Australia: An offer you cannot (or probably should not) refuse: Knowing the difference between Offers of Compromise and Calderbank Offers

Where Court proceedings have already been issued and the parties want to try and resolve the dispute early to avoid legal costs, reduce the uncertainty of the outcome of the proceedings or continue doing business together, an offer of settlement will typically be in the form of either an Offer of Compromise or in a Calderbank offer.

In this article we discuss the characteristics of both types of settlement offers and the strengths and weaknesses of each.

Offer of compromise

An Offer of Compromise is made under the relevant Rules of the Court in which proceedings have commenced. For example, the Supreme Court (General Civil Procedure) Rules 2015 (Rules) will govern Offers of Compromise in proceedings before the Supreme Court of Victoria.

Under the Rules, an Offer of Compromise:

1. Must be in writing;
2. Must contain a statement that it is made according to the Rules;
3. Must state whether the offer is inclusive of costs, or that costs are payable in addition to the settlement sum;
4. Must specify which parties it is made to, if there are multiple parties
5. Must remain open for at least 14 days in the Supreme Court of Victoria and County Court of Victoria or 7 days in the Magistrates' Court of Victoria.
6. Cannot be withdrawn while it is open, unless the Court orders otherwise.

An Offer of Compromise is an important strategic tool in litigation, as there can be significant cost consequences of rejecting a well-placed offer. The Rules specify the cost consequences of rejecting an Offer of Compromise in certain scenarios. Where¹:

Ordinary costs are usually between 40-60% of the costs a party will pay their lawyers, Indemnity costs are usually 60-80% of the costs a party will pay their lawyers.

Given the potential for significant cost consequences, litigants should give careful thought to both making and rejecting an Offer of Compromise in their proceedings.

Another great strength of an Offer of Compromise is the Court's power to make Orders if there is a default in the performance of an offer. For example, the Court may:

1. Make orders giving effect compromise;
2. Stay or dismiss the proceedings if the Plaintiff is in default;
3. Strike out the defence if the Defendant is in default; or
4. Order that a claim that was not subject to the offer should proceed.

There are some circumstances however where an Offer of Compromise may not be the most appropriate form of settlement offer.

The offer can only be for a pecuniary sum either inclusive or exclusive of legal costs in exchange for the proceedings being finalised. Sometimes a more nuanced or non-monetary offer of settlement is required. In these circumstances, a Calderbank offer is likely to be more appropriate.

Calderbank offers

The term 'Calderbank offer' derives from the 1975 English Court of Appeal decision in Calderbank v Calderbank. The Court found that if a party rejects an offer of settlement and is awarded an outcome by the Court that is on less favourable terms than that of the settlement offer, then the rejecting party may have to pay part of the offering parties' legal costs from the time after the offer was made.

In practical terms, a Calderbank offer will take the form of a 'without prejudice' letter sent from one party to the other/s. The letter will state the terms of settlement and should remain open for acceptance for a reasonable period of time.

The principles have been adopted by Victorian courts. In Hazeldene's Chicken Farm Pty Ltd v Victorian Workcover Authority². the Victorian Court of Appeal found that:

1. There is no automatic presumption that a party that rejects a Calderbank offer should pay indemnity costs
2. In determining whether indemnity costs should be paid, the Court should consider whether it was unreasonable to reject the offer in the circumstances of the case.
3. There is no requirement that the offering party set out the reasons why the offer should be accepted, however this is a factor in assessing whether it was unreasonable to reject the offer.

The Court in Hazeldene, helpfully listed some factors which a Court should take into account when determining whether it was unreasonable to reject the offer:

1. The stage of the proceeding at which the offer was received;
2. The time allowed to consider the offer;
3. The extent of the compromise offered;
4. The offeree's prospects of success, assessed at the date of the offer;
5. The clarity with which the terms of the offer are expressed; and
6. Whether the offer foreshadowed an application for indemnity costs if rejected.

Unlike an Offer of Compromise, the Court has far more discretion in determining whether indemnity costs should be payable in the circumstances of each individual case.

There are however significant advantages to a Calderbank offer – it may be open for a shorter or longer period of time, allows far greater flexibility in the terms of settlement and can be withdrawn prior to expiry without leave of the Court.

Takeaways

Strategically a party needs to consider which of these methods of resolution will be most appropriate in the circumstances that they are dealing with in their dispute. Sometimes it is obvious and other times a tactical decision needs to be made to increase the chances of resolving the dispute as early as possible.

Take the time to discuss the pros and cons of each approach so that you select the one that works best for you.

Footnotes

¹ Under the Rules, the Court may, in its discretion, make alternative orders as to costs.

² (No 2) (2005) 13 VR 435

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.