FEDERAL COURT OF AUSTRALIA

Mount Isa Mines Ltd v The Ship “Thor Commander” (No 2)

[2018] FCA 1702

REASONS FOR JUDGMENT

RARES J:

1    On 29 August 2018, I published my reasons (Mount Isa Mines Ltd v The Ship “Thor Commander” [2018] FCA 1326) for concluding that, in substance, the plaintiff, Mount Isa Mines Ltd, was entitled to judgment against the defendant, being the ship, Thor Commander, and its owners who had appeared as the relevant person, being MarShip GmbH & Co. KG MS “Sinus Aestuum” (collectively MarShip) in the amounts of USD909,000 as its share in respect of salvage, together with the sums of GBP42,660.47 for Mount Isa’s costs in resolving the salvage issue with the owners of Xinfa Hai, GBP431.99 as the costs of the general average bond, and AUD147,956.27 for transhipment costs, together with interest and the costs of the proceeding. I also found that Mount Isa was entitled to a declaration that it was not liable to contribute to general average. I directed the parties to confer and bring in draft orders to reflect those outcomes.

2    The parties did so on 31 August 2018 when I made final orders in the proceedings. Those included an agreed order that, in addition to MarShip paying Mount Isa’s costs of the proceedings (including the costs of and occasioned by MarShip’s cross-claim), Mount Isa’s application for an order that costs from 18 June 2017 be payable on an indemnity basis be stood over for hearing to today.

Background

3    The circumstances in which Mount Isa made its claim for indemnity costs are in a narrow compass. The trial was fixed to commence on 19 June 2017 at 10.15am. On Saturday, 17 June 2017 at about noon, Mount Isa’s solicitors sent MarShip’s solicitors a without prejudice offer, save as to costs, based on the principles in Calderbank v Calderbank [1976] Fam 93. The letter recited that Mount Isa had set out the reasons why it expected to succeed in the proceedings in its outline of opening submissions that it had filed and served on 8 June 2017. Mount Isa offered to accept USD615,000 in respect of its claims for damages inclusive of interest and its costs, together with a declaration absolving it from having to contribute to general average in the form that Mount Isa had sought and that I ultimately made. The letter said that if accepted, Mount Isa’s claim and MarShip’s cross-claim would both be otherwise dismissed, with no order as to costs. The offer was to remain open until 9 am on 19 June 2017, an hour and 15 minutes before the commencement of the trial.

4    At 8.02 am on 19 June 2017, the solicitors for MarShip emailed their counterparts. The email referred to the then ongoing mediation and attached a letter written without prejudice save as to costs. That letter referred to Mount Isa’s offer made on 17 June 2017 and stated that: “Our client rejects that offer and makes the following counter-offer in full and final settlement” of the proceeding. MarShip offered to pay Mount Isa USD300,000 including interest and costs, without admission of liability and without prejudice to any claim in general average, and to consent to the proceedings and cross-claim being discontinued with no order as to costs. The offer was to be open until 9 am on 21 June 2017. As had Mount Isa, MarShip asserted that its offer was reasonable having regard to the strength of its case as outlined in its opening submissions, that it had served on 14 June 2017. MarShip’s letter referred, once again, to Calderbank [1976] Fam 93.

The parties’ arguments

5    Mount Isa contended that the relevant test for determining whether a rejected offer to settle proceedings gives rise to an entitlement to an award of costs on an indemnity basis from the time of its rejection or non-acceptance, depends on the offeror demonstrating that the offeree was imprudent or unreasonable in rejecting the offer. The parties referred to some decisions of the Full Court which had expressed a qualification of that position, namely, that the offeror had to demonstrate that the rejection was not simply unreasonable, but rather that it was “plainly unreasonable”. However, during the course of argument, it appeared to be common ground that, in the circumstances, not much seemed to turn on that question.

