What should you consider when making an offer of compromise?

Consider this:

  • I make an offer of compromise under the relevant Court Rules in the course of litigation;
  • the offer is not accepted;
  • at trial, the end judgment represents a better result than my offer.

I get indemnity costs from the time of my offer, don’t I?  Well, it depends…

The above represents the general rule, but the general rule is only that.  The Court has the power to make a different order if the circumstances of the case warrant it.

Polczynski Lawyers (now Polczynski Robinson) was recently involved in just such a case, successfully arguing that the defendant had significantly changed its case after an offer of compromise had expired and that the defendant should not receive indemnity costs as a result.  This decision was unanimously upheld on appeal to the Full Court of the Federal Court of Australia.

Gorst v Sydney Equine Coaches Pty Ltd [2016] FCA 1067

In this case, the plaintiff alleged that a luxury horse truck purchased by her was fundamentally defective as it exceeded the maximum weight allowance to be lawfully driven on public roads.  The defendant denied this allegation. 

An offer of compromise was made by the defendant and rejected by the plaintiff.

Some months after the defendant’s offer had expired, the defendant filed an expert report.  The conclusions reached by the defendant’s expert were in dispute, but Jagot J found that the expert report contained an express acknowledgement that in certain circumstances the truck would not comply with statutory weight limits.  The expert concluded, however, that this non-compliance could be fixed for a comparatively low price and proposed a solution.

At trial, the parties’ experts ultimately agreed that the low-cost fix proposed by the defendant’s expert would resolve the truck’s non-compliance with statutory weight limits.  Judgment by consent was entered in favour of the plaintiff for an amount representing the cost of this fix.  The judgment amount was less than the offer previously put by the defendant.  The defendant, therefore, sought its costs on an indemnity basis from the date of the offer onwards.

However, Jagot J considered that the filing of the expert report represented a fundamental shift in the way the defendant was running its case.  The defendant’s argument was no longer that the truck was compliant with weight limits.  The defendant instead said that the truck was not compliant, but could be fixed at little cost.

This new argument was not put forward by the defendant until after the offer had expired.  When the plaintiff received the defendant’s offer, she was considering it in the context that the defendant simply denied that the truck exceeded weight limits.  She was not at that time aware of any low cost fix and was, therefore, entirely justified in refusing the offer.

Jagot J therefore concluded that the plaintiff should be awarded her costs up until the date the defendant’s expert report was filed and that both parties bear their own costs after that date.

The defendant appealed this decision in relation to costs. 

Sydney Equine Coaches Pty Ltd v Gorst [2017] FCAFC

The Full Court agreed with the analysis of Jagot J. 

The Full Court emphasised the discretionary nature of a costs order.  A judge making a costs order can look at all of the surrounding circumstances and is not required to simply compare the amount of the judgment entered with the amount of the offer made.  Where compelling reasons exist to depart from the usual order regarding costs after an offer, a judge is free to do so and that decision will not be lightly overturned on appeal.

So, how do I get my indemnity costs?

Every case has its own unique twists and turns that unfold as the litigation progresses.  The case you started with may not be the case you end up with at trial. 

Parties need to constantly consider and (if appropriate) revise offers of compromise made in the course of the litigation as those twists and turns unfold.  A set and forget approach may come back to bite if the litigation has taken a different road in the mean time!

For more information, please contact Dajana Malnersic or Claire Latham on 02 9234 1500.