FEDERAL COURT OF AUSTRALIA

Coshott v Learoyd [1999] FCA 276

TRADE PRACTICES – Alleged misleading conduct by architect in making representations to a development consent authority regarding the likely environmental effects of a proposed building – Whether shadow diagrams submitted to development consent authority were misleading – Whether height of external wall misstated – Whether damage sustained by the applicants, adjoining landowners.

NEGLIGENCE – Alleged negligence by architect in making representations to development consent authority, especially in relation to shadow diagrams – Alleged negligence by development consent authority in considering proposed building – Whether architect and/or the development consent authority owed a duty of care to adjoining owners – Whether damage sustained.

COSTS – Application for indemnity costs – Pre-trial offer by respondents pursuant to Order 23 of Rules to compromise proceeding on the basis of a payment of $500 plus costs to date – Applicants failed to accept offer and failed at trial – Whether circumstances in which indemnity costs are awarded are limited to cases where a party’s conduct is unreasonable – Significance of use of Order 23 – Desirable form of “indemnity” costs order.

Trade Practices Act 1974, s52

Federal Court of Australia Act 1976, s43

Federal Court Rules, Order 23

ROBERT GILBERT COSHOTT and LJILJANA COSHOTT v RODERICK IAN LEAROYD, SALWEEN PTY LTD and WOOLLAHRA MUNICIPAL COUNCIL

NG779 of 1997

WILCOX J

SYDNEY

23 MARCH 1999

THE COURT ORDERS THAT:

1.                  The proceeding be dismissed.

2.                  The applicants, Robert Gilbert Coshott and Ljiljana Coshott, pay the costs of the respondents, Roderick Ian Learoyd, Salween Pty Limited and Woollahra Municipal Council:

(a)                incurred up to and including 19 January 1999 - taxed or assessed on a party-party basis;

(b)               incurred after 19 January 1999 – taxed or assessed on the basis that such costs are to include all costs except insofar as they are of an unreasonable amount or were unreasonably incurred so that, subject to such exceptions, each of the respondents will be completely indemnified by the applicants for his or its costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     WILCOX J:  This proceeding raises some legal issues of general importance.  They include the questions:

(i)                  whether architects act “in trade or commerce” in making representations to a development consent authority, such as a local council, regarding the likely environmental effects of a building whose erection they propose;

(ii)                whether, in making such representations, architects have a duty of care towards the owners of adjoining land, whose amenity and property may be adversely affected by the proposed building; and

(iii)               whether, in considering a development application, a council has a duty of care towards the owners of properties potentially adversely affected by the proposed building.

2                     However, in the view I take, it is not necessary to reach a conclusion about these interesting issues; even if they are answered favourably to the applicants, their claims must fail.

The facts

3                     The applicants, Robert Gilbert Coshott and Ljiljana Coshott, are the owners of land known as 5 Gilliver Avenue, Vaucluse.  About 10 years ago they erected on the land a substantial three level house from which may be enjoyed a panoramic westerly view down Sydney Harbour to the Harbour Bridge.  When they built their house, the adjoining land, 7 Gilliver Avenue, was occupied by a large single storey bungalow erected in about 1917.  Both allotments are substantially level but, near the western boundary, fall sharply to the street.

4                     Kam Tou Mak and Iok Peng Wan purchased 7 Gilliver Avenue in 1994, apparently with an eye towards demolition of the old bungalow and the erection of a new house.  They retained the second respondent, Salween Pty Limited, as their architectural consultant.  The first respondent, Roderick Ian Learoyd, is a registered architect and the principal of Salween.  On 1 July 1994 Mr Learoyd caused Salween to submit to the third respondent, Woollahra Municipal Council (“the Council”), a development application seeking consent to the erection on the land of a new house.  The proposed building contained four levels, only two of which stood wholly clear of the ground.  A basement level, that partly protruded from the ground, contained a pool, gymnasium and storeroom.  A lower level contained a garage.

5                     The development application was supported by a set of working drawings comprising ten sheets.  One of these sheets was a roof plan on which Mr Learoyd had marked the shadows that he estimated the proposed building would cast on the Coshott property at 9am, 12 noon and 3pm on 22 June each year.  The diagrams located the shadows by reference only to the horizontal plane; that is, as on open ground.  They did not show the shadows in elevation; that is, their effect on the Coshott’s building, particularly upon the windows in the northern wall, which faced the development site.

