Also published in adapted format in Law Society Journal, April 2007, Volume 45, page 22
The consequences of rejecting a defendant’s offer of compromise have taken a fresh turn. The Uniform Civil Procedure Rules 2005 were amended with effect from 8 December 2006. The Uniform Civil Procedure Rules (Amendment No.11) 2006 have introduced a range of amendments including a significant new provision: Rule 42.15A.
By Suzanne Ward[note]Suzanne Ward is a Director of Pattison Hardman – The Legal Costing Company. Suzanne also holds a current practising certificate and tutors in a range of tertiary law subjects.[/note]
The consequences of rejecting a defendant’s offer of compromise have taken a fresh turn.
The Uniform Civil Procedure Rules 2005 were amended with effect from 8 December 2006. The Uniform Civil Procedure Rules (Amendment No.11) 2006 have introduced a range of amendments including a significant new provision: Rule 42.15A.[note]The Uniform Civil Procedure Rules (Amendment No. 11) 2006 were gazetted 8 December 2006.[/note]
While prior NSW judgments have set out circumstances in which indemnity costs may be awarded to a party, including imprudent refusal of an offer of compromise,[note]For example, see The Anderson Group Pty Ltd v Tynan Motors Pty Ltd [No. 2]  NSWCA 120 (18.5.06); Harrison & Anor v Schipp Cameron & Anor v Schipp  NSWCA 13 (20.2.01) and Colgate-Palmolive Pty Ltd v Cussons Pty Ltd (1993) 46 FCR 225.[/note] Rule 42.15A provides more certainty for defendants. Rule 42.15A expressly clarifies the costs implications where an offer of compromise is not accepted by a plaintiff and judgment is subsequently as favourable or more favourable to the defendant.
Rule 42.15A states:
(1) This rule applies if the offer concerned is made by the defendant, but not accepted by the plaintiff, and the defendant obtains an order or judgment on the claim concerned as favourable to the defendant, or more favourable to the defendant, than the terms of the offer.
(2) Unless the court orders otherwise:
(a) the defendant is entitled to an order against the plaintiff for the defendant’s costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and
(b) the defendant is entitled to an order against the plaintiff for the defendant’s costs in respect of the claim, assessed on an indemnity basis:
(i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and
(ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made.[note]Uniform Civil Procedure Rules 2005 (NSW) Rule 42.15A. Emphasis added. The position in relation to offers of compromise made by plaintiffs is addressed by Rules 42.13A-14 of the Uniform Civil Procedure Rules.[/note]
This provision is significant for defendants for a number of reasons. First, Rule 42.15A expressly entitles a defendant to order in its favour for indemnity costs in the circumstances described in Rule 42.15A(1) from the start of the day after the offer of compromise is made or, if the offer is made during a trial, as from 11 am the following day.
Second, the Rule highlights the importance of making an early offer of compromise to protect the defendant’s costs.
Third, the Rule allows for clear and continuing costs implications. There is an increased incentive for a defendant to make offers of compromise throughout a trial.
The advantages flowing to a defendant from this provision and these circumstances arise from the difference between costs assessed on an ordinary (i.e. party/party) basis and costs assessed on an indemnity basis. The difference between the two is not always readily understood and is a frequently asked question of our firm.
The primary difference between the two in all matters is that the onus of proof shifts. That means for costs assessed subject to a party/party costs order the successful party must prove that the costs are fair and reasonable. By comparison, in circumstances where costs are assessed subject to indemnity costs order the party liable to pay costs must prove that the costs are not fair and reasonable.[note]For example, see Singleton v Macquarie Broadcasting Holdings Ltd (1991) 24 NSWLR 103; EMI Records Ltd v Ian Cameron Wallace Pty Ltd  2 All ER 980.[/note]
As most practitioners would be aware, an indemnity costs order does not provide a complete indemnity. The effect of the reverse onus of proof where indemnity costs are awarded is that the gap between solicitor and own client costs and the total assessed costs to be recovered from the unsuccessful party will be reduced significantly. This is the case because, according to the guiding authorities, while indemnity costs must still be reviewed in terms of what is fair and reasonable, “the benefit of any doubt as to the question of reasonability” must be given to the party with the benefit of the indemnity costs order.[note]Bouras v Grandelis,  NSWCA 463 (16.12.05).[/note]
In practice on assessment, costs pursuant to an indemnity costs order are therefore assessed on a more generous basis. This may affect the determination and ultimate allowance, inter alia, of hourly rates, supervisory attendances, attendances by multiple solicitors, research, cancellation fees legal services are, for example, less likely to be reduced where there is an indemnity costs order. Photocopying and facsimile rates charged in accordance with a Costs Agreement are also less likely to be moderated. Unusual or unique expenses (for example, higher than usual expert witness expense claims) are also more likely to be recovered from the unsuccessful party in circumstances where there is an indemnity costs order.
Due to the wide variation in hourly rates and delegation practices, it is very difficult to advise an ‘average’ percentage return on assessment. However, in our experience, a properly drawn bill of costs in a ‘typical’ matter is likely to be assessed at 70-85% of the amount claimed on a party/party basis and 80- 95% of the amount claimed on an indemnity basis. It should be noted that the results of assessments may vary significantly according to the nature of the matter, the manner in which the matter was conducted, issues in dispute, the outcome and a range of factors specific to the matter.
Finally, a significant consequence of the difference between an indemnity costs order and a party/party order arises in personal injury matters otherwise subject to the costs cap set out in Section 338 Legal Profession Act 2004. An order for indemnity costs in favour of a defendant will remove the matter from the costs cap otherwise applicable.
Rule 42.15A must therefore be considered very closely and the significant costs implications of the new provision and offers of compromise explained carefully to defendants and plaintiffs.