SMEC Testing Services Pty Ltd v Campbelltown City Council

[2000] NSWCA 323

CITATION:	SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323
FILE NUMBER(S):	CA 40744/99
HEARING DATE(S):	25 October 2000
JUDGMENT DATE:	14 November 2000
PARTIES :	SMEC Testing Services Pty Ltd - Appellant Campbelltown City Council - Respondent
JUDGMENT OF:	Priestley JA at 1; Giles JA at 35; Rolfe AJA at 51

LOWER COURT JURISDICTION :	District Court
LOWER COURT FILE NUMBER(S) :	DC 3515/96
LOWER COURT JUDICIAL OFFICER :	Taylor DCJ

COUNSEL:	P W Larkin - Appellant C Needham SC - Respondent
SOLICITORS:	HIH Legal Services Pty Ltd - Appellant Phillips Fox - Respondent
CATCHWORDS:	COSTS - plaintiff claims against defendant - defendant cross-claims against three cross-defendants - offer of compromise under rules made to defendant by one of the cross-defendants - no costs consequences under rules - treated as Calderbank letter - also Calderbank letter sent - plaintiff succeeds against defendant and defendant against all cross-defendants - but for less than amount of offer - whether defendant should pay cross-defendant's costs - by majority, departure from ordinary rule not warranted - cross-defendant to pay defendant's costs. D
CASES CITED:	Calderbank v Calderbank (1976) Fam 93; Messiter v Hutchinson (1987) 10 NSWLR 525; State Superannuation Board v Property Estates (Qld) Pty Ltd (Cole J, 8 February 1991, unreported); AWA Ltd v Daniels (Rogers CJ Com Div, 8 October 1992, unreported); Beregold Pty Lted v Mitsopoulos (Cole J, 20 November 1992, unreported); John S Hayes & Associates Pty Ltd v Kimberley-Clarke Australia Pty Ltd (1994) 52 FLR 201; MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (1996) 70 FLR 235; Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425; England v Van Donk (CA, 5 December 1997, unreported).
DECISION:	Leave to appeal granted; (By majority) Appeal dismissed with costs.

.THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40744/99

DC 3515/96

PRIESTLEY JA

GILES JA
ROLFE AJA

Tuesday 14 November 2000

SMEC TESTING SERVICES PTY LTD v CAMPBELLTOWN CITY COUNCIL

JUDGMENT

1    PRIESTLEY JA: SMEC Testing Services Pty Limited ( SMEC) seeks leave to appeal against orders made by Taylor DCJ on 1 September 1999 having the effect that SMEC must pay the costs of Campbelltown City Council (the Council) in District Court Action No 3515 of 1996. SMEC and the Council have agreed that SMEC’s application for leave should be argued as if it were an appeal so that if the court grants leave it can proceed to judgment in the appeal without further argument.

2 Before Taylor DCJ the question of costs was argued on the footing that s 109ZJ of the Environmental Planning and Assessment Act 1979 applied to the proceedings. Because of this Taylor DCJ formed the view that Pt 19A r 10 of the District Court Rules could not apply to the proceedings and that he must deal with the case pursuant to Pt 39A r 25.
3    The objects of Pt 39A r 25 are stated in sub-r (1A) as being:

“ (a) to introduce an added element of risk in order to promote early settlement of actions without hearing or arbitration;
(b) to compel the parties to an action, under threat of possible penalties in costs, to arrive at an early assessment of the amount of damages, if any, recoverable by the plaintiff;
(c) to encourage the making and acceptance of reasonable offers of compromise by:
(i) providing for penalties in costs to be imposed on a party who rejects an offer of compromise and does not at the hearing or arbitration of the action achieve a position better than he would have held if he had accepted the offer of compromise; and
(ii) providing corresponding costs relief to the party making the offer;
(d) to impart as much certainty to the imposition of costs penalties referred to in object (c) as may be imparted without substantial injustice; and
(e) to provide a discretion in the Court to relieve a party from the imposition of a costs penalty, to be exercised only in an exceptional case and for the avoidance of substantial injustice. ”

4    The remainder of r 25 makes provisions which implement those objects.

5    Before Taylor DCJ, SMEC claimed that it had made offers to the Council which, pursuant to r 25, meant that indemnity costs orders should be made in its favour. Taylor DCJ disagreed and exercised his discretion in ordering SMEC to pay the Council’s costs.

6 If the case in this court were to be decided on the same basis as that on which Taylor DCJ dealt with it, I would have seen no appellable error in his exercise of discretion. However, the day before the proceedings in this court were to be heard, counsel for SMEC notified the court of his discovery of cl 34 of the Environmental Planning and Assessment (Savings and Transitional) Regulations 1998. The existence of cl 34 had not been made known to Taylor DCJ. Counsel in this court were agreed that it prevented the application of s 109ZJ to the case and that as a result Pt 19A r 10 was applicable. That rule provides:

“ 10. Where 2 or more defendants are alleged to be jointly or jointly and severally liable to the plaintiff in respect of a debt or damages and rights of contribution or indemnity appear to exist between the defendants, Part 39A rule 25 shall not apply to an offer unless -
(a) in the case of an offer made by the plaintiff - the offer is made to all defendants, and is an offer to compromise the claim against all of them;
(b) in the case of an offer made to the plaintiff -
(i) the offer is to compromise the claim against all defendants; and
(ii) where the offer is made by 2 or more defendants - by the terms of the offer the defendants who made the offer are jointly or jointly and severally liable to the plaintiff for the whole amount of the offer. ”

7 The reasons for the parties’ agreement that Pt 19A r 10 applied to the case will be stated later. This rule involves different discretionary considerations from the one which was mistakenly used. Since it seemed to the court that the application for leave should be considered on the basis of the rule which was in fact applicable to the proceedings and since the case has now been argued before this court on that basis, it therefore seems to me that, although I reach the conclusion reluctantly because of my view that Taylor DCJ reached the right conclusion by a wrong route that was not his fault, it is appropriate for the court to grant leave and proceed to deal with the matter as an appeal.

8    It follows from the fact that Taylor DCJ exercised his discretion by reference to a wrong standard that this court must either consider for itself what would be the outcome of discretion exercised by reference to the applicable rule or return the case to the District Court for the discretion again to be exercised there. It seems appropriate to me that in the circumstances of this case, the court should take the former course.

9    SMEC and the Council were not the only parties in the District Court proceedings. In fact there were five. Normak Pty Ltd (Normak) was the plaintiff. It had bought land for development purposes from the Council. Normak claimed that the state of the land, which had been filled by the Council some years before, was not as represented by the Council at the time Normak had contracted to buy it. (It is not necessary to detail Normak’s causes of action against the Council. For present purposes it is enough to state the general nature of its claim.) Normak claimed damages from the Council for the extra cost of building which it alleged resulted directly from the different state of the land. It also claimed damages for loss of rent from the buildings in its development, allegedly caused by the delay brought about by the need to reorganise its building plans. The work that the Council had done in filling the land had been done by independent contractors engaged by the Council. Three of these became parties to the action. These were Lean Lackenby & Hayward Pty Limited (Lean Lackenby), SMEC and T.J. & R.F. Fordham Pty Limited (Fordhams).

