Knope v Webster - [2009] SASC 152

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
KNOPE & ANOR v WEBSTER & ANOR
[2009] SASC 152
Reasons for Decision of The Honourable Justice David
29 May 2009
PROCEDURE - COSTS - GENERAL RULE - COSTS FOLLOW THE EVENT - COSTS OF WHOLE ACTION - WHERE MONEY PAID INTO COURT OR OFFER OF COMPROMISE MADE - OFFER OF COMPROMISE MADE
By consent parties entered into judgment in respect of dispute - consent judgment not inclusive of costs - plaintiffs had filed offer to settle prior to judgment - plaintiffs' offer less than ultimate judgment sum - whether plaintiffs entitled to costs of whole action on solicitor and client basis.
Held: Plaintiffs entitled to costs of whole action on solicitor and client basis.
Supreme Court Rules 1987 (SA) r 41; Supreme Court Rules 1970 (NSW) Pt 52 r 17, referred to.
Messagemate Australia Pty Ltd v NCI & Ors (No 2) [2002] SASC 377; Shaw v Jarldorn (1999) 76 SASR 28; Thorne v Doug Wade Constructions Pty Ltd [1985] VR 433; Tickell v Trifleska Pty Ltd (1990) 25 NSWLR 353, discussed.

KNOPE & ANOR v WEBSTER & ANOR
[2009] SASC 152
Civil

DAVID J. This decision relates to the award of costs following the delivery of a consent judgment. On the day the trial of this matter was to commence, the parties informed the Court that they had arrived at a settlement, and that a consent judgment was sought. Accordingly, I entered judgment in terms as agreed by the parties. The judgment provided:
1.By consent, judgment is entered for the plaintiffs in the sum of $102,356.16, this sum comprising principal of $77,856.85 and agreed interest of $24,499.31.
2.Execution of this judgment is to be stayed for 14 days.
3.Adjourned to 10.30 am on Friday, 8 May 2009, for argument as to basis for award of costs.
On Friday 8 May 2009 I heard argument from the parties as to the basis on which I would award the plaintiffs their costs of the action.
Background
I will deal with the background to the dispute between the parties, to which I will refer as the “primary dispute”, only insofar as it is relevant to my decision in respect of the award of costs. In setting out the facts of the primary and present disputes, I take as admitted a number of facts alleged in the plaintiffs’ Amended Statement of Claim. My reasons for taking this approach will be canvassed later in this decision.
The primary dispute arose from a business relationship between the plaintiffs and Mr Robert Hallett Shueard. This relationship commenced in about April 1994. It is not necessary for me to discuss this relationship in detail, or for me to provide an extensive background of the dispute between the plaintiffs and Mr Shueard. It is sufficient to say that in the course of the business relationship between the plaintiffs and Mr Shueard, Mr Shueard became quite considerably indebted to the plaintiffs.
In 1996 Mr Shueard was injured in two separate motor vehicle accidents. He retained the firm Frank Webster & Associates (“the firm”), of which the defendant was a principal, to act for him in recovering damages in respect of injuries sustained by him in those two accidents. On 12 June 2001 the plaintiffs and Mr Shueard entered into an agreement by which Mr Shueard charged in favour of the plaintiffs the prospective proceeds of his two claims for damages. On 13 June 2001 the defendant personally and irrevocably undertook that he would repay to the plaintiffs the amount owed to them by Mr Shueard from the proceeds of his two claims for damages.
It was agreed between the plaintiffs and Mr Shueard that as at 31 May 2002 the amount owed to the plaintiffs by Mr Shueard was $170,012.85 plus interest. Mr Shueard’s damages claims were resolved in 2004, and the firm received two cheques from the Territory Insurance Office (“the TIO”) totalling $280,000. Mr Shueard contacted the plaintiffs and instructed them to deal directly with his lawyers, as the whole balance of the proceeds of his damages claims were charged in the plaintiffs’ favour.
The defendant claims that he ceased legal practice on 29 January 2004. Mr Ken Gluche took over the conduct of Mr Shueard’s damages claims. On 17 June 2004 the plaintiffs attended at the firm’s offices in relation to receipt by them of moneys paid to the firm by the TIO. They claim that Mr Gluche refused to pay the balance, less the firm’s costs, of the moneys received from the TIO to the plaintiffs.
