Reviewing the Principles of Calderbank Offers of Compromise

Lessons from Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) [2011] NSWCA 344.

Costs are of primary concern to all litigants. This concern deepens as a matter nears the hearing date and deepens further if a notice of intention to appeal is filed.

In the recent decision of Miwa Pty Ltd v Siantan Properties Pty Ltd (No 2) [2011] NSWCA 344, the NSW Court of Appeal had the opportunity to clarify whether an offer made in accordance with the principles of Calderbank v Calderbank [1976] Fam 93 (a Calderbank offer) prior to a hearing at first instance would trigger the indemnity costs provisions on appeal, if the party who made the offer (the offeror) received a more favourable judgment on appeal.

In this case the offeror (the appellant) had been unsuccessful in its claim at first instance in the Supreme Court of NSW, yet successful in the Court of Appeal with an order for costs on the ordinary basis for the proceedings in both Courts. The appellant sought to vary the order for costs to claim indemnity costs from the date of a Calderbank offer served six days prior to the hearing at first instance. The Court of Appeal dismissed the motion and the judgment of Basten JA serves as a review of:

  1. the principles of a Calderbank Offer;
  2. the operation of Calderbank offers;
  3. the Court’s attitude to indemnity costs on appeal; and
  4. Calderbank offers as distinct from offers of compromise in accordance with Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r.20.26 (a formal offer of compromise).

Principles of a Calderbank Offer

The Court has wide discretion regarding costs.  The general rule is that costs are awarded to the successful party in litigation and are assessed on the ordinary basis, unless the Court otherwise orders.  If a Calderbank offer was made, the offeror may rely on the offer to seek that the Court exercise its discretion to order that costs be assessed on a different basis.

If a Calderbank offer was made and the offeror later seeks to claim indemnity costs from the date the offer was made, the court’s approach in exercising its discretion is to consider the following two questions:

  1. was there a genuine offer of compromise; and
  2. was it unreasonable for the party to who the offer is made (the offeree) not to accept it.

The offeror bears the onus of proof in relation to these considerations.

In assessing if the offer was genuine, the subjective intentions of the offeror are irrelevant.  Basten JA cited with approval the words of Giles J in Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368:

“A plaintiff with a strong case, or a plaintiff with a firm belief in the strength of its case, is perfectly entitled to discount its claim by only a dollar, but it does not in any real sense give anything away, and I do not think that it can claim to have placed itself in a more favourable position in relation to costs unless it does so.”

In relation to whether the offeree unreasonably failed to accept the offer, Basten JA confirms the Court will consider the following:

1. the value of the offer at the time it was made;

2. relevant factors as defined in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298:

“(a) the stage of the proceeding at which the offer was received;
(b) the time allowed to the offeree to consider the offer;
(c) the extent of the compromise offered;
(d) the offeree’s prospects of success, assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed;
(f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree’s rejecting it.

The Court rejected the suggestion that an offer need set out with specificity the bases upon which it was said that the offeree should accept the compromise proffered. The relevance of such material would depend upon the extent to which the issues had already been canvassed, for example by way of pre-litigation correspondence, and whether there were circumstances with which the offeror might reasonably expect the offeree not to be conversant. In some circumstances greater leniency may be accorded to a defendant offeree at an early stage of proceedings, than to a plaintiff offeree. 

3. whether the offeror has discharged their onus of proof.

Calderbank offers should provide a deadline that is reasonable given the factual and legal issues. This consideration is crucial early in proceedings as the Court adopts a more lenient attitude towards a defendant offeree rejecting an offer prior to receiving particulars of a claim sufficient to assess an offer to compromise.  In assessing the value of the offer at the time it was made, Basten JA notes it “should not entail a detailed investigation into the state of preparation or knowledge of the offeree as at the date of the offer”.

