In the recent decision of The University of Melbourne v Commissioner of State Revenue  VSC 322 (“SRO Case”), Justice Osborne of the Supreme Court of Victoria considered the Court’s discretion to refuse the making of an indemnity costs order in relation to an offer of compromise made under the Supreme Court (General Civil Procedure) Rules 2015 (“Rules”).
Offer of Compromise
An offer of compromise is essentially a formal offer to settle a proceeding made in accordance with the relevant court rules.
Pursuant to order 26.08 of the Rules, a party who makes an offer of compromise is entitled to their costs on an indemnity basis, if the offer is rejected and the party obtains judgement at trial no less favourable than the terms of the offer. The presumption in favour of an order for indemnity costs applies unless the court “otherwise orders.” Practically speaking, this means the party is entitled to recover more in respect of their legal costs from the other party than if a standard costs order had been made. The difference between the two cost awards can be substantial.
On 15 April 2019, the University of Melbourne (“University”) objected to a Land Tax Assessment Notice issued by the Commissioner of State Revenue (“Commissioner”) on the basis that the relevant land was exempt under s.74 of the Land Tax Act 2005 (Vic) (“Act”) as the University was a charitable institution.
On 28 February 2020, the Commissioner disallowed the objection and the matter was set down for hearing.
During the course of the proceeding, the University made two offers of compromise. The first offer of compromise (“First Offer”) was foreshadowed in correspondence in July 2020 and was served on 26 August 2020. Pursuant to the First Offer, the University agreed to waive any claim in respect of the University’s costs incurred to date (approx. $130,000), if the Commissioner granted the exemption sought. The First Offer was made at an early stage in the proceeding, and before the University had filed material in support of its position.
The second offer of compromise (“Second Offer”) was served on the Commissioner on 28 November 2020, after the University had filed material in support of its position. The Second Offer was on the same terms as the First Offer (except that the University’s costs at that date were approximately $305,000).
At trial, the Court handed down judgement in favour of the University.
The costs issue
The Commissioner did not dispute that the University had obtained judgment on terms “no less favourable” than the First Offer and Second Offer. Therefore, the University was entitled to its costs on an indemnity basis from the day after the First Offer, unless the Court exercised its discretion to “otherwise order” within the meaning of r 26.08(2).
The Commissioner argued that the Court should exercise its discretion against ordering indemnity costs in respect of the First Offer for three reasons. Firstly, because the First Offer did not represent a genuine compromise; secondly, because its defence was not “hopeless;” and finally, because the offer was at an early point in the proceeding.
Justice Osborne noted that the Commissioner had a “heavy burden” to resist an order for indemnity costs in respect of the First Offer. However, His Honour accepted the Commissioner’s submission that the genuineness of any compromise is of “clear importance” in the proper exercise of the costs discretion, including whether to “otherwise order” within the meaning of r.26.08(2)(b).
While His Honour accepted a “walk away” offer can represent a genuine compromise in certain circumstances, he was not persuaded this was the case in respect of the First Offer. In particular, His Honour noted that the First Offer was made at an early stage in the proceeding, and would have involved a “complete capitulation” of the Commissioner’s claim.
Having regard to the circumstances of the case, Justice Osborn found that the First Offer was designed to “obtain costs protection” and was not a “genuine compromise” in accordance with the Rules. Accordingly, indemnity costs were awarded from the day after the Second Offer was made.
While an offer of compromise can act as a form of costs protection, to be effective the offer must represent a genuine compromise. When serving an offer of compromise, it is important to consider the stage of the proceeding, and whether the issues in dispute have been adequately articulated, such that they are understood by the recipient. An offer served prematurely may not provide the desired costs protection.
~ with Alice Rudaya, Lawyer