Shellharbour City Council v Johnson (No 2)

[2006] NSWCA 114

Reported Decision: 67 NSWLR 308

Court of Appeal

CITATION:	Shellharbour City Council v Johnson [No 2] [2006] NSWCA 114
HEARING DATE(S):	The matter proceeded by way of written submissions.
JUDGMENT DATE:	5 July 2006
JUDGMENT OF:	Beazley JA at [1]; Tobias JA at [2]; Hunt AJA at [3]
DECISION:	(1) The defendant is to pay the plaintiff’s costs of the appeal up to and including 22 June 2005 on a party and party basis and thereafter on an indemnity basis.; (2) The defendant is to pay the plaintiff’s costs of this application.
CATCHWORDS:	Plaintiff’s judgment for personal injury less than $100,000 — defendant unsuccessful in appeal against judgment — offer of compromise by plaintiff — Legal Profession Act 1987, s 198F, limits party’s right to seek indemnity costs order pursuant to rules of court — it does not itself authorise an indemnity costs order — “reasonable” offer defined — general approach by courts to offers of compromise pursuant to the SCR applicable to offers pursuant to UCPR — amount of interest lost on judgment if offer of compromise accepted relevant to whether offer should properly be regarded as a compromise — s 198D(4)(b) prevents order for costs exceeding maximum permitted, but it applies to certificate of assessment of costs filed in court, not to general order made by court that one party pay the other party’s costs but does not specify amount.
LEGISLATION CITED:	Civil Liability Act 2002 Civil Procedure Act 2005 Legal Profession Act 1987 Legal Profession Act 2004
CASES CITED:	Andrews v NSW (2004) 1 DCLR (NSW) 230 Connor v Hatgis (No 2), Court of Appeal (BC9501810), 7 December 1995, unreported Forbes Services Memorial Club Ltd v Hodge (Court of Appeal BC9504456), 8 March 1995, unreported Fowdh v Fowdh, Court of Appeal (BC9302200), 4 November 1993, unreported Herbert v Tamworth City Council (No 4) (2004) 60 NSWLR 476 Hillier v Sheather (1995) 36 NSWLR 414 Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 Manly Council v Byrne (No 2) [2004] NSWCA 227 Morgan v Johnson (1998) 44 NSWLR 578 Newcastle City Council v McShane [No 3] [2005] NSWCA 437 NSW Insurance Ministerial Corporation v Gomes (No 2), Court of Appeal (BC9807723), 3 December 1998 Nicholson v Nicholson (No 2), Court of Appeal (BC9504206), 1 February 1995 Nolan v Clifford (1904) 1 CLR 429 Penrith City Council v Parks [2004] NSWCA 381 Shellharbour City Council v Johnson [2006] NSWCA 67 South Eastern Sydney Area Health Service v King [2006] NSWCA 2 South Eastern Sydney Area Health Service v King [No 2] [2006] NSWCA 73
PARTIES:	Shellharbour City Council – Appellant Aaron Johnson – Respondent
FILE NUMBER(S):	CA 40238/05
COUNSEL:	PR Garling SC – Appellant SG Campbell SC – Respondent
SOLICITORS:	Leitch Hasson Dent – Appellant DGB Lawyers – Respondent
LOWER COURT JURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	DC 142/01
LOWER COURT JUDICIAL OFFICER:	Quirk DCJ

CA 40238/05

BEAZLEY JA
TOBIAS JA
HUNT AJA

5 July 2006

SHELLHARBOUR CITY COUNCIL v JOHNSON [No 2]

Headnote

A plaintiff —

(1) who has recovered a judgment of less than $100,000 as damages for personal injury,

(2) who is a successful respondent to an appeal by the defendant against the judgment he recovered,

(3) who made an offer of compromise to settle the appeal for an amount less than the judgment recovered, and

(4) who seeks an order that his costs of the appeal be assessed on an indemnity basis —

must apply for such an order pursuant to the relevant rules of court, either the Supreme Court Rules or the Uniform Civil Procedure Rules, and not pursuant to s 198F of the Legal Profession Act 1987.

Section 198F merely places a restriction on such a plaintiff’s rights to apply for that order, that the offer of compromise was a “reasonable” one. A reasonable offer for the purposes of that restriction is defined by the section as one where the amount recovered is no less favourable to him than the terms of the offer. This restriction was satisfied, and the plaintiff was entitled to make his application for indemnity costs.