10 Lean Lackenby had been consultants, SMEC had been geotechnical experts and Fordhams had done the actual earthworks. In the appeal papers Lean Lackenby was called the First Third Party, SMEC the Second Third Party and Fordhams the First Cross Defendant. However, we were told by both counsel before us that as between the Council and these three parties, the District Court Rules, which had changed relevantly during the course of the proceedings, brought about the result that the Council was to be treated as a plaintiff and each of the other three parties as a defendant. They also agreed that this was so for purposes of Pt 19A r 10. When referring to Lean Lackenby, SMEC and Fordhams collectively I will call them the Third Party Defendants. The Council had caused these parties to be joined because the Council’s position was that if Normak proved any damage against it one or more of them must be responsible.

11    Normak began its action in 1996. On a date not precisely identified in the materials before this court, but apparently about mid 1998 the action was sent to Mr P. Callaghan SC as referee, for report. He heard the case during the days and evenings of thirteen days, commencing on 12 October and ending on 12 November 1998. He delivered his report on 22 December 1998.

12    The opinions in the referee’s report were that 1. there should be a verdict for Normak against the Council for $75,962 to which interest should be added from the end of September 1995, 2. that the Council should bear 90% of Normak’s costs, 3. that there should be verdicts in favour of the Council against Lean Lackenby and SMEC for the sum of $75,962 plus interest and against Fordhams for 25% of that sum, 4. that the judgments should note that they related to the same liability and that recovery by the Council of money on account of any such judgment would operate as a pro tanto discharge of the other judgments, and 5. that Lean Lackenby, SMEC and Fordhams should be ordered to pay the Council’s costs (including the costs payable by it to Normak) in the proportions 50%, 25% and 25% respectively.

13    The referee’s report led to the parties agreeing that the District Court proceedings should be settled by the making of the following consent orders, which were made in their final form on 19 August 1999:

“ 1. Judgment in favour of the council against Lean Lackenby, SMEC and Fordhams for $104,162.62 plus interest on that sum from 3rd March 1999 to date (the judgment) in the proportions of 37.5% for each of Lean Lackenby and SMEC and against Fordhams in the proportion of 25% of the judgment.
2. Note that the judgment relates to the same liability and the recovery by the Council of money on account of any such judgment operates as a pro tanto discharge of the other judgments.
3. Order that Lean Lackenby pay the Council’s costs up to the time of the making of the consent orders (including the costs payable to Normak) but excluding the costs payable to any other part in the proportion of 42.5%.
4. Order that SMEC and/or Fordhams pay the Council’s costs (including the costs payable to Normak) in the proportions of 32.5% and 25% respectively, subject to any application by SMEC and/or Fordhams that a different order should be made based on offers made by them.
5. Vacate all previous orders for costs.
6. As between SMEC, Lean Lackenby and Fordhams dismiss all cross-claims and third party notices and order each party pay its own costs. ”

14    SMEC and Fordhams each made an application pursuant to order 4, for “a different order”. They asked that the Council pay their costs on an indemnity basis, since 8 April 1998 in SMEC’s case and from 7 May 1998 in Fordhams’ case. In the alternative they asked that the Council pay their costs on a party and party basis from the same dates. Taylor DCJ dismissed both applications. Fordhams did not seek leave to appeal against his decision.

15    SMEC’s case for costs was based on a letter it had written bearing date 7 April 1998, to the solicitors for the Council, headed “Without prejudice save as to costs” and enclosing what the letter described as “Offer of Compromise in the amount of $110,000 plus costs dated 7 April 1998”. The terms of the material part of the offer were as follows:

“ 1. The Second Third Party ” [SMEC] “ offers to compromise the claim in the following manner:-
(a) To pay the Defendant the sum of $110,000 plus costs.
2. This offer is made in accordance with Pt 19A of the District Court Rules.
3. This offer is open for a period of twenty-eight days from the date it is made. ”

16    By a second letter bearing the same date headed “Without prejudice save as to costs. ‘Calderbank letter’” SMEC wrote to the solicitors for the Council as follows:

“ We refer to our client’s offer of compromise for $110,000 plus costs dated 7 April 1998 and advise that we have been instructed to put the following alternative offer.
That the Second Third Party contribute/pay to the defendant 50% of the Plaintiff’s claim plus 50% of the Plaintiff’s costs, plus 50% of the defendant’s costs.
Take notice that this offer shall lapse twenty-eight days from the date of this letter. ”

17    Fordhams had made an offer of compromise on 7 May 1998. No argument by SMEC in this court involved any reliance on this offer, its terms or any of the facts relating to it. Indeed I have been unable to find a copy of it in the papers before this court for the purpose of SMEC’s leave application/appeal.

18    Some time earlier, by identical letters dated 17 March 1998, the solicitors for the Council had written to the solicitors for SMEC and Fordhams “Without prejudice except as to costs”, as follows:

“ We refer to the conference between the defendant parties at our offices on 12 March 1998.
As discussed, it is our client’s view that whatever judgment may be made against it in contract, it will be successful in passing all of its liability on to the other Defendant parties.
Our client does not believe the disagreement between the other Defendant parties concerning apportionment of liability between them should prejudice its position and force it to incur costs greater than those already incurred.
In an effort to reach an early resolution of this matter and to minimise costs we are instructed to ask the other Defendant parties to grant indemnity to our client in the proportion to which they themselves are found liable in these proceedings to our client.
Our client seeks full indemnity with respect to its costs which are as follows: [details of costs totalling $57,284.32 were then given].
Please advise your client’s instructions on the granting of an indemnity to our client as soon as possible. We note this matter is listed for a directions hearing on 19 March 1998 and would be grateful if an indication could be made to us on that date.

(Taylor DCJ noted that a similar letter had been written to Lean Lackenby on the same day but I have not found it in the materials put before this court.)

19    The solicitors for the Council wrote further identical letters, “Without prejudice except as to costs” bearing date 28 April 1998 to the solicitors for SMEC and Fordhams, (and it seems to Lean Lackenby, see par 5 of affidavit of Gates sworn 30 June 1999) as follows:

“ We refer to our letter dated 17 March 1998.
In our view, no evidence has been presented in this matter which allows a conclusion other than that Council’s liability to the Claimant, if any, will be passed on to the Other Parties in full.
In order to avoid incurring unnecessary costs, we believe the Other parties should grant indemnity to our client in respect of its costs and liability to the plaintiff in the proportion to which the Other Parties are found liable for the damage claimed by the Plaintiff.
This proposal allows the Other Parties to continue their debate with respect to the apportionment of liability and will not prejudice their position with respect to each other. At the same time it reduces costs for which they will ultimately be liable.
We will be grateful if you will advise your client’s urgent instructions with respect to indemnity. ”

20    There was no answer to this letter by SMEC (or Lean Lackenby), see par 6 of the Gates affidavit. Fordhams’ only answer seems to have been by its own offer of 7 May 1998.

