Rayner v Pethick - [2006] SASC 70

SUPREME COURT OF SOUTH AUSTRALIA
(Magistrates Appeals: Civil)
RAYNER & ANOR v PETHICK & ANOR
Judgment of The Honourable Justice Bleby
10 March 2006
PROCEDURE - COSTS - APPEALS AS TO COSTS - WRONG EXERCISE OF DISCRETION
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - CONDUCT OF PARTIES - DEMAND, OFFER AND CONSENT
Appeal by plaintiffs against Magistrate's refusal to award plaintiffs costs of whole action following judgment in favour of plaintiffs - Cross-appeal by defendants against failure of Magistrate to award defendants costs on an indemnity basis - Argument on costs by way of written submissions only - Solicitor correspondence included in defendants' written submissions - Costs awarded to plaintiffs to a date well before trial and defendants awarded costs from thereafter - Whether correspondence constituted an agreement for settlement of action - Whether costs should follow the event - Consideration of consequences of "without prejudice" settlement offer on costs - Whether Magistrate entitled to rely on "without prejudice" correspondence on question of costs - Whether correspondence admissible under s 67C(2) Evidence Act 1929 (SA) - Appeal allowed - Cross-appeal dismissed - Defendants to pay plaintiffs' costs of whole action.
Magistrates Court Act 1991 (SA) s 37(1); Magistrates Court (Civil) Rules 1992 (SA) r 106; Supreme Court Act 1935 (SA) s 40(1); Supreme Court Rules 1987 r 55, r 56, r 59, r 101.02; Evidence Act 1929 (SA) s 67C, referred to.
Copping & Ors v ANZ McCaughan Ltd (No 1) (1995) 63 SASR 523, applied.
Battye & Battye v Shammall (No 2) (2003) 86 SASR 254; Bates v Nelson (1973) 6 SASR 149; Formosa v Eminent Forms Pty Ltd (2005) 91 SASR 6; Cutts v Head [1984] Ch.29, distinguished.
Chapman v Allan & Draper (1999) 74 SASR 274, discussed.
Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; Duke Group Ltd (In Liq) v Pilmer & Ors (Unreported, Mullighan J, 1 June 1998); Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1998) 81 ALR 397; Groom v Earthmoving Contractors Association of SA Inc (No 2) [2001] SASC 241, considered.

RAYNER & ANOR v PETHICK & ANOR
[2006] SASC 70
Magistrates Appeal: Civil
BLEBY J:
Introduction

This is an appeal by the plaintiffs in an action in the Magistrates Court and a cross‑appeal by the defendants in respect of the Magistrate’s order for costs following the entry of judgment in favour of the plaintiffs in the sum of $14,005.19, after the hearing of the disputed claim. The plaintiffs’ claim was for monies unpaid by the defendants to the plaintiffs for the plaintiffs’ crop of pears in the years 2000 and 2001 which had been processed and marketed by the defendants. What began as a harmonious relationship between neighbours became a bitter feud between the parties.
On 20 October 2005 the Magistrate gave judgment for the plaintiffs in the sum of $14,005.19. There was no counterclaim by the defendants. The Magistrate reserved the questions of interest and costs for further argument. The hearing was adjourned to 24 November 2005 when the Magistrate ordered that the defendants were to provide “written submissions as to their argument in relation to costs and pre‑judgment interest” within 7 days, and that the plaintiffs were at liberty to file “answering documents” within 7 days thereafter.
On 30 November 2005 the defendants filed not only a written submission but a number of affidavits exhibiting, among other things, correspondence between the solicitors for the parties on which the defendants relied to oppose the plaintiffs’ application for costs and on which the defendants sought an order for payment of portion of their costs on an indemnity basis. I will return to the nature of the correspondence exhibited to the affidavits in due course.
On 2 December 2005 the plaintiffs filed written submissions in support of their application for costs. They also filed affidavits exhibiting some further correspondence which they claimed was relevant to their application.
