Original article by Justin Castelan via LinkedIn.

After all of the pleadings, the applications, the bluff and bluster, the one thing we all know is that at one point or another, most commercial cases settle. Navigating towards a settlement is a game within the game: it involves strategy, cunning and calm.

This is especially so during and shortly before a trial. It is the time of real pressure. Every moment and each piece of evidence is magnified. No trial is without drama and no party is spared from those hair-raising moments when you are surprised to think that your case is nowhere near as good as you thought 2 minutes before.

So serving an offer of compromise at the start of a trial, being an offer that must remain open for 14 days regardless of what the trial brings, is a very risky option. It gives the other side a whole lot of power. Unless there are exceptional circumstances, that offer will be able to be accepted at any time in those 2 weeks regardless of how badly your witnesses go. The recipient of the offer is playing poker with house money.

The Court of Appeal recently specifically considered whether an offer of compromise by a defendant could be withdrawn during a trial. The defendant claimed that there had been a change of circumstances which meant it would have been unjust to hold the defendant to the offer. That defendant was presumably so happy with how things were going at the trial that it wanted to revoke a $525,000 offer it made, within 3 days of making it. Big change of heart.

What happened was this.

1. In July 2012, Project Gas Services Pty Ltd (PGS) entered into a master lease agreement with Leaseplus Operations Pty Ltd (Leaseplus) for the supply of 4-wheel drive vehicles.

2. Two years later, PGS served a notice of termination because it no longer needed the leased vehicles.

3. Leaseplus sued PGS in the County Court and sought damages for breach of contract, including:

$1,065,639 liquidated damages, being a debt due under the terms of the agreement in the event that PGS failed to pay rent and defaulted on a subsequent demand by Leaseplus (the Termination Amount); or
alternatively, Leaseplus claimed loss and damages , including:
– $1,274,015 for loss of profits it would have earnt (Main Lost Profits)

– $192,009 for lost revenue that Leaseplus claimed it would have earnt from expansion of its business into Sydney (Sydney Lost Profits).

4. PGS claimed it was a hirer at will and paid the daily rent at the end of each month up to the date of termination. It claimed it had validly terminated the agreement. It also claimed that the Termination Amount claim was bound to fail because the term of the agreement relied upon was void for uncertainty or otherwise a penalty.

5. Both parties engaged accounting experts. PGS’ expert, Mr Jaski and together with Leaseplus’ expert, Mr Stone, agreed that the Termination Amount was valued at $1.06 m. A joint expert report was filed 2 days before trial.

6. The experts did not agree on the value of the Main Lost Profits claim but put it somewhere between $910,802 and $618,598. They agreed the undiscounted amount was $980,443, and they disagreed on the value of the discount to be applied. The joint report stated:

“The experts agree that they do not have sufficient information to be able to provide a definitive view on the appropriate discount rate to be applied for either Leaseplus as a whole, or these specific lost profits.

Mr Jaski is of the view that an appropriate discount rate for the Leaseplus lost profits is between 27.50% and 52.50%….”

The report later stated that Mr Stone’s view was that the discount to be applied could be 6.50%.

7. The day after the joint report was delivered, and the Friday before trial was to start, PGS made a formal offer of compromise offering to pay Leaseplus $525,000 all-in ($25,000 of that was for costs). The offer had to remain open for 14 days.

8. The letter from PGS’ solicitors that accompanied the offer stated:

a.    their view was that the claim for the Termination Amount was bound to fail – void for uncertainty, penalty;

b.    that the Main Profits claim was likely to be less than $450,000 after taking account of a failure to mitigate and evidence of the experts; and

c.     the Sydney Lost Profits Claim had little chance of success.

9. The trial started the following Monday.

10. On Wednesday, being day 3 of the trial, the CEO of Leaseplus gave evidence about computer software used by it to produce quotes for customers. Some data was called for and produced. Counsel for PGS claimed it was relevant to the calculation of the Termination Amount.

11. Day 4 of the trial was adjourned for the day so that PGS could consider the data.

12. Friday was day 5 and the trial resumed. During the morning that day:

a.    Counsel for Leaseplus stated that it would not press its claim for the Termination Amount; and

b.    Mr Stone gave evidence for Leaseplus. He was cross-examined until lunchtime.

13. Mr Stone gave evidence that the discount to be applied to the Sydney Lost Profits Claim was higher than that for the Main Profits Claim. In cross-examination, he confirmed that he did not have sufficient information about the Leaseplus business as a whole to give his opinion as to the appropriate discount rate to reflect that risk. He was hammered about this and some of the transcript appeared in the VSCA decision at [20]:

“So you don’t know what risks would be applied in relation to the loss of profits’ claim in this case? — I don’t know what discount should be applied to reflect the risks associated with this stream of income or lost income in this case.