6                     Salween also submitted a document called “Statement of Environmental Impact” in which Mr Learoyd described the proposed building.  The document included the following paragraph:

“The roof sits at almost the same height as the existing roof ridge and considerably under the Council limit of 9.5 metres.  The roof also corresponds well with the adjacent roof lines to the east and west as can be seen on the elevation drawings.  Boundary setbacks are generally in excess of the Council minimum and range from 1.5 to 3.6 metres.  This maintains sunlight access to the side properties and provides areas of substantial side planting.  The proposal has minimal impact on view loss from the neighbouring properties to Gilliver Avenue or from the rear apartments which will retain a similar view to that seen over the existing ridge.”  (Emphasis added)

7                     The Council’s Director of Land Management Services wrote to Mr and Mrs Coshott advising them of the application and enclosing small scale reproductions of two of the working drawing sheets, not including the sheet on which the shadows were marked.  The letter indicated the full set of drawings was available for inspection at the Council chambers.

8                     The evidence does not reveal whether Mr and Mrs Coshott availed themselves of the opportunity to inspect.  Whether or not they did, Mr Coshott wrote a letter to the council on 23 July 1994 in which he said:

“re:  D/A 94/141 – 7 Gilliver Avenue, Vaucluse

I thank you for your letter dated 13^th July, 1994 regarding the above proposed development and would advise that, provided the building was moved back from Gilliver Avenue to where it is in line with the building alignment of our residence and the height does not exceed the maximum prescribed height under the planning scheme, we have no objection to the proposed development.

We would ask that the building approval, when eventually given, contain conditions/provisions to minimise the inconvenience to adjoining owners from dust, noise, etc. during demolition and construction.”

9                     Council’s Area Planner, David Booth, prepared a report in which he described the proposal in some detail.  The report included a table dealing with the proposal’s compliance with the requirements of Council’s Residential Development Control Plan (“the RDCP”).  The table revealed that the proposed development exceeded the RDCP stipulation in respect of gross floor space, floor space ratio and setbacks on the northern and southern boundaries.  The proposed setback to the southern boundary, that shared with Mr and Mrs Coshott, was reported as 1.5 to 2.5 metres whereas the RDCP required 2.4 to 3.2 metres.  The external wall height was shown as 7.2 metres and this was said to comply with the RDCP.

10                  Under the heading “Notification of Adjoining Owners”, Mr Booth mentioned comments from three neighbours, including Mr Coshott’s request for a greater setback from Gilliver Avenue.

11                  The report then discussed aspects of the development.  Mr Booth noted that the proposed floor space ratio exceeded that permitted by the RDCP only because of the basement and garage.  As these were substantially below ground level, he suggested Council waive the RDCP floor space requirement.  Under the heading “Siting of the Development”, Mr Booth noted the non-complying side boundary setbacks.  He said:

“In respect to the southern boundary, the area of non-compliance is limited to the study/bedroom 4 area which projects from the general building line.

The proposed study and bedroom 4 will have narrow vertical windows which will align with windows of the adjoining property to the south.  Although this property did not object to this aspect of the proposal, in order to maintain visual privacy, it is considered necessary that the proposed windows be obscure.

The extent of the additional overshadowing to the property to the south will not significantly affect the existing recreational areas as the majority of the shadow impact will be limited to the northern external wall of the adjoining building to the south.”

Mr Booth thought an increase in the side boundary setbacks unnecessary and that it “would adversely impact upon the scale of the building”.  He concluded as follows:

“The proposal development is considered to be of a compatible bulk, scale, siting and roof form in respect to other development in the locality.  Although the proposal fails to comply with the floor space ratio requirement, the fact that the lower levels of the proposal are excavated below the natural ground level is significant in that an acceptable scale of development has been maintained.

Non-compliance with side boundary setbacks is considered to be acceptable given that no adverse impact on adjoining properties, in respect to loss of privacy and overshadowing, is envisaged.  It is recommended that the development application be approved subject to conditions.”

12                  Two councillors required the application to be referred to Council’s Building and Development Committee.  There was a site inspection on 6 October 1994 attended by several councillors.  The Inspection Committee recommended the application be deferred and the applicant be invited to reduce the excavation required to construct the garage and basement levels of the building.  This recommendation was adopted by Council on 10 October and the decision notified to Mr Learoyd.  On 26 October he submitted an amended application that markedly reduced the floor space in the two lower levels of the building and therefore the volume of excavation.  The changes brought the gross floor area and floor space ratio into compliance with the RDCP.  The two upper levels were unaffected by the changes.  Mr Booth recommended approval and this was granted by Council on 14 November 1994.  Council notified Mr Learoyd of its decision four days later.

13                  In reliance on this approval, a building was constructed during 1995.  There is a question whether the building as constructed conformed in every respect with the approved plans.  Any discrepancies were minor and unrelated to the issues arising in this case.  However, they were the subject of complaint, amongst other matters, in an application made to the Land and Environment Court of New South Wales by Mr and Mrs Coshott.  The respondents to that application were the Council, Mr Mak and Ms Wan.  This application was heard by Bannon J in October 1996.  On 19 November 1996 his Honour made an order refusing the application.

