Abandoned claims and sunk costs: Apportioning costs to reflect ‘wins’ and ‘loses’ in litigation

The decision in Donau Pty Limited (formerly Forgacs Engineering Pty Ltd) v ASC AWD Shipbuilder Pty Limited (No 2) [2018] NSWSC 1589 (Donau v ASC) is a timely reminder of the limitations of an Offer of Compromise in affording a successful party any guaranteed indemnity costs protection in circumstances where the offering party has in fact secured a better outcome than the offer.

The Supreme Court of New South Wales has recently handed down a significant decision on costs.

The decision in Donau Pty Limited (formerly Forgacs Engineering Pty Ltd) v ASC AWD Shipbuilder Pty Limited (No 2) [2018] NSWSC 1589 (Donau v ASC) is a timely reminder of the limitations of an Offer of Compromise in affording a successful party any guaranteed indemnity costs protection in circumstances where the offering party has in fact secured a better outcome than the offer.

In Donau v ASC, despite ASC submitting that it was entitled to indemnity costs by reason of it having issued an offer of compromise pursuant to r.20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (ASC’s Offer), the NSW Supreme Court instead determined that a fair method of apportioning the cost orders of the proceedings to reflect the relative successes and failures of the parties on particular issues, was to order that ‘each bear its own costs’ – and so the Court ordered.

Background to the proceedings

The proceedings concerned a dispute between Donau and ASC regarding Donau’s entitlement to be paid fee for its work on the AWD Project in constructing parts of three air warfare destroyers for the Australian Navy.

Donau and ASC entered into an Original Contract on 20 August 2009 setting out the terms upon which Donau was engaged to work on the Project. The parties subsequently, on 26 October 2012, entered into a Heads of Agreement which varied the terms of the Original Contract, including those provisions of the Original Contract governing Donau’s entitlement to be paid fee. The primary issue in the proceedings was centred around the question of whether the Heads of Agreement came into effect, and if so, what implications that had on Donau’s entitlement to fee.

Donau contended that the Heads of Agreement did come into effect – the consequence of which was that ASC was liable to pay Donau in excess of $30m in unpaidfee.

ASC contended that the Heads of Agreement did not come in effect by reason of certain pre-conditions of the Heads of Agreement having not been met. As such, ASC argued that the parties’ respective rights, obligations and responsibilities remained governed by the strict terms of the Original Contract. In the alternative, ASC alleged that if the Heads of Agreement was found by the court to have taken legal effect, Donau had engaged in misleading and deceptive conduct by inducing ASC to execute the Heads of Agreement and by reason of that alleged conduct, the Heads of Agreement was unenforceable.

As His Honour Ball J set out in his judgment, during the course of the proceedings a large number of issues were raised by the parties in connection with their dispute. Some of those issues, such as a claim by ASC that the Heads of Agreement should be rectified and claims by Donau that various estoppels operated in its favour, raised substantial factual issues. Many of those issues were abandoned before trial and were the subject of extensive lay affidavit evidence served prior to the commencement of the hearing.

The findings of the NSW Supreme Court judgment in Donau Pty Limited v ASC AWD Shipbuilder Pty Limited [2018] NSWSC 1273 (the substantive judgment), were that:

  1. contrary to ASC’s submissions, the Heads of Agreement didcome into effect;
  2. contrary to Donau’s submissions, ASC did(by way of a letter dated 7 June 2013) validly terminate the Heads of Agreement;
  3. the effect of ASC’s valid termination was that despite the Heads of Agreement coming into effect, the consequence of its subsequent valid termination was to ‘re-enliven’ the Original Contract upon termination with the consequence being that any monies payable to Donau under the Heads of Agreement were to be taken into account when determining Donau’s entitlement to fee once the parties were found to have reverted back to the Original Contract. Of significance in the context of the Court’s judgment on costs Donau v ASC, is that this was a construction and interpretation of the terms of the Heads of Agreement that was not contended for by either party to the proceedings. Instead this finding reflected the court’s own findings as to the true and proper construction of the terms of the Heads of Agreement – including upon its valid termination;
  4. had it been necessary to decide, contrary to ASC’s submissions, ASC’s misleading and deceptive conduct cross-claim would have failed.
The parties were invited by the court to serve separate submissions on costs and court handed to down its decision on costs on 23 October 2018.

The costs decision in Donau v ASC

The practical result of the findings above was that the court entered a substantial judgment in ASC’s favour.

In that context, on the question of costs, ASC submitted that the appropriate cost orders were that (subject to existing costs orders made throughout the conduct of the proceedings): (i) Donau otherwise pay ASC’s costs of and incidental to the proceedings up to ASC’s Offer, on the ordinary basis; (ii) on and from ASC’s Offer, Donau pay ASC’s costs on an indemnity basis.

On the other hand, Donau submitted that the appropriate order flowing from the substantive judgment was that each party bear its own costs. Donau’s contention as set out its written submissions which both parties were invited to file on costs, was that an ‘each party bear its own costs’ order was fair and appropriate in all the circumstances, including by reason of the following arguments put forward by Donau.

  1. Whilst the practical result of the court’s finding on the question of construction of the terms of the Heads of Agreement was that ASC was entitled to its claimed judgment amounts, the court’s findings were not arrived at by reason of the case argued by ASC at trial.  Instead, and as set out above, the court came up with its own interpretation on the question of construction and operation of the Heads of Agreement – which did not reflect the position advanced by ASC at trial – yet resulted in ASC being entitled to the judgment amounts it claimed. Donau argued that this warranted a departure from the general that costs follow the event.
  2. Throughout the course of the proceedings, both Donau and ASC abandoned substantive claims, the consequence of which was that both parties incurred costs in respect of the preparation of evidence, and in the course of giving discovery, in respect of claims ultimately not pressed by both parties at hearing.
  3. By reason of the court’s findings, ASC’s misleading or deceptive conduct claim did not arise. Nevertheless, the court concluded that had it been necessary to determine the issue, the court would have concluded that ASC’s claim should fail. Donau contended that significant costs were incurred by Donau in responding to this allegation which ultimately failed.
In respect of ASC’s Offer and the indemnity costs consequences that may flow from an Offer of Compromise under the Uniform Civil Procedure Rules, in circumstances where ASC succeeded on a case that was substantially different to ASC’s pleaded case and the case advanced by ASC at hearing, the court should exercise its discretion to “order otherwise” and against an indemnity costs order in all the circumstances.

His Honour accepted Donau’s submissions and determined that in the context of the various claims abandoned by both sides in the lead up to the hearing (in respect of which separate costs orders had been made) that “it seem[ed] sensible to vacate all costs orders and order that each party bear its own costs of those issues….an order in those terms would simplify considerably the task of assessing costs”.

The ’take home’ points

This decision is not only a timely reminder of the limitations of an Offer of Compromise in affording a successful party any guaranteed indemnity costs protection in circumstances where the offering party has in fact secured a better outcome than the offer, but also a reminder of the court’s willingness to exercise its discretion to “order otherwise” when determining to take a practical approach to apportioning costs in circumstances where both parties have succeed and failed on the issues in dispute.

Contributors

Guy Lewis Lawyer