21    As matters stood in April 1998 the Council was the defendant in litigation facing a claim that would require the plaintiff to prove that one or more of the Council’s independent contractors had been negligent. If the plaintiff failed in that claim then the Council and its independent contractors would all be free of liability and, presumably, would be entitled to their costs from the plaintiff. If the plaintiff succeeded against the Council then it is difficult to see any reason why the Council would not in turn succeed in establishing against one or more of its independent contractors the same liability that the plaintiff had established against it.

22    In the first version of Normak’s statement of claim it had claimed $160,457.93 together with interest.

23    In August 1997 it amended its claim to $176,548.25. The two major components of this claim were amounts of $106,401.25 for extra building costs and $67,185 for three months loss of rental income. There were two further quite small amounts claimed. Then, on the basis of a further report dated 1 May 1998, by the plaintiff’s expert who had calculated the earlier figures claimed, the figure claimed for extra building costs was revised further upward to $203,990.

24    As matters stood at the time of SMEC’s offer of 7 April 1998 and the Council’s (reiterated) response of 28 April 1998, it seems to me quite obvious that the Council’s position was more reasonable than SMEC’s. The Council’s letters of 17 March 1998 and 28 April 1998 show that all the parties had conferred about liability on 12 March 1998 and that following the conference the Council was firmly taking the position that any liability it suffered would have to be passed on to one or more of the other parties. This position accords with my own understanding of the realities of the particular litigation, as it then stood. The sequence of events comprised by the conference on 12 March 1998, the Council’s first letter to SMEC, SMEC’s letter to the Council and then Council’s second letter to SMEC, lead me to suspect that the Third Party Defendants were of the same view and that the only real issues in the litigation were going to be the amount to be recovered by the plaintiff and then the apportionment of that liability between the Third Party Defendants. I infer that difficulties in reaching agreement between the Third Party Defendants as to apportionment between themselves were more likely to have been responsible for the form of SMEC’s offers to the Council, than any doubt about the Council’s being able to pass on any liability to one or more of the Third Party Defendants.

25    Whether or not it be right that SMEC recognised the inevitability, or near inevitability that the Council, if found liable to the plaintiff, would be able to pass on that liability to one or more of the Third Party Defendants, it seems to me at the very least to have been quite reasonable for the Council to have taken the view that such an outcome was highly likely.

26 The reasonableness of the Council’s response to SMEC’s offers can only be considered in light of the facts that in the litigation the Council was standing between the plaintiff on the one side and the three Third Party Defendants on the other which meant that the most sensible settlement for the Council with the Third Party Defendants was one of the kind involving them all, preferably along the lines first suggested by the Council in March, and then again in April 1998. To have accepted SMEC’s Pt 19A offer would have left many outstanding questions which could be troubling for the Council. If either or both the other Third Party Defendants did not join in an overall settlement, and if the plaintiff did not join in, then the Council would be faced with being the defendant at a trial in which at least one of the Third Party Defendants would be missing. The consequences of this would be hard to see in April 1988. Certainly it raised the spectre of possible unwanted complications at the trial, if the trial were to proceed. Further, and most obviously, the Council would still have been exposed to a claim considerably greater than it had settled for.

27    As events turned out, Normak’s claim against the Council was litigated before the referee. Normak maintained the claim based on its expert’s report of 1 May 1998, which involved the revised figure of $203.990 for several days before the referee. On the third day of the hearing, 14 October 1998, one of the plaintiff’s technical witnesses made concessions in cross-examination which led to the reformulation by the plaintiff of its claim. On 22 October 1998 a further amended statement of claim was filed which reduced the claim for cost of extra works to $79,679. As the referee recorded in his report, what happened was that “At the end of the tenth hearing day it was eventually agreed that the extra costs associated with the extra work were $73,000”. The addition of the two small items earlier referred to, which the referee did not think had really been in contest, brought the figure of $75,962 plus interest which he recommended in his report.

28    SMEC’s primary contention was that this was a better result for it than the result would have been if either of its offers had been accepted. This primary contention was then made the first premise in a variety of arguments, which all seemed to me to be directed to persuading the court that the Council had been commercially unreasonable in not accepting what SMEC had offered. I am doubtful whether it really is valid in the circumstances of this case to compare what SMEC offered with the amount it was eventually found to be liable to pay to the Council. Another comparison, which seems to me to be the more relevant one for present purposes is to compare what the Council eventually got as against all the Third Party Defendants, compared with what it would have got if it had accepted SMEC’s offer and no more. If what the Council had suggested had been done, then the same position would have been reached as actually came about. Had the Council accepted SMEC’s offer, then what would have happened afterwards cannot be deduced with any confidence at all.

29 Ordinarily speaking an offer of compromise is an offer the acceptance of which will bring proceedings to an end. In the present case the Council was concerned with four separate sets of proceedings, Normak’s action against it and its separate (although related) actions against the three Third Party Defendants. Part 19A r 10 itself recognises a compromise offer of the kind here made by SMEC is not the kind of offer which attracts the application of Pt 39A r 25. Part 39A r 25 would only have been applicable, in view of the provisions of Pt 19A r 10, if SMEC’s offer had been an offer to compromise the Council’s claim against all three Third Party Defendants.

30 The fact that Pt 19A r 10 excluded the application of Pt 39A r 25 to SMEC’s offers in the present case, supports my view that the kind of offer which the Rules contemplate as one which will have adverse cost consequences if unaccepted will usually be an offer which will have substantially the result of bringing the whole litigation to an end. I am not suggesting that this will be so in every case. In cases such as the present, with its three layers of parties, it may be that offers of compromise can be made by third party defendants to the defendant in the middle layer which, although if accepted will not bring the overall proceedings to an end, will nevertheless have real practical purpose and warrant consideration by the offeree, such that the reasonableness of the conduct of the offeror or offerors and the offeree will be a proper matter for the judge to take into account when exercising discretion about costs at the end of the proceedings. However, in my opinion, SMEC’s offers in the present case would have had to go much further than they did in order to reach a level where they could have any decisive effect on the exercise of judicial discretion when considering what costs orders should be made.

31    In fact, in the present case, as the parties in this court agreed, Pt 39 r 1A was the applicable rule. This provides that “the costs of any action ... shall, except where otherwise ordered by the court, follow the event of the action”. This is the familiar rule pursuant to which costs ordinarily follow the event unless a party seeking to disturb the ordinary course persuades the court that there is some good reason for departing from it. That is, in terms of the present case, it was for SMEC to show some persuasive reason why the court should depart from the usual rule. In my opinion not only has SMEC not done this, there is a clear positive case against any departure from the ordinary rule.