No oral hearing took place before the Magistrate. On 15 December 2005 the Magistrate ordered that the plaintiffs be paid their costs on the scale applicable to complex actions up to 31 August 2004, and that the defendants should have their costs on the same scale from that date onwards. A number of adjournments took place after that date, an amended defence was filed, and the trial took place in June and September 2005.
The plaintiffs appeal against the refusal to award them costs of the whole action. The defendants cross‑appeal, alleging that the Magistrate should have awarded them indemnity costs from 31 August 2004.
The Magistrate’s reasons
The Magistrate noted first that the issue of costs is a matter of discretion. He considered that he was entitled to take into account “without prejudice” correspondence between the parties in an attempt to settle the matters in dispute. The Magistrate took the view that the attitude of the plaintiffs expressed in a letter dated 20 August to the defendants’ solicitors was “not appropriate”. He inferred that the plaintiffs should have accepted the defendants’ proposal for settlement. It was on that basis that he awarded the defendants costs from 31 August 2004.
Principles governing orders for costs in the Magistrates Court
Section 37(1) of the Magistrates Court Act 1991 provides:
Subject to this Act and the rules, costs in any civil proceedings will be in the discretion of the Court and may be awarded against any person (whether a party to or a witness in the proceedings or not).
Rule 106 of the Magistrates Court (Civil) Rules 1992 relevantly provides:
(1)Subject to these rules or to an order of the Court, a successful party in an action (other than a minor civil action) is entitled on judgment to costs against an unsuccessful party, or any other party that the Court may order, in accordance with the following principles:
(a)     where judgment is in respect of an action for a sum of money;
(i)a successful plaintiff is entitled to costs on the relevant scale in the Third Schedule applicable to the sum actually recovered;
(ii)a successful defendant is entitled to costs on the relevant scale in the Third Schedule applicable to the sum claimed;
(b)     where judgment is in respect of any other action - a successful party is entitled to costs on the scale in the Third Schedule specified by the Court;
or
(c)     where the action involved unusual difficulty or intricacy, or other proper cause exists – a successful party is entitled to costs on such percentage of the Supreme Court scale as the Court specifies.
…
(4)Where proper cause exists, the Court may order that a successful party is entitled to costs on a solicitor and client basis.
Sub-rule (7) provides a process by which costs may be awarded on the relevant scale as a complex action.
Section 37(1) of the Magistrates Court Act is cast in similar but not identical terms to s 40(1) the Supreme Court Act 1935. Both sections confer a discretion on the Court said to be subject to the Rules of Court. Rule 106(1) of the Magistrates Court (Civil) Rules makes a provision similar to that of r 101.02 of the Supreme Court Rules1987 which provides that subject to the rules, the costs of and incidental to a proceeding shall follow the event unless the Court otherwise orders.
The effect of such provisions was considered by the Full Court in Copping & Ors v ANZ McCaughan Ltd (No.1).[1] It was argued that r 101.02 was a qualification on the discretion conferred by s 40 of the Supreme Court Act. King CJ, delivering the judgment of the Court, said:[2]
The existence of s 40 is also an important, even controlling factor, in the construction of the rule. It is true that the section is expressed to be “subject to the rules”. Nevertheless the legislative intention is plainly to confer on courts and judges an unfettered discretion as to costs. A construction of a rule of court which practically negates the statutory provision is not lightly to be adopted. It may well be that the rule, so construed, would be invalid. Where a statutory provision is made subject to Rules of Court, the rules may prescribe procedures which condition the operation of the statutory provision or limit the mode of its operation. They may even modify or exclude its operation in defined circumstances. But a general provision in a Rule of Court which substitutes a different rule across the board for that prescribed by the statue would seem to me to be invalid as repugnant to the statute.
[1] (1995) 63 SASR 523.
[2] Ibid at 527.