Where both the offer and the rejection occurred before the new rules commenced on 15 August 2005, the issues as to whether —

(1) the offer of compromise complied with the requirements of SCR Pt 22, and

(2) whether exceptional circumstances justified the defendant’s failure to accept the offer —

are to be determined in accordance with the Supreme Court Rules, but the consequences of the defendant’s rejection of the plaintiff’s offer are to be determined pursuant to UCPR r 42.14. Both sets of rules are in substantially the same terms, and the general approach taken by the courts to SCR Pt 52 r 22(4) should be applied also to UCPR r 42.14.

South Eastern Sydney Area Health Service v King [No 2] [2006] NSWCA 73 applied.

An offer of compromise connotes that the party making it gives something away. The apparent means of the plaintiff who has made an offer of compromise will in some cases indicate that even a small reduction of the judgment from which the appeal is brought may properly be regarded as a compromise, as the plaintiff has given away an amount of some significance to that particular plaintiff, provided that it is neither trivial nor contemptuous.

Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721; Forbes Services Memorial Club Ltd v Hodge (Court of Appeal BC9504456), 8 March 1995, unreported; Manly Council v Byrne (No 2) [2004] NSWCA 227 applied.

Where costs are assessed on an indemnity basis, they are excluded from the maximum amount of costs permitted by s 198D of the Legal Profession Act 1987.

Obita dicta in Penrith City Council v Parks [2004] NSWCA 381 and Newcastle City Council v McShane (No 3) [2005] NSWCA 537 followed.

Herbert v Tamworth City Council (No 4) (2004) 60 NSWLR 476; Andrews v NSW (2004) 1 DCLR (NSW) 230 referred to.

The prohibition in s 198D(4)(b) of the Legal Profession Act 1987 — against a court ordering the payment to one party by another party of costs in respect of legal services provided to that party in an amount that exceeds the maximum allowed — does not apply to the general order made at the time the court delivers judgment which does not specify the amount. The order to which it does apply is the certificate of the assessment of costs filed in the court having jurisdiction in respect of the amount of costs to be paid, which certificate is taken by statute to be a judgment by that court to pay that amount.

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CA 40238/05

BEAZLEY JA
TOBIAS JA
HUNT AJA

5 July 2006

SHELLHARBOUR CITY COUNCIL v JOHNSON [No 2]

Judgment

1 BEAZLEY JA: I agree with Hunt AJA.

2 TOBIAS JA: I agree with Hunt AJA.

3 HUNT AJA: On 6 April 2006, this Court gave judgment in the appeal brought by the defendant in the action by which it sought leave to challenge the judgment entered in favour of the plaintiff on the basis that (stated in general terms) it owed no duty of care to him. The defendant was granted leave to appeal, but the appeal was dismissed and the defendant was ordered to pay the plaintiff’s costs of the appeal: Shellharbour City Council v Johnson [2006] NSWCA 67. There was no challenge in the appeal to the damages awarded or to the finding that the plaintiff was 50% responsible for the collision which had led to his injuries.

4 The plaintiff now seeks an order that those costs be assessed on an indemnity basis following the defendant’s failure to accept his offer of compromise pursuant to SCR Pt 22. The offer was that the plaintiff would accept $45,000 in lieu of the $48,785.60 awarded to him in the District Court. The offer was exclusive of costs, and it was made on 22 June 2005. The offer was rejected by the defendant on 30 June 2005. The appeal was heard on 14 February 2006.

5 The plaintiff has made his application for indemnity costs pursuant to s 198F of the Legal Profession Act 1987. That section has now been replaced by s 340 of the Legal Profession Act 2004 but, as the 2004 statute did not commence until 1 October 2005, it would appear that the provision in the 1987 statute is the one which would be relevant to the present case. Both sections are in the same terms. The defendant has agreed with the plaintiff that it is the provisions of s 198F which permit this Court to make the order sought in the present case.

6 Despite this unanimity of approach by the parties, I do not accept that an order that costs be assessed on an indemnity basis is made pursuant to either of the two statutes in question. To explain why that approach results from a misconception, it is necessary to refer to the circumstances in which both s 198F and s 340 apply.

7 Section 198F is to be found in Division 5B of the 1987 statute (“Maximum costs in personal injury damages matters”), which contains ss 198C–198M. The Division was inserted in that statute by s 8 and Sched 2.2 of the Civil Liability Act 2002. The intention of Division 5B — consistently with the restrictions imposed by the Civil Liability Act on liability and damages in personal injury claims — is to restrict the amount of the costs for legal services provided in relation to such claims. In a case such as the present, where the damages recovered are less than $100,000, the maximum costs for legal services provided to a plaintiff are fixed by s 198D(1)(a), which states:

If the amount recovered on a claim for personal injuries does not exceed $100,000, the maximum costs for legal services provided to a party in connection with the claim are fixed as follows:

(a) in the case of legal services provided to a plaintiff maximum costs are fixed at 20% of the amount recovered or $10,000, whichever is greater.

