To settle or not to settle

Soggy school books and bad behaviour has led to a double win for the Ministry of Education.
A leaking high school in Botany, Auckland was the subject of lengthy trial in 2018 between the Ministry of Education and the builder Hawkins (more properly known as H Construction North Island Limited, which is now in liquidation).
After a 4-week trial the Court’s decision was a victory for the Ministry – an award against Hawkins for $13.5M, the amount that the Court said was necessary to dry out the text books and fix the leaky school that Hawkins had built.
But the victory, sadly, was brief. Ten days after the Court released its decision, Hawkins was placed in receivership and within a month it went into liquidation. The $13.5M judgment became just a number on a Court judgment, unable to be recovered. The Ministry did not have the money for repairs and had no party to recover its extensive legal and expert costs from.
Action was needed. The Ministry sought its costs of $1.48M from McConnell Limited and its directors, which sat at the top of the Hawkins’ chain of companies. Although McConnell was never a defendant in the claim, as the “head honcho” of the Hawkins’ group of companies it had guaranteed Hawkins’ trial costs and was involved in Hawkins’ trial strategy.

What does the Court decision on costs mean for defendants?

The costs’ decision reminds defendants to think carefully before going to trial about whether they should reject a settlement offer from a plaintiff. And if they do reject it, they need to think carefully about whether they ought to counter offer and if so, for how much.
The Ministry sought $1.48M in costs from McConnell. McConnell argued that even if an award could be made against it, as a non-party, a reasonable costs’ award would be $970,000.
The Judge disagreed and awarded the Ministry $1.1M in costs to be paid by McConnell. The Judge got to the figure of $1.1M by increasing the costs by 50% on all steps taken by the Ministry after the first settlement offer was made by the Ministry and rejected by Hawkins.
According to the Judge, Hawkins had, before trial, unreasonably rejected a settlement offer from the Ministry. The Ministry had, 3 times prior to the trial beginning, offered to settle for $7.1M. Hawkins declined all 3 offers and instead made settlement offers, its highest being $2.1M – when in fact at trial Hawkins was found liable for almost $13.5M.
The Judge said Hawkins should have appreciated that it was likely to be found liable at trial given its own experts had warned it would likely be found liable for “virtually every element of the claim”. Hawkins did not like the advice it received and did not act on it, to its peril. In addition, Hawkins had applied unsuccessfully to adjourn the trial, placing undue pressure on the Ministry.
Even though McConnell was not a party to the claim, it was liable to pay the $1.1M . The Judge said it had authorised Hawkins to defend the claim, it was complicit in Hawkins using its insolvency as a settlement weapon and it had guaranteed Hawkins’ legal fees.

A call out to all defendants – be strategic

Our best advice is to be proactive and face the claim head on. When the claim arrives on your desk pull it apart, look at it from every angle, be objective, get experts involved early, understand your best and worst case scenarios at trial.
Once the claim is ripped apart and the parameters of your liability are established, think about settlement sooner rather than later. What information do you need to assess liability/quantum? When is the optimum time to settle? Should you protect your position on costs by making a written settlement offer and if so, when?
If a party rejects a written settlement offer and the outcome for that party at trial is worse than the settlement offered, the court can award increased costs, as in this case, against the party that unreasonably refused to settle. If you receive a written settlement offer, consider it carefully in light of your potential exposure at trial. Would rejecting it expose you to a costs award if you lose at trial? Consider whether you ought to make a written settlement offer, and if you do, make sure the offer fairly reflects your exposure at trial.

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