It follows that r 106(1) of the Magistrates Court (Civil) Rules cannot fetter the discretion conferred on a Magistrate by s 37(1) of the Magistrates Court Act, neither does it purport to do so because the rule itself is expressed to be subject to an order of this Court. The discretion is at large, but it cannot be exercised capriciously. As King CJ went on to say in Copping:[3]
Where costs are in the discretion of the court, the discretion must nevertheless be exercised judicially. A successful party has a reasonable expectation of obtaining his costs. The judge ought not to exercise his discretion against a successful party on grounds wholly unconnected with the cause of action: Donald Campbell & Co Ltd v Pollak [1927] AC 732. I think that r 101.02(1) does no more than express in the rules that well established principle. The reference to costs following the event is an expression of the general expectation that the successful party will get the costs. The phrase “unless the court otherwise orders” reflects the unfettered discretion of the judge to fashion the order for costs as he sees fit in the interests of justice.
[3] Ibid at 527-528.
There is therefore an expectation that, in most cases, costs will follow the event. Nevertheless, as in the Supreme Court Rules, there are other matters prescribed in the Magistrates Court (Civil) Rules which must be considered by a Magistrate in exercising that discretion. One example is r 59 which requires the Court, in making an order as to costs at the trial of an action, to take into account any offer to consent to judgment filed in accordance with the provisions of r 55 or any payment of a sum of money into Court in accordance with the provisions of r 56. Unless the Court for special reasons otherwise orders, a plaintiff who obtains a final judgment for a sum equal to or less than the amount of an offer or payment into Court is not entitled to costs after the expiration of 14 days from the date of service of the notice or notice of the payment into Court as the case may be.
The Magistrates Court (Civil) Rules also provide for a series of conciliation conferences before a trial. Rule 106(10) provides that a magistrate may intimate his or her view of the likely result of a case during that pre‑trial process, and such intimation, whilst concealed from the trial Magistrate during the trial, may be taken into account on the question of costs.
However, this was none of those cases. The Magistrate was asked to rely and in fact relied only on the relevant correspondence exhibited to the affidavits.
The correspondence before the Magistrate
The correspondence exhibited to the affidavits filed on behalf of the defendants included a series of letters exchanged between the solicitors for the parties between 2 August and 20 August 2004. It began with a “without prejudice” letter from the plaintiffs’ solicitors indicating that the plaintiffs were prepared to settle the matter for $14,166 plus costs on the complex actions scale. All relevant correspondence which followed from the plaintiffs’ solicitors was open correspondence. Every relevant letter which followed from the defendants’ solicitor was “without prejudice”. There was discussion in the correspondence about the contents of a possible deed of release and in particular a confidentiality clause, culminating in a letter of 16 August 2004 from the defendants’ solicitor in which he set out what he believed were the plaintiffs’ proposals contained in previous correspondence and requesting the plaintiffs’ solicitor to draft a deed of settlement and release. There was no statement in the letter that the defendants agreed with those proposals. In earlier “without prejudice” correspondence the defendants had indicated agreement to the plaintiffs’ proposals concerning the amount of the judgment and costs.
The position following the letter of 16 August 2004 was therefore that the defendants had made various proposals for settlement in “without prejudice” correspondence. Those proposals had never been accepted by the plaintiffs. The plaintiffs’ letter of 20 August 2004 was “without prejudice”, rejecting any concept of confidentiality and inviting the defendants to settle the matter on the basis outlined in their previous “without prejudice” letter of 2 August 2004.
Thus, it can be seen that any offers on the part of the plaintiffs to settle the action were made “without prejudice”. Any conditional acceptance of the plaintiffs’ proposal made by the defendants was in “without prejudice” correspondence, and there was no meeting of the minds such as to enable any conclusion that agreement between the parties had been reached.
The question is whether the Magistrate was entitled to rely on that correspondence in making the order for costs that he did.
Section 67C, Evidence Act1929
Section 67C of the Evidence Act 1929 relevantly provides:
(1) Subject to this section, evidence of a communication made in connection with an attempt to negotiate the settlement of a civil dispute, or of a document prepared in connection with such an attempt, is not admissible in any civil or criminal proceedings.