The equivalent in Division 9 of the 2004 statute is s 338 (“Maximum costs in personal injury damages matters”), and it is in the same terms as s 198D. However, the 2004 statute also includes s 338A, which provides that, where there has been an appeal, the maximum costs for legal services provided to a plaintiff are increased by 15% of the amount recovered or $7,500, whichever is the greater. There is no similar provision in the 1987 statute. The additional amount allowed by s 338A does not assist plaintiffs in proceedings to which the 1987 statute applies: Newcastle City Council v McShane (No 3) [2005] NSWCA 437 at [37]–[47].

8 Section 198F, on which the plaintiff relies, is headed “Costs can be awarded on indemnity basis for costs incurred after failure to accept offer of compromise”. That heading is reflected in the terms of s 198F(1), which states:

If a party to a claim for personal injury damages makes a reasonable offer of compromise on the claim that is not accepted, this Division does not prevent the awarding of costs against another party to be assessed on an indemnity basis in respect of legal services provided after the offer is made.

As I have said, s 340(1) of the 2004 statute is in the same terms. That subsection is carefully worded. It does not by itself authorise any award of costs on an indemnity basis. Its effect is to provide that, notwithstanding the limitation imposed by Division 5B in the 1987 statute (Division 9 in the 2004 statute) on the maximum costs for legal services provided, that limitation does not “prevent” an order being made that the costs are to be assessed on an indemnity basis. It recognises that, so far as the Court of Appeal is concerned, the Supreme Court Rules (and now the Uniform Civil Procedure Rules) have always been the source of the power to make an order that costs be assessed on an indemnity basis in relation to an appeal. In my opinion, those rules remain the source of that power.

9 Section 198F(1) does, however, impose a restriction on the right of a party to obtain such an order pursuant to those rules where the damages awarded for personal injury are less than $100,000. That restriction is that, before an order can be made that costs be assessed on an indemnity basis, the offer of compromise not accepted by the other party must have been a “reasonable” one. Section 198F(2) defines a reasonable offer in these terms:

An offer of compromise on a claim by a party is reasonable if the court determines or makes an order or award on the claim in terms that are no less favourable to the party than the terms of the offer.

(The emphasis is supplied in the 1987 statute, but it is absent from the 2004 statute.)

10 That misconception concerning s 198F leads to consideration of another misconception concerning this legislation which is apparent from submissions made in this and many other cases to which Division 5B of the 1987 statute applies. Section 198D(4) of the 1987 statute provides:

When the maximum costs for legal services provided to a party are fixed by this Division the following provisions apply (subject to sections 198E–198G):

(a) a solicitor or barrister is not entitled to be paid or recover for those legal services an amount that exceeds those maximum costs,

(b) a court or tribunal cannot order the payment by another party to the claim of costs in respect of those legal services in an amount that exceeds that maximum,

(c) in assessing the amount of those costs that is a fair and reasonable amount, a costs assessor cannot determine an amount that exceeds the maximum set by this section.

Section 338(4) of the 2004 statute is in the same terms, except that the introduction refers to ss 339–341 in lieu of ss 198E–198G, and par (a) refers to “a law practice” in lieu of “a solicitor or barrister”. Section 198D(4)(b) has been interpreted by some practitioners as limiting the power of a court when delivering judgment in such cases to make an order for costs at the time of delivering judgment. One of the cases cited in the present appeal accepted such a submission (see par [30] infra). That is the second misconception.

11 An order for costs at the time judgment is delivered generally identifies only (a) the parties by whom and to whom the costs are to be paid, (b) whether the whole or a specific proportion of those costs are to be paid, and (c) the basis on which those costs are to be assessed. Such an order for costs at that stage is merely for the payment of an unspecified amount of costs. Whether or not the costs claimed pursuant to that order exceed the maximum costs fixed by either Division 5B of the 1987 statute or Division 9 of the 2004 statute cannot be determined until there is either an agreement as to the amount payable or an assessment made in accordance with that particular statute.