The date on which the defendant retired from practice took on considerable significance in these proceedings. It is a matter to which I will return.
On 18 June and 14 July 2004 the firm paid to Mr Shueard the sums of $115,755.79 and $44,633.31 respectively, both payments being made from the settlement proceeds of Mr Shueard’s claims for damages. This represents a total payment to Mr Shueard of $160,389.10. A further $360 was paid by the firm to Mr Shueard on 20 July 2004, for a total payment of $160,749.10. Mr Shueard paid the plaintiffs the sum of $112,520.00. This was $77,856.85 less than the $190,376.85 the plaintiffs claimed they ought to have received.
It appears from documents on the Court file that there were prolonged discussions between the plaintiffs and the defendant from 2001 to 2004. The plaintiffs wrote to the defendant on 15 September 2004 requesting payment of $77,856.85. Legal proceedings were instituted on 17 August 2006. Mr Shueard was joined as a third party to this action by the defendant in September 2007. A formal offer of settlement pursuant to r 41.01(1) of the Supreme Court Rules 1987 (SA) was filed by the plaintiffs on 20 November 2008. By this offer, the plaintiffs agreed to settle the action for $94,000. This amount represented the outstanding principal claimed, and was inclusive of interest. The defendant did not accept this offer.
On the afternoon trial was scheduled to commence, I was informed that the plaintiffs and defendant had arrived at an agreement in relation to the outstanding principal and interest sums. The parties entered into a consent judgment. The question of costs was expressly not covered by the consent judgment. This question is the focus of the present dispute. The plaintiffs submit that they should receive their costs of the entire action on a solicitor and client basis. The defendant disputes this.
As I have already mentioned, this recital of the facts is extremely brief. There remains an ongoing dispute between the defendant and Mr Shueard, however, these reasons do not concern the dispute between those parties. Had it been necessary, I could have gone into great detail about the communications between the plaintiffs, the defendant and Mr Shueard over the last decade or so, and particularly since 2004. However, I consider that the rudimentary background I have provided is sufficient to resolve the present dispute.
The Law
Pre-trial offers to settle made by a plaintiff in respect of actions commenced before 4 September 2006 are governed by r 41 of the Supreme Court Rules 1987 (SA). Rule 41.01(1) provides:
A plaintiff may at any time up to 21 days prior to trial lodge with the Registrar and serve on all other parties a notice offering to accept a stated amount, or a judgment for a stated amount where it is necessary to enter judgment, together with his costs of action, in satisfaction of the plaintiff’s cause of action or where there are more causes of action than one, of one, some or all designated causes of action.
Rule 41.04 provides:
Where a defendant has not accepted a plaintiff’s offer made pursuant to this Rule and the sum recovered or, as the case may be, the proportion of the debt or damages or the relief recovered by the plaintiff is equal to or greater than that contained in the plaintiff’s offer, the Court, unless it thinks proper to order otherwise, shall order the defendant to pay the whole of the plaintiff’s costs of action to be taxed as between solicitor and client.
In the event that an offer made pursuant to r 41.01(1) is not accepted by a defendant, r 41.04 provides that a plaintiff who is awarded more than the sum offered pursuant to r 41.01(1) should be compensated for all costs incurred on a solicitor and client basis. This is the standard, or default, position under the Supreme Court Rules 1987 (SA), and applies to all costs incurred in the action, not just those costs incurred after the offer is made. Only where the Court is of the opinion that it is “proper to order otherwise” will there be departure from this standard.
In Shaw v Jarldorn,[1] the Full Court considered the operation of r 41 of the District Court Rules 1991 (SA). This rule is in the same material terms as r 41 of the Supreme Court Rules 1987 (SA). Doyle CJ said:[2]
The purpose of r 41 is clear. The purpose of the rule is to encourage the settlement of actions. It does so by providing an incentive to a plaintiff to make a realistic offer in settlement of a claim. The incentive provided to the plaintiff is the prospect of recovering costs as between solicitor and client, rather than the lesser amount of costs likely to be recovered as between party and party. The rule provides an incentive to a defendant to make a realistic response to an offer by the plaintiff. The incentive is the risk of having to pay costs as between solicitor and client if the plaintiff recovers more than the amount of the offer.