Basten JA approvingly notes decisions in which the Court has chided offerors for serving offers with a cursory or “derisory” settlement figure given the amount in dispute and the likelihood of success.  In Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 the Court refused to grant indemnity costs and made scathing remarks regarding the offeror’s apparent disinterest in commercially evaluating the case.  The grounds for the Court’s approach are to maintain the utility of offers to compromise, to promote settlement and prevent the parties from relying on futile costs applications.

In Miwa Pty Ltd v Siantan Properties the facts were that a $1000 offer exclusive of costs was offered by the lessee plaintiff (the appellant) to the lessor defendant (the respondent) in return for delivery up of a $45,000 bank guarantee. This is a case in which the amount at issue was $45,000: the appellant was either liable for that amount (via the call on the bank guarantee) or it was not; there was no intermediate position.  The appellant served a Calderbank offer without an express deadline, without explicitly evaluating the parties’ cases, with no reference to costs and no reference to the possibility of an appeal. Basten JA determined the offer was open for a “reasonable period” by implication (without elaborating on how long a reasonable period is).  It was inferred that there was no need for an express evaluation of the case because the Calderbank offer was served six days before the trial hearing. The period was regarded as long enough for the offeree to consider the offer because there were no significant factual issues in dispute.

Basten JA concluded the respondent’s rejection of the offer was not unreasonable because the offer required the offeree to return the bank guarantee in return for no real benefit other than the nominal amount offered, in circumstances where the respondent had reasonable prospects of success and went on to succeed at first instance.  The respondent’s claim was $45,000 at its highest. The appellant offered $1,000 with no contribution to the appellant’s costs. In his assessment of the relative value of the offer, Basten JA noted that although the payment for success was low, the considerable legal costs incurred to the date of the offer were financially significant. 

The Operation of Calderbank Offers

Interestingly, Basten JA provides a rationale upon which Calderbank offers operate to change the position of the offeror in relation to costs. In his view serving a Calderbank offer alters the nature of the event referred to in the general rule that costs follow the event and provides the Court with a basis on which to exercise its discretion under Civil Procedure Act 2005 (NSW) s.98 (CPA).  The event is the offeree’s rejection of a Calderbank offer which is ultimately found to be more favourable than the judgment. From the date of this event, the offeree is the unsuccessful party on the issue of costs.

The Court’s Attitude to Indemnity Costs on Appeal

In Miwa Pty Ltd v Siantan Properties, the Calderbank offer referred to settling “the proceedings” without clarifying whether this extended to an appeal. The appellant made no further offer and did not renew this offer after the judgment in the Supreme Court was delivered. The Court confirmed it would not generally award indemnity costs in these circumstances because:

  1. where the offer has expired and not been renewed, the offeree is entitled to say its success at first instance would be a significant event, such as to render the rejection of the offer reasonable;
  2. the offeror failed to renew its Calderbank offer and test whether the offeree would reject it unreasonably; and
  3. the offer in the Court at first instance to settle “the proceedings” was reasonably understood as referring to the proceedings on foot in the Supreme Court, not a possible appeal.

In this case, Basten JA inferred that the plaintiff offeror served a Calderbank offer to avoid any reference to costs, which would be required under a formal offer of compromise.  The Calderbank offer “made no express reference to costs. However, it may be inferred from the reference to settling “the proceedings” that each party was to bear its own costs.”  The court found that the defendant offeree’s failure to accept the offer was not unreasonable for two reasons:

  1. The offer was nominal without any obligation to pay the costs of the proceedings to that point and so involved capitulation by the defendant;
  2. The defendant’s prospects of success, as assessed at the date of the offer were reasonable, despite the fact that the defendant ultimately failed on appeal.

As a result the plaintiff offeror would not permitted to rely on the offer to obtain a more favourable costs order, even if it had been hypothetically renewed before the appeal.