32    A reason for this conclusion beyond what is apparent from what I have already said, is that, looking at the practicalities of the situation, there was no reason I can see why SMEC, although not in form a party to Normak’s action, should not, as a matter of commercial commonsense, have made to Normak the offer it made to the Council, in consideration, for example, of Normak’s discontinuing the proceedings against the Council. This would in substance have been a less complicated course to follow towards an overall resolution of the litigation, than for the Council to attempt to deal with all parties as SMEC seems to be saying it should have done. If Normak rejected SMEC’s offer, that fact would be relevant to costs orders after the decision of the litigation, and would have enabled a fairer set of costs orders to be made all round, with Normak probably being required to meet a larger share.

33    At the least, SMEC was in as good a position commercially as the Council to put the substance of its offer to Normak. The fact that neither did so does not in my opinion give SMEC an advantage over the Council in this court’s consideration of the discretion it is now exercising.

34    In my opinion, the orders made by Taylor DCJ are the orders appropriate to be made after a proper exercise of discretion in regard to the costs in question here. I therefore propose that the court order:

1. Leave to appeal granted.
2. Appeal dismissed with costs.

35    GILES JA: The circumstances in which SMEC seeks to appeal from the orders made by Taylor DCJ appear in the reasons of Priestley JA, which I have had the advantage of reading in draft. I agree that leave to appeal should be granted, and in the light of his Honour’s reasons can briefly state why I agree that the appeal should be dismissed.

36 The effect of s 109ZJ of the Environmental Planning and Assessment Act 1997, had it applied, would have been that the Council obtained judgment against each of the Third Party Defendants for, and only for, such proportion of its total damages as was considered to be just and equitable having regard to the extent of each of those parties’ responsibilities for the relevant loss or damage; and there could not be contribution between the Third Party Defendants. Apparently under the misapprehension that s109ZJ did apply, the parties agreed that the Council’s judgments should be for proportionate shares of the $104,162.62 plus interest. In fact s 109ZJ did not apply, and the Council was entitled to judgments for the whole sum against each of the Third Party Defendants, and prima facie to orders that each of the Third Party Defendants pay to it the costs it had to pay to Normak.

37    The Council was also entitled to orders that the Third Party Defendants pay its costs unless the court otherwise ordered: Pt 39 r 1A. The making of an offer of compromise in the form of a Calderbank letter (from Calderbank v Calderbank (1976) Fam 93), where the offeree does not accept the offer but ends up worse off than if the offer had been accepted, is a matter to which the court may have regard when deciding whether to otherwise order, but it does not automatically bring a different order as to costs. All the circumstances must be considered, and while the policy informing the regard had to a Calderbank letter is promotion of settlement of disputes an offeree can reasonably fail to accept an offer without suffering in costs. In the end the question is whether the offeree’s failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs, and that the offeree ends up worse off than if the offer had been accepted does not of itself warrant departure: see for example, John S Hayes & Associates Pty Ltd v Kimberley-Clarke Australia Pty Ltd (1994) 52 FLR 201; MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (1996) 70 FLR 235.

38    SMEC’s Calderbank letter of 7 April 1998 offered to pay 50 per cent of Normak’s claim and 50 per cent of its costs. Although suffering a judgment for only 37.5 per cent of the amount for which the Council was found liable to Normak and only 42.5 per cent of Normak’s costs, SMEC was in fact liable for the whole of the amount and prima facie for all the costs. The Calderbank letter did not offer to the Council a better result than that to which it was entitled and which, but for the parties’ misapprehension, it would have obtained. It is therefore difficult to see why the Council’s failure to accept the offer warrants departure from the ordinary rule as to costs.

39    The circumstances were, of course, not those of a straightforward claim by the Council against SMEC. The Council was the defendant to Normak’s claim and a claimant also against Lean Lackenby and Fordhams. If the Council could be said to have acted imprudently in not accepting an offer of half its entitlement, it could only be (if at all) because it should have been confident of receiving sufficient to cover entirely its exposure to Normak from judgments also against Lean Lackenby and Fordhams and recovery under those judgments.

40    Normak’s claim was founded on inappropriate compaction of fill on land it bought from the Council. As Priestley JA has observed, if Normak succeeded against the Council then it is difficult to see any reason why the Council would not in turn succeed in establishing liability to it of one or more of the Third Party Defendants. But it is another matter for the Council to have confidence in obtaining judgments against Lean Lackenby or Fordhams and recovery thereunder.

41    The position must be assessed as at April 1998, but in the absence of more direct evidence the guidance must be obtained from the referee’s report. It is evident that Lean Lackenby’s stance was that it had done what was required of it by engaging SMEC, on behalf of the Council, to supervise the compaction, and that Fordham’s stance was that it had done all that SMEC directed it to do. The referee found that the discussions between Lean Lackenby and SMEC had insufficiently established SMEC’s supervisory role. It is not obvious that the Council could have counted on this outcome, however, particularly when it turned on evidence coming from Lean Lackenby and SMEC. I do not think it has been shown that it should have been confident of judgments against Lean Lackenby or Fordhams. Even if it should, there was no evidence showing that it should have been confident of recovery from Lean Lackenby and Fordhams.

42    It is true that one would not expect the Council to have sued Lean Lackenby and Fordhams unless it considered that it had maintainable cases against them, and that in the correspondence in April 1998 it was insisting on complete indemnity involving Lean Lackenby and Fordhams. But if the Council was uncertain which of the three parties potentially responsible for the inappropriate compaction was in truth responsible, it could properly sue all three, and its insistence was not that Lean Lackenby and Fordhams provide full indemnity but that full indemnity be provided in such proportions as the Third Party Defendants decided between themselves. Others may see it differently, but I do not see confidence that Lean Lackenby and Fordhams were liable to the Council. So far as appears Lean Lackenby made no offer, and what Fordhams offered is unknown, so it can not be said that the Council should have had its confidence bolstered by offers from those parties.

43    I do not feel able to conclude that the Council acted unreasonably in not accepting the offer in SMEC’s Calderbank letter, or that otherwise the Calderbank letter can properly bring departure from the ordinary rule as to costs.

44 SMEC’s offer of compromise of 7 April 1998 offered to pay $110,000 plus costs. It was expressed to be made in accordance with Pt 19A of the District Court Rules. While it was open to be made, the effect of Pt 19A r 10 was that Pt 39A r 25 did not apply to the offer of compromise and the offer did not have the cost consequences for which the last-mentioned rule provides.

45    A Calderbank letter may be deployed even though the rules provide for offers of compromise (Messiter v Hutchinson (1987) 10 NSWLR 525 (as to payment into court); AWA Ltd v Daniels (Rogers CJ Com Div, 8 October 1992, unreported); Beregold Pty Ltd v Mitsopoulos (Cole J, 20 November 1992, unreported; England v Van Donk (CA, 5 December 1997, unreported) per Powell JA). It was not submitted by the Council that an offer of compromise made in accordance with the rules, but on the face of the rules incapable of bringing costs consequences under the rules, should not be taken into account as equivalent to a Calderbank letter when exercising the general discretion as to costs. It might have been argued that a party receiving such an offer of compromise is justified in putting it aside. In State Authorities Superannuation Board v Property Estates (Qld) Pty Ltd (Cole J, 8 February 1991) and Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 esp at 438 regard was had, it seems without argument to the contrary, to offers of compromise which were made under the rules but which had no costs consequences under the rules, not because they were incapable of doing so but because in the events that happened they could not do so. In what follows I assume that regard can be had to SMEC’s offer of compromise in deciding whether to otherwise order.