(2) Such evidence is, however, admissible if –
(a)the parties to the dispute consent; or
…
(g)the making of the communication, or the preparation of the document, affects the rights of a party to the dispute; or
…
The defendants sought to justify the admissibility of the correspondence both before the Magistrate and before me on a number of grounds. First, the defendants argued that the correspondence indicated that the parties were ad idem and the matter had settled. The “without prejudice” correspondence was admissible to show the terms of the agreement. If that is so it is surprising that there was no attempt on the part of the defendants or, indeed, for that matter on the part of the plaintiffs, to rely on the agreement at the trial. The plaintiffs did not sue on the agreement and did not seek to amend their pleadings after 20 August to do so. The defendants, although they filed an amended defence after 20 August 2004 did not plead the agreement as an answer to the plaintiffs’ claim for damages. The first time any alleged agreement or settlement was raised was in the defendants’ argument as to costs. As there was no agreement, the “without prejudice” correspondence was not admissible to prove the terms of any agreement, and without the aid of s 67C(2) of the Evidence Act was not admissible at all.
The defendants relied on s 67C(2)(a). The defendants were not given leave by the Magistrate to file affidavits in support of their argument. They nevertheless did so. There is no suggestion that in doing so they had previously obtained the consent of the plaintiffs to the tender of or reliance on the correspondence. The accompanying written submission relied heavily on and referred to the correspondence. On the other hand, the plaintiffs, in filing their written submission, did not object to the defendants’ reliance on the correspondence. They exhibited some of their own in relation to events subsequent to 20 August 2004, but none of this was “without prejudice”. In essence, their argument was that no agreement had been reached.
The Full Court had occasion to consider the effect of s 67C(2)(a) in Chapman v Allan & Draper.[4] In that case the defendant in his defence had pleaded the letter in question and was, by that, taken to have consented to the tender of the document in evidence if it was otherwise admissible. By their pleading in reply the plaintiffs did not consent to the tender of the document and objected to its use, but not on grounds contained in s 67C. At the trial, counsel for the plaintiffs sought to tender the document, relying on the defendant’s pleading, arguing that any confidentiality, and presumably any bar to its use derived from s 67C, had been waived. The Full Court concluded that the document was not admissible under s 67C(2)(a), holding that there was never a mutual consent to the tender. In particular the Court declined to resolve the matter by analogy with offer and acceptance in the law of contract. That is, by treating the statement of the plaintiffs’ counsel in opening as an acceptance of a consent indicated by the defendants’ plea in his defence:[5]
There is much to be said for the view that a document caught by s 67C cannot be tendered under the exception in s 67C(2)(a) unless, at the time of tender, there is mutual consent. There may be circumstances in which a party would be prevented from withdrawing a consent earlier given, particularly when the other party has acted to its prejudice upon the basis of that consent. But there is no suggestion of that here. [Emphasis added]
[4] (1999) 74 SASR 274.
[5] Ibid at 289.
Likewise, I am inclined to the view that there was no relevant consent under para.(a) for the use of the documents in this case. The defendants took it upon themselves to tender the documents by exhibiting them to affidavits which they had not been given leave to file, and by moulding the whole of their written submission on the documents in question. No prior consent was given. It is perhaps not surprising that the plaintiffs’ solicitors felt that they had to answer the submission by denying any agreement.
The question of whether the correspondence was admitted by consent was not fully argued before me. As I said, I am inclined to the view that the correspondence was not admissible under para.(a). Nevertheless, I am prepared to decide the case on the footing that there was implied consent to the use of the documents by the plaintiffs and to proceed on the footing that the documents were properly before the Magistrate.
The defendants also argued that the correspondence was admissible under para.(g). I reject that argument. As there was no concluded agreement for settlement, the correspondence did not affect the rights of the parties to the dispute. Insofar as it is argued that the correspondence affects the defendants’ right to costs of the action, it appears from what follows that they do not, and the correspondence was not admissible under this paragraph.
