there doesn't need to be an assessment of what the costs would have been at the date of the offer.

The inclusion of contributor parties will make offers of compromise more attractive to complex multi-party disputes, such as building and insurance disputes. However, the language of this provision appears convoluted and this may give rise to some disagreement about what sort of parties are intended to be captured by this provision. For instance, is this intended to apply to apportionable claims under Part IVAA Wrongs Act 1958, or contribution proceedings under Part IV Wrongs Act 1958, or both?

Recent (2014) discovery amendments to the Civil Procedure Act 2010 (Vic)

The Justice Legislation Amendment (Discovery, Disclosure and Other Matters) Act 2014 (Vic) was given Royal Asset on 8 April 2014, and amends the Civil Procedure Act 2010 (Vic) (the "CPA"). The amendments mainly concern document management in the discovery process.

Click here for the link to the Explanatory Memorandum.

Click here for the link to the Justice Legislation Amendment (Discovery, Disclosure and Other Matters) Act 2014.

The amending legislation does the following to the CPA:

• It gives a court power to order parties to prepare a statement of issues, which may be used for many purposes including discovery (ss50 and 50A).
• It gives a court power to give directions limiting the obligation of discovery to a class or classes of documents or to documents relating to one or more specified facts or issues in dispute (s55(2)(c)).
• It gives a court power to order a party to pay a specified amount to another party in relation to the costs of discovery, including by way of payment in advance or as costs in the proceeding (s55(4) and (5)).
• It gives the court power, on consent of the parties, to give over all documents in that party's possession or control, on the basis that privilege is not waived (s55A).
• It gives the court power to order a party to provide an affidavit of document management, including details of the volume or location of discoverable documents, the way the documents are arranged or stored, or the party's document management processes more generally (s55B).
• It gives the court power to order oral examination of a deponent of an affidavit of document management or another appropriate person who is able to provide information about the matters in the affidavit (s55C).

The amendments relating to discovery are novel, and reflect the increasing need for proper document management and the kind of document management processes. The purpose of the amendments, expressed in the Explanatory Memorandum, is:

[T]o ensure that the courts, parties and legal practitioners are using appropriate tools to reduce the costs and delays associated with the discovery process, for example by more clearly defining the issues in dispute, considering document management issues prior to undertaking discovery, and limiting the scope of discovery requests.

The amendment that allows a party to hand over all of its documents and maintain privilege is a method used in large-scale litigation where it is considered too onerous for a party to wade through millions of documents to extract privileged and irrelevant documents. Of course, the risk of agreeing to this kind of order is that once a document is seen, it cannot be unseen. On the other hand, this sort of order may avoid the kind of extreme satellite litigation that occurred in the recent High Court of Australia decision of Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited (2013) 303 ALR 199. There, a party inadvertently discovered and produced 13 documents because of errors made in a large and complex discovery process, and the opposing party refused to return them. The discovery dispute started in the New South Wales Supreme Court, then went to the Court of Appeal, and then on to the High Court.

This is the sort of balancing exercise the Court and the parties will need to engage in when considering this kind of order, in light of the overarching purpose to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute (CPA, s7).

Receiver's access to intermingled company documents, and confidentiality regimes: Re Kavia Holdings [2013] NSWSC 1269 and Hall v Sherman [2001] NSWSC 810

In the matter of Kavia Holdings Pty Limited (Administrators Appointed) (Receivers and Managers appointed) & Ors [2013] NSWSC 1269 ("Kavia") concerned a claim by receivers for books and records held by a director of a company in administration, in particular, emails held by a defendant director. There, the director refused to provide emails on the basis that the emails sent by him as director were intermingled with emails sent by him as a solicitor in his own capacity, and those emails may contain privileged communications.

There was resistance in providing the emails, relying on the decision in Hall v Sherman [2001] NSWSC 810.