12 In the absence of such agreement, a person ordered by a court to pay an unspecified amount of costs applies to the “Manager, Costs Assessment” for an assessment of those costs: 1987 statute, s 202(1); 2004 statute, s 353. The “Manager, Costs Assessment” is defined as the person holding that office in the Attorney General’s Department: 1987 statute, s 3; 2004 statute, s 4. The assessment is made by an assessor appointed by the Chief Justice pursuant to the relevant statute: 1987 statute, s 208S; 2004 statute, s 390. The task of the assessor where the costs are ordered by a court is to determine the amount of costs that, in that assessor’s opinion, is a fair and reasonable amount: 1987 statute, s 208F(2); 2004 statute, s 367A, but s 198D(4)(c) of the 1987 statute (s 338(4)(c) of the 2004 statute) prevents the assessor from determining an amount that exceeds the maximum fixed by those sections (the section is quoted in par [10] supra).

13 If the assessment has been determined pursuant to the 1987 statute, a certificate (in accordance with Form 3) signed by the assessor is issued stating the “fair and reasonable amount of costs to be paid”: s 208J(3). That subsection also provides that, once the certificate is filed in a court having jurisdiction to order the payment of that amount of money, the certificate is taken to be a judgment of that court for the amount of costs assessed without any further action taken, with the rate of any interest payable in respect of that amount being the rate of interest in the court in which the certificate is filed. If the assessment has been determined pursuant to the 2004 statute, the certificate signed by the assessor is in accordance with Form 2, which identifies the “fair and reasonable amount of costs to be paid” and which also expressly includes a statement that the respondent to the assessment is to pay the applicant to amount so assessed. That certificate is given the same effect as the certificate under the 1987 statute: 2004 statute, s 368(5).

14 Neither s 198D(4)(b) of the 1987 statute nor s 338(4)(b) of the 2004 statute therefore limits the power of a court, at the time it delivers judgment, to make a general order for costs which does not specify the amount of costs payable.

15 I turn now to the merits of the application by the plaintiff in the present case for an indemnity costs order (see par [4] supra). The defendant in the present case has submitted that the offer made by the plaintiff (to accept $45,000, exclusive of costs) was unreasonable, being approximately 91% of the judgment of $48,785.60 obtained by the plaintiff in the District Court, viewed in the light of the issues raised in the application for leave to appeal and the grant of leave. That submission ignores the very direct terms of s 198F(2), which are quoted in par [10] supra. The effect of the dismissal of the defendant’s appeal is that the plaintiff recovers $48,785.60, and such a result is no less favourable to him than the terms of the offer of compromise he made to accept $45,000. That is all that is required to satisfy the restriction imposed by s 198F, so that the plaintiff is not — by reason only of the size of his award of damages for personal injury — prevented from obtaining an order that the costs of the appeal be assessed on an indemnity basis in accordance with the appropriate rules of court.

16 Both the offer of compromise and the rejection of that offer in the present case occurred in June 2005 (see par [4] supra). At that time, the Supreme Court Rules were the relevant rules in force. The Uniform Civil Procedure Rules commenced on 15 August 2005, and those rules also apply to proceedings commenced before that date unless an order has been made dispensing with their requirements: Civil Procedure Act 2005, Sched 6, cl 5. No such order has been made in relation to the proceedings by which this appeal was instituted.

17 In South Eastern Sydney Area Health Service v King [No 2] [2006] NSWCA 73, this Court accepted (at [8]–[9]) that the issues as to whether

(1) the offer complied with the requirements of SCR Pt 22, and

(2) whether exceptional circumstances justified the defendant’s failure to accept the offer

are to be determined in accordance with the Supreme Court Rules where both the offer and the rejection occurred before the new rules commenced, but the consequences of the defendant’s rejection of the plaintiff’s offer are to be determined pursuant to UCPR r 42.14. (That decision was concerned with an offer of compromise made before the appeal.)

18 In fact, both sets of rules are in substantially the same terms: South Eastern Sydney Area Health Service v King [No 2] at [10]. In that case, this Court proceeded on the basis that the general approach taken by the courts to SCR Pt 52A r 22(4) is applicable also to UCPR r 42.14. Although it was unnecessary for the point to be determined in that case, it was suggested that such an approach would appear to be correct: Ibid at [14]. In my opinion, this is the correct approach to be taken, and it should be taken in the present case. Effectively, therefore:

(1) if the offer made by the plaintiff is not accepted by the defendant, and

(2) if the plaintiff obtains a judgment on the claim to which the offer related no less favourable than the terms of that offer, then

(3) unless the court otherwise orders, the plaintiff is entitled to an order that his costs are to be assessed on an indemnity basis, and

(4) indemnity costs will be assessed as and from and including the day following the day on which the offer was made: Ibid at [11].