Reliance on the correspondence
The correspondence was not admissible to prove an agreement. Assuming for present purposes that it was admissible under s 67C(2), the question still arises as to whether the Magistrate was entitled to rely on it in making his order as to costs. I also assume that on a proper construction of the correspondence, the defendants made a “without prejudice” offer to settle the plaintiffs’ claim subject to certain conditions which were never agreed, for an amount slightly in excess of the amount of the judgment entered in favour of the plaintiffs.
The defendants relied on the decision of Besanko J in Battye & Battye v Shammall (No 2)[6] where the Judge held[7] that a Magistrate was entitled to take into account the two matters he identified in considering whether a higher scale of costs should apply. One of the matters so identified was described by Besanko J in the following terms:[8]
Secondly, the Magistrate noted that there had been informal offers which would have led to a resolution of the matter on a basis more favourable to the plaintiffs than the ultimate result. The Magistrate said that he did not need to consider whether the letters constituted “Calderbank” letters. The Magistrate said that the Court could take into account informal offers, and he referred to the decision of this court in Bates v Nelson (1973) 6 SASR 149 at 158 per Mitchell J. The Magistrate referred in particular to an offer made by the defendant on the last day of trial whereby the parties “completely walk away from all issues in dispute between them and leaving items of common property to the party then in possession of it”.
[6] (2003) 86 SASR 254.
[7] Ibid at 260, [29].
[8] Ibid at 257, [14].

It is not clear from the report of that case whether the offers were open offers. I infer that they were, given the reference to Bates v Nelson in that passage. The defendants also relied on a dictum of mine in Formosa v Eminent Forms Pty Ltd[9] where I said that one of the circumstances that an arbitrator could have regard to in making an order for costs under the Commercial Arbitration Act 1986 was “whether offers may have been made in the course of the arbitration which rendered the continuation of the proceedings on that particular point unreasonable”.
[9] (2005) 91 SASR 6 at 15, [33].
In my opinion, the defendants’ reliance on those cases is misconceived. In neither case was reference made to “without prejudice” offers. In Bates v Nelson[10] the offer that was relied on in denying the plaintiff a portion of her costs was an open offer made on the second day of the hearing of the action where the offer of a sum inclusive of costs to that point exceeded the amount of the judgment obtained by the plaintiff. There had been earlier offers filed under the Rules of Court from which the defendant could take no benefit. Mitchell J in that case ordered that the plaintiff should have her costs up to and including the day of the offer but not thereafter. The significance of the offer in that case was that it was an open offer made orally in court.
[10] (1973) 6 SASR 149
By way of contrast, the Court of Appeal in Cutts v Head[11] considered the effect of an offer of settlement contained in a “without prejudice” letter as part of a negotiation towards possible settlement. Importantly, however, as well as being “without prejudice”, the letter contained the statement:
We reserve the right to bring this letter to the notice of the Judge on the issue of costs.
[11] [1984] Ch. 290.
In a comprehensive judgment considering a great number of authorities, Oliver LJ was at pains to preserve the sanctity of “without prejudice” correspondence, but held that where a reservation of that nature was incorporated and brought to the attention of the recipient, there was nothing to prevent the Court from relying on it in deciding the question of costs.
No such reservation was contained in any of the correspondence relied on by the defendants in this case, and I consider that the correspondence was therefore not admissible and could not be relied on by the Magistrate in determining the plaintiffs’ entitlement to costs. It is not difficult to understand why this should be so. In August 2004 the parties, through their solicitors, were attempting to settle the principal action. Apart from the quantification of the plaintiffs’ costs to that time as part of the settlement proposal, neither party directed their attention to the question of the consequences in costs should an offer not be accepted. The plaintiffs had no warning that the defendants would seek to rely on “without prejudice” offers on the question of costs. They had no reason to address their minds to the costs consequences of refusing a “without prejudice” offer. It was quite unlike the situation of the filing of an offer to consent to judgment under the Rules of Court or the payment of money into Court or the intimation of a Magistrate in the course of pre-trial processes whereby a plaintiff is on notice from the rules that failure to accept an offer or an amount paid into Court or to act on the intimation of a Magistrate in conciliation will put the plaintiff at risk as to costs. Without the defendants making an open offer or a “without prejudice” offer in which they reserved the right to bring the letter to the attention of the Magistrate on the issue of costs, they were not entitled to rely on the correspondence, and the Magistrate erred in doing so.
