Recent Victorian Offer of Compromise reform: costs inclusiveness, claim failure, pre-litigation offers and other changes

The Magistrates' Court General Civil Procedure (Offers of Compromise Amendments) Rules 2014 bring the rules on offers of compromise in the Magistrates' Court of Victoria ("MCV") largely into alignment with the Supreme Court of Victoria ("VSC") and County Court of Victoria ("CCV") rules on offers of compromise. This amendment commenced on 1 August 2014. The VSC and CCV rules were amended on 1 September 2013 and 7 October 2013 respectively.

Summary of the reform

By way of summary, the rule amendments for all Victorian Courts implement the following significant changes to Order 26 which concerns offers of compromise:

• Offers of compromise shall be either expressed to be inclusive of costs, or costs are to be paid or received in addition to the offer (r26.02(3)). 
• An acceptance of an offer of compromise may may be withdrawn if the money is not paid within the time specified in the offer or within 28 (SCV/CCV)/30(MCV) days after acceptance of the offer and the court gives leave to do so. A party seeking leave may also seek orders to restore the parties to their position at the time of acceptance and as to the further conduct of the proceeding (r26.07)
• If a party defaults in complying with the offer after its acceptance, a non-defaulting party may apply to the court for an order giving effect to the offer, an order staying or dismissing the proceeding if the plaintiff is in default, an order striking out the defendant's defence if the defendant is in default or an order that a claim, not the subject of the offer, shall proceed (r26.07.1). Where there are multiple defendants this rule is limited to where the offer is made to compromise the claim against all defendants (r26.07.2).
• The consequences of non-acceptance commence at 11am on the second business day after the offer was served, instead of the day after the offer was served (r26.08).
• Where an offer of compromise is made by a defendant and the plaintiff "unreasonably fails to accept the offer" and the claim is dismissed or judgment is entered in favour of the defendant, then, unless the court otherwise orders, the defendant shall be entitled to costs on the usual basis up until 11am on the second business day after the offer was served, and thereafter on an indemnity basis (CCV/SCV)/25% increase on the applicable scale (MCV) (r26.04(4)). The operation of this rule has already been considered, noted below.
• The court can take into account pre-litigation offers in exercising its discretion as to costs, provided the offer was open to be accepted for a period of at least 7 days after the offer was made and the offeror obtains an order no less favourable to the offeror than the terms of the offer (r26.08.1).
• Offers of compromise are extended to "contributor parties" that may be held liable to contribute towards an amount of debt or damages. A contributor party may make an offer to another contributor party to contribute, to a specified extent, to the amount of the debt or damages. If the offer is made and not accepted, and the offeror obtains an order against the offeree more favourable than the terms of the offer, then unless the court otherwise orders, the offeror is entitled to an order that the offeree pays the offeror's costs on the usual basis up until 11am on the second business day after the offer was served, and thereafter on an indemnity basis (SCV/CCV)/25% increase on the applicable scale (MCV) (r26.10).
• Transitional provisions provide that the amendments do not have retrospective effect, and the previous provisions apply to offers of compromise served when the previous provisions were applicable (r26.11).

Click here for the VSC amending legislation (Supreme Court (Chapter I Offers of Compromise Amendments) Rules 2013), here for the CCV amending legislation (County Court (Chapter I Amendment No. 8) Rules 2013) and here for the MCV amending legislation (Magistrates' Court General Civil Procedure (Offers of Compromise Amendments) Rules 2014) from the Victorian Parliament website.

These amendments follow the suggestion by the Victorian Law Reform Commission in its 2008 "Civil Justice Review" Report for the Costs Council to review the rules relating to offers of compromise, and a 2012 consultation process between the Civil Procedure Advisory Group and various industry stakeholders.

Consequences on failure of a claim where there is an offer by a defendant

In Smith v Jovanoska & Anor (No. 2) [2013] VSC 714 the Supreme Court of Victoria considered the new r26.04(4), which provides for cost consequences on a dismissal of a claim where an offer was served by a defendant and the plaintiff unreasonably fails to accept the offer. There, an offer of compromise was served by the first defendant offering to pay the plaintiff $40,000 inclusive of costs. It is not made clear from the decision, but it can be reasonably assumed, that the outcome of the case is that the plaintiff failed in the claim. 

There, Zammit AsJ held that the considerations for "Calderbank" offers (see Calderbank v Calderbank [1975] 3 WLR 586) set out in the matter of Hazeldene’s Chicken Farm v Victorian WorkCover Authority (No 2) [2005] VSCA 298 ("Hazeldene's") are applicable to an offer of compromise under this new provision, and ordered that the plaintiff pay the first defendant's costs from the second business day after the offer was served on an indemnity basis. By way of recap, the matters a court is to have regard to, from Hazeldene's, are as follows:

(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 offer of compromise;
(d) the offeree’s prospects of success as assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed;
(f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.

In Smith, the offer was served late in the proceeding, after mediation and before trial. These facts were decisive in the outcome.

Discussion

Since the reform allows cost inclusive offers, this may have the effect of displacing the "Calderbank" offer as the offer of first resort, since a "Calderbank" offer has the disadvantage of requiring the offeror to prove that the rejection of the offer was unreasonable. However, there is still a benefit in making an offer "plus costs", because where an offer is made "plus costs" it is much easier for the court to assess whether the result is more or less favourable than the offer. This is because where an offer is made "plus costs" there doesn't need to be an assessment of what the costs would have been at the date of the offer.

The inclusion of contributor parties will make offers of compromise more attractive to complex multi-party disputes, such as building and insurance disputes. However, the language of this provision appears convoluted and this may give rise to some disagreement about what sort of parties are intended to be captured by this provision. For instance, is this intended to apply to apportionable claims under Part IVAA Wrongs Act 1958, or contribution proceedings under Part IV Wrongs Act 1958, or both?