How to make a settlement offer

A carefully prepared settlement offer can create an environment that puts both parties under pressure to settle a legal dispute. In particular, the rejection of certain types of settlement offers may mean that the offeree will be ordered to pay more of your legal costs if you are successful.

Settlement offers

Settlement offers not only have the potential to save the time and expense of litigation, but also give the parties a chance to consider commercial solutions that would not be available from a court order. The relief available from a court order is limited, whereas parties can use settlement offers to explore alternative commercial resolutions.

Certain types of settlement offers, namely Calderbank[1] offers and Offers of Compromise, are particularly valuable in litigation matters. This is because the rejection of a Calderbank offer or an Offer of Compromise may mean that the offeror will be entitled to a higher award of legal costs if successful in the lawsuit.

Costs

In Australia, the general rule is that the successful party in a litigation is entitled to a payment for their legal costs. Undoubtedly, considering the potential legal costs in a lawsuit is a paramount consideration of the parties since it is not unusual for legal costs to exceed the claim.

Awards of legal costs are assessed on what is referred to as an ordinary basis or ‘party/party’ costs, unless the court orders otherwise. Costs assessed on an ordinary basis do not usually cover the successful party’s full legal expenses. It is usually around 70% of the actual legal costs. However, the rejection of a Calderbank offer or an Offer of Compromise may mean that the successful party is entitled to indemnity costs which is a higher costs award more closely reflecting actual legal costs.

For example, a plaintiff who has a claim seeking damages for $1,000,000 serves an Offer of Compromise on the defendant to settle for $500,000. The defendant rejects the Offer of Compromise and the plaintiff is ultimately awarded damages by the court of $600,000. Because the plaintiff was successful in the court action, the plaintiff is now entitled to both the $600,000 award of damages + it’s legal costs. Let’s say, the plaintiff’s legal costs were $500,000. Under the ordinary basis, the plaintiff would likely recieve around 70% or $350,000 for legal costs. However, since the plaintiff made an Offer of Compromise (which offer was less than the damages award), the plaintiff is entitled to 100% of their legal costs from date of the Offer of Compromise.

Both the Calderbank offer and an Offer of Compromise encourage the making of reasonable settlement offers during litigation by rewarding the party making a settlement offer with a possible higher costs award and, likewise, forcing the recipient to carefully weigh the value of the settlement offer.

Calderbank offer

The failure to accept a Calderbank offer will be considered by the courts in deciding whether to order indemnity costs to the successful party. However, not all settlement offers will be Calderbank offers. A Calderbank offer should:

• Be presented as a letter that uses the term “Without prejudice save as to costs”.

• Set out the terms of the settlement clearly and be capable of acceptance.

• Explain why the offer is reasonable in the circumstances (having regard to the evidence or the law). It cannot simply be a demand to surrender.

• Allow the offeree a reasonable period in which to consider the offer. It is a safe practice to use the time periods in the Rules[2].

• Specify that the offer is made in accordance with the principles in Calderbank and foreshadow that if the offer is not accepted and the offeror obtains a better result in the litigation, the offeror will rely on the letter to apply for an indemnity costs order against the offeree.

Even if you put forward a Calderbank offer that meets these conditions, it will not necessarily mean an entitlement to a higher costs award if the defendant can show that the rejection of the offer was reasonable. The court has discretion in deciding whether to award indemnity costs and relevant factors in deciding whether the rejection of a Calderbank offer is reasonable will include:

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

• The time allowed to the offeree to consider the offer;

• The terms of the settlement offer; and

• The offeree’s prospects of success, which are assessed as at the date of the offer.

Offer of Compromise

An alternative to a Calderbank offer is an Offer of Compromise, also referred to as an offer under the “Rules” because it must be made in accordance with the rules of the relevant court in which the court action is bought. The advantage of presenting an Offer of Compromise over a Calderbank offer is that the court must automatically pay the offerer indemnity costs if the offeror is successful. With a Calderbank offer, the court has discretion and is only required to consider the settlement offer in deciding costs.

 Because an Offer of Compromise must be made in acordance with the court rules, it is rigid in respect of its content and form. In general an Offer of Compromise must:

• Be made in writing.

• Identify the claim, or part of the claim, to which it relates.

• Cannot include the party’s legal costs (unless there is an exception in the court rules).

• Must specify the orders for the disposal of the proceedings (for example for the dismissal of the case).

• State that it is made under Rules.

 If your settlement offer does not follow the Rules, then it will not be considered a valid Offer of Compromise (although it may still qualify as a Calderbank offer).

Timing

Both a Calderbank offer and an Offer of Compromise can be made at any time during proceedings and frequently more than one Calderbank offer and/or Offer of Compromise is made throughout proceedings.

Since the indemnity costs award only applies to legal costs incurred from the date of service of the Calderbank offer or Offer of Compromise, there is incentive for both parties to make these types of settlement offers early in the litigation. However, making a Calderbank offer or an Offer of Compromise too early may mean that it is reasonable for the party receiving the offer to reject the same. This is because not all the facts may have been presented for a party to be able to consider whether or not the offer is reasonable.

Accordingly, it is prudent to make Calderbank offers and Offers of Compromise at the conclusion of the evidence phase of proceedings.

Terms

What should your settlement offer contain? An ordinary settlement offer can contain a broad range of possible commercial resolutions. However, both Calderbank offers and Offers of Compromise are limited in possible settlement terms. 

The content of an Offer of Compromise must follow the rules for the relevant court in which the action is bought. In the Federal Court of Australia, it would be put in accordance Federal Court Rules 2011 (Cth), r 25.01-25.05 and set out in Form 45.

A Calderbank settlement offer is presented as a letter and provides more flexibility than an Offer to Compromise; you can include any settlement terms that you think may be appropriate, including a payment as to your legal costs. However, the settlement terms should be commensurate with a possible outcome from the proceedings and must be capable of being accepted. The court will consider it reasonable to reject a settlement offer if it contains complex terms that aren’t closely related to the relief sought.

Final say

Both Calderbank offers and Offers of Compromise are valuable litigation tools that help to minimise exposure to legal costs and put pressure on both parties to resolve proceedings prior to a hearing. The recipient of a Calderbank offer or an Offer of Compromise must weigh it up carefully: otherwise they may be ordered to pay higher legal costs. As a litigant you will be afforded some relief as to legal costs if you are successful and the other side has been resistant to settlement negotiations.

However, both Calderbank offers and Offers of Compromise must be carefully timed and well-written.

If the Offer of Compromise is not given in accordance with the Rules it will not be valid. While the conditions for a Calderbank offer are more flexible than an offer under the Rules, it must still meet the requirements for being “reasonable”. If it is reasonable for the offeree to reject a Calderbank offer, for example because the proposed settlement terms are unlikely to be achieved as a result of the litigation action or because the recipient did not yet have all the facts of the case, then the offeror will not be entitled to an indemnity costs award.

 If you have any questions about how to settle your legal dispute, please contact the team at Burns IP.

[1] A Calderbank offer is derived from an old English Court of Appeal case Calderbank v Calderbank. In that case, the wife made a reasonable offer to settle the dispute. The husband rejected the offer, and the wife ended up with a better result at court. The judge considered that the husband was unreasonable by rejecting the offer.

[2] Each court will have a set of rules that will govern the correct form for making an Offer of Compromise. Under the Federal Court of Australia, an Offer of Compromise would be made under Federal Court Rules 2011 (Cth), r 25.01-05 and you would use Form 45.