The applicants’ case

14                  The applicants’ case has two aspects.  First, the applicants contend that Salween and Mr Learoyd misled the Council about the extent of shadow that would be cast onto their property by the building proposed to be erected at 7 Gilliver Avenue; they were negligent in that respect and the Council was negligent in its consideration of the likely shadow effect of the proposed building.  The applicants say Salween and Mr Learoyd misled the Council in two ways:  by saying, in the Statement of Environmental Effects, that the proposal “maintains sunlight access to the side properties” and by supplying inaccurate shadow diagrams. 

15                  Second, the applicants say it was misleading of the architect to suggest, and negligent of the Council to accept, that the proposal complied with the requirements of the RDCP in respect of setbacks and height and this affected the extent of shadow on their house.  In fact no representation to that effect was made by Salween or Mr Learoyd.  Mr Booth appreciated there was a non-compliance in relation to the side boundary setbacks and reported this fact to Council.  The only possible argument in relation to this second point is that Mr Booth erred in determining that the external wall height complied with the RDCP requirement.

External height

16                  The applicants’ second submission raises a short point that may be addressed immediately.  Clause 6.3 of the RDCP specified that the height of “any external enclosing wall” should not exceed 7.2 metres for buildings erected on land for which a local environmental plan establishes a maximum building height of 9.5 metres, as was the case in relation to the subject land.  The RDCP did not define the term “external enclosing wall”.  Mr Learoyd designed the building to have a sheer side wall of 7.15 metres with a small parapet set back from each side wall and reaching to a height approximately half a metre above the top of the external wall.  Robert Albon, a town planner called by the applicants, conceded that, conventionally, “roof structures above the height of the eaves would not be included in calculations of external wall height”.  But he said:

“If such a wall continues to rise vertically to a parapet, however, then this is the feature that will have the potential for environmental impact, for example, overshadowing.  The fact that there may be no living areas of the dwelling behind the parapet would be immaterial in consideration of the wall that the DCP policy sets out to control.”

17                  In cross examination Mr Albon conceded, first, that the external wall did not continue to rise vertically to the parapet, yet, second, this concept was inherent in the way the term “external enclosing wall” was used in the RDCP.  It also became clear that the question whether this wall should be regarded as having a height of 7.2 metres or 7.7 metres at the point of the parapet has little to do with the shadow consequences of the development.  There is no substance in this aspect of the applicants’ case.

The Statement of Environmental Effects

18                  The applicants contend that the statement in the Statement of Environmental Effects that the proposal “maintains sunlight access to the side properties” was false and misleading; the proposal reduced the sunlight access below what was enjoyed at the time of the application, when the 1917 bungalow continued to occupy the site.  The latter statement is true, so obviously so it is impossible to believe that Mr Learoyd intended to suggest otherwise or that anybody at the Council understood him to do so.  Plainly the new building would cast much more shadow than the old one.  Having regard to that circumstance, it seems to me unreasonable to read the statement about maintenance of sunlight access as a claim there would be no diminution of sunlight.  It is more reasonable to read it as a statement that sunlight would continue to be available to the properties on either side of the development.  Sunlight did continue to be available, although to a reduced extent in the case of the Coshotts’ property.  To what extent was the important question, and that is where the shadow diagrams become important.

The shadow diagrams

19                  In order to make good their contention that Mr Learoyd’s shadow diagrams were inaccurate, the applicants led expert evidence that the diagrams were referenced to magnetic north rather than true north and contained incorrect azimuth angles.  As a result the diagrams understated the extent of the shadow cast on the Coshott property during mid-winter mornings and overstated the mid-winter afternoon overshadowing.  The extent of the error is demonstrated in a series of shadow diagrams prepared by John Hammond Mills, the proprietor of a firm that uses computer modelling for determination of the solar access effects of proposed building developments.  The diagram showing the position as at 9am on 21 June reveals Mr Learoyd omitted from his drawing two areas in the front yard of the Coshott residence, one very small but close to the house and a larger area close to the street alignment.  The 12 noon calculation shows a small omitted north-south strip.  The 3pm calculation omitted a small wedge-shaped portion of the backyard of the house and erroneously included a greater area.

20                  In considering whether incorrect shadow diagrams are capable of constituting misleading conduct, within the meaning of s52 of the Trade Practices Act, or are negligently prepared, it is important to bear in mind that precision is almost impossible to achieve.  Numerous variables have to be taken into account.  Almost inevitably, there will be differences between diagrams produced by different people, even solar access specialists working with the most advanced technology.  This is demonstrated by the present case in which five independent experts made or considered shadow studies.  No two of them came to precisely the same conclusions, and this despite the fact that they prepared their evidence in the knowledge that shadow was the critical issue in this case.

