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Tuesday, August 20, 2013

Offers to Compromise: an exercise in discretion

By Lawyer Rob Clark

Regular Scintilla readers may remember John Kismet Jashar, his company Kismet International Pty Ltd, Mr McMahon and those piles of guano. In short, the court had found that while Mr McMahon had infringed the registered trade marks of Mr Jashar in selling his guano, Mr Jashar had been unable to prove that the sales of Mr McMahon's guano occurred because of this infringing use. The upshot was that Mr Jashar was entitled to a mere $5000 for reputational damage, substantially less than the damages he sought.

In Kismet International Pty Ltd v Guano Fertiliser Sales Pty Ltd (No 2) [2013] FCA 705, Justice Murphy dealt with the issue of costs. We focus here on one aspect – Offers to Compromise.

Under Rule 25.14(1) of the Federal Court Rules, a respondent can make an offer to the applicant to settle the proceeding. If the applicant rejects the offer and obtains a judgment less favourable than the terms of the offer, it is not entitled to costs from the second day after the offer was served and it must pay the respondent's costs on an indemnity basis from that time. However, as is clear from Kismet (No 2), orders pursuant to this rule are discretionary, like all orders relating to costs.

There was one Offer to Compromise made by the respondents in the proceedings, and two made by the applicants. The relevant offer was made on 22 December 2011, pursuant to which the respondents offered to settle the proceedings on the basis of a net payment of $20,000 plus costs. As noted above, the applicants were only awarded $5000 in damages. So, the judgment was less favourable than the respondents' offer. Therefore, on the face of Rule 25.14, the respondents were entitled to their costs on an indemnity basis from the second day after the offer was served. However, Justice Murphy found that the respondents were not entitled to indemnity costs until 13 June 2012, some six months after the time when the offer was made.

Justice Murphy referred to Specsavers Pty Ltd v Optical Superstore Pty Ltd [2012] FCAFC 183 for the principle that Rule 25.14 creates a rebuttable presumption in favour of costs, rather than an entitlement. The judge delayed the date from which indemnity costs would run because at the time the respondents' offer was made, the respondents' evidence had not been filed. This evidence defeated the damages claim of Mr Jashar. By 13 June 2013 all the respondents' evidence was on and, according to Justice Murphy, the applicants could consider the strength of their position.

This is rather surprising, as it suggests that an offer to compromise cannot operate in a party's favour until such time as the other side has all the necessary information before it regarding their prospects in the proceedings, including evidence. If correct, the scope and utility of Offers to Compromise would be curtailed dramatically. The point of the offer is to resolve the proceedings early to save time, expense and uncertainty. As such, the offer ought to be able to be able to 'bite' before evidence is filed.

The preferable reading is that this judgment arises out of very unusual circumstances, and it stands for no more than the fact that all costs are discretionary, including under Rule 25.14. It is important to be aware of this when deciding whether to make or accept an Offer to Compromise.

Whatever the precise principles arising from the decision, the upshot of this decision is that for Mr Jashar, kismet continues to be unkind.

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