19 In accordance with the approach formerly taken to SCR Pt 52A r 22(4), the onus is on the defendant to persuade the Court that an order should not be made that the costs be assessed on an indemnity basis. The defendant must demonstrate the basis on which such an order should not be made. The defendant must establish that serious thought had been given to the risk involved in non-acceptance of the offer, and that the plaintiff’s case had been assessed properly and in the context of the rule and the achievement of its purpose — to encourage the proper compromise of litigation in the private interests of the litigants and in the public interest of the prompt and economical disposal of litigation. The decision to award or withhold indemnity costs where a plaintiff’s offer of compromise has not been accepted by the defendant involves a discretion to be exercised by reference to all of the circumstances of the case, not by applying a fixed mathematical formula. Authorities supporting all of those propositions are Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 725 and Morgan v Johnson (1998) 44 NSWLR 578 at 581-582. Generally, exceptional circumstances are required to justify such an order denying the plaintiff's entitlement; see Fowdh v Fowdh, Court of Appeal (BC9302200), 4 November 1993, unreported, per Kirby P at 11; Hillier v Sheather (1995) 36 NSWLR 414 at 422; South Eastern Sydney Area Health Service v King [2006] NSWCA 2 at [83]. The last of those decisions was concerned with an offer of compromise made before the trial of the action.

20 The offer made by a plaintiff must “give something away” in order to be regarded properly as a compromise: Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368, Courts at first instance often may not be sufficiently privy to the circumstances which demonstrate the extent to which a plaintiff’s offer does indeed give something away: Forbes Services Memorial Club Ltd v Hodge, Court of Appeal (BC9504456), 8 March 1995, unreported, per Kirby P at 14. This Court, however, is usually able to judge — from the amount for which judgment was given in the court below — the extent to which a plaintiff gives something away in an offer of compromise made in relation to the appeal. Nevertheless, as Kirby P also said in the last cited case (at 14):

However, for the operation of the rule, it would appear that the principle contemplates that so long as some actual offer of compromise, short of the full amount payable under the order under appeal [is made], the rule will apply.

21 For the sake of completeness, I have interpreted the defendant’s submission that the plaintiff’s offer was unreasonable because it gave away only 9% of the judgment obtained in the District Court (see par [15] supra) as a claim that the offer made by the plaintiff in this case should not properly be regarded as an offer of compromise at all. The plaintiff has submitted that the offer was a fair attempt at compromise.

22 There was no challenge by the defendant in the appeal to the amount awarded. The only issue on appeal was liability, and the offer of compromise related directly to the defendant’s chances of establishing that it owed no duty of care to the plaintiff in the circumstances of this case. The plaintiff points out that, had his offer of compromise been accepted by the defendant, he would have foregone not only almost $4000 of the $48,785.60 awarded in the District Court but also the interest on the whole of the sum awarded from 21 September 2004 (the date of the judgment in the District Court) to the date of a judgment entered in June or July 2005 as a result of a settlement of the appeal. On my calculation, this amounts to approximately $3300 being added to that amount of $4000, so that the plaintiff was offering to give away over $7000 of his judgment of $48,785.60, or closer to 15%, rather than 9% as the defendant has submitted. By way of explanation, the usual order in this Court where a new amount of damages is substituted for that awarded at first instance is to order that the judgment is to take effect from the date of the judgment at first instance. This ensures that the plaintiff obtains the benefit of interest on the sum found on appeal to be the proper amount from the date of the judgment at first instance and is not penalised by reason of the error established on appeal: Nicholson v Nicholson (No 2), Court of Appeal (BC9504206), 1 February 1995, at 1-2; NSW Insurance Ministerial Corporation v Gomes (No 2), Court of Appeal (BC9807723), 3 December 1998, at 3. Such retrospective operation was not a term of the offer made in the present case.

23 In some cases, the apparent means of the plaintiff who has made an offer of compromise will indicate that even a small reduction of the judgment from which the appeal is brought may properly be regarded as a compromise, as the plaintiff has given away an amount of some significance to that particular plaintiff — provided that it is neither trivial nor contemptuous: Maitland Hospital v Fisher (No 2) at 725; Forbes Services Memorial Club Ltd v Hodge at 14; Manly Council v Byrne (No 2) [2004] NSWCA 227 at 14. It will often be the case that the indemnity costs rule will apply to offers close to the sum eventually recovered: Connor v Hatgis (No 2), Court of Appeal (BC9501810), 7 December 1995, unreported, at 2. In the present case, the evidence suggests that the plaintiff is likely to be a person of modest means. The amount he was prepared to forego was therefore of some significance to him. I am satisfied that the offer in this case should properly be regarded as an offer of compromise.