21                  Having regard to that situation, I conclude any skilled viewer of a shadow diagram would realise the situation it indicates is subject to a margin of error; the diagram should be read as indicating the approximate situation at the assumed time rather than as a precise prediction.  Nonetheless, a skilled viewer would assume the compiler has used true north rather than magnetic north and not made any azimuth error.  As this is not true of Mr Learoyd’s diagrams, they were misleading.  However, it is difficult to think the errors had significance.  Apparently, none of the portions of the Coshott property erroneously shown as free from shadow on 22 June was an area devoted to recreational use.  They may have included planted areas but it seems unlikely anybody spent much time in them on a winter’s day.  It is significant that neither Mr or Mrs Coshott nor anybody else gave evidence about the use of the property.

22                  Mr I G Harrison SC, counsel for the applicants, did not suggest the use of the places erroneously shown as shadow-free in the horizontal diagrams was important.  However, he submitted the errors caused officers and members of the Council to fail to appreciate the extent of overshadowing on the vertical plane; a substantial horizontal shadow would have led viewers to realise there was likely to be a substantial shadow on the vertical plane.

23                  As the hearing progressed, it quickly became apparent that the only significant shadow issue related to the vertical, rather than the horizontal, plane.  The drawings submitted with the development application contained no information about the vertical plane.  It is common ground amongst the relevant expert witnesses (architects and town planners, including town planners with experience as council development control officers) that in 1994 councils did not ordinarily require vertical plane shadow diagrams.  Woollahra Council did not require such diagrams and Salween did not supply them.

24                  It may be accepted, as a generalisation, that the greater the shadow on a horizontal plane, the more likely that a viewer (especially a skilled viewer) would think about the overshadowing of walls, and especially windows.  However, no attempt was made in the present case to demonstrate the effect on the vertical plane of Mr Learoyd’s errors.  So far as I am aware, it would have been possible for a solar access expert to translate both Mr Learoyd’s horizontal plane shadows and the “true” horizontal plane shadows on to an elevation plan of the northern wall of the Coshott residence.  Such an exercise would have demonstrated the effect of the error on the shadows sustained by that wall and, in particular, the 14 windows (seven at the upper level and seven at the lower) set into that wall.  However, the exercise was not performed.  Instead, the applicants’ experts compared the shadow cast on the Coshott residence by the new building (as designed by Mr Learoyd or as built) with, first, the 1917 bungalow and, second, a “fully compliant” building i.e. a hypothetical building erected on the same footprint as the new building but complying in every respect with the RDCP and local environmental plan. 

25                  The applicants’ leading solar expert was Andrew Marsh, an architect specialising in solar access.  His analysis demonstrated the designed building casts much more shadow on the Coshotts’ northern wall than did the 1917 building.  This is not surprising.  Although there is little difference between the maximum heights of the two buildings, they have very different configurations.  The 1917 building is a single storey building with a pitched roof; the designed building has a flat roof at or near the maximum height throughout.  Even as redesigned at Council’s behest, its floor space ratio is probably twice that of the 1917 building.

26                  I see no relevance in a comparison between the designed building and the 1917 building.  Having regard to the value of the land, and the extent and nature of redevelopment in the neighbourhood (including by Mr and Mrs Coshott themselves), it was almost inevitable that the 1917 building would soon be replaced by a much larger building that would cast a greater shadow on the Coshott property than the old bungalow.  The Council would have had no justification for refusal of an application to redevelop the site.

27                  There is relevance in the comparison between the shadow effects of the building designed by Mr Learoyd and that of a “fully compliant” building.  Accordingly to Mr Marsh, both of these buildings would shade the whole of the seven lower level northern wall windows at 9am on 21 June and all but half the westernmost window at 12 noon.  At 3pm, in both scenarios, the three lower level easternmost windows would be totally shaded and a fourth partly so.  At the lower level there would be no substantial difference between the shadow effect of a “fully compliant” building and that of the building as designed.

28                  Mr Marsh’s initial analysis was that, at the upper level, there would be a significant difference.  At 9am four upper level windows would be totally shaded, from the building as designed, and three partly affected.  The compliant building would not totally shade any upper level window; it would partly affect six of the seven windows.  At 12 noon the upper level windows of a compliant building would be unaffected by shadow, whereas two windows would be partly overshadowed by the building as designed.  With the substitution of “three” for “two”, the same statement might be made about the 3pm situation.

29                  During the course of cross examination, Mr P R Garling QC, senior counsel for the Council, suggested to Mr Marsh that his calculations were erroneous in some respects.  Mr Marsh checked them overnight and next day conceded this was so.  He produced revised drawings that showed a compliant building would cast 9am and 12 noon shadows that were indistinguishable, in practical terms, from those of the designed building.  The position at 3pm remained better; only one window would be partly affected by a hypothetical compliant building, whereas two would be affected, to a greater or lesser extent, by the building as designed.  Even so, the difference was marginal.