46    As I construe the offer of compromise, the costs in the offer were the Council’s costs to the time of acceptance of the offer. If the Council were held liable to Normak it would in the ordinary course have to pay Normak’s costs, and the offer would not provide indemnity for the amount of those costs. If the Council had accepted SMEC’s offer of compromise, it would have had in hand $110,000 to meet Normak’s claim and Normak’s costs. The amount of Normak’s costs as at April 1998 was not established, but presumably would have been of the same order as the costs the Council said it had incurred, some $57,000: I will take taxed costs of $40,000. Let it be assumed that the Council should have anticipated that Normak would obtain judgment for $76,000 plus costs. Treating the total of $116,000 as the Council’s claim in a straightforward claim by the Council against SMEC, the offer of compromise did not offer to the Council a better result than that to which it was entitled and which, but for the parties’ misapprehension, it would have obtained as at April 1998.

47    Again, the circumstances were not those of a straightforward claim by the Council against SMEC. But for the reasons earlier described I am not satisfied that the Council should have been confident it would receive more money from Lean Lackenby and Fordhams. And the complications went further. As at 7 April 1998 the Council was faced with a claim by Normak for $176,548. I put aside the increase in the claim to $203,990, which may or may not have been known within the 28 days of the currency of the offer of compromise. The Council could not make Normak settle, nor could it count on settlement with Lean Lackenby and Fordhams on a basis which did not involve payment of their costs. The litigation could continue - it might be thought that was likely given the amount claimed by Normak. Normak’s costs at the conclusion of the litigation would be much more than its costs as at April 1998. Had it accepted the offer of compromise, the Council would have still been involved in the proceedings and, while having $110,000 and its costs to acceptance of the offer in hand, exposed to the incurring of more costs and liability for more costs (as it happened, significant costs) and all the uncertainties attendant on litigation of the kind in which it was involved. In general a compromise should crystallise the parties’ position, but acceptance of the offer of compromise would have left uncrystallised positions and a real prospect that the Council’s outgoings in the litigation would further and considerably exceed the income from SMEC’s offer.

48    SMEC submitted that the Council could have protected itself by making a corresponding offer of compromise to Normak. The Council could not include in the offer the amount offered by SMEC for the Council’s costs; it could only offer $110,000. The offer could not have included Normak’s costs (see earlier as to $116,000) unless the Council contributed from its own pocket. An offer made under the rules would have been capable of bringing costs consequences. As matters turned out, it might have protected the Council in relation to Normak’s costs after the date of the offer, but it would have left the Council liable for Normak’s costs to the date of the offer. And the asserted protection ignored the complication from the levels of parties and multiple cross-defendants. If Normak did not accept the offer made to it in April 1998, the Council would still have been locked in the litigation and still claiming against Lean Lackenby and Fordhams, and still incurring and exposed to costs. The protection would have been significantly incomplete.

49    Again, therefore, I do not feel able to conclude that the Council acted unreasonably in not accepting SMEC’s offer of compromise, alone or in conjunction with a corresponding offer of compromise to Normak, or that otherwise the offer of compromise can properly bring departure on Calderbank principles from the ordinary rule as to costs.

50    Cases may be envisaged in which an offer made by one of a number of co-defendants alleged to be jointly or jointly and severally liable will be so attractive that refusal should affect the exercise of the discretion as to costs. This is not such a case. The result to which Taylor DCJ came, although for no fault of his Honour on a wrong basis, was in my view the correct result. I agree with the orders proposed by Priestley JA.

ROLFE AJA :

Introduction

51    I have had the advantage of reading the draft reasons for judgment of Priestley JA. I agree that leave to appeal should be granted and that this Court should determine the appeal. However, I am of the opinion that the appeal should be allowed.

The Facts Giving Rise To The District Court Proceedings

52    On 10 May 1995 the plaintiff, Normak Pty Limited, settled a contract for the purchase by it from the defendant, Campbelltown City Council, which is the opponent in this Court, of vacant land in an industrial area on which it intended to build, and has since built, a retail development. The land was part of a larger area, which the defendant had had filled and compacted by the first cross-defendant, T.J. and R.F. Fordham Pty Limited, (“Fordham”). The defendant retained the first third party, Lean Lackenby & Hayward Pty Limited, (“LL&H”), which carried on business as a consultant in surveying, engineering, planning and development, in relation to the proper performance of that work. LL&H, in turn, retained SMEC Testing Services Pty Limited, (“SMEC”), which was the second third party and applicant in this Court.

53    Before contracting to purchase the land, the plaintiff made enquiries of the defendant about it and expressed concern when told that it had been filled. This led the defendant to give the plaintiff’s principal director a copy of a geotechnical report and other written material prepared by SMEC. On 23 January 1995, the plaintiff and the defendant entered into the contract in which the defendant disclosed that the land had been filled by it:-

“.. to the standard specifications of the Council of the City of Campbelltown as set out in the specifications for the construction of subdivision, road works and drainage works dated May 1991. The purchaser shall raise no objection, requisition, claim for compensation nor seek to rescind this contract pursuant to this disclosure.”

54    The plaintiff alleged that the land had not been filled conformably with those specifications. It brought proceedings in the District Court against the defendant claiming damages for breaches of contract and warranty and for misleading and/or deceptive conduct based on the disclosure in the contract, such damages being for additional building costs and loss of rental, the latter allegedly arising by reason of the delay in completing the building because of the problems caused by the inadequate filling. The defendant denied that it was liable under the contractual provision and in respect of the other claims for a number of reasons.

55    The proceedings were commenced in 1996 and the defendant joined LL&H and SMEC as third parties and cross-claimed against Fordham. LL&H, SMEC and Fordham claimed against each other for contribution and indemnity.

56    The defendant sued LL&H in contract, for negligence and under the Trade Practices and Fair Trading Acts. It sued SMEC for negligence and under those Acts. It sued Fordham in contract and for negligence.

57    The following issues were thus propounded for decision:-

(a) Whether the defendant was liable to the plaintiff and, if it was, the damages to which the plaintiff was entitled;
(b) If the defendant was liable to the plaintiff, whether any or all of SMEC, LL&H and Fordham was or were liable to contribute to or indemnify the defendant against such liability; and
(c) If any or all of SMEC, LL&H and/or Fordham was or were so liable whether, as between themselves, any was entitled to contribution to or indemnification in respect of that liability from any other of them.