24 The fact that leave to appeal was granted does not necessarily indicate an acceptance of the assertions made in support of the application for leave. The grant of leave does not carry weight in every case. In some cases, of which the present was in my opinion one, leave will be granted in order to hear argument so that the reasons for dismissing the appeal may be stated more fully than they would be stated in a refusal of leave to appeal, the need for doing so being a misconception by the applicant which is apparently widely held. The applicant in such a case does not demonstrate that his or its failure to accept an offer of compromise was reasonable because leave to appeal had been granted. I see no basis on which this Court’s remaining discretion in relation to an indemnity costs order should be exercised in the defendant’s favour. The defendant has not persuaded me that this Court should, in accordance with UCPR r 42.14, “otherwise order” to deny the plaintiff’s entitlement to an indemnity costs order. In my opinion, the plaintiff is entitled to an indemnity costs order in relation to the appeal.

25 There does, however, remain an issue which has not as yet been decided by this Court by way ratio decidendi. That issue is whether costs assessed on an indemnity basis are excluded (or excepted) from the maximum costs fixed by s 198D (or s 338), or whether the maximum fixed by those sections applies whatever the basis on which the costs may be assessed. Section 198D(1)(a) is quoted in par [7], supra; it states that, in a case such as the present where the damages recovered are less than $100,000, the maximum costs for legal services provided to a plaintiff are fixed at 20% of the amount recovered or $10,000, whichever is the greater. Section 338(1)(a) of the 2004 statute is in the same terms. This issue must now inevitably arise in the present case, and in my opinion it is preferable for it to be determined at this stage rather than have the present case wend its way once more to the Court of Appeal when it does arise. The parties have made submissions specifically in relation this issue.

26 Section 198F was considered by this Court in Penrith City Council v Parks [2004] NSWCA 381, and it was interpreted there as excluding indemnity costs from that maximum. The plaintiff had recovered damages greater than the amount nominated as acceptable in an offer of compromise made to the defendant. The trial judge in the District Court made a special order that the defendant pay the plaintiff's costs of the whole proceedings, which both parties to the application for leave to appeal assumed was an order for indemnity costs. The defendant argued in this Court that such an order was prevented by s 198F(1), which permits an order that a party pay costs on an indemnity basis for "legal services provided after the offer [of compromise] is made" (the subsection is quoted in full at par [8] supra). In fact, the order made was that the defendant pay the plaintiff's costs of the whole proceedings on a solicitor and client basis, not an indemnity basis. Such an order was permitted in the District Court pursuant to DCR Pt 39A r 25, which was introduced in 1998 deliberately to increase the incentive to make reasonable offers of compromise: Practice Note 42, par 5.

27 This Court held (at [10]) that s 198F did not constitute a code precluding an order for costs on a solicitor and client basis for legal services provided before the date of the offer of compromise, but that the costs assessed on a solicitor and client basis nevertheless could not exceed the limit imposed by s 198D on the maximum amount of costs payable (see also [16]). Leave to appeal against the costs order made by the judge was refused. In those circumstances, the consideration given by this Court to s 198F was obiter, but what was said is nevertheless of assistance.

28 When discussing the amendments made to the Legal Profession Act 1987 by the Civil Liability Act, this Court (at [6]) described s 198F as providing an “exception” to the limitation (or ceiling) on the maximum costs imposed by s 198D, and it said (at [10]):

Section 198F permitted an award of costs which could on assessment exceed the ceiling amount, although the excess could come only from assessment on an indemnity basis in respect of legal services provided after the offer of compromise was made.

That proposition was not developed further but, if this interpretation of s 198F is correct, it would follow that, where in a given case:

(1) the amount recovered by the plaintiff is no less favourable to him than the terms of his offer of compromise (so that the offer was, by definition, a reasonable one);

(2) the maximum (or ceiling) of costs permitted is $10,000; and

(3) the party and party costs of the whole proceedings equalled or exceeded that amount,

the plaintiff would be entitled to be paid, in addition to the $10,000, the full assessed amount of the indemnity costs for the legal services provided after the offer of compromise was made, as they are excepted from that maximum. Where the party and party costs for the legal services provided before the offer of compromise were less than $10,000, the plaintiff would be entitled to be paid the full assessed amount of both those party and party costs and the indemnity costs for the legal services provided after the offer.

29 In Andrews v NSW (2004) 1 DCLR (NSW) 230 (a decision given before the judgment in Penrith City Council v Parks), Cooper DCJ also suggested (at [21]) that the failure to accept an offer of compromise provided an exception to the limitation on costs imposed by Division 5B of the 1987 statute, but this suggestion was also obiter, as the judge went on to hold (at [34]–[35]) that in any event the case did not fall within Division 5B because the damages sought were for malicious prosecution and not for personal injury.