6    MarShip argued that Mount Isa had failed to prove that it (MarShip) had acted imprudently or unreasonably at the time it rejected the offer. MarShip contended that was because of three principal reasons. First, there were critical matters that Mount Isa had failed to establish because there remained outstanding at the time complex factual and legal issues, including evidentiary issues, concerning both whether the colour of the exhaust gas changed at any relevant time and the findings that were open based on last recorded exhaust gas temperatures before the Praxis system broke down on 28 December 2014 (see Mount Isa [2018] FCA 1326 at [195]) which expert evidence suggested were inconsistent with any malfunction of the fuel injector valve in cylinder number 5. I also pointed out that another critical variable in what might be awarded as damages was the quantum of the salvage award. Indeed, as I noted in my reasons, Mount Isa [2018] FCA 1326 at [341], the authorities established that there was no jurisdiction in which the quantification of an award was more in the discretion of a judge than the determination of a salvage award.

7    Secondly, MarShip argued that MarShip’s timing of the offer gave it only 36 hours during the weekend immediately preceding the trial, to assess and consider it. It contended that this time period was unreasonably short having regard to the fact that it would be necessary for MarShip to consult two different insurers, namely its hull and machinery insurer, in respect of the general average claim, and its P&I insurer, in respect of the salvage claim. MarShip pointed to the circumstances that, over that weekend, the parties were both engaged in a mediation and counsel were also then engaged in preparing the matter for trial. MarShip argued that it was likely that the instructing officers in the two insurers would be located in London or elsewhere overseas rather than in Australia. MarShip contended that much needed to be done in less than a whole weekend to prepare for trial concurrently with continuing participation in the mediation. MarShip contended that the mere fact that it made its own counter-offer an hour before the deadline set for acceptance of Mount Isa’s offer did not indicate, of itself, that MarShip had sufficient time to assimilate or consider properly Mount Isa’s offer. Rather, MarShip argued, all I could infer was that it had been working on its own counter-offer independently of its receipt of Mount Isa’s offer, and in that context MarShip was satisfied that it was appropriate to make the counter-offer, so that once the counter-offer was made, necessarily Mount Isa’s offer would be taken to have been rejected. However, so MarShip’s submission ran, of themselves, those factors did not suggest that there had been sufficient time for MarShip to have given proper consideration to Mount Isa’s offer because of the time at which Mount Isa made its offer and the time it would remain open for acceptance.

8    Thirdly, MarShip also argued that, in its offer, Mount Isa had not explained or analysed how it had arrived at the quantum of USD615,000. MarShip argued that unlike MarShip’s counter-offer, Mount Isa’s offer did not point to any explanation in its opening submissions that had asserted that the salvage award should be quantified at about USD350,000.

Consideration

9    The Full Court has discussed the principles applicable to determine, at common law, whether an offeree who fails to accept an offer of settlement will be liable to pay costs thereafter on an indemnity basis. Different Full Courts have stated the test as that the rejection of the offer must be either “imprudent or unreasonable” or “imprudent or plainly unreasonable” in order to enliven the discretion to award costs on an indemnity basis. This difference in expression, while unfortunate, does not appear to be substantive. In Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 at [7], Sundberg and Emmett JJ said:

The mere making of an offer of compromise and its non-acceptance, followed by a result more favourable to the offeror, does not automatically lead to an order for payment of costs on an indemnity basis: John S Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 at 204-206; MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 at 239. The applicant for a more generous award must show that the rejection of the offer was imprudent or plainly unreasonable: NMFM Property Pty Ltd v Citibank Ltd (No 2) (“NMFM”) (2001) 109 FCR 77 at 98; Australian Competition & Consumer Commission v Australian Safeway Stores Pty Ltd (No 3) [2002] FCA 1294 at [28]; Sydney Markets Ltd v Sydney Flower Market Pty Ltd [2002] FCA 283 at [16]-[17] and [23]. (emphasis added)

10    They added (at [8]) that this position was unlike that applicable to the service of an offer of compromise under an analogue of what is now Pt 25 of the Federal Court Rules 2011. They said that the offer must be a reasonable one and ordinarily should contain a statement of the reasons that the offeror maintains why the offeree’s case would fail.

11    The authorities do not lay down an inflexible rule, that some detailed reasoned explanation need be given, to justify the exercise of what is, after all, a judicial discretion to make an order for costs on a basis different to the ordinary party-party basis. That is particularly so in circumstances such as the ones that obtain here, where each party, on the eve of the trial, had engaged in an ongoing mediation that remained alive, as the letters rejecting the offer and making the counter-offer demonstrated, and each had provided the other with substance of its evidence-in-chief and its detailed opening submissions that drew, quite clearly, the battle lines between them.

