A formal offer to settle can often be a useful tool to assist parties to litigation in understanding each other’s theory of the case. They can also provide incentives towards settlement in the form of potential cost consequences for rejecting a formal offer to settle. However, they must be used strategically in order to be effective.
The purpose behind formal offers to settle is to inspire parties to make their best efforts to compromise. They encourage plaintiffs to settle at the low end of what they expect to recover at trial, and defendants to settle at the high end of what they believe the plaintiff will be entitled to at a trial. The legislative intent behind the formal offer is to close the gap between parties. Parties that have had the opportunity to settle and choose not to do so run the “full risk of adverse cost consequences” that accompany a formal offer.
A formal offer to settle refers to an offer to settle made pursuant to Rule 9-1 of the BC Supreme Court Civil Rules. The offer must specify that it is being made subject to Rule 9-1, and follow the specific requirements of the rule. It can then be considered by the court in relation to costs after all other issues in the proceeding have been determined.
It is important to remember that costs consequences will not automatically attach where a party “beats” its formal offer. Rather, in a proceeding where a formal offer to settle has been made, the court has the discretion to:
- deprive a party of costs they would otherwise be entitled to after the date the offer was delivered;
- award a party double costs from the date of the offer;
- award party costs they would not have been entitled to but for the offer; or
- award costs in the usual course.
Typically, plaintiff offerors will recover double costs of their proceedings after the date they serve their reasonable offers, and defendants will recover costs after the date of their reasonable offers, while the plaintiffs will not be awarded costs after that date, even if the judgment is in their favour.
In exercising its discretion, the court may consider:
- whether the offer was one that ought reasonably to have been accepted;
- the relationship between the terms of the settlement offered and the final judgment of the court;
- the relative financial circumstances of the parties; and
- any other factor the court considers appropriate.
For the best chance of the court exercising its discretion to order costs consequences as a result of a formal offer, the offer should be clear, unambiguous, and stated in plain language. It must be unconditional; for example, it must not be contingent on the actions of others or on the outcome of future events. The terms of the offer should not extend beyond the scope of the litigation. Ideally, the offer should come at a time when all relevant documents have been disclosed, and the parties are aware of the evidence on each side. The court may judge the reasonableness of the decision not to accept an offer on the amount of information available to the offeree at the time the offer was made. While the offer need not be left open indefinitely, it must be left open long enough to give the offeree a reasonable amount of time to consider it.
Formal offers can be the most useful when opposing parties have very different theories of a case, and their positions on damages are very different. This is especially true in large, complex litigation, such as construction litigation. They can be less helpful in smaller cases where positions on damages are not very different. They can also be unhelpful in cases where credibility is the issue. Several decisions have stated that it is reasonable to reject an offer where it is unclear which party’s version of events will be accepted. Similarly, where there are contentious issues of law involved, courts are more likely to decide it was reasonable for a party to reject a formal offer in favour of having the question of law decided. A nuisance offer, or an offer to waive costs, may not attract cost consequences, unless it can truly be said that the plaintiff’s claim was groundless, frivolous, had no real prospect of succeeding. Where a claim is meritorious but uncertain, the court will be inclined to find that it was not unreasonable for the plaintiff to reject a low offer.
Cost consequences are meant to be a deterrent for unreasonable litigation conduct, not a penalty for wrongfully guessing the outcome of a proceeding. Accordingly, for a formal offer to be effective, it should represent a true compromise in the parties’ positions and illustrate the concept of putting one’s best foot forward in an attempt to settle. While it can be tempting to only view a dispute from one perspective, formal offers are a way of encouraging parties to expand their viewpoints and look at both sides of the story.