30                  During the course of cross examination of John Howard Fawcett, the applicants’ expert valuer, Mr Garling asked him to examine Mr Marsh’s revised drawings.  Mr Fawcett conceded that the difference in overshadowing at each of the three selected times was insignificant.  His evidence went on:

“And we ask you to consider as the compliant development shadow, the three shadows I’ve shown you on the short document and you’ve agreed that the difference between those shadows and the existing building shadows are insignificant?---Yes, that’s true.

Do you follow?---Yes.

And insignificant on the worst day for overshadowing being mid Winter?---Yes.

You’d agree with me if that’s the extent of the difference in overshadowing between what’s built and between a compliant development then there would be no quantifiable loss or difference in value, would there?---Yes, that’s correct.”

31                  A second shadow expert called by the applicants was Steve King, an architect associated with the National Solar Architecture Research Unit of the University of New South Wales.  Mr King prepared a report in which he demonstrated the effect on the horizontal plane of Mr Learoyd’s errors.  He also made a comparison between the shadow effects of the building at 7 Gilliver Avenue “as built”, the 1917 building and a hypothetical building built to the maximum height permitted under the RDCP.  Understandably, the 1917 building cast the least amount of shadow.  At 9am on 21 June there was no practical difference between the other two shadow lines.  There were differences at 12 noon and 3pm, the advantage being with the hypothetical building.  In cross examination Mr King conceded there were minor inaccuracies in his calculations caused by a slightly erroneous assumption about the north point.  He also gave reasons why there could be differences between experts in regard to shadow calculations.  Particularly in the light of that explanation, it is no criticism of Mr King to say that photographs of actual shadow on the Coshott building taken on 25 June 1998 demonstrate that the “as built” situation is not as bad, in some respects, as that calculated by him.  Mr King’s evidence does not affect the conclusion reached by me, on the basis of the opinions ultimately expressed by Mr Marsh and the respondents’ witnesses, that there is no appreciable difference between the shadow effect of the building actually erected at 7 Gilliver Avenue and that which would have been cast by a building, occupying the same footprint, that fully complied with the RDCP and local environmental plan.

32                  The point was made, both during the course of evidence and in counsel’s submissions, that the Council was not bound to approve a fully compliant building; it might have refused consent and invited an amended design that achieved a greater setback than the RDCP required, and/or reached a lesser height than it permitted.

33                  I accept this is a correct statement of the legal position.  It is another matter whether this would be a realistic option for Council.  The only basis upon which Council could justify a demand for a more extensive setback or lesser height would be that this would enhance sunlight access to, or views from, neighbouring buildings.  But the whole purpose of including setback and height standards in the RDCP was to avoid ad hoc invidious judgments about sunlight access to, and maintenance of views from, particular properties.  The RDCP was intended to provide a fair regime, letting everybody know in advance the constraints they would face in redeveloping these extremely expensive, and relatively small, allotments.  In the absence of some special circumstance, such as an application for a building of radically novel design, it would be extremely difficult for the Council to justify – to itself or on appeal in the Land and Environment Court – a refusal of a building that complied with the RDCP standards.

34                  I think the overshadowing of the Coshott property by the building designed by Mr Learoyd is about what anybody would have expected to occur once 7 Gilliver Avenue was redeveloped; and anybody in the position of Mr and Mrs Coshott ought reasonably to have expected this to occur sooner rather than later.  Although I accept there were errors in the shadow diagrams prepared by Mr Learoyd, and that these errors were not picked up by any Council officer, I do not think these errors had any practical effect on the extent of overshadowing to which the Coshotts would inevitably be subjected when 7 Gilliver Avenue was redeveloped.  It follows they have sustained no damage from the breaches of duty they allege.  Even if the legal issues noted by me at the commencement of these reasons were answered favourably to the applicants, the proceeding must still be dismissed.  Under those circumstances, I prefer not to determine them in this case.

Costs

35                  It became apparent during the course of submissions that the applicants were bound to fail.  The respondents then tendered a copy of an offer of compromise made to the applicants on 29 December 1998.  This offer was made jointly by all respondents and pursuant to Order 23 of the Federal Court Rules.  It was open for acceptance for 21 days from the date it was made; that is, until 19 January 1999.  The respondents offered the applicants “the sum of $500.00 plus costs in settlement of all causes of action pleaded in these proceedings”.

36                  The offer was not accepted by 19 January, or at all, and the trial commenced on 1 February 1999.  Under these circumstances, the respondents seek that the costs incurred after 19 January be taxed or  assessed on an indemnity basis.