Even if it were proper for the Magistrate to take the correspondence into account, he appears to have denied the plaintiffs their costs after 31 August 2004 by reference to his assessment of what the plaintiffs ought to have done at that time. The Magistrate was not privy to the plaintiffs’ instructions or advice or indeed as to any other forces which might have been operating to cause the plaintiffs to take the course they did. It is clear from subsequent correspondence that the plaintiffs did not abandon any attempt at settlement. The question was revived in their solicitors’ letter to the defendants’ new solicitors on 1 October 2004, to which no response was given. It was raised again verbally by the plaintiffs’ solicitor on 1 December with no response and again by letter of 8 December 2004. The only response to those approaches was a letter of 22 December 2004 from the defendants’ solicitors relying on a Rules of Court offer which had been filed by the defendants on 1 July 2004, before the settlement negotiations had commenced, for a sum significantly less than had been the subject of previous negotiations and significantly less than the amount of the final judgment. A further offer to settle was made by the plaintiffs in a letter from their solicitors dated 7 January 2005 and rejected by the defendants on 12 January 2005. It is clear that by then divisions between the parties were running very deep.
I mention the subsequent developments not by way of attempted vindication of the plaintiffs’ position but to illustrate the danger of relying on “without prejudice” correspondence which does not result in agreement. By 22 December 2004 the defendants themselves had abandoned any reliance on previous proposals and were relying totally on a much earlier filed offer to consent to judgment. That was a significant fact in itself. However, it is impossible for a judicial officer reading correspondence of that nature to make any assessment of what a particular party ought to have done at a particular time. The only guide in this type of case for a departure from the usual rule that costs should follow the event is where an open offer has been made, where there is a specific reservation made to rely on a “without prejudice” offer on the question of costs or where one of the devices contemplated by the Rules of Court have been successfully brought into play. None of those occurred here, and the Magistrate had no justification for departing from the usual rule that costs should follow the event.
In their written submissions both parties agreed that the appropriate scale for the plaintiffs’ costs was the scale applicable to complex actions. The Magistrate also agreed and ordered that the plaintiffs should have their costs accordingly. I see no reason to depart from that on this appeal.
It follows that the plaintiffs’ appeal must be allowed, the Magistrate’s order for costs set aside, and that in lieu thereof there should be an order that the defendants pay the plaintiffs’ costs of the action on the relevant scale as a complex action.
It also follows that the defendants’ cross‑appeal must be dismissed. The defendants have no entitlement for costs after 31 August 2004. Even if they were entitled to costs after that date, there would have been no justification for indemnity costs as claimed before the Magistrate. No submission was put to the Magistrate to justify that claim. Before me it was suggested that the justification for an order for indemnity costs in favour of the defendants was to be found in an imprudent refusal on the part of the plaintiffs to offer to compromise.[12] It is not for the court to decide in this case the prudence or otherwise of a refusal to compromise. The defendants also relied on an alleged ulterior motive on the part of the plaintiffs as justifying an order for indemnity costs.[13] It is sufficient to say that there was no evidence on which any such finding could be based, and the claim had no substance.
[12] Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233; Duke Group Ltd (In Liq) v Pilmer & Ors, Unreported, Mullighan J, 1 June 1998, Judgment No. S6699.
[13] See Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1998) 81 ALR 397 at 401; Groom v Earthmoving Contractors Association of SA Inc (No 2), [2001] SASC 241 at [32].