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Withdrawal of Offers of Compromise due to 'Change of Circumstances'

NewsFlash 31 March 2017

On 20 March 2017 a decision was made in the Victorian Supreme Court of Appeal relating to withdrawal of offers of compromise on the basis of a party’s ‘change of circumstances’. The trial judge in Leaseplus Operations Pty Ltd v Project Gas Services Pty Ltd refused leave for Project Gas Services to withdraw its offer of compromise and it sought leave to appeal this decision. Tate, Ferguson and McLeish JJA of the Court of Appeal upheld the trial judge’s decision to refuse leave to withdraw the offer on the basis there was no sufficient ‘change of circumstances’. 

Termination of the Agreement 

The respondent to the appeal, Leaseplus Operations (Leaseplus), had issued proceedings against the applicant, Project Gas Services Pty Ltd (PGS), in the County Court in relation to termination of a master lease agreement the parties had entered into for the supply of a specialist four-wheel drive vehicle. 

Leaseplus sought liquidated damages against PGS in the amount of $1,065,639 (the “Termination Amount”). It alleged that under the terms of the master lease agreement, it was entitled to terminate the agreement and PGS was required to pay the Termination Amount on demand. Leaseplus further pleaded that if it did not recover the Termination Amount, it had suffered loss and damage because PGS had wrongfully repudiated the master lease agreement claiming loss of profits, interest and revenue. It relied on an expert report of Mr Owain Stone. 

Amongst other things, PGS pleaded it had validly terminated the master lease agreement and denied it had wrongly repudiated the agreement. It also pleaded that any loss suffered by Leaseplus should be offset from money received from the sale of the vehicles and that Leaseplus had failed to mitigate its loss. It relied on the report of Mr Campbell Jaski and a joint report of Mr Jaski and Mr Stone (the joint report).  

The joint report dated 11 February 2016 stated the experts agreed on the Termination Amount of $1,060,635.42 but did not agree on the amount of lost profits or the appropriate discount rate that should be applied to the loss of profits claim.  

Offer of Compromise 

An Offer of Compromise (the offer) was served by PGS’s solicitors on the eve of the trial pursuant to Order 26 of the County Court Civil Procedure Rules 2015 for the amount of $525,000 inclusive of GST, costs and interest. The costs component of the amount offered was $25,000.  In the letter attached to the offer, PGS’s solicitors stated that their client’s position was that Leaseplus had no entitlement to the amounts claimed. The letter went on to say that if their client was wrong about that, PGS considered that the Termination Amount claim would fail. It also referred to the lost profits claim and the disparity between the experts and stated this element of the claim was “likely to be less than $450,000”. 

The trial started on 15 February 2016. On 17 February 2016, the CEO of Leaseplus gave evidence about quoting for leases. He mentioned information in Leaseplus’ IT system for calculating the residual value of vehicles; this related to calculation of the Termination Amount. PGS called for this information and it was produced the next day by Leaseplus.  

On 19 February 2016, Leaseplus advised it would not be proceeding with its claim for the Termination Amount under the liquidated damages clause. However, it stated it still wished to continue with its claim for damages for lost profits, interest and revenue. 

Directly after, Mr Stone gave evidence that there was uncertainty regarding some elements of the lost profits claims and the appropriate discount rate to reflect the risk to lost profits. During the lunchtime adjournment, PGS sought to make application for leave to withdraw its Offer of Compromise and asked for a listing from the Court to hear this application. Before the application was listed, Leaseplus accepted the Offer of Compromise. PGS’s application for leave to withdraw was subsequently heard and refused. 

Offers of Compromise

Order 26 of the relevant court Rules provides that offers have to remain open for 14 days and ‘shall not be withdrawn during the time it is open to be accepted, unless the Court otherwise orders’

The decision whether to grant leave to withdraw an offer of compromise is discretionary and it is necessary to demonstrate an error (House v King (1936) HCA 40).  In order to set aside a decision regarding granting leave to withdraw, a party would need to show that a judge made a decision based on: 

  • a wrong legal principle; 
  • a mistake as to the facts, 
  • taking into account an irrelevant matter;
  • failing to take into account a relevant matter.

Alternatively, it would have to be shown that the decision was so unreasonable or plainly unjust that a Court could infer there was a failure to exercise the discretion properly.

When a judge is considering whether to allow a party to withdraw an offer of compromise, he/she will have to consider whether there been a sufficient ‘change in circumstances’ since the offer was made to allow the offeror to withdraw the offer.  A change in circumstances could include new evidence that is or may well be significant to the result of the case or a change in the law. Examples of matters held not to constitute a sufficient change in circumstances include advice from new counsel that the offer is worth more than the value of the claim or belated realisation of a good defence to the claim.  

Whether there has been a sufficient change in circumstances since an offer was made to warrant the grant of leave to withdraw it must be determined on the facts of the case in question. There are no definitive rules. The grant of leave is discretionary. 

In this case, the trial judge concluded that the claim for the Termination Amount was weak and manifest to be seen even before the proceeding was commenced. PGS was alive to those difficulties and weaknesses and therefore no significant change had occurred. The Court therefore refused to grant leave for the offer to be withdrawn. 

Court of Appeal 

The Court of Appeal upheld the decision of the trial judge and stated there was no basis for interfering with the trial judge’s exercise of discretion. The Court of Appeal held that “where a party chooses to make an offer of compromise under the Rules shortly before or during the 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.”

Important takeaway from this case - unhelpful (or helpful depending on which side you are on) evidence from a witness during trial does not amount to a sufficient change in circumstances to withdraw an offer of compromise.  An Offer of Compromise needs to carefully be made, cognisant of the fact that once made under the relevant rules of Court, it cannot be withdrawn lightly.


Maria Kerhoulas, Partner
Melbourne

Joni Burns, Associate
Melbourne

NewsFlash 31 March 2017
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