30 In Herbert v Tamworth City Council (No 4) (2004) 60 NSWLR 476 (also a decision given before Penrith City Council v Parks), Sperling J held (at [19], [29]) that s 198F overrides the limitation as to amount specified in s 198D where the condition that the offer of compromise was a reasonable one is fulfilled. He did so in the belief that it was an issue he had to determine in that case, having accepted the defendant's submission (at [14]) that he could not make an order that the defendant pay the plaintiff's costs on an indemnity basis because the costs "might be capped" by s 198D. As I have already pointed out (at [10]–[14] supra), such a submission was incorrect, as the limitation applies only to an order for costs based on the certificate of assessment filed in the court having jurisdiction to order the payment of that amount of money; it does not apply to a general order by the trial court for costs which does not specify the amount of costs payable.

31 Nevertheless, Sperling J gave careful consideration to the issue, and his judgment deserves attention in this appeal. His reasoning was as follows:

(a) The terminology of s 198F (“does not prevent the awarding of costs against another party to be assessed on an indemnity basis in respect of legal services provided after the offer is made") shows that it was intended to allow indemnity costs to be recovered which would otherwise be precluded by Division 5B (at [20]).

(b) There is nothing in s 198D which prevents costs being awarded on an indemnity basis "subject to the limit imposed as to the amount specified in the section" (at [21]).

(c) Section 198F, in order that it has some work to do, must have been intended to override the limitation as to amount if the conditions for the operation of s 198F are fulfilled (at [22]).

In coming to that conclusion, the judge relied in part on the Premier's Second Reading speech, where he described s 198F as an "exception" to the cap on fees imposed by s 198D.

32 With due respect to Sperling J, I doubt that reliance may be placed on the Second Reading speech to support his line of reasoning. Section 34(1) of the Interpretation Act 1987 limits the circumstances in which consideration may be given to such extrinsic material. The statement made by the Premier did not identify the purpose or object underlying s 198F of the CivilLiability Act. That provision in the statute is expressed in terms which convey a clear meaning. Nor is the ordinary meaning of s 198F either ambiguous or obscure. What is unclear is the effect s 198F has on s 198D, and that effect must be derived from what is meant by what Parliament has said in the statute, not by what Parliament may have intended to say when it enacted the statute: Nolan v Clifford (1904) 1 CLR 429 at 449. That is the approach taken by this Court in Newcastle City Council v McShane (No 3) at [33]. There may perhaps be an argument that, if s 198F does not operate as an exception to s 198D as suggested by this Court in Penrith City Council v Parks, such an interpretation leads to a result which is unreasonable, but I would myself prefer to approach the issue of interpretation on the basis of what the statute says rather than on what was said in the Second Reading speech. I do not, however, disagree with the reasoning which Sperling J expressed, although I would myself prefer to describe s 198F as an exception to s 198D rather than “overriding” it.

33 In the recent decision of Newcastle City Council v McShane (No 3), this Court also referred (at [15(7)], [24] and [39]) to s 198F as effectively providing an exception to the limitation as to amount specified in s198D where a reasonable offer of compromise has been made. Those references were by way of general observations on an issue which had not been fully argued, and without reference to Penrith City Council v Parks or any of the other cases to which reference has now been made; nor did they disclose the reasoning which led to those obiter statements. It is therefore necessary to start from the terms of the statute itself.

34 Section 198F of the 1987 statute may be compared with s 198G in the same statute (s 341 of the 2004 statute), which expressly permits an order to be made excluding from the operation of the whole of Division 5B of that statute (Division 9 of the 2004 statute) the legal costs provided to a party where they were provided in response to an action on behalf of the opposing party which was not reasonably necessary for the advancement of that party’s case or was intended or reasonably likely to unnecessarily delay or complicate the determination of the claim.

35 There is no similar express provision excluding indemnity costs from the maximum amount of costs which may be recovered. The defendant submits that, in the ordinary exercise of statutory construction, the two sections must be read together, so that, in the event that indemnity costs are ordered, the monetary cap imposed by s 198D — which is expressed without regard to the method by which costs are to be defined — still stands.

36 Section 198G is nevertheless a strong indication of a legislative intention that the limitation on the maximum costs which may be recovered in a “small” claim for damages for personal injuries (that is, one in which the amount recovered does not exceed $100,000) depends on the reasonableness of the conduct of the unsuccessful party. The intention of the provisions in the longstanding Rules of Court permitting an order for indemnity costs to be made where the unsuccessful party has not accepted a reasonable offer of compromise is consistent with that legislative intention. It may fairly be assumed that, when the Legislature recognised those provisions in the Rules in s 198F (and s 340), it also recognised their intention. The interpretation placed on s 198F by this Court in Penrith City Council v Parks and Newcastle City Council v McShane (No 3) is therefore consistent with the legislative intention referred to.

