Tsotsis v Khneiger & Khneiger (No 2) No. DCCIV-02-1364

[2003] SADC 162

TSOTSIS -v- KHNEIGER & KNEIGER (No 2).
[2003] SADC 162

Judge Robertson
Civil

1. The Plaintiff has made an application seeking an order that the Plaintiff pay the Defendants’ costs on a solicitor and client basis.

2. On 5 September 2003 I entered judgment for the Plaintiff in the sum of  $934 together with interest of $37. I delivered written Reasons on that day.  In recording that judgment I had earlier concluded that the Plaintiff on her claim was entitled to the sum of $18,176 damages and the Defendants were entitled on their cross claim to $17,242 damages.  I determined that either by way of set off or pursuant to Rule 48.03(b) of the District Court Rules (“Rules”) that I was able to give judgment in favour of the Plaintiff for the difference between those two amounts, namely $934.

3. As part of my written Reasons,  which I published on 5 September, I also ordered that each party bear their own costs.  In those Reasons I set out the basis upon which I made that costs order.  I also pronounced the order for costs orally when I orally entered judgment.    However, immediately after I pronounced the costs order I was informed by the first named Defendant, (“Mr Khneiger”) that there was a filed offer for an amount greater than the judgment I had awarded in the Plaintiff’s favour.  On receiving this information I vacated my order for costs  and adjourned the question of costs for further hearing.  As it turns out, Mr Khneiger was in error in that there was no filed offer pursuant to the Rules.  However, the Defendants now rely upon an offer to settle the action contained in a letter from the Defendants’ solicitors to the Plaintiff’s solicitors dated 9 December 2002.  This letter is described in the Defendants’ written submissions in support of this application as “the Calderbank offer”.

4. In the letter dated 9 December 2002, the Defendants made an offer that they would forego their cross-claim of $20,378.74 and pay to the Plaintiff the sum of $5,000 in full and final settlement of the Plaintiff’s claim.  This offer was rejected by the Plaintiff’s solicitors on 13 January 2003 and a counter offer was proposed by the Plaintiff.  Later a further offer was made in a letter from the Defendants’ solicitors to the Plaintiff’s solicitors dated 10 February 2003. In that letter the Defendants offered to forego their cross-claim and offered the Plaintiff $15,000 in full settlement of her claim.  A further letter containing a further offer was dated 22 April 2003.    In that letter, the Defendants indicated that the offer of 10 February 2003 was withdrawn.  The Defendants offered to forego their cross claim of $20,378.74.  They offered to pay the $15,000 referred to in the previous letter by two instalments, one to be made on 15 May 2003 and the other on 12 June 2003.  The offer was to remain open only until 1.00 pm on Wednesday 23 April. This offer was rejected by the Plaintiff and a counter offer was made by the Plaintiff to the Defendants by letter dated 23 April 2003.  That offer was rejected by the Defendants.  The action then proceeded to trial commencing on 5 May 2003.

5. I now turn to consider the principles relevant to this Application.  The award of costs in any action is at the discretion of the Judge.  Whilst it is an unfettered discretion it must be exercised judicially.  (Cretazzo v Lombardi (1975) 13 SASR 4 at 11). The facts and circumstances of the case will determine whether there will be any order for costs and what will be the nature of that order. Where costs are ordered, the ordinary rule is that they be paid on a party and party basis. (Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 at 256). However, it has long been accepted that a court is entitled to exercise its discretion to award solicitor and client costs where there is some special or unusual feature present. (Fountain Selected Meat (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 400). In Colgate Palmolive (at 257) Shepherd J, whilst acknowledging that the categories for the exercise of the discretion to order solicitor and client costs were not closed set out some of the circumstances in which a Court has exercised the discretion and ordered solicitor and client costs. One of those categories is where there was an imprudent refusal to compromise (see also Pirrotta v Citibank Ltd (1998-1999) 72 SASR 259 at 262).