Hall v Sherman concerned the One.Tel group of telecommunications companies. Administrators were appointed to the parent company and most of the subsidiaries, and they were appointed liquidators when the creditors resolved the group be wound up. Certain subsidiaries of the group had a receiver and manager appointed to them, and the receiver and manager sought documents from the liquidators. The evidence was that it was difficult to determine whether any given document belonged to the parent or another company, and there were around 1400 boxes of intermingled documents. The receiver and manager said that the non-provision of documents was impeding his function. Austin J held that books of the company, to which the receiver and manager was entitled under the appointment deed and s420 Corporations Act 2001 (Cth), meant books belonging to the company, rather than books relating to the company ([70] and [71]). Further, in respect of a declaration sought by the receiver that it be entitled to possession of the books of the company, Austin J considered this order futile, and identified the real controversy in the matter as not who had a right to documents, but instead ([62]):

The real controversy between the parties in this case, in my opinion, is not at all about whether the plaintiff is entitled to possession of documents belonging to Network Group companies; it is about the practical problem of how to classify documents, given the mass of documents involved, and who is to pay for the cost of doing so.

In respect of a right of inspection of the books and records of the companies, Austin J considered that it would not be appropriate ([77]):

by declaration or order, to impose on the liquidators the duty, either immediately or in the future, of trawling through tens of thousands of documents to ascertain which documents were books of the corporation to which the plaintiff's statutory right would attach.

The end result is that the Court did not grant the receiver and manager orders giving access to the books and records of the company, despite his right, in the appointment deed and the Corporations Act 2001, to the books and records.

In Kavia, Bergin CJ in Equity allowed access to the emails of the director, even though there was a risk that it contained emails in his capacity as a solicitor. The effect of this result is that Hall v Sherman does not stand in the way of a mechanism put in place, with the appropriate confidentiality regime, to ensure that the books and records of the companies are produced ([40]):

The only outstanding express resistance to production is in respect of Mr Crawley's emails. The defendants submitted that because Mr Crawley utilised the email account of his legal practice and intermingled the Companies' emails with those of the legal practice, the defendants are not obliged to produce them to the plaintiffs. I do not accept this submission. There is no doubt that mechanisms can be put in place, with the appropriate confidentiality regime, if necessary, to ensure that the books and records of the Companies are produced from the email account in which the Companies' records were created.

That is, provided one party (most likely an official liquidator, being an officer of the court) is giving confidentiality undertakings in respect of books and records that may not belong to the company to which he or she is appointed receiver or manager, then this may be an impediment to that party having access to the intermingled group books and records.

Inadvertent production of confidential documents: ERA v Armstrong (2013) 303 ALR 199

At present the New South Wales, Queensland, South Australia and Western Australia Solicitors’ Rules require the return of documents to an opponent where there is inadvertent disclosure of confidential documents. The High Court recently commented that such a rule should not be necessary as “in the not too distant past it was understood that acting in this way obviates unnecessary and costly interlocutory applications” (Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited (2013) 303 ALR 199 (“ERA v Armstrong”))

In ERA v Armstrong a firm of solicitors, Norton Rose, gave general discovery on behalf of a client. This included 13 documents that the client intended to claim privilege over, but which were inadvertently listed as non-privileged and produced for inspection. The error appeared to result from a mistake in the process of reviewing and identifying documents in large-scale discovery. On receipt of the documents Marque Lawyers sent a letter to Norton Rose stating that there was an inconsistency in the discovery as some communications were disclosed, but others were the subject of a claim for privilege. Norton Rose wrote to Marque Lawyers stating that the production was a mistake and requested the documents be returned. Marque Lawyers refused to return the documents and said that any privilege attaching to them had been waived.

Marque Lawyers was successful in the New South Wales Supreme Court and Court of Appeal. On appeal the High Court of Australia unanimously ordered the return of the documents to Norton Rose. The High Court noted that times have changed since the decision of Slade LJ in Guinness Peat Properties Ltd v Fitzroy Robinson Partnership [1987] 1 WLR 1027 at 1044. and case management concerns, including specific case management powers in the rules (in ERA v Armstrong, the CPA NSW ss 56, 57, 58 and 59) now give courts the power to order the return of the documents to further the “overriding purpose”, that is, the just, quick and cheap resolution of the real issues in the dispute or proceedings (ERA v Armstrong, [56], [57]). The High Court considered the pursuit of satellite interlocutory proceedings, in circumstances where the discovery dispute was a minor issue and offered very little advantage to the recipient, would not fulfill the overriding purpose and is the kind of conduct to be avoided (ERA v Armstrong, [59]). Also, a mistake had been made and this fact was not disputed. As such, there was no question of waiver sufficient to be agitated, and it was necessary that the mistake be corrected and the parties continue with their preparation for trial (ERA v Armstrong, [60] - [63]).

