Getting maximum impact from your settlement offer 

In a three part series, this first article provides a general overview of Calderbank offers and discusses the impact of timing on the effectiveness of that offer.

---

What you need to know

• "Calderbank" settlement offers can result in a costs order in your favour even if you lose – or a bigger costs order if you win. That makes them valuable in their own right and also useful in encouraging settlement.

• But the chances of an offer having that effect depend on a number of things, including when it is made.

• We discuss practical tips such as how and when to make an offer to increase the chance of it leading to a costs order (and conversely, when it may be less risky to reject an offer).

---

The upside that offers can bring even if you don't settle

If you make a settlement offer that your opponent rejects, then that might result in a special costs order in your favour regardless of who actually wins. The starting point is that there might be cost consequences where the offer would have given the recipient the same or better outcome than they ultimately achieved.

Those cost consequences could be:

• a successful party who made the offer getting costs on an indemnity basis;

• an unsuccessful party who made the offer not having to pay the other side's costs, and potentially even getting payment of their own costs.

The result is that offers can serve two important purposes:

• First, managing your own legal cost risks – ie getting some "costs protection".

• Secondly, increasing your opponent's cost risk – and as a result encouraging settlement either then or later (as the cost risk becomes more acute).

Offers of compromise v Calderbank offers

The simplest – and generally most effective – way to make a settlement offer is an Offer of Compromise under the court rules. That is because they lead to a presumption of a costs order if the other side does not end up doing better than the offer.

But formal Offers of Compromise are restrictive and cannot be made in all situations – and that is where "Calderbank" offers are particularly important.

When will a special costs order be made?

It is ultimately a matter of discretion whether to make a costs order as a result of a Calderbank offer, and the court applies an overarching principle that "costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs".

There are two key questions that the courts generally look at:

• First, was there a genuine offer of comprise?

• Second, was it unreasonable for the recipient not to accept it?

It is the second question that is most often the difficult one – in particular because of the need to show "unreasonableness".

The factors that play in to reasonableness

Whether it was unreasonable to reject an offer is considered objectively, and assessed based on what was known at the time of the offer.

Key factors the Court considers which include an element of timing include:

• The stage of the proceeding at which the offer was received.

• The prospects of success of the party who received the offer - assessed as at the date of the offer.

• The time allowed to consider the offer.

Each of the above demonstrates that it could be reasonable to reject an offer at one point in the proceedings – but not at another. But there is no magic formula in working this out - the Court's general guidance is that "it is necessary to look at all the circumstances surrounding the making of the offer".

Troubling times

There are four periods that require particular attention:

• before commencement or early in the proceedings;

• before service of evidence;

• when the case changes;

• when there is an appeal.

Offers before commencement or early in the proceeding

An offer before commencement or early in the proceedings gives the greatest potential benefit as there are more costs that could be the subject of a special costs order.

But it is also the most difficult time to make an offer effective, particularly for plaintiffs. The NSW Court of Appeal has said "greater sympathy may be accorded a defendant who receives an offer early in proceedings where there has been no reasonable opportunity for it to assess its questions of liability or its likely exposure in damages". This is even more acute where an offer is made before commencement of proceedings, where an offeree will not have the benefit of an offeror's pleading setting out the key facts and basis for their case.

There are two things that can be particularly helpful here:

• First, if the relevant evidence and information about the case is within the knowledge of the recipient so that they are able to assess their position. This might be the case when a defendant is making an offer to a plaintiff.

• Secondly, providing information about the case with the offer.

Offers before service of evidence

There is a similar difficulty here – it might be considered unfair to impose a costs order on a party that does not have the benefit of having been able to consider the other party's evidence.

While this might be a reason why no costs order is made, that won't necessarily be the case. The Court has said:

"The notion that Calderbank offers can safely be ignored without costs consequences just because the offeror’s case is not ready for trial or all pretrial requirements as to service of reports or supply of particulars have not been complied with cannot be right: much will depend on a commonsense approach to the case and the particular circumstances at the time of the offer."

Change in an offeror's case

If your case theory significantly changes after making an offer, then a costs order might not be made (although there have been cases where orders have been made despite the case becoming "very different"). A key consideration will be whether the case the plaintiff/defendant succeeded on was known at the time of the offer.

It is therefore worth thinking about making an additional offer after material changes to the case being run.

Appeals

Parties may experience difficulty seeking indemnity costs during appellate proceedings where the original offer was made in the lower court.

Whilst an appellate Court may have regard to an offer made in a lower Court, the general weight of authority is that "if a party intends to seek an order for indemnity costs of appeal proceedings, a fresh offer of compromise ought to be made in relation to the appeal proceedings". The Court has given a number of justifications for this, including: (a) "appeal costs should primarily be determined by the issues in and the outcome of the appeal"; (b) parties on appeal will have the benefit of the primary judge's reasons for judgment where factual findings have been made and legal principles discussed; and (c) the offer may not have been open for acceptance when the appeal was instituted or before significant costs had been incurred".

However, if a party makes an offer during the first instance proceedings and an appeal and is successful on appeal, it may be awarded indemnity costs for the entire period from the date of the first offer to the conclusion of the appeal (ie including the part of the appeal proceedings before an offer was made in the appeal).

Practical tips

We will discuss the practical steps that should be taken when drafting offers and rejection letters in Part 3 of this series. However, when it comes to timing:

• The key issue for offers early in proceedings or before the service of evidence is the uncertainty that the other party may have in understanding and assessing the offeror's case. An offer will be more effective if it includes more content devoted to explaining the offeror's case and evidence. Particular emphasis should be placed on objective evidence (e.g. contemporaneous documents) than subjective evidence (e.g. a particular person's recollection). Similarly, when rejecting an offer at that time, that letter should emphasise where possible the uncertain nature of the proceeding or evidence.

• In circumstances where an offeree may be considering the offeror's case and evidence for the first time, sufficient time should be given to allow that party to properly analyse those matters. Generally 28 days should be enough, but it will depend on the nature of the case. It can be helpful to invite the other party to tell you if they need more time to consider the offer.

• The timing and frequency of offers made will depend on the case strategy adopted for a particular case. Making offers early and often might increase your prospects of an effective Calderbank offer, but may also reduce the benefits a party can negotiate as part of that process. However, where there is a change in an offeror's case since the making of an offer, that will be one situation where unless there are compelling reasons otherwise, a renewed offer should be given (even if on the same terms).

• Where appeal proceedings are commenced, a new offer should be made. The sooner the offer is made the greater the chances of obtaining indemnity costs for the whole period from the first offer (assuming a better outcome was achieved).

 

Authors: Matt Youssef, Senior Associate; and Ian Bolster, Partner.