6. There is some confusion with regard to the Defendants approach in this Application.  In the written outline of submissions of the Defendants it states that they are seeking costs on a party and party basis incurred from 23 December 2002.  This date would appear to be fourteen days after the first letter offering to settle dated 9 December 2002.  However, at the hearing of the application Mr Khneiger said he was seeking solicitor and client costs.  I will consider addressing both of these matters in these Reasons.

7. Before I proceed any further I need to make reference to the Rules.  Rule 40 of the Rules sets out a regime, whereby a Defendant can file with the Court and serve upon the Plaintiff an offer to consent to judgment in satisfaction of the Plaintiff’s claim.  The Defendant is entitled to file such an offer at any time within twentyone  days prior to trial.  Rule 40.05 provides that where a Plaintiff does not accept a filed offer and fails to recover damages greater than the filed offer then the Court, unless it thinks proper to order otherwise, shall order that the Defendant making the offer recover from the Plaintiff the party and party costs incurred fourteen days after the service of the offer.  However, although there is a specific regime created by Rule 40, it has long been recognised that a Court, in the exercise of its discretion to award costs or to award costs on a solicitor and client basis, may consider an offer made by a letter which is in the form of a “Calderbank letter” (Pirrotta v Citibank (supra) at 264).

8. The Defendants’ submit in the first instance that the Calderbank offer contained in the letter of 9 December 2002 was adequate and the Plaintiff acted unreasonably in rejecting that offer and as a result they are entitled to award of costs.  Secondly, presumably for the same reasons (it has not been made clear), that they are entitled to the costs on a solicitor and client basis.

9. The offer of 9 December 2002 is in two parts, the first is an offer to forego the cross-claim of $20,378.74 and the second part is an offer to pay the Plaintiff $5,000 in full and final settlement.  Whilst it is not specifically stated in the sum offered it would seem that it includes the Plaintiff’s costs. At that time those costs would have been quite substantial.

10. I mentioned earlier that it has long been held that a Court may, in the exercise of its discretion, consider an offer to settle an action contained in a Calderbank letter.  However, it has also been held that a factor which may be taken into account is the failure of a party to use the “offer” procedures established by the Rules.  (Duke Group Ltd (in liq) v Pilmer (No 8) Judgment S6699 Delivered 1 June 1998).  In Re Vitch (No 2) (1988) 147 LSJS 279 Lunn AJ (at 282) said:-

    “However, in order to give proper effect to the intention of the 1987 Rules I consider that the Court should not take informal offers into account in exercising its general discretion on costs other than in exceptional cases, and only where there is some good reason for not having used Rules 40 or 41”.

    This decision was followed in Ashby v Marshall (Judgment 3133: Delivered 28 November 1991).

11. In Callaghan v Callaghan (Judgment S5562: Delivered 3 May 1996 Perry J had this to say about informal offers:

    “Standing back from this case, there seems to be a growing tendency for trial judges to be confronted by arguments that, for one reason or another, the ordinary incidence of costs, and in particular that the loser generally pays the successful litigant’s costs, should not apply.  The court should be slow to yield to such arguments when there are adequate procedures under the rules for formal offers in settlement to be made, which, once made, are accompanied by clear cost sanctions”.

12. Here the Defendants failed to use of the procedure established by Rule 40 of the Rules and file an offer to settle the action.  The regime established by Rule 40 is to encourage the parties to settle litigation in the knowledge that a costs sanction will follow if the judgment does not better the offer.  That is the important difference between the Rule 40 regime and an offer by way of a Calderbank letter.  Whilst there is still a discretion under Rule 40, the court commences with the presumption that costs will be awarded against the unsuccessful Plaintiff.  It is this important difference which underlies the judicial observations to which I have referred.  By contrast an offer in a Calderbank letter is only a factor which may be taken into account in the exercise of the discretion.

13. It was submitted by the Defendants that because the terms of the offer took into account the Plaintiff’s claim and the Defendants’ cross-claim that the use of Rule 40 was not appropriate.  I reject this submission.  The scope of the Rule clearly allows for an offer to be filed of the nature contained in the letter of 9 December 2002 or the offer in the letter of 10 February 2003.  This was the only explanation provided to explain the failure of the Defendants to use the procedure laid down by Rule 40.