12    In my opinion, the preponderance of authority in the Full Court, to the extent that the word “plainly”, as a qualification to “unreasonable”, may be thought to affect the test, is that set out in the reasons of Nicholas, Yates and Beach JJ in Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [6]-[8], namely:

[6] A well-established circumstance justifying an award of indemnity costs is an imprudent refusal of an offer to compromise (Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233 per Sheppard J). In such cases, a key question is whether the offeree’s refusal of the offer was “unreasonable” when viewed in light of the circumstances existing at the time the offer was rejected (Black v Lipovac & Ors (1998) 217 ALR 386 at 432 per Miles, Heerey and Madgwick JJ; CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd [2008] FCAFC 173 at [75] per Moore, Finn and Jessup JJ).

[7] The circumstances to be taken into account in determining whether rejection of an offer was “unreasonable” cannot be stated exhaustively but may include, for example:

(a) the stage of the proceeding at which the offer was received;

(b) the time allowed to the offeree to consider the offer;

(c) the extent of the compromise offered;

(d) the offeree’s prospects of success, assessed as at the date of the offer;

(e) the clarity with which the terms of the offer were expressed; and

(f) whether the offer foreshadowed an application for an indemnity costs in the event of the offeree rejecting it.

(Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 at [25] per Warren CJ, Maxwell P and Harper AJA; Beling v Sixty International S.A. (No 2) [2015] FCA 355 at [25] per Mortimer J).

[8] An unsuccessful party is not liable to pay indemnity costs merely because it received an offer to settle on terms more favourable than it achieved at trial and rejected that offer (CGU Insurance at [75]; Black at [217]-[218]). As we observed in the Appeal Reasons, albeit in the context of r 25.14(2) of the FCRs, assessment of the “unreasonableness” of an offeree’s refusal of a settlement offer is a broad-ranging inquiry that is not restricted to consideration of the extent or quantum of the compromise offered.

13    And, in Insight SRC IP Holdings Pty Ltd v Australian Council for Educational Research Ltd (No 2) [2013] FCAFC 73 at [7]-[9], North, Rares and Robertson JJ approved what Moore, Finn and Jessup JJ had said in CGU Insurance Limited v Corrections Corporation of Australia Staff Superannuation Pty Ltd (2008) ANZ Insurance Cases 61-785, [2008] FCAFC 173 at [75], namely:

[7] In his reasons in Uniline Australia Ltd v S Briggs Pty Ltd (No 2) (2009) 82 IPR 56 at 65-66 [38], which were approved by Besanko, Perram and Katzmann JJ in Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53 at [131]-[132], Greenwood J said:

“In the modern world of commercial litigation and various subsets of that litigation such as intellectual property litigation, costs are a very real and quantifiable concern. It would be extremely odd to think otherwise. Costs are incurred in a recoverable inter-parties sense from the moment the proceedings issue and they continue to be incurred at every point along the continuum of the litigation. Litigants who are required to pay these costs in order to assert or resist a claim, regard them as a very real and present expense, if not a real and present danger. Very often these costs are a significant business expense. They invariably require a commitment of significant resources and separate budget allocations. An offer to compromise which is framed in terms of a party’s willingness to abandon the recovery of costs so incurred along that continuum through the preparation and analysis of statements, disclosure, analysis of documents and the preparation and review of expert reports, is undoubtedly considered by the litigant as an offer that involves giving up something meaningful, real and measurable. This is particularly so after the completion of case managed preparatory steps at various phases of the litigation which may have the effect of front-end loading significant costs in order to save trial costs. In many cases although not in all cases, the notion that a party is giving up nothing by inviting another party to discontinue a claim on the footing that the offeror will not make any claim for payment of its costs incurred to the date of the offer, is a fundamentally abstracted notion from the practical perspective of the engaged litigant confronting the management of the proceeding and the appropriation of expenditure to conduct it. An offer, on the other hand, that invites discontinuance of a claim on the payment of the offeror’s costs to date offers not very much at all other than the stemming of future costs which in a particular case may nevertheless be very real.” (emphasis in original)