The District Court Proceedings

58    In 1998 the District Court ordered that the whole of the proceedings be referred to Mr P.R. Callaghan of Senior Counsel, pursuant to Part 28B rule 10, to provide a report. He commenced the reference on 12 October 1998. It proceeded for thirteen days and evenings and, according to the report, there were over one thousand pages of transcript and exhibits and the closing written submissions filled, “to absolute capacity”, a lever arch folder. After referring to these matters in his report, the Referee said:-

“The cost of the case to the parties must be most substantial and utterly disproportionate to the comparatively small amount in issue. Nevertheless, throughout the hearing, the parties steadfastly failed to reach a commercial settlement and insisted on the hearing proceeding.”
The observations in the first sentence are obviously correct. From my experience in hearing applications for security for costs, I would estimate the costs of the hearing of each party at about $7,000 per day. For a thirteen day hearing that amounts to some $91,000 per party, which takes no account of prior costs and the costs of written submissions.

59    The plaintiff claimed initially $160,457.93 and interest, a claim it amended in August 1997 to $176,548.25. The two major components of the second claim were $106,401.25 for extra building costs and $67,185 for three months’ loss of rental. On 1 May 1998, apparently on the basis of a further expert’s report, the plaintiff increased its claim for extra building costs to $203,990.

60    By virtue of concessions made during the reference the parties agreed, on the tenth hearing day, that the amount of damages for additional building costs was $75,962.

61    On 22 December 1998, the Referee, having rejected the plaintiff’s claims for lost rent and damages for misleading and/or deceptive conduct, reported to the Court that in his opinion:-

1. There should be a verdict for the plaintiff against the defendant for $75,962.
2. It would be appropriate for the judgment to include interest from the end of September 1995.
3. The defendant should pay ninety per cent of the plaintiff’s costs.
4. “There should be verdicts in favour of the Council against each Lean Lackenby and SMEC respectively for the sum of $75,962 plus interest to judgment date, and against Fordhams for twenty five per cent of that sum. The judgments should note that they relate to the same liability and that recovery by the Council of money on account of any such judgment would operate as a pro tanto discharge of the other judgments".
5. LL&H, SMEC and Fordham should be ordered to pay the defendant’s costs, including its costs payable to the plaintiff, in the proportions of fifty per cent, twenty five per cent and twenty five per cent respectively.

62 In his report the Referee made reference to s.109ZJ of the Environmental Planning and Assessment Amendment Act, sub-s.(1) of which provides that after determining an award of damages in a building or subdivision action, the Court must give judgment against each contributing party for such proportion of the total amount of damages as it considers to be just and equitable having regard to the extent of each party’s responsibility for the loss or damage. Sub-section (2) states:-

“Despite any Act or law to the contrary, the liability for damages of a contributing party is limited to the amount for which judgment is given against that party by the court.”

63    The Referee also made reference to contribution conformably with s.5 of The Law Reform (Miscellaneous Provisions) Act 1946 and, at p.30, said:-

“Having regard to the respective omissions and acts of the parties and doing the best I can with their relative responsibilities, I have concluded that it would be just and equitable to treat them as responsible in these proportions: Lean Lackenby 50%, SMEC 25% and Fordham 25%.”
I find it strange that having reached this conclusion he made the orders to which I have referred. Prima facie his findings, if he was proceeding under The Law Reform (Miscellaneous Provisions) Act , should have been that the defendant was entitled to judgment against each of SMEC, LL&H and Fordham for the full amount with contributions in the percentages to which he referred. Alternatively, if the Referee was proceeding under s.109ZJ he should have recommended judgments for the defendant against LL&H for 50 per cent, and against each of SMEC and Fordham for 25 per cent, a course he followed when ordering costs.

64    I do not make these comments merely to point up some error that there may have been in the Referee’s reasoning, but to show that the Referee was clearly of the opinion that LL&H and Fordham, as well as SMEC, were liable to the defendant. This is a matter of significance to which I shall refer later.

65    In relation to LL&H, the Referee was satisfied that there was a term of its contract with the defendant to the effect that it would give such directions to SMEC as were required to ensure that testing carried out by SMEC and monitoring of the works by SMEC would ensure that the works were performed in accordance with the defendant’s requirements. The Referee was of the opinion that LL&H failed to comply with that provision.

66    So far as Fordham was concerned, the Referee was of the view that no criticism could be levelled against it, other than that it failed to achieve the result for which it had contracted, namely a dry density ratio of at least ninety eight per cent standard compaction. That, if I may say so with respect, was a substantial criticism of breach of contract. The Referee thought that Fordham was in breach of contract, but that its breach “was not a negligent one”. He then proceeded to apportioin liability in the percentages to which I have referred.

67    After the Referee published his report the Court was asked to make the following orders by consent:-

“1. Judgment in favour of the Council against Lean Lackenby, SMEC and Fordhams for $104,162.62 plus interest on that sum from 3rd March 1999 to date (the judgment) in the proportions of 37.5% for each of Lean Lackenby and SMEC and against Fordhams in the proportion of 25% of the judgment.
2. Note that the judgment relates to the same liability and the recovery by the Council of money on account of any such judgment operates as a pro tanto discharge of the other judgment.
3. Order that Lean Lackenby pay the Council’s costs up to the time of the making of the consent orders (including the costs payable to Normak) but excluding the costs payable to any other party in the proportion of 42.5%.
4. Order that SMEC and/or Fordhams pay the Council’s costs (including the costs payable to Normak) in the proportions of 32.5% and 25% respectively, subject to any application by SMEC and/or Fordhams that a different order should be made based on offers made by them.
5. Vacate all previous orders for costs.
6. As between SMEC, Lean Lackenby and Fordhams dismiss all cross-claims and third party notices and order each party pay its own costs.”

68    Each of SMEC and Fordham brought Notices of Motion seeking an order that the defendant pay its costs on an indemnity or party/party basis from 8 April 1998 and 7 May 1998 respectively.

69    Taylor DCJ dismissed both Notices of Motion. SMEC seeks to challenge that order. Fordham does not.

Attempts At Settlement

70 On 7 April 1998 SMEC made an Offer of Compromise to the defendant in the sum of $110,000 plus costs. Part 19 rule 2A(1) provides that a costs’ offer comprises any claim by the party to which the offer is made “for his costs incurred in the action up to the date of acceptance of the offer”. The offer was purportedly made pursuant to Part 19A, but not in terms which would attract the prima facie consequences of Part 39A rule 25 in the event of the defendant’s not obtaining a better result than the offer. The reason for that was that the offer did not comply with Part 19A rule 10.

71 Part 19A is headed “Offer Of Compromise”. Rule 1 provides for the making of such an offer. Rule 7 provides for disclosure to the Court at an appropriate time of such an offer, which has not been accepted, for the purposes, relevantly, of Part 39A rules 25(4), (4A) or (6) or as provided by Part 39A rule 25(9). Part 19A rule 10 provides that where two or more defendants are alleged to be jointly or jointly and severally liable to the plaintiff, (it being conceded that in this case, by virtue of the definitions the defendant was a plaintiff and SMEC, LL&H and Fordham were defendants for the purpose of the rule), an offer in the terms of that sub-rule must be made to make Part 39A rule 25 applicable. It was not in issue that SMEC’s Offer of Compromise did not achieve that result.