The power to “order otherwise” confers upon the Court an unfettered discretion. But it is a discretion which, if exercised, is exercised to displace what will otherwise be the required effect of r 41.04, which is that the defendant pay the whole of the plaintiff’s costs of action as between solicitor and client. In other words, it will be proper for the Court to order otherwise only if, in the exercise of that wide discretion, there is good reason to order that the rule is not to have its usual effect. In considering whether there is good reason to so order, it is necessary to bear in mind the manner in which the rule operates, and the context in which it operates.
…
A defendant who does not accept an offer made by a plaintiff will, of necessity, only know after judgment if the defendant was right to fight on rather than to accept the offer. But once again, the rule operates on the premise that if an offer is made by the plaintiff, the defendant will weigh up the advantages and disadvantages of not accepting the offer. In weighing up those advantages and disadvantages, the defendant must take into account the ordinary risks of litigation, including the fact that in a damages claim in particular it is usually impossible to predict with any precision the amount of damages that will be awarded. And such a defendant must also bear in mind that if matters of fact that will affect the amount of damages are in issue, a decision on those matters can go one way or the other. For those reasons it will not usually be to the point, in submitting that the Court should order otherwise, for the defendant to submit that there were reasons why it might not have anticipated the Court awarding as much as it did.
[1] (1999) 76 SASR 28.
[2] Ibid [3]–[4], [6].
In circumstances where the plaintiff has made an offer to the defendant, and that offer has subsequently been bettered by an award of damages following trial, the onus is on the defendant to demonstrate that reason exists to award costs on other than a solicitor and client basis. There is no exhaustive list of determinative factors that must be considered by the Court when deciding whether it is proper to order that the costs of a successful plaintiff to whom r 41.04 applies be paid other than on a solicitor and client basis.[3]
[3] Shaw v Jarldon (1999) 76 SASR 28, [10] (Doyle CJ).
In the case of Tickell v Trifleska Pty Ltd,[4] heard in the Commercial Division of the Supreme Court of New South Wales, Rogers CJ considered Pt 52, r 17(4) of the Supreme Court Rules 1970 (NSW), which provided:
Where an offer is made by a plaintiff and not accepted by the defendant, and the plaintiff obtains an order or judgment on the claim to which the offer relates no less favourable to him than the terms of the offer, then, unless the Court otherwise orders, the plaintiff shall, subject to rule 24, be entitled to an order against the defendant for his costs in respect of the claim from the day on which the offer was made, taxed on an indemnity basis in addition to his costs incurred before and on that day, taxed on a party and party basis.
[4] (1990) 25 NSWLR 353.
Rogers CJ said:[5]
Unless circumstances are wholly exceptional a demand for payment to the plaintiff of everything, to which it may possibly entitled, hardly falls in the category of the compromise. It is true, as Mr Campbell pointed out, that there are difficulties in cases of a claim for liquidated damages when one is called upon to formulate an offer of compromise. He suggested that it was inconceivable that a court should be required, in the circumstances of Pt 52, r 17(4), to have to decide in each and every case whether an offer represented a bona fide compromise. With respect I do not think it is inconceivable at all. What the court is invited to do is to determine whether, in the totality of the circumstances, the offer by the plaintiff represented any element of compromise or whether it was merely, yet another, formally stated demand for payment designed simply to trigger the entitlement to payment of costs on an indemnity basis.
It was never in the minds of the draftsmen of the rule, or the members of the Rule Committee responsible for the passing of this rule, that Pt 22 [sic] should be utilised simply as a statutory demand which, other circumstances being equal, will automatically entail the payment of costs on an indemnity basis.
[5] Ibid 355.