14. In my opinion the failure of the Defendants to use the Rule 40 procedure is sufficient to refuse the Defendants application.  However there is a further reason for rejecting the Application.

15. This is not a case where it can be said that the Plaintiff was imprudent or unreasonable in refusing the offer contained in the letter of 9 December 2001 or for that matter the offer contained in the letter of 10 February 2002.  The significant diminution of the Plaintiff’s original quantified claim as the result of the Judgment has been largely brought about by two factors.  The first of these is the reduction of over $10,000 in her claim for rectification work and further contract work, based upon the Report of Mr Peter Jankovic a Building Consultant.  Throughout the time leading up to Trial the Plaintiff was in possession of a builders quote indicating that the work would cost in excess of $30,000.  She was entitled to rely on that quote.  The reduction occurred because during the Trial, the two building experts, the other being Mr Short who was called by the Defendants, with the consent of the parties, considered the value of the work to be performed and as a result reduced it by in excess of $10,000.  The second factor was the reduction in the cost of rendering the house which formed part of the Plaintiff’s claim for work not completed by the Defendants, which work was required by the contract.  It was clear from the plans that such work was part of the contract but the Plaintiff had overlooked that, there was an agreement that the rendering, other than the new section was not to be undertaken.

16. There are a number of other factors which have led to the reduction of the Plaintiff’s initial quantified claim.  Among those factors was a reduction of $1,700 from the cost of painting, which the Defendants were required to undertake pursuant to the contract.  The cost of the painting work agreed by the experts was on the basis of a professional painter’s costs.  However, it became apparent that in the period before Trial the Plaintiff had completed the work herself.  Accordingly I made an allowance of only $1,100.  The Plaintiff undertaking that work clearly advantaged the Defendants.  A further factor reducing the Plaintiff’s quantified claim was that on a small number of items of damages the Plaintiff did not produce evidence in support of her claim.

17. In considering this issue it needs to be recognised that on two of the important matters in the Trial, the Plaintiff was largely successful.  The first being the work required to be undertaken pursuant to the contract.  The second being the defective work which was required to be rectified.  When assessing whether the Plaintiff has been imprudent in refusing to accept the offer it needs to be recognised that she was in a relatively strong position on the first point, as the work required to be carried out was identified on the plans upon which the Defendants prepared their quote.  She was also in a position of relative strength on the second point, as at the time she was considering the offer in the letter of 9 December 2001, she was in possession of the Report of Mr Jankovic.  By the time of the arrival of the offer in the letter of 10 February 2003 she had received from the Defendants the building report from Mr Chris Short.  In this report, Mr Short to a large extent agreed with the opinions of Mr Jankovic contained in his report.

18. I should also mention, in considering the Defendant’s offer, that the Plaintiff was entitled to consider that the Defendants would not fully succeed on their cross-claim.  This is as it has turned out.  However, for the purpose of the offer of settlement, whilst the Defendants indicated that they would forego their cross-claim, the amount of that cross-claim had an effect on the amount of money that was actually being offered to the Plaintiff.  In other words the agreeing to forego the counter-claim had a net effect on the monetary offer.

19. Finally, I should also mention that in addition to the quantified amount, the Plaintiff sought damages for the Defendant’s failure to provide Builders’ Indemnity Insurance and damages for inconvenience resulting from the Defendants’ breach of contract.  Whilst the Plaintiffs failed in both of these claims, for reasons I have expressed in the Judgment, both claims are relevant in considering whether the Plaintiff was unreasonable or imprudent in rejecting the offer.

20. For all the reasons I have expressed I am of the view, as I mentioned earlier, that the Plaintiff was not unreasonable or imprudent in rejecting either offer.  As I stated earlier this is an added reason why I am not prepared to exercise my discretion to award the Defendants their costs either on a party and party basis or a solicitor and client basis.  Accordingly, the Application is refused.

21. I order that my original order be re-instated, namely that each party bear their own costs for the reasons I have stated in my Judgment.