72    Part 39A rule 25(6) provides that where an offer is made by a defendant, which is not accepted, and the plaintiff obtains an order or judgment on the claim to which the offer relates, which is no more favourable than that offer, then, unless the Court in an exceptional case and for the avoidance of substantial injustice otherwise orders, the defendant shall be entitled to an order for costs against the plaintiff from the date the offer was made on a party and party basis.

73 It was not in issue that the Offer of Compromise was made under Part 19A, nor that it could attract the provisions of Part 39A rule 25(6).

74    On the same day SMEC’s solicitors wrote to the defendant’s solicitors on a without prejudice basis save as to costs, which was stated to be a “Calderbank letter”, making an alternative offer, namely that it would pay fifty per cent of the plaintiff’s claim, plus fifty per cent of both the plaintiff’s and the defendant’s costs. The evidence was that no response was received to either offer.

75    Fordham made an Offer of Compromise on 7 May 1998. SMEC addressed no argument to this Court in reliance on it or its terms or any of the facts relating to it. Whilst it seems to me that the only reasonable inference is that it was for payment of a monetary sum either expressed in dollars or as a percentage of the ultimate judgment, without knowing the terms of the offer and in the absence of any submissions, I do not think it appropriate to take into account, in determining the appeal, the fact that some offer was made by Fordham.

76    The defendant’s attitude was made clear in letters its solicitors wrote to the solicitors for SMEC, Fordham and LL&H on a without prejudice basis save as to costs and in identical terms on 17 March and 28 April 1998:-

“We refer to the conference between the defendant parties at our offices on 12 March 1998.
As discussed, it is our client’s view that whatever judgment may be made against it in contract, it will be successful in passing all of its liability on to the other Defendant parties.
Our client does not believe the disagreement between the other Defendant parties concerning apportionment of liability between them should prejudice its position and force it to incur costs greater than those already incurred.
In an effort to reach an early resolution of this matter and to minimise costs we are instructed to ask the other Defendant parties to grant indemnity to our client in the proportion to which they themselves are found liable in these proceedings to our client.
Our client seeks full indemnity with respect to its costs which are as follows: (Details of the costs totalling $57,284.32 were then given).
Please advise your client’s instructions on the granting of an indemnity to our client as soon as possible. We note this matter is listed for a directions hearing on 19 March 1998 and would be grateful if an indication could be made to us on that date.”

77    This letter made clear that the defendant regarded itself as legally entitled, as against each of SMEC, LL&H and Fordham, to a full indemnity in respect of liability and to costs on an indemnity basis. It was written at least fifteen months after the commencement of the litigation at a time when the defendant had had an ample opportunity to consider its position. It expressed no doubt as to its view of its entitlement against each of those parties.

78    The letter of 28 April 1998, which post-dated SMEC’s offers, stated:-

“We refer to our letter dated 17 March 1998.
In our view, no evidence has been presented in this matter which allows a conclusion other than that Council’s liability to the Claimant, if any, will be passed on to the Other Parties in full.
In order to avoid incurring unnecessary costs, we believe the Other Parties should grant indemnity to our client in respect of its costs and liability to the plaintiff in the proportion to which the Other Parties are found liable for the damage claimed by the Plaintiff.
This proposal allows the Other Parties to continue their debate with respect to the apportionment of liability and will not prejudice their position with respect to each other. At the same time it reduces costs for which they will ultimately be liable.
We will be grateful if you will advise your client’s urgent instructions with respect to indemnity.”

79    This letter reinforced the strong view the defendant was taking against each of SMEC, LL&H and Fordham.

80    The solicitors for SMEC, probably in reliance upon the offers made, did not respond and Fordham’s only answer seems to have been its offer of 7 May 1998. There is no evidence that LL&H commented.

81    It is, in my opinion, necessary to consider with some care the letters written by the solicitors for the defendant. Whilst the defendant may have been confident that in the event of its being found liable to the plaintiff it would be successful in passing all of its liability on to the other defendant parties, there was a very real question as to the damages, “if any”, to which the plaintiff was entitled. Presumably the defendant had in mind seeking to settle the matter with the plaintiff, although it did not state on what terms it proposed to do so. No other reasonable inference can be drawn from the letters of 17 March and 28 April 1998.

82    What, in substance, the defendant was seeking was, as Counsel for SMEC put it, a “blank cheque” from the other parties to enable it to settle, because had they agreed to the defendant’s proposal there was no suggestion that they would have any control over the amount for which it might settle with the plaintiff. Rather the issue for them, as propounded in the defendant’s correspondence, was the contribution each should make among themselves. In those circumstances it does not seem to me that SMEC, Fordham and LL&H acted unreasonably in rejecting that stance. They were entitled to know, in my opinion, the maximum amount for which the defendant was prepared to settle with the plaintiff before agreeing to indemnify the defendant against any liability to the plaintiff.

83    The only reasonable inference I can draw from the sequence of events is that after receipt of the letter of 17 March 1998 SMEC and Fordham decided to make Offers of Compromise and offers of settlement, although they were not able to do so in terms which would bring into operation Part 39A rule 25 because of the disagreement as to the proportions between themselves and, it would appear, the failure of LL&H to agree to contribute to a settlement figure.

How Should The Discretion Be Exercised?

84 Prima facie costs follow the event. That result may be changed by an Offer of Compromise in which event the Court’s discretion to make some other order is quite limited; or by the making of an offer by way of a Calderbank letter, in which event the Court has a greater degree of discretion as to whether it will follow the usual rule. The offer SMEC made under Part 19A should be treated as such an offer, it not having the more stringent consequences flowing from Part 39A rule (6). The rules in relation to Offers of Compromise were obviously introduced to give effect to the aims and objectives stated in Part 39A and, in my opinion, the Court, when exercising the wider discretion may have some regard to those aims and objectives, which are very important in the conduct of litigation.

85    It seems to me that in considering, in any particular case, the way in which the discretion, either in relation to an Offer of Compromise or a less formal offer, is to be exercised, the Court must have regard to the specific facts of the case. It is not, in my opinion, sufficient to simply rely upon a general observation that the position of the parties or the state of the litigation caused difficulty in determining whether an offer should or should not be accepted. One of the major difficulties in litigation is determining the result. Indeed one of the questions most frequently asked of legal advisers is what the likely result will be. The whole process of offers involves the parties’ speculating, at least to some extent, on the answers to the questions whether liability will be established and, if it is, what will be the amount of damages. The earlier the offer is made, the less likely it will be that the parties can receive a confident answer to that question. The reason for that is that most litigation is now conducted on the basis of exchange of evidence in chief and experts’ reports, so that the further prepared it is, the more likely it is that a reasonably accurate answer can be given.