Other than the fact that r 41.04 provides for payment of the whole of the successful plaintiff’s costs on an indemnity basis (rather than all costs incurred from the date the offer is filed), the two rules are substantially the same. In the above passage quoted from Tickell,[6] Rogers CJ suggests that some element of compromise must be present in an offer filed by the plaintiff in order for Pt 52, r 17(4) to operate. I am prepared to accept that this is the position under the Supreme Court Rules 1987 (SA). However, in accepting this position it must be remembered that r 41.04 is designed to both encourage settlement and to punish a defendant who rejects what is shown by judgment to have been a reasonable settlement offer. In Shaw v Jarldorn,[7] Doyle CJ said:[8]
It is part of the ordinary operation of the rule that it affects the amount to be paid by way of costs in respect of steps in the action that precede the making of the offer. That is an aspect of the incentive, deliberately created, to respond to an offer, rather than to continue to litigate in the hope of achieving a better outcome. In this respect the operation of the rule can be said to be penal... But this operation of the rule cannot, of itself, be a reason to order otherwise. It is part of the very scheme of the rule.
[6] Ibid 353.
[7] (1999) 76 SASR 28.
[8] Ibid [5].
In determining an application for costs pursuant to r 41.04, the Court must find a balance between the compromise element of the rule and its punitive function. It was argued before me that r 41.04 should be construed as being more punitive than its New South Wales counterpart. The significant difference, it was suggested, is that r 41.04 provides that a successful plaintiff will receive the entirety of his or her costs on a solicitor and client basis, whereas a successful plaintiff relying on Pt 52, r 17(4) would only receive costs on a solicitor and client basis from the time the offer to settle was filed.
In addition to r 41.04, the Court has an inherent power to make orders as to the basis on which costs shall be awarded to a successful party. Again, there is no prescriptive test to be applied, and in any particular case the Court must make a determination having regard to all facts and circumstances of the litigation. Both counsel made submissions on the issue of the Court’s inherent power to make orders as to costs. As will become apparent, I am of the view that this case can be determined by r 41.04. I therefore do not consider it necessary to expand upon the submissions made by counsel in respect of the inherent power of the Court to make costs orders, nor is the exercise of that power one which is relevant to this decision. The Court’s inherent power to make orders with respect to costs must operate subject to the express rules of Court.
The Present Case
The case currently before the Court is somewhat unusual, in that the dispute follows the delivery of a consent judgment prior to trial. Liability has been determined in this matter without the Court making any findings of fact. The plaintiffs submit that in these circumstances, there can be no basis on which the Court can decide that it is proper to order that costs be paid on other than a solicitor and client basis. They argue that such a finding would essentially require the Court to make findings in relation to facts that have been subsumed entirely within the consent judgment. This approach, contends the plaintiff, would require that there be a quasi-trial, complete with evidence and the need for written findings of fact to be prepared and delivered.
There were a number of submissions put to me by the defendant. The defendant argues that the plaintiffs ought to receive their costs only on a party and party basis, except insofar as those costs related to that aspect of the litigation concerning the question of when the defendant retired from practice (“the retirement issue”). The defendant asserts that he was entitled to payment of his costs by the plaintiffs in respect of this issue. There were a number of inter-related arguments advanced for this contention, to which I will return.
Compromise
A further submission advanced by the defendant was that r 41.04 was simply not activated in the circumstances of this case. In developing this submission, the defendant argues that before a successful plaintiff can rely upon r 41.04 in recovering costs, the Court must be satisfied that the offer was a genuine offer of compromise. I will deal with this issue briefly before returning to the retirement issue.
Counsel for the defendant directed the attention of the Court to Messagemate Australia Pty Ltd v NCI & Ors (No 2),[9] in which Williams J said:[10]
In reality the plaintiff’s filed offer was really nothing more than an offer to accept the whole of its claim for the principal debt together with interest. Supreme Court Rule r 41.01 probably requires some degree of compromise in a case such as the present.
[9] [2002] SASC 377.
[10] Ibid [17].
Counsel for the defendant submits that in the present case there was no true offer of compromise from the plaintiffs, rather an invitation to capitulate. He submits that the notice filed by the plaintiffs on 20 November 2008 was no more than a further demand that the defendant pay the amount of money sought in the Amended Statement of Claim. The defendant submits that any apparent compromise in the offer was not bona fide, as the only aspects of the claim not included in the offer were not particularised and hopeless in any event.