A comparison of Calderbank offers and formal Offers of Compromise

In both formal offers of compromise and Calderbank offers, the plaintiff can access indemnity costs if the judgement is as  or more favourable to it.  The defendant can access indemnity costs or a more favourable costs order if it obtains a judgement that is less favourable to the plaintiff or, as or more favourable to the defendant.  A formal offer of compromise is more advantageous than a Calderbank offer due to the presumptive entitlement that a formal offer secures indemnity costs from the day following the date the offer was made, if the offeror achieves a more favourable result. This is not the case if a Calderbank offer is served in the same circumstances. Basten JA reminds lawyers using Calderbank offers that “there is no presumption that an offeree who does not accept an offer and does not obtain a judgment more favourable than the offer will necessarily pay indemnity costs from the date of the offer.”  In addition, if a defendant offeror serves a Calderbank offer and the judgment is less favourable to the plaintiff, the defendant may seek a more favourable costs order.

To be effective, formal offers of compromise must be exclusive of costs  and open for a period of 28 days (or for a reasonable period if made less than two months before a hearing).   To rely upon a formal offer of compromise on appeal, the offer must be made prior to the appeal in accordance with Rules 51.47 and 51.48 , in which case the same presumptive entitlements apply. Rule 51.49  recognises that the court may have regard to a formal offer or a Calderbank offer made in the court below but the authorities show that indemnity costs will likely not be awarded if the offers were made prior to the initial hearing only . The prudent approach for parties seeking to secure indemnity costs is to make a further formal offer of compromise or a fresh Calderbank offer if the matter is appealed. Campbell JA explains in Monie v The Commonwealth (No 2) [2008] NSWCA 15 at [71]:

“An offer of compromise made under court rules at first instance can be a relevant factor to consider on the question of costs on appeal, even if that offer has no statutory effect under the rules on the costs of an appeal: Ettingshausen v Australian Consolidated Press Ltd (1995) 38 NSWLR 404 at 410 per Gleeson CJ and Priestley JA; Fotheringham v Fotheringham (No 2) [1999] NSWCA 21; (1999) 46 NSWLR 194 at [33], 205 per Stein JA. There is no reason of principle why any different situation should apply concerning a Calderbank offer made at first instance. Such an offer operates as one factor able to be taken into account in exercise of the court’s discretion: Estate of Virgona v De Lautour (No 2) [2007] NSWCA 323 at [10]. However, the failure to renew for the purpose of an appeal a Calderbank offer that had been made for the purpose of trial is well recognised as a factor that tends against an award of indemnity costs for the appeal.”

Lessons for advising clients

Miwa Pty Ltd v Siantan Properties emphasises that lawyers assisting their clients to secure indemnity costs in cases where the matter is appealed, must counsel their client to either renew their Calderbank offer or make a fresh offer. When litigation lawyers advise clients to serve Calderbank offers it is prudent to reiterate to the client that the offer must be genuine and pitched so it is unreasonable for the offeree not to accept it. Ultimately the differential between the offer and the judgment may influence the Court in assessing what has been given up by the offeror, so lawyers serving Calderbank offers should assess the likely award and whether the differential is significant to the offeree. Basten JA reiterates that the Court takes a dim view of inappropriate offers to capitulate and calls for the parties to undertake a commercial and legal evaluation of their claim when serving offers to compromise.  A commercial evaluation considers the commercial benefit of resolving the proceeding, such as the anticipated costs of pursuing litigation and certainty of the outcome. Litigation lawyers should bear in mind the factors considered by the Court to determine whether the offeree’s rejection of a Calderbank offer was reasonable, and contemplate whether a formal offer of compromise is more appropriate on the facts and the relevant stage of litigation.

The case confirms the advantage of serving a formal offer of compromise rather than a Calderbank offer in that formal offers of compromise afford the offeror the presumptive entitlement to indemnity costs if the judgment is more favourable to the offeror. The case also confirms that Calderbank offers must be renewed or made afresh to secure indemnity costs. The same applies to formal offers of compromise, with the only difference being that once made, the presumptive entitlement applies in the case of formal offers.

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