86    Further, the rules providing for Offers of Compromise do not state that any such offer must be made at a time when the offeree is in the best, or even a good, position to assess its prospects in the case. Nor is an offer by way of a Calderbank letter necessarily governed by those considerations. Indeed, there is much to be said for making offers at an early stage before the parties take entrenched positions and before the costs expended make it very difficult, if not impossible, for a commercial settlement to be reached. The making of an early offer is also consistent with the aims and objectives of the rules.

87    In this case the plaintiff was suing the defendant. No question of multiple defendants affected any Offer of Compromise between those parties. The defendant should, in my opinion, have been in a position by April/May 1998 to form an assessment of its prospects of successfully defending the plaintiff’s claim and of the likely range of damages to which the plaintiff would become entitled and to make a further assessment of any discount, which should be made, on the basis that the plaintiff would not succeed on liability.

88    I say that based on the facts that the litigation had been proceeding for at least fifteen months, i.e. at the shortest since the end of 1996; that the defendant was well aware of what steps had been taken in respect of the filling and must have been aware of the development proposed by the plaintiff, it being the relevant consent authority for it; and that it had instructed experienced commercial solicitors over some period. On the basis of the information it had, the defendant was able to make the assertions in the letters of 17 March and 28 April 1998, which I construe to be letters predicating that the defendant would offer to settle with the plaintiff provided it had a full indemnity. Where, in my opinion, the defendant failed, at least in the first instance, was by not advising those it was suing of the amount for which it proposed to settle, but rather seeking an unlimited indemnity.

89    Nor was the defendant was simply offering to hand over the conduct of the litigation to those it had sued in return for the full indemnity because, in the absence of any settlement between it and the plaintiff, it necessarily remained a party to the proceedings.

90    Accordingly, it seems to me that the correspondence of 17 March and 28 April 1998, properly construed, required a complete indemnity from those joined by the defendant to the defendant, which would enable the defendant to settle with the plaintiff and then leave those which the defendant had joined to fight out the question of contribution as between themselves.

91    In my opinion, having received the offer from SMEC, the defendant was not entitled to retreat to its position of only being prepared to negotiate on the basis of a complete indemnity. It was then bound, at the very least, to explore the prospect of settlement, it being pivotal to an overall settlement. However, it did not do so.

92    SMEC’s principal submission was that an obvious course open to the defendant, which it should have taken, was to accept the offer of SMEC and pass it on, by way of Offer of Compromise, to the plaintiff. That would not have led to any complication in the litigation, because if it had taken it, and on the assumption that the offer was not accepted, SMEC would not have been removed from the litigation. As between it and the defendant, the proceedings would have been resolved, but it would have remained a party by virtue of the claims for contribution and indemnity made against it by Fordham and LL&H. Thus, in the case against the plaintiff its evidence would have been available and, of course, SMEC had a real interest in keeping the plaintiff’s damages down and in contesting the amount of contribution for which it was liable.

93 In my opinion SMEC’s submission should be accepted. The question to be asked was whether, as matters stood when it made its offer under Part 19A, it was reasonable for the defendant not to have passed it on by way of an Offer of Compromise to the plaintiff. I consider that it could only have been reasonable for it not to do so, if that left the defendant in a position of risk in the litigation. I do not believe, viewed as at April 1998, it did.

94    This conclusion must be tested by looking at the various results, which could have been foreseen as at April 1998, if such Offer of Compromise had been made.

95    Firstly, the plaintiff may have accepted it, in which case the defendant would have paid it out with money received from SMEC and had its costs substantially paid by SMEC. Any residual dispute about contribution between SMEC, LL&H and Fordham could not have adversely affected the defendant. Indeed that is what the defendant was suggesting in the correspondence should occur.

96    Secondly, the plaintiff may not have accepted the offer. In that case two situations can be hypothesised, viz that the plaintiff would have received a less favourable or a more favourable result than the Offer of Compromise.

97    In the first situation the defendant would have been able to meet the judgment from the offer made by SMEC; it would have received from SMEC its costs to the date of making the offer and it would have been entitled to an order under Part 39A rule 6 that the plaintiff pay its costs on a party and party basis from the date of the offer. One can see no basis why the ameliorating provisions of that rule would have led to any other conclusion. Thus the defendant would not have suffered any prejudice.

98 In the second situation the defendant would have had SMEC’s contribution to the judgment and its costs to the date of the offer. As the parties it joined would have still been in the litigation, it could have claimed the additional amount from them, the defendant believing and asserting in very strong terms that it was entitled to recover a full indemnity against each of them. So far as the costs payable to the plaintiff, the defendant could have recovered them from LL&H and Fordham. The only possible prejudice was if the Court was to apportion costs between SMEC, LL&H and Fordham in a way which made SMEC liable for some costs which the defendant could not recover because of the settlement. But this was not a concern the defendant was expressing in 1998. As I have said several times it was demanding a full indemnity from each. However, more significantly, as s.109ZJ did not apply, any judgment against LL&H and Fordham would have been for the full amount of indemnity to which the defendant was entitled against each. Contribution would have remained an issue as between LL&H and Fordham, but would not have affected the entitlement of the defendant to recover the whole amount from either.

99    On this analysis the defendant would not have, in any of the situations which could have occurred, suffered any prejudice. It would have left the litigation without having to make any payment save for its own solicitor and client costs, for which it was liable in any event.

100    Accordingly, I consider that the defendant’s retreat to the position it took in its letter of 28 April 1998 and its failure to pass on SMEC’s offer to the plaintiff, it being the only party which could settle with the plaintiff, was completely unreasonable.

Conclusions

101    In these circumstances, if the defendant had taken the simple step of passing on the offer it would have been, on the material before this Court, in a “no lose” situation. By its failure to do so, however, it has exposed SMEC to significant costs and, as matters turned out, costs which would never have been recoverable against SMEC in any event. However, one cannot look at the matter with the benefit of hindsight, but rather as it existed at April/May 1998.

102    In these circumstances, I consider that the proper exercise of discretion demands that the defendant pay SMEC’s costs on a party/party basis as from 1 June 1998, being a date by which the defendant would have had a reasonable opportunity to consider the position and make any necessary decisions.

103 The defendant filed a Notice of Contention in which it sought to argue that his Honour erred in holding that Part 19A rule 10(1) did not apply to SMEC’s Offer of Compromise and in applying Part 39A rule 25(6). In my opinion Part 39A rule 25 was not activated by SMEC’s Offer of Compromise. Accordingly, it is not necessary to consider this.

Proposed Orders

104    The orders I propose are:-

(a) Leave to appeal granted.
(b) Appeal allowed with costs.
(c) In lieu of the order made in the District Court order that the Campbelltown City Council pay SMEC Testing Services Pty Limited’s costs of the proceedings on a party/party basis from 1 June 1998 and its costs of the Notice of Motion in the District Court for a special order for costs.

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