By Liam Prescott, Partner and Tracy Bridge, Solicitor.
"In today's world, costs and litigation are not regarded as they once were. Unnecessary litigation imposes its own strains on the parties, their resources, witnesses and their employers, families, or businesses, as well as the public resources of the Crown... Costs awarded, even on an indemnity basis, do not always compensate a party" (Sagacious Legal Pty Ltd v Westfarmers General Insurance Limited (No 5)  FCA 630).
In litigation, costs are said to act as a compensatory award rather than a punitive penalty. The general rule is that while the court has discretion, costs normally follow the event. Typically, the successful litigant has their costs paid by the unsuccessful litigant on a standard basis and in accordance with the appropriate court scale. A more generous order for costs is costs awarded on an indemnity basis. A number of recent Federal Court decisions have highlighted the fact that depending on the circumstances, a prior offer by the successful litigant to settle on a 'walk away' basis can be enough for that party to obtain an indemnity costs order.
In the case of Sagacious Legal Pty Ltd v Westfarmers General Insurance, the court found that the defendant insurer was entitled to an order for indemnity costs because the plaintiff insured acted unreasonably both in its conduct of the proceedings and in rejecting an earlier Calderbank offer made to it by the defendant.
The case involved a claim by the plaintiff company against its insurer for the indemnity value of a car, owned by the company, which had been written off by a party nominated on the policy (the wife of the principal of the company) during an alcohol-related accident. Litigation ensued after indemnity was refused by the insurer for a number of reasons, including the plaintiff's failure to disclose the nominated party's previous drink-driving history in full when applying for insurance, and the insurer's contention that the nominated party was under the influence at the time of the accident. Rares J dismissed the plaintiff's claim and initially ordered costs on a party and party (standard) basis. The insurer subsequently applied for indemnity costs.
In first considering the conduct of the plaintiff in the litigation, Rares J found that it was apparent from an objective assessment of the written material from emergency services and hospital witnesses that the nominated party smelt of alcohol and was behaving consistently with being under the influence at the scene and at the hospital. On that basis "[o]nce that fact was established, the insurer's case was unsustainable, whatever it may have thought of the other bases of the insurer's declinature. The insurer was unreasonable to require Dr Chan, Ms Henning, four police offers and an ambulance officer among others to give up a day of their time to be cross- examined about what was obvious either from their contemporaneous notes or their later written evidence in the police brief". Rares J also held that the plaintiff answered questions in an evasive and unhelpful way, finding that "the insured conducted the proceedings unreasonably so that it would be unjust to limit the insurer's recovery of its costs to party and party costs".
Turning to the question of whether the settlement offered justified an order for indemnity costs, the court recognised the difference between the Federal Court rules, which provide a 'presumptive entitlement' to indemnity costs where a party ultimately achieves a better outcome than the offer it has made, and the common law, which makes it necessary for the offeror to demonstrate that the offeree's refusal of the offer was unreasonable (not just that the offer itself was reasonable). Rares J confirmed that whether the refusal was unreasonable will depend on the circumstances facing the offeree at the time the offer was made, and in this case the facts available to the plaintiff at the time the offer was made meant that it acted unreasonably in rejecting the offer.
It did not matter that the offer was only to settle on a 'walk away' basis and indeed His Honour held that a 'walk away' offer can, in appropriate circumstances, be sufficient to warrant an indemnity costs order because otherwise "unmeritorious and unreasonable litigants would be given a powerful weapon to use in forcing their chosen opponent to offer more in order to settle a worthless case. The law should not encourage such behaviour". With this reasoning in mind, Rares J agreed with the judgment of Greenwood J in Clark v Commissioner of Taxation, which recorded the authorities for the proposition that a 'walk away' offer is capable of being characterised as a genuine attempt to resolve litigation, and can provide a foundation for the court to order the unsuccessful party to pay costs on an indemnity basis.
The case of Sagacious Legal makes it clear that costs remain very much a discretionary power of the court and will be exercised to reflect the circumstances of each case. The grounds relied on by Rares J in ordering indemnity costs in this case provide a timely reminder of both the perils of conducting unmeritorious litigation and the potential value to the offeror of an offer to settle on a 'walk away' basis, where the circumstances warrant such an offer being accepted by the offeree. The case also confirms the court's awareness of the costs and burdens for successful defendants, third party witnesses and the court itself, where a plaintiff insists on running litigation that is destined to fail.
The substantive decision dismissing the claim is presently being appealed by the plaintiff.
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