Counsel for the plaintiffs argues that it is not appropriate for the Court to engage in a process of comparing the amount of an offer made with the maximum amount of a plaintiff’s claim. He argues that to finely assess the difference between an offer to settle and a final award of damages, so as to determine the compromise discount, would undermine the purpose of r 41, being to encourage settlement of actions. This would be the result, he said, because it would introduce a greater degree of uncertainty into an already uncertain equation. That is, it is notoriously difficult to calculate with any degree of certainty a likely award of damages prior to trial, and the settlement of matters would not be advanced by a rule which requires a careful consideration, after the fact, of the difference between an offer to consent to judgment and the amount that may have been awarded had the offer not been accepted. Rule 41.04 has a punitive operation, in that it is designed to punish a defendant who does not accept an offer that is less than the Court finally awards a successful plaintiff.[11] The punishment is the requirement to pay the whole of the successful plaintiff’s costs on a solicitor and client basis.
[11] Shaw v Jarldorn (1999) 76 SASR 28, [5] (Doyle CJ).

I indicate that I do not consider there to be any real difference in outcome whether the amount for which the plaintiffs were willing to settle is compared with the amount they actually received, or whether that amount is compared with an estimate of how much they may have received had the trial proceeded.
I find that the offer was one to which r 41 applied. It was a bona fide offer of compromise. I agree with the submission put by counsel for the plaintiff that it would be undesirable for this Court to seek to determine whether there was sufficient difference between the plaintiffs’ offer and the judgment sum to warrant the conclusion that no compromise was ever offered. The plaintiffs were willing to settle the action for $94,000 in November 2008. Judgment was awarded in the sum of $102,356.16 on 4 May 2009. Had the matter proceeded to trial, the plaintiffs may have received more than this amount. They may have received less.[12] I do not consider speculation on this matter to be of any real assistance. I further note that the plaintiffs, by the Amended Statement of Claim, sought compensation in respect of the loss of use of the $77,856.85 principal owed to them by the defendant. Notwithstanding that this claim was not particularised, its apparent abandonment by the offer to settle in November 2008 must suggest that at least some element of compromise was present.
[12] Of course, had the plaintiffs received less than $94,000 after trial, the Court would not be involved in a determination exercise pursuant to r 41.04.
I reject the defendant’s argument that r 41.04 does not apply in this case, and further reject the argument put by the defendant that the plaintiffs’ refusal to compromise constitutes proper reason for this Court to award costs on other than a solicitor and client basis under r 41.04.
The Retirement Issue
In the course of argument, counsel for the defendant sought to call a number of witnesses to give evidence about the retirement issue. I refused permission for this. In my view, there was no relevant evidence that could have been called on this issue. By agreeing to the consent judgment the defendant acknowledged his liability to the plaintiffs. Counsel for the defendant conceded in argument that the defendant was bound to fail at trial, albeit on an issue unrelated to the retirement issue. Where there has been a consent judgment prior to any findings of fact being made, I do not think that any useful purpose would be served by allowing either party to call evidence with the intention of going behind that consent judgment to re-agitate particular issues therein. The judgment in this case disposed entirely of the substantive legal dispute between the plaintiffs and the defendant. It was entered into by consent. By agreeing to enter into the consent judgment, the defendant admitted that he was liable to the plaintiffs in the amount of the judgment sum. To arrive at this position, certain facts must be taken to have been admitted by the defendant. Absent admission or proof of these facts, there would be no basis upon which to ground liability. It is for this reason that I have accepted as either admitted or proven those matters alleged in the Amended Statement of Claim that inform the section of this judgment which recites the factual background of this matter.
Once it has been accepted that sufficient facts as to make the defendant liable have been admitted or proved, that is the end of the fact-finding exercise. Absent some form of statement of agreed facts or an expressly limited admission of liability, there is simply no reason why a Court considering r 41.04 should consider the factual allegations made in the course of litigation. Delivery of judgment crystallises those facts.