You don’t know what risk should be applied to the loss of profit on the Sydney expansion either? — The same extent, its not that I don’t know the risk should be applied, clearly some risk should be applied and the risk should be greater for the Sydney loss of profits than it would be for the loss of profits from the contract.

So it should be greater than a number we don’t know. So we’re going to have a number we don’t know that’s greater than another number we don’t know. Is that really where your evidence is at? — Correct.”

14. During the lunch time break, presumably very happy with how its cross-examination was going, PGS informed Leaseplus that it intended to apply for leave to withdraw its offer and sought a listing for that application. Before it was listed (possibly also spooked by this latest development), Leaseplus accepted the offer of compromise.

15. The trial judge heard the application and refused leave to PGS to withdraw the offer of compromise. So the case appeared to have settled. But no.

16. PGS must have become extremely confident that it would do better than the offer of compromise if the trial were allowed to proceed. It applied for leave to appeal to the Court of Appeal.

To determine whether to allow a party to withdraw an offer of compromise, the trial judge had to ask whether there had been a sufficient change in circumstances since the offer was made, to make it just that the offeror be permitted to withdraw the offer. It was then a question of discretion.

The question for the Court of Appeal was this: whether the trial judge’s decision was so unreasonable or plainly unjust that the Court could infer that the trial judge had failed to exercise his discretion properly.

The trial judge refused the application because His Honour concluded:

· The data that was discovered on day 4 of the trial could have been derived from other discovered documents;

· PGS, by its actions and its solicitors’ correspondence, had always considered that the claim for the Termination Amount was unrecoverable, so the fact that it was abandoned did not reflect a change in circumstances sufficient to justify withdrawal from the offer;

· The terms of PGS’ letter that accompanied the offer of compromise also showed it was well aware of the vulnerability of Leaseplus’ expert, and where Leaseplus had its own expert witness, any concessions by Mr Stone under cross-examination could not have created any sort of “epiphany for the defendant”.

· No significant change had occurred. Offer of compromise stood. It was accepted. Case settled.

The Court of Appeal essentially agreed with the analysis of the trial judge. It ultimately concluded that:

· The data that was discovered on day 4 could have been derived from other documents. If such evidence could not have been discovered using reasonable diligence, then that might have changed things [59];

· Mr Stone’s evidence was consistent with what was contained in the joint expert report. There was no material change there and at [58]:

“If evidence that is truly new comes to light, rather than a witness simply giving evidence that is better or worse  than expected, then it may be easier to conclude that it would be unjust to hold the offeror to the offer.”

· On a superficial level, the abandonment of the Termination Amount claim seemed significant, but on closer examination, it was not the case. Viewed objectively, the parties’ conduct showed that they considered that the claim was weak. At [61]:

“Even taking into account that the solicitors for Project Gas Services may (for the purposes of negotiation) have  overstated the weaknesses in the claim, their correspondence is cast in disparaging terms”; so the abandonment  of a weak claim by PGS did not alter the landscape. It was only that PGS admitted it was weak.

Overall, the Court concluded at [57]:

“Sometimes a case will go badly for one party or the other as the trial proceeds. That is just part of the fluctuating fortunes common in litigation. Where a party chooses to make an offer of compromise under the Rules of shortly before or during trial, then that party takes the risk that the evidence at trial may mean that its offer turns out to be more generous than it had intended. “

So the appeal was dismissed. Case settled.

Would be very interesting to recreate the events over lunch on day 5. No doubt Counsel for PGS was very happy with how the cross-examination went. The team was probably also happy that Leaseplus had abandoned the Termination Amount claim. Then they remembered the offer of compromise….. d’oh!…

Also interesting was that it looks like it was only after PGS applied to withdraw the offer, that it was accepted. Leaseplus did not necessarily have to accept it there and then. It could have run for another few days before deciding on whether to accept. Perhaps it had accepted it over the lunchbreak first and then PGS decided to apply to withdraw it?

In any event, the defendant lost on all fronts. Hindsight is wonderful, especially in litigation, and judgments are never easy in the moment and never easy in the carriage of a trial, but it looks like this:

· PGS will regret having served the offer of compromise the day before the trial started;

· PGS might regret some of the contents of the letter served alongside the offer of compromise. Especially the prose that described the Termination Amount claim in “disparaging terms”. Perhaps if they had written nothing  about it, or no cover letter at all, then they could have been better placed to argue that Leaseplus’ abandonment  of that claim had constituted a change in circumstances that justified withdrawal of the offer;

· PGS will regret having appealed. Probably cost itself another $200k on top of the $525k.

Such is the cut and thrust of litigation. A lesson to any party thinking of serving an offer of compromise at the start of a trial …. caution…. Things just might go better than you think!