37                  Order 23 of the Rules covers offers of compromise by any party to any other party:  see rule 2.  The offer made in this case complied with the formal requirements of rule 3.  Rule 11 sets out provisions concerning costs.  Where an applicant makes an offer which is not accepted by the respondent and the applicant obtains a judgment not less favourable than the terms of the offer, the applicant is prima facie entitled to have costs on an indemnity basis as from the date of the offer.  Where a respondent makes an offer that is not accepted and the applicant obtains a judgment not more favourable than the terms of the offer, the applicant is prima facie entitled to party-party costs until the day after the offer and the respondent to party-party costs thereafter.  However, rule 11 does not cover the situation that occurred in this case, where a respondent’s offer is rejected and the applicant is wholly unsuccessful.  Apparently the situation is similar under the equivalent rule of the New South Wales Supreme Court.  The omission was pointed out, and deprecated, by Rolfe J in Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425.  Nonetheless, Rolfe J awarded the defendant costs on an indemnity basis as from the date of rejection by the plaintiff of an offer of compromise made by the defendant.

38                  In considering the appropriate costs order in Multicon, Rolfe J discussed two cases in this Court in which judges declined to award costs on an indemnity basis because they were not prepared to categorise the rejection of the offer as unreasonable.  These cases were John S Hayes & Associates Pty Limited v Kimberley-Clark Australia Pty Limited (1994) 52 FCR 201, a decision of Hill J, and Sanko Steamship Co Ltd v Sumitomo Australia Ltd (Sheppard J, 7 February 1996, unreported).  Order 23 did not apply to either case; on each occasion the issue was discussed in terms of the reasonableness of the offeree’s conduct in rejecting the offer and proceeding with the litigation.

39                  An earlier Federal Court case is Donnelly v Edelstein (1994) 49 FCR 384.  In that case a Full Court (Neaves, Ryan and Lee JJ) awarded a party its costs on an indemnity basis as from a date, during the course of the trial, at which the Full Court held the offeree “had had ample time to assess the strength of the case against [the offeror] and involved an offer that was extremely favourable to the [offeree]”.

40                  In Multicon Rolfe J acknowledged it would be inappropriate to propound any fixed rule; determination of the proper costs order involves the exercise of a judicial discretion in relation to which it is necessary to take into account all relevant circumstances.  However, he criticised the confining of indemnity costs orders to cases where the conduct of the offeree was “plainly unreasonable”.  His Honour said at 449-450:

“In my opinion it is more consonant with attempting to achieve a settlement that if the negotiations break down or if a party wishes to press more strongly for a settlement, a party should be entitled to strengthen its position by making the offer of settlement, which will require the party to whom the offer is made to make a reasonable and sensible assessment of its position in the light of the offer and the consequence that if it is not bettered there is a real prospect that costs on an indemnity basis will be ordered.  There seems to be a suggestion that the party to which the offer is made is under some greater disadvantage in assessing the position than the party making the offer.  However, generally speaking, both parties must be aware of the uncertainties of the determination of legal and factual issues and the party making the offer grapples with those uncertainties because, once the offer is made, it may well be accepted.  If the offering party can undertake that assessment task there seems to me to be no reason why the offeree cannot do so also. … The other side of that coin is that the fact that there may be difficulties in the litigation applies to both parties and does not, of itself, justify the failure to make a decision as to whether an offer should or should not be accepted.”

At 451 Rolfe J propounded this approach:

“In my opinion the proper approach to take to an offer of compromise, whether made under the Rules or pursuant to a Calderbank letter, is that there should be a prima facie presumption in the event of the offer not being accepted and in the event of the recipient of the offer not receiving a result more favourable than the offer, that the party rejecting the offer should pay the costs of the other party on an indemnity basis from the date of the making of the offer.  I proceed on the basis that the unreasonableness was the failure by the offeree to accept the offer, which unreasonableness is demonstrated, prima facie, by the ultimate result.  This approach is consistent with the decisions to which I have referred, the policy evidenced by the Act and the Rules and the widely accepted philosophy that settlements should be encouraged.”

41                  Lindgren J considered Rolfe J’s approach in MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (1996) 70 FCR 236 but he did not make an indemnity order.  In that case the offeror had not used Order 23 but had delivered a “Calderbank letter”:  see Calderbank v Calderbank [1976] Fam 93.  The apparent reason why the offeror did not use Order 23 was that there was not the requisite 14 days between the time when it decided to make the offer and the commencement of the trial.  As I read Lindgren J’s reasons for judgment, the failure to use Order 23 played a substantial part in his decision not to award indemnity costs.  He said at 240:

“The foregoing considerations merely show that there are elements of the regime established by O 23 which may be more protective of an offeree’s position than the unregulated offer made in a Calderbank letter.  It is difficult to accept, for example, that in the extreme case of an offer made in a Calderbank letter which contained only a minimal element of compromise and was open for acceptance for say only one day, should, in the event of total success of the offeror, give rise to a presumptive entitlement to indemnity costs generally similar to that provided for in O 23, even if, in such a case, the presumptive entitlement might be easily displaced by the offeree.” 

