Written by Maral Manoukian
In the NSW Supreme Court decision of Teo & Anor v Twyford bht Cunningham (No 2) [2023] NSWSC 1626 Justice Henry considered a defendant’s entitlement to indemnity costs in a contract for sale of land dispute.
The decision serves as a useful reminder of the factors the Court considers when awarding indemnity costs, and clarifies when a defendant’s offer will amount to a genuine compromise so as to make the plaintiff’s refusal to accept it unreasonable.
Facts and Background
On 15 February 2021, two plaintiff purchasers (Carolyn Teo and Raven Gibb-Kalvin Spirit) and a defendant vendor (David Twyford) entered into a contract for the sale of land located at Tanja, NSW.
Prior to the contract being completed, a notice seeking to rescind the contract was served on the plaintiffs declaring that the defendant vendor was a mentally ill person, relying on clause 34 of the contract. Clause 34 provided:
“Notwithstanding any rule of law or equity to the contrary, should either party, or if more than one any one of them, prior to completion die or become mentally ill, as defined in the Mental Health Act 2007 … then either party may rescind this contract by notice in writing forwarded to the other party and thereupon this contract shall be at an end and the provisions of clause 19 hereof shall apply.”
Commencement of Proceedings
The plaintiffs then lodged a caveat and warned the defendant they would bring an application for specific performance if he did not complete the contract. In March 2021 the plaintiffs’ lawyer issued a Notice to Complete on the defendant. Following this, the Mental Health Tribunal held an inquiry under s34 of the Mental Health Act. It was determined the defendant was in fact a mentally ill person under s35. The plaintiffs then commenced proceedings seeking to enforce the contract.
Decision
On 30 November 2023, Justice Henry dismissed the plaintiffs’ claim. Costs were awarded in favour of the defendant on an ordinary basis.
On 7 December 2023, the defendant made an application seeking that costs be awarded on an indemnity basis after the expiry of a “walk away” Calderbank offer dated 17 September 2021.
Justice Henry declined to exercise the Court’s discretion to award indemnity costs under s 98 of the Civil Procedure Act 2005 (NSW).
Why Were Indemnity Costs Not Granted?
Her Honour was not satisfied that the defendant’s offer embodied a genuine compromise so as to show that it was unreasonable for the plaintiffs to not accept it [12].
As to the question of the reasonableness of the plaintiff’s non-acceptance of the offer, Justice Henry considered factors including:
- the stage of the proceedings at which the offer was received;
- the time allowed for acceptance;
- the extent of the compromise;
- the plaintiffs’ prospects of success assessed at the date of the offer; and
- whether the offer foreshadowed an application for indemnity costs [13].
The Stage of the Proceedings at Which the Offer Was Received
Justice Henry concluded that at the time the defendant’s offer was conveyed, the plaintiffs were unlikely to have been in a position to “properly test the defendant’s assertions” as to justify the walk away offer and make a realistic assessment of the probable outcome of the proceedings. The offer was made after a defence had been filed, but no lay evidence had been served on behalf of the defendant, no expert evidence had been served and the plaintiffs had not yet issued a subpoena for the defendant’s medical records [17].
Justice Henry held that the making of the offer “at an early stage in the proceedings” did not weigh in favour of the defendant on these facts [18].
The Extent of the Compromise
Whilst acknowledging that “walk away” offers are capable of engaging the principles in Calderbank, on these facts the only compromise involved on the defendant’s part was to not seek the costs he was likely to recover on an ordinary basis if the offer was not accepted. Her Honour observed that those costs were not significant at the time of the letter and that the offer to forego party/party costs on the factors did not involve a “real concession or genuine compromise”.
The Plaintiffs’ Prospects of success Assessed at the Date of the Offer
- Justice Henry was of the view that the outcome of the proceedings at the time of the letter was “binary” in a sense in that it involved an “all or nothing” case based on the court’s interpretation of the relevant contractual clause entitling the defendant to rescind same.
Her Honour did not characterise the plaintiffs’ claim to be frivolous or vexatious such as to support an indemnity costs order against them. Justice Henry held that the defendant failed to establish that it was unreasonable for the plaintiffs to have rejected the Calderbank offer at the time it was made [19]. Her Honour maintained the order providing for the plaintiffs to pay the defendant’s costs as agreed or assessed on an ordinary basis [23].
Takeaways from the Case
This decision is a good reminder that indemnity costs orders are of a discretionary nature. Litigants and their legal representatives ought to be mindful of the factors the Court considers when exercising its discretion including the extent of the compromise contained in any offer and the timing of making the offer.
Strategic decisions will need to be made during the course of the proceedings concerning when, what and how such offers are made to ensure cost benefits for the offeree. An offer made too early in the proceedings or without genuine compromise will not make a party’s rejection of it unreasonable despite the offeree’s favourable outcome. In those circumstances, the Court will decline to exercise its discretion to award indemnity costs and follow the usual rule concerning costs, being that costs follow the event on an ordinary basis unless it appears that some other order should be made: Rule 42.1 and 42.2 UCPR. Whilst this was a NSW decision, a similar approach will be taken in other Australian jurisdictions.
If you wish to discuss this decision, please contact Sindri Bergsson on 02 9044 3263 or any member of the Ligeti Partners team on 03 9947 4500.