37 If the Legislature had intended the limitation on the maximum amount of costs to be recovered to include indemnity costs, there was little need for s 198F(1) other than to give a specific definition of what constitutes a reasonable offer of compromise in a “small” claim for damages for personal injuries before an indemnity costs order may be made — that the offer of compromise must be equal to or less than the amount recovered (see par [9] supra). Such a provision could have been far more simply expressed than it is presently if that had been the only purpose of the subsection. The interpretation adopted in Penrith City Council v Parks gives the section a reason for its existence in its present form, as do the interpretation adopted earlier in Herbert v Tamworth City Council (No 4) and that suggested later in Newcastle City Council v McShane (No 3).

38 Moreover, there will be no incentive for defendants to accept a reasonable offer of settlement if the indemnity costs sanction applied by the Rules is rendered ineffective by a contrary interpretation of s 198F (and s 340). Particularly is this so in the personal injury litigation of “small” claims to which s 198F(1) is specifically directed, where the restriction on the costs payable greatly favours the party with the deeper pocket, and where it enables that party to take advantage of procedural steps which (although perhaps not offending the letter of s 198G) impose pressure on the other party by using up his or her allowed maximum costs.

39 A recent example of such a case can be seen in Newcastle City Council v McShane [No 3], to which s 198D(1)(a) applied. The plaintiff’s claim in the District Court was referred by that Court for arbitration. The plaintiff succeeded in the arbitration, but the defendant obtained a rehearing before a judge. The matter was not reached on the date fixed for hearing, and was relisted for another date. On that date, the judge entered a verdict for the plaintiff for $62,300 (after deducting 30% for contributory negligence) plus costs. The defendant filed a holding appeal and obtained a stay of proceedings, with the costs of the application being made costs in the appeal. Both the defendant’s application for leave to appeal on liability and the plaintiff’s cross-appeal on contributory negligence were heard together, when judgment was reserved. This Court granted leave to the defendant to appeal but dismissed its appeal, refused leave to the plaintiff to appeal and ordered the defendant to pay 85% of the plaintiff’s costs. It was subsequently held by this Court that the plaintiff’s costs of the defendant’s unsuccessful appeal were also the subject of the maximum of 20% of the verdict. The limit of $10,000 costs permitted went nowhere near to covering the costs incurred by the actions of the defendant.

40 In my opinion, the obiter dicta of this Court in Penrith City Council v Parks and Newcastle City Council v McShane (No 3) were correct, and they should be followed in the present case.

41 The usual order made has been for the unsuccessful party to pay the successful party’s costs on a party and party basis up to and including the day the offer of compromise was made, and thereafter on an indemnity basis. This is consistent with the terms of s 198F(4)(b) and s 340(4)(b). However, the Civil Procedure Act 2005 now provides, by s 98(1)(c), that a court should award costs “on the ordinary basis or on an indemnity basis”. The “ordinary basis” is defined by s 3 of that Act as meaning the basis of assessing costs set out in s 364(1) and s 364(2) of the Legal Profession Act 2004 (in a Subdivision of that Act entitled “Party/party costs”), which state:

(1) In conducting an assessment of legal costs payable as a result of an order made by a court or tribunal, the costs assessor must consider:
(a) whether or not it was reasonable to carry out the work to which the costs relate, and

(b) whether or not the work was carried out in a reasonable manner, and

(c) what is a fair and reasonable amount of costs for the work concerned.

(2) In considering what is a fair and reasonable amount of legal costs, a costs assessor may have regard to any or all of the following matters:
(a) the skill, labour and responsibility displayed on the part of the Australian legal practitioner or Australian-registered foreign lawyer responsible for the matter,

(b) the complexity, novelty or difficulty of the matter,

(c) the quality of the work done and whether the level of expertise was appropriate to the nature of the work done,

(d) the place where and circumstances in which the legal services were provided,

(e) the time within which the work was required to be done,

(f) the outcome of the matter.

The appropriate order in the present case would therefore be for the defendant to pay the plaintiff’s costs up to and including 22 June 2005 on the ordinary basis and thereafter on an indemnity basis.

42 I propose that the following orders be made:

(1) The defendant is to pay the plaintiff’s costs of the appeal up to and including 22 June 2005 on the ordinary basis and thereafter on an indemnity basis.
(2) The defendant is to pay the plaintiff’s costs of this application.

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