42                  On 11 February 1998 Lehane J gave judgment in respect of an application for indemnity costs in a proceeding, Flemington Properties Pty Limited v Raine & Horne Commercial Pty Limited [1998] FCA 11 February 1998, that has some similarities with the present case.  The applicant claimed that a valuer had acted in breach of duty in connection with the making of a property valuation.  After earlier offers and counteroffers, the respondent made an offer pursuant to Order 23 to settle the matter upon the basis of a payment of $300,000 plus costs.  The offer was not accepted and the applicant failed at trial.  In rejecting the respondent’s application for indemnity costs, Lehane J said:

“This is not a case to which O 23 r 11 applies:  the offers concerned were made by respondents who were wholly successful and are in any event entitled to an order for costs in their favour.  The question is to be decided as a matter of discretion, to be exercised having regard to all the circumstances and in the light of the authorities concerning the effect to be given to Calderbank offers.  Underlying that line of authority is, undoubtedly, a policy of the law in favour of the sensible compromise of disputes.  That policy is promoted if a party who rejects a genuine and realistic offer of compromise risks an order for indemnity costs if it refuses the offer and ultimately obtains a result no better than that which it would have got by accepting the offer.

Its promotion, however, does not in my view require that an applicant who receives any offer and rejects it be at risk of an order for payment of indemnity costs should the applicant ultimately fail to obtain any relief because it fails to make good the cause of action on which it relies.  There is, after all, a policy also against deterring parties from pursuing claims to which they reasonably believe themselves entitled.  A case – particularly a complex commercial case – in which there is room for substantial argument, and opposing views, about issues going to liability is by no means uncommon.  Nor is it uncommon in such a case that an applicant, if it makes good the elements of its cause of action going to liability, will be entitled to substantial damages.  The Calderbank policy by no means necessarily requires, in such a case, that the applicant, if ultimately unsuccessful, be required to pay indemnity costs because it rejected an offer of a small fraction of the amount which it claims.  It may be -–perhaps is likely to be – otherwise where the offer is a commercially realistic one made upon a sensible and informed assessment of the prospects and risks of the litigation on each side.”

Lehane J went on to comment that considerations of that kind no doubt explain:

“… the course of authority in this court which measures the weight to be given to a Calderbank offer having regard to its terms and to the other circumstances of the litigation, including the relative strengths and weaknesses of each party’s case as they might have been apparent to the parties when the offer was made.”

43                  After referring to the authorities and noting Multicon, Lehane J concluded he “should follow the well established course of authority in this court”.  In considering whether the applicant had acted unreasonably in failing to accept the respondents’ Order 23 letter, Lehane J said the case involved a difficult question of law and that the offer was made before some of the respondent’s expert reports were available to the applicant.  He said:

“In short, at the time when it considered the offers the applicant, in my view, had reasons to think it had significant prospects of success on liability and, if it were to succeed on liability, a prospect of recovering very substantial damages.  In those circumstances, I cannot conclude that there was anything imprudent about the rejection of an offer the value of which was less than one tenth of the damages which, if its expert’s evidence were accepted, it might have recovered; and I do not think that its rejection of the offers, in the circumstances which I have described, justifies the making of an order for payment of costs on an indemnity basis.”

44                  In Black v Lipovac (Miles, Heerey and Madgwick JJ, [1998] FCA 4 June 1998, not reported), a Full Court of this Court considered the apparent divergence between the view taken in this Court and that suggested by Rolfe J. The Court said:

“In reality there is not a substantial difference between the two views; both accept that the reasonableness of the conduct of the offeree, viewed in the light of the circumstances which existed when the offer was rejected, is relevant to the exercise of the discretion to award indemnifying costs.  To the extent there is a difference, we would prefer the by now well established line of authority in decisions of single judges of this Court.  However, we would not, with respect, necessarily endorse the view of Sheppard J in Sanko that the conduct of the offeree has to be ‘plainly unreasonable’.  To adopt an especially high standard of unreasonableness would operate as a fetter on the discretion to award indemnity costs and diminish the effectiveness of the Calderbank offer as an incentive to settlement.  There is in our view force in the comments of Byrne J in the Supreme Court of Victoria in Mutual Community Ltd v Lorden Holdings Pty Ltd (unreported, 28 April 1993) at 12-13:

            ‘The policy of the Court is to encourage litigating parties to undertake genuine settlement negotiations and, for that purpose, to face up to serious offers of settlement.

            The response of a litigant in receipt of an offer of settlement will always be affected by the prospect that the sum which the Court might order including party and party costs may be less advantageous than the terms of the offer.  Experience, however, shows that this prospect alone is not always sufficient to compel a litigant to face up to the offer.  The further prospect of a super-added costs penalty if a reasonable offer be not accepted is a salutary inducement to an offeree to undertake this often painful task.’”

