Australia: Offers of Compromise which refer to costs are invalid

Curwoods Case Note
Last Updated: 15 March 2012
Article by Vid Dragomirovic

Judgment date: 20 February 2012

McGlen-McLeod v Galloway (No.2) [2012] NSWDC 11

District Court of New South Wales1

In Brief

  • An offer of compromise must conform to Rule 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) and must be exclusive of costs.
  • The exception to the Rule is where an offer of compromise states that it is a verdict for the defendant and the parties are to bear their own costs.
  • An offer of compromise expressed "plus costs or exclusive of costs" may be invalid pursuant to Rule 20.26 of the UCPR.


On 28 May 2008, Ms McGlen-McLeod (plaintiff) sustained injury when she fell through a rotten floorboard in the verandah of the home she and her family were renting.

By way of Statement of Claim filed on 18 December 2009, the plaintiff sought damages arising from the negligence of the owners of the premises, Mr Nathan Galloway and Mrs Daniel Galloway (defendants).

Liability was admitted following service of the Statement of Claim, however, the defendants contested the issues of causation and the quantum of damages the plaintiff was to be awarded.

On 20 July 2010, the defendants served an offer of compromise in relation to the plaintiff's claim in the following terms:

"By making payment of the sum of $4,000 plus costs in answer to the cause of action on which the plaintiff claims [sic]".

On 10 January 2011, a further offer of compromise was served by the defendants in the following terms:

"By making payment of the sum of $20,000 plus costs in answer to the cause of action on which the plaintiff claims [sic]".

The matter was listed for Hearing on 10 and 11 October 2011. On 14 October 2011, her Honour, Gibson DCJ, delivered her decision and amongst other orders, decided the following:

  1. Judgment for the plaintiff for $700.
  2. Defendants to pay the plaintiff's costs.
  3. Liberty to restore in relation to costs.

District Court Proceedings – Application for Costs

The defendants made an application for costs, heard on 31 January 2012 and 20 February 2012.

The application was brought on 2 bases, the first being the defendants were entitled to costs as a consequence of the offers of compromise served in July 2010 and January 2011; and the second being on the basis that the plaintiff should not be entitled to any costs by reason of the amount of damages awarded falling below the jurisdictional limit.2

The plaintiff submitted that the offers of compromise did not comply with the UCPR and that the plaintiff should not be deprived of costs following the event by reason of the size of the verdict falling below the prescribed limit.


The defendants sought to rely upon the dissenting judgment of Beazley JA in Old v McInnes (Old Case).3 In that matter, her Honour considered that the offer of compromise did not conform to Rule 20.26 of UCPR because it included an offer from Mr McInnes to pay Mr Old's costs. However, her Honour found that the practical effect of Mr McInnes's offer of compromise was that, had it been accepted according to its terms, Mr Old would have received a sum of money together with his costs up until acceptance of the offer. Her Honour found that, in the circumstances, in the exercise of the Court's discretion, Mr McInnes should have his costs on an indemnity basis, that is, from the day after the offer of compromise was made.4

The plaintiff relied upon the decision of Meagher JA with Giles JA concurring, in the Old Case as confirming the correctness of the decision in Dean v Stockland Property Management Pty Ltd (No 2) (Dean Case)5. In the Old Case, his Honour considered that neither of the offers made on behalf of Mr McInnes was exclusive of costs, or within the exception in Rule 20.26. It provided that Mr McInnes should pay Mr Old's costs as agreed or assessed. For that reason, neither was an offer in fact made under Rule 20.26 for the purposes of UCPR Rule 42.13, and accordingly, each was of no effect for the purposes of the offer of compromise régime under the UCPR. In deciding this, his Honour cited the decision of Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2)6 and the Dean Case7.

The plaintiff submitted that until the Court of Appeal handed down its decision in the Dean Case, it was standard practice for parties making offers of compromise to include the words "plus costs" or "plus costs as agreed or assessed" in order to make it clear that the amount that was offered was not an amount which referred to costs. The defendants submitted that otherwise there was a risk of ambiguity, in that unless it was made clear that the sum did not include costs, it might be thought that the party was offering to settle the whole of the proceedings, including costs.8

Jurisdictional Limit

The plaintiff was awarded damages following her Honour's decision on 14 October 2011 in the sum of $700 representing 2 weeks' leave of absence from the plaintiff's part-time employment

and the provision of some medical costs. The defendants submitted that these proceedings should not have been brought in the District Court, but should have been brought in the Local Court, and that due to the plaintiff's failure to do so, no costs should have been awarded. The defendants submitted that the plaintiff enjoyed a much better state of health than alleged, as revealed by the medical and surveillance evidence.