[8] In the case of a Calderbank offer (cf: Calderbank v Calderbank [1976] Fam 93), Moore, Finn and Jessup JJ said in CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd (2008) 15 ANZ Insurance Cases 61-785; [2008] FCAFC 173 at [75]:

“From the tenor of claims which have come before the court in recent years, there appears to be a view abroad that the failure of a party who has rejected a Calderbank offer ultimately to achieve a better outcome than provided for in the offer leads to a presumptive entitlement to indemnity costs with respect to the period subsequent to the offer. Such a view would be mistaken. Where a moving party (including a cross-claimant) offers to settle for a sum which is less than he or she eventually achieves at trial, there is a presumptive entitlement to indemnity costs under O 23 r 11(4) of the Federal Court Rules. However, where recourse is not had to the O 23, but reliance is placed upon the court’s general discretion, it is necessary for the party seeking indemnity costs to demonstrate that the other party’s refusal of the Calderbank offer was unreasonable: Black v Lipovac (1998) 217 ALR 386, 432; Maniotis v JH Lever & Co Pty Ltd (No 2) [2006] FCAFC 28. It is not sufficient that the offer was a reasonable one: Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121, 128 [35]; Dais Studio Pty Ltd v Bullet Creative Pty Ltd [2008] FCA 42, [11]. In considering this question in a particular case, the matter of unreasonableness will be judged by reference to the circumstances facing the offeree at the time of the offer. While the eventual outcome in the case may go part of the way in this regard, there is no presumption that ultimate success in the proceeding for the offeror necessarily renders the offeree’s rejection unreasonable.” (emphasis added)

[9] In our opinion, those principles are apposite in a case such as the present where the offer was made in an open, rather than without prejudice, communication. It was unreasonable of ACER to have caused Insight Holdings and Insight to deal with the issues ACER raised in its answering submissions on the appeal. While the issue of quantification had some difficulties, the likelihood was that the appeal would result in substantial damages in the order of Insight’s loss as found by the primary judge.

14    And in Keays v J P Morgan Administrative Services Australia Limited (No 2) [2011] FCA 574 at [7]-[20], Buchanan J discussed the authorities and ultimately came to the same conclusion as I, being that the test is whether the offeror is able to demonstrate that the rejection of its offer was imprudent or unreasonable, unqualified by the word “plainly”.

15    I reject MarShip’s argument that the timing of the offer and the length of time during which it was open for acceptance entailed that MarShip had not been given a reasonable and appropriate opportunity to consider the offer and determine whether or not it should be accepted. Much litigation settles at the door of the court. That occurs because parties, at that point, are likely to be best placed to consider all of the relevant risks and strengths of the litigation to which they will be exposed if they proceed to the imminent hearing. Necessarily, most cases that go to trial involve both factual and legal complexity, since the parties will have been unable to agree upon a likely or acceptable outcome or a sufficient allocation of risk.

16    There is no evidence, as one might have expected there would have been had MarShip’s argument had substance, to show that MarShip, in fact, had not had a reasonable opportunity to consider Mount Isa’s offer. The fact is MarShip was able not only to consider the offer and to reject it an hour before it expired, but it made a counter-offer without any contemporaneous complaint in the letter of rejection that reflected MarShip’s present arguments. While in some circumstances an offer made at noon on a Saturday immediately before a trial, where parties had foreign clients or other interests to consult and counsel were preparing for the trial to commence on the Monday morning, may make it difficult to deal with, the context in which Mount Isa’s offer was made was one in which the parties were then actively engaged in a mediation and were fully alive to all of the issues in a properly prepared trial. Moreover, both sides were well-resourced and advised at the time. MarShip’s lack of contemporaneous complaint, that it had not had a proper opportunity to consider the offer, speaks volumes about the lack of merit in its current argument.

17    In my opinion, the facts that MarShip was able to reject the offer, without any complaint as to the circumstances of its making or the time allowed for its consideration, and to make its own counter-offer, demonstrate that it did have a fair and reasonable opportunity to deal with Mount Isa’s offer at the time it was made and during the time that it remained open.