Expert determinations and procedural fairness: Glenvill Projects v North North Melbourne [2013] VSC 717

In Glenvill Projects Pty Ltd & Ors v North North Melbourne Pty Ltd & Ors [2013] VSC 71 a claimant in an expert determination challenged an interlocutory decision of the expert to refuse the claimant leave to amend its claim. After discussing the nature and purpose of expert determination, and construing the contract between the parties and the expert, the Court held that the expert did not err.

Facts

A dispute between an owner of a residential building and the builder was referred to expert determination. The builder alleged that it was entitled to liquidated damages arising out of the failure of the owner to deliver the site to the builder with utility services connected.

Late in the expert determination process, and after exchange of submissions and affidavits, the builder sought to amend its claim, alleging that liquidated damages were also payable because of other matters unrelated to the failure to provide utility services. The expert’s terms of engagement with the parties to the building contract provided, among other things, that any dispute arising between the parties in respect of the expert determination process was to be determined by the expert.

The expert disallowed the proposed amendment because:

• the owner refused consent to it;
• he considered it was not within the scope of the referral; and
• he considered that the process would need to be recommenced with fresh submissions.

There were terms of the building contract including:

• the decision of the expert is final and binding in the absence of manifest error; and
• the expert must decide the dispute acting as an expert and not an arbitrator.

The builder submitted to the expert that if leave to amend was not granted, it would be compelled to commence further proceedings, either by way of another expert determination, or by issuing in VCAT or the Courts. It contended that this would result in a multiplicity of proceedings and the risk of inconsistent finding or issue estoppel.

The builder submitted to the court that because the expert disallowed the proposed amendment, there was a manifest error within the meaning of the building contract because the amendment was within the scope of the expert determination referral, and also because the expert denied the builder a proper opportunity to put its case.

Decision

Vickery J analysed the law concerning the role of an expert. A summary of the analysis (at [45], [46], [56] and [57]) follows:

• The activities of an expert are subject to little control of the court, save as to jurisdiction or departure from the mandate given.
• A referral to an expert usually arises because the parties desire a particular body of expert experience, learning, skill and judgment to be applied to the resolution of defined issues that may arise in the course of the relationship and need to be dealt with.
• The problem solving role is usually intended to be applied in a manner which is untrammelled by overly restrictive procedural considerations, so that the specialist skills and insights of the expert can be fully applied to the issues for resolution, in an expeditious and cost effective manner which is attended with an appropriate measure of finality.
• There is no obligation to give procedural fairness in the absence of an express contractual provision.
• Parties who by the terms of their contract agree to submit a question to an independent expert are bound by the determination of that expert acting honestly and in good faith.
• Mistake or error in the process of the determination will not invalidate a decision as long as it is made in accordance with the terms of the agreement.

Vickery J noted that how the expert went about making the determination was in the hands of the expert subject to the terms of the expert’s terms of engagement, which in this instance was comprised of the IAMA Rules and a preliminary conference agenda. His Honour construed the expert’s terms of engagement in light of its commercial context, particularly the reasons for submitting disputes to experts set out in the analysis summarised above.

His Honour considered that the IAMA rules conferred the following important procedural processes to be determined by the expert:

• defining the issues in dispute; and
• appropriate procedures for determination of those issues.

Vickery J reviewed the reasons of the expert for refusing leave to amend and held that there was no error of law manifest in those reasons. Further, His Honour held that the expert did not deny the builder procedural fairness, and it was within the expert’s power to reject the application for the reasons given.

Finally, Vickery J noted that the only remedies available to the builder would be contractual in nature, limited to discretionary declaratory relief. His Honour held that specific performance would not be appropriate as the process to be followed is left to the expert’s discretion within the broad parameters of the Expert’s terms of engagement. Further, His Honour noted that administrative law remedies would not be available for a contractual appointment.

Discussion

The decision is important because it highlights the distinction between arbitrations on the one hand and expert determination on the other. The arbitration process is a quasi-judicial process whereas the expert determination process is governed by the expert within the parameters of his terms of engagement.

In this matter the builder also contended that although the dispute resolution process prescribed in the building contract was described as an expert determination, it was in effect an arbitration in the sense that the expert was being asked to hear and resolve opposing contentions.

The Court construed the terms of the Expert’s terms of engagement and found that, irrespective of the expert’s role appearing to be similar to an arbitrator, the process was governed by the building contract and the Expert’s terms of engagement.