Her Honour considered the inconsistencies between the cases submitted and found it necessary to set out the principles from the relevant case law in coming to her decision.

Her Honour considered that the problem identified in the Dean Case was that any reference to costs, including references of the kind made in offers under consideration in the present case, with the one exception referred to in the Rule, fatally taints the offer of compromise.

Her Honour, in citing the decision in the Dean Case, questioned whether an offer of compromise containing references to costs was still capable of being valid. She noted the change of direction by the Court of Appeal and the cases that closely followed this decision9, and decisions where the direction in the Dean Case was distinguished or not followed10.

Her Honour considered that there appeared to be a conflict as to how the decision in the Dean Case should be interpreted. Her Honour noted a series of decisions throughout 2010 and 2011 where argument in relation to indemnity costs was heard where references to costs ("plus costs, exclusive of costs, or plus costs as agreed or assessed") were determined without reference to the decision in the Dean Case or to any invalidity of the offer of compromise pursuant to Rule 20.2611. Her Honour also considered the decision of Johnstone DCJ in Stevanovic v McIndoe (Costs)12 who rejected a submission that an offer of compromise "plus costs on a full and final basis" was invalid, without referring to the decision in the Dean Case.

Her Honour considered the decision in the Old Case13, relied upon by both parties, and considered that it would not be appropriate for her to follow the well-reasoned arguments of Beazley JA in dissent. Her Honour decided, in preference to the majority judgment of the Court of Appeal, consistent with the Court of Appeal's decision in the Dean Case, that the defendants'application for indemnity costs should be dismissed based upon their offers of compromise.

Further, her Honour held that the combination of the failure of the defendants to serve medical evidence, and the service of surveillance evidence on the eve of the trial, were contributing factors in her decision to reject the defendants' submissions that the plaintiff should be deprived of costs by reason of the sum awarded falling below the threshold set out in Rule 42.35 of the UCPR. Her Honour considered that in proceedings where liability is not admitted until some time after the pleadings are filed, and where evidence of quantum, if accepted, indicates a claim over the threshold, it is appropriate for those proceedings to be brought in the District Court.


The case provides guidance as to the likely interpretation the Court will make when considering an offer of compromise and its validity in accordance with Rule 20.26.

Whilst the Rule explicitly states that an offer must be exclusive of costs, any reference to costs, either on a "plus costs", "plus costs as agreed or assessed" or "exclusive of costs" basis, may well render the offer of compromise deficient and/or invalid.

It would be prudent for those who rely on offers of compromise to amend their precedents and review offers previously served.

A party may seek to rely upon the provisions in Calderbank v Calderbank14 in making an offer that does not comply with the relevant Rules of the Court, however, when making an offer of compromise, a party must clearly make its intention known that a Calderbank offer is intended should the offer of compromise be invalidated.


1Gibson DCJ, 20 February 2012
2Part 42, Rule 42.35 UCPR
3[2001] NSWCA 410
4Beazley JA, 22 December 2011
5[2011] NSWCA 141
6[2007] NSWCA 194
7[2011] NSWCA 141 at [16]-[29]
8Gibson DCJ, 20 February 2012
9Pritchard v Trius Constructions Pty Ltd (No 2) [2011] NSWSC 1114; Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 1396
10Smart Distribution Services Pty Ltd v General Wholesale Pty Ltd (No 3) (2010) 11 DCLR (NSW) 38; [2010] NSWDC 108; Stevanovic v McIndoe (Costs) [2011] NSWDC 43; Toheta Pty Ltd v Ehrenfeld [2010] NSWSC 799
11Ying v Song [2011] NSWSC 618; Tasevska v Tasevska [2011] NSWSC 411
12[2011] NSWDC 43
13[2011] NSWCA 410
14[1975] 3 AllER 333

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