45                  The Full Court noted that the trial judge had refused an application on behalf of the plaintiff for indemnity costs from the date of refusal of the Calderbank offers because he thought the offers were not unreasonably or imprudently refused.  The Full Court agreed.  The first offer was made before the critical expert reports were served.  The second offer, by its terms, lapsed on the day after receipt.  It accompanied a report that contained “a substantial and new hypothesis” for the plaintiff’s case.

46                  As the Full Court suggested in Black, the difference between the approach propounded by Rolfe J and that adopted in this Court may be more apparent than real.  Everybody agrees there can be no fixed rule; a proposition established for this Court by the terms of s43 of the Federal Court of Australia Act 1976 conferring on the Court a discretionary jurisdiction in relation to costs.  Everybody also agrees that, while the ordinary practice is to award costs on a party-party basis, it is sometimes appropriate to take a different course, including ordering indemnity costs against a party who has acted unreasonably.  The difference between Rolfe J and the Federal Court decisions seems to turn on whether there should be “a prima facie presumption” of indemnity costs against a party who has not accepted an offer of compromise made pursuant to the Rules or a Calderbank letter and achieved no better result at trial, or whether this is only a factor to be taken into account in determining whether the offeree acted unreasonably.  On either view, the Court has to look at the whole situation, including the circumstances that applied at the time of non-acceptance of the offer.

47                  Where an offer is made pursuant to Order 23, with the safeguards to the offeree that are thereby imported, it seems to me its non-acceptance should be given considerable weight; otherwise, there is not much point in offerors using the Order.  And the purpose of the Order is a salutary one; it is to enable a party to “raise the stakes” in the litigation, and thereby encourage the opposing party to give more anxious consideration to the desirability of a settlement.  This was the point made by the Full Court in Black, in adopting the comments of Byrne J in Mutual Community Ltd v Lorden Holdings Pty Ltd and rejecting the standard “plainly unreasonable”.

48                  As Black itself demonstrates, it does not follow that non-acceptance of a Calderbank offer (or even an Order 23 offer) must lead to an order for indemnity costs; the Court must still consider the whole of the circumstances.  However, whether or not it is correct to talk about a “prima facie presumption”, non-acceptance of an Order 23 offer should at least be regarded as providing to the offeror a good start in the task of persuading the Court to award more than party-party costs.

49                  The offer made in the present case was for a nominal amount; unlike the situation in Donnelly v Edelstein, it can hardly be described as “extremely favourable” to the applicants.  Nonetheless, the offer involved payment by the respondents of the applicants’ costs incurred to that date, which would have included the fees paid to its expert witnesses.  The hearing was imminent.  And, as a direction had been made for the evidence in chief of all parties to be in affidavit form, and all affidavits had then been filed and served, the applicants were in a position to assess the strength of their case against the respondents.  By the terms of the offer they had three weeks to make that assessment.

50                  The applicants knew there was a lively contest as to whether they had sustained any damage at all.  They also knew there was no evidence about the effect on the vertical plane of Mr Learoyd’s errors; so they would be unable to demonstrate that they made any difference at all, in terms of the use and enjoyment of their house or its resale value.  Their only valuation evidence was Mr Fawcett’s opinion that the erection of the Mak residence had affected the value of the Coshott residence to the tune of $500,000, as compared with the situation if the 1917 building was to remain indefinitely.  This evidence was offered despite Mr Fawcett’s personal opinion, elicited in cross examination, that there was at all times a reasonable probability that the 1917 building would soon be replaced by a larger building and the served evidence of the Council’s valuer, Frank Egan, that, if 7 Gilliver Avenue was to be regarded as a redevelopment site, there was no loss of value at all.  Even leaving aside the legal issues I identified at the commencement of these reasons, it should have been obvious to the applicants that their case faced enormous problems.  In the circumstances, I think it was foolhardy of them to press on, and unreasonable to inflict further costs on the respondents.  There is a case for a special costs order.

51                  However, one of the difficulties about an order for indemnity costs is its open-ended nature.  Because the underlying concept is one of indemnity, the order allows recovery even of costs that have been unreasonably incurred, or incurred in an unreasonable amount.  The Court will rarely know whether such costs have been incurred.  So the Court risks making an order that is unreasonable in effect.  This is not a proper course to take, even as a response to unreasonable behaviour on the other side.

52                  This problem was avoided by a Full Court in Re Wilcox; Ex parte Venture Industries Pty Ltd (1996) 72 FCR 151.  The Court ordered that the prosecutors pay the costs of the second respondent taxed “on the basis that such costs are to include all costs except insofar as they are of an unreasonable amount or were unreasonably incurred so that, subject to such exceptions, the second respondent will be completely indemnified by the prosecutors for its costs”.  I think it is appropriate to make an order in similar form in this case, in relation to costs incurred after 19 January 1999.  The costs incurred by the respondents on or before 19 January should be taxed on a party-party basis.

Associate:

Dated:  23 March 1999