The inescapable, and fatal, conclusion for the defendant is this: even if the plaintiffs’ pursuit of the retirement issue was ill conceived and doomed to failure, the plaintiffs were always going to succeed on other arguments. Given this, the defendant cannot succeed in his argument that the plaintiffs’ unreasonable pursuit of the retirement issue constitutes a proper reason for the purpose of r 41.04 to award costs on other than a solicitor and client basis. Notwithstanding the fact that the plaintiffs may have failed at trial in respect of the retirement issue, they would have succeeded on other grounds. Had the defendant accepted this fact and agreed to settle the matter, the costs of prosecuting and defending a claim based on the retirement issue would never have been incurred.
To my mind, there is no reason why r 41.04 should not have its standard operation in this case. The plaintiffs, prior to trial, made an offer to settle. The defendant refused this offer and opted to continue the litigation. Significant extra costs must have been incurred by both parties. Immediately prior to trial a settlement was reached and consent judgment entered in favour of the plaintiffs, and in an amount greater than that for which the plaintiffs had previously agreed to settle. The defendant’s counsel acknowledges that the defendant had no prospect of successfully defending the entirety of the plaintiffs’ action. In these circumstances, I find it impossible to conclude that proper reason exists to order costs on other than a solicitor and client basis. The defendant chose to fight on until trial, notwithstanding the fact that he could not win. It is neither here nor there that one of the plaintiffs’ arguments was doomed to fail; so was the defence.
Other Matters
There are two other points raised by the defendant, with which I can deal quickly. The first is an argument that the plaintiffs should not receive the whole of their costs pursuant to r 41.04 because they effectively alleged fraud against the defendant, and this fraud was never proved. In making this argument, the defendant points to a number of authorities. In my view, this claim must fail, and for substantially the same reason as the claim in respect of the retirement issue. The dispute between the parties was resolved without a trial. No evidence was led on any issue. In Thorne v Doug Wade Consultants Pty Ltd,[13] Kaye J said:[14]
The courts have long so viewed the seriousness of allegations of dishonesty as to compel an unsuccessful plaintiff making the same to pay the costs of the defendant against whom the allegations are made, notwithstanding that the plaintiff might have succeeded on other issues.
[13] [1985] VR 433.
[14] Ibid 500.
I accept this and similar propositions contained in other decisions to which I was referred by counsel. Had the matter proceeded to trial, and had findings of fact been made, it may have been appropriate to consider whether the plaintiffs should be denied some portion of their costs due to an unsubstantiated allegation of fraud against the defendant. However, as I have already made plain, I consider that the entering of the consent judgment obviates the need to embark upon a fact-finding exercise. Absent some evidence to suggest that the allegations, described by the defendant as allegations of fraud, were in fact false, I am not inclined to deny the successful plaintiffs their costs.
The final argument raised by the defendant is that the plaintiffs’ conduct in seeking exemplary damages ought to deprive them of their costs in respect of the retirement issue. Again, this issue can be disposed of on the basis that I have determined no evidence should be called in this matter. Because of this determination, I am unable to ascertain whether there is any merit in the plaintiffs’ claim for exemplary damages, nor in the argument that the plaintiffs’ claim for exemplary damages is without merit.
I reject each of the arguments put forward by the defendant.
I acknowledge that these reasons may give rise to allegations of circularity of argument. In holding that there is no evidence to which the defendant can point to establish that proper reason exists to order costs on a basis other than as between solicitor and client, I am mindful of the fact that there is no evidence because I refused to allow such evidence to be put before the Court. In my view, there is no actual circularity here. I have explained my reasons for refusing to allow the defendant to call evidence. In the circumstances of this case, I am of the opinion that no useful purpose would have been served by allowing the defendant to conduct what would, in effect, have been a trial on certain aspects of the litigation. The defendant has admitted his liability and consented to judgment in an amount that is greater than that which was offered by the plaintiffs. In this case, the defendant’s admission of liability is reason enough to dispose of the defendant’s application to call evidence.
Order
The defendant has failed to demonstrate that r 41.04 should not apply in the present case. I therefore order that the defendant is to pay the plaintiffs’ costs on a solicitor and client basis, to be agreed or taxed.