18    Moreover, the offer contained a real and significant compromise of Mount Isa’s claim. It was for a sum in the order of about 45% of the principal claimed, excluding any interest and costs, albeit that, as MarShip argued, the offer also involved MarShip having to give up its claim to general average by consenting to the declaration, which was a valuable right for it. As MarShip pointed out, its case had significant factual support by reason of the crew’s evidence of visual observations of the exhaust gas colour and the recorded exhaust gas temperature measurements prior to the failure of the Praxis system on 28 December 2014 (see: Mount Isa [2018] FCA 1326 at [194]-[196], [256]).

19    There cannot be any question that Mount Isa’s offer was sufficiently clear and that it foreshadowed that this application would be made (see: the considerations set out in Anchorage Capital (No 2) [2018] FCAFC 112 at [7]).

20    In Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281 at 289-290 [45]-[46], Hely J pointed out that the strength of a party’s argument at the time an offer is made cannot be considered in isolation from the reasons in favour of the particular quantum that is offered. He noted that the policy of the law favoured the sensible compromise of disputes but there was also a policy against deterring parties from pursuing claims (or I would add, defences) to which they reasonably believe themselves entitled.

21    It could not be suggested that MarShip had a hopeless or weak case. Rather, there were genuine and difficult factual and legal disputes bound up in a very complex case. This points to the wisdom of what Moore, Finn and Jessup JJ said in CGU Insurance (2008) 15 ANZ Insurance Cases 61-685 at [75], namely that, in considering a question in a particular case, the matter of unreasonableness will be judged by reference to the circumstances facing the offeree at the time of the offer. They noted that the eventual outcome of the case could go part of the way in that regard, and that there was no presumption that ultimate success in the proceeding for the offeror necessarily rendered the offeree’s rejection unreasonable.

22    Moreover, here, there was a difficult question as to the quantification of the damages in respect of the salvage award, if Mount Isa were to succeed in establishing that MarShip was to pay it damages in respect of the USD1 million that Mount Isa had paid to the owners of Xinfa Hai to settle the salvage claim.

23    MarShip did not contest that Mount Isa’s offer was reasonable. Rather, its argument was that Mount Isa had not discharged the onus of establishing that MarShip was imprudent or unreasonable, as I have found the test to be, in rejecting the offer in all of the circumstances at the time.

24    Modern rules of court, such as those in Pt 25 of the Federal Court Rules, provide for offers of compromise to be made that have prima facie consequences that impose on the party that does not accept that offer a liability to pay indemnity costs unless the Court otherwise orders. In those circumstances, the making of an offer of compromise under such rules of court entails, without the need to demonstrate imprudence or unreasonableness in the offeree’s non-acceptance or rejection, a prima facie liability on the unsuccessful offeree to pay indemnity costs.

25    The technique identified in Calderbank [1976] Fam 93, of making an offer to settle without prejudice except as to costs, no doubt led to the making of such rules of court. Much litigation that requires a court ultimately to engage in a hearing to determine rights and liabilities involves factual and legal disputes of considerable complexity. In general, but not always, commercial, well-advised parties, will only contest cases where some real question or questions of fact or law ought be tried.

26    This was a case in which there were clearly difficult and real questions of both fact and law to be tried and about which there was no certainty on either side as to what the ultimate outcome would be immediately before the trial when MarShip rejected Mount Isa’s offer.

27    I am of opinion that, given those very uncertainties, Mount Isa’s offer put forward a real and reasonable compromise. However, balancing the two considerations of the promotion of settlement of litigation and the right of parties to resort to the court to resolve their differences, in all of the circumstances, I am not satisfied that it was imprudent or unreasonable for MarShip to have rejected Mount Isa’s offer given the complexities of the case. The case is close to, but does not cross, the line despite the fact that Mount Isa’s offer was much less favourable to it than what it ultimately achieved in the litigation. I am of opinion that MarShip was entitled to reject the offer and allow the matter proceed to trial, difficult as it was.

Conclusion

28    For these reasons, I am not prepared to order that MarShip pay Mount Isa’s costs on an indemnity basis.

Associate:

Dated:    8 November 2018