One of the key factors that must be taken into account when deciding whether to pursue a claim is the potential legal costs involved. The financial constraints imposed by the global economic downturn mean that the significance of cost considerations will be elevated, but paradoxically, it is during times of economic turbulence that disputes are most likely to arise. It is therefore reassuring to remember that the role of the disputes resolution lawyer is not simply to pursue the litigation or arbitration to a judgment or award, but to seek to resolve the dispute as quickly as possible in a manner that is both satisfactory and cost effective from the client's perspective. To this end, the disputes lawyer has a wide range of commercial and legal tactics at his disposal.  

In this newsletter, we consider a dispute resolution tactic that Japanese companies are likely to find particularly effective when involved in proceedings in common law jurisdictions such as Australia, Canada, England, Singapore and Hong Kong. This is the making of settlement offers that are expressed to be "without prejudice except as to costs". Such offers are widely used in litigation in those jurisdictions and can be a very effective tool to encourage the resolution of a dispute.  

The Principle of Costs Shifting in Litigation in Common Law Jurisdictions  

It is a general rule of litigation in many common law countries that "costs follow the event"1. This means that in addition to having to bear its own costs, the unsuccessful party will, in the ordinary course, be ordered by the court to pay all or a large proportion of the costs incurred by the successful party during the litigation. Such costs include the fees of lawyers and expert witnesses. As any Japanese company that has been involved in litigation will be aware, these costs can be very substantial.  

The rationale behind the general "costs follow the event" rule is that a successful litigant should be entitled to recover the costs that it has incurred in pursuing, or defending, the claim. However, this means that the financial consequences of losing large-scale litigation can be extremely onerous. Even where a party's prospects of success are regarded as being good, the exposure to potential liability for two sets of legal fees in the event of defeat provides an incentive to settle a dispute.  

Costs Shifting and "Without Prejudice Except as to Costs" Offers  

Courts and legislatures of many common law jurisdictions have sought to increase the incentive to settle disputes by imposing a further "costs shifting" rule in circumstances where a settlement offer has been made by one of the parties. The idea behind the rule is that if a party rejects a settlement offer but fails to achieve a better result at trial, then (subject always to the discretion of the court) the party making the offer ("the offeror") may recover from the party to whom the offer is made ("the offeree") all or a significant proportion of any legal costs incurred after the date on which the offer expired. By way of example, if:  

  • Party A has brought a claim for £100 million against Party B;
  • Party B makes an offer of £50 million to settle the dispute; and  
  • Party A rejects this offer and is subsequently awarded only £40 million in damages by the court,  

then, providing the necessary procedural requirements for the offer were satisfied2, the court may order Party A to pay the legal costs incurred by Party B since the date the offer expired (even though Party B is the "losing" party).  

The offers to which this rule is applied in certain common law jurisdictions will nearly always be made on the basis that they are "without prejudice except as to costs". This means that the existence of the offer is not admissible evidence until the dispute has been finally determined but, once the court has reached a decision on the substantive issues of liability and quantum, the offer can be drawn to the attention of the court during its assessment and allocation of the costs between the parties.  

In England, offers made on a "without prejudice except as to costs" basis were recognised and held to be permissible in the decision of the Court of Appeal in connection with a family dispute. The case, Calderbank v Calderbank3, gave rise amongst English lawyers to the expression, a "Calderbank offer". Further, the letter containing the offer came to be referred to as a "Calderbank letter". Such offers quickly became a very effective and widely used method of applying pressure in order to settle disputes or, if a settlement could not be reached, for protecting the position of the offeror in relation to legal costs.  

The decision of the Court of Appeal in Calderbank v Calderbank has largely been superseded by a statutory procedure contained in Part 36 of the Civil Procedure Rules 1998. Part 36 sets out detailed rules relating to the form and content of "Part 36 offers" as well as the consequences of non-acceptance where the offeree fails to achieve a better result at trial. The possible consequences include an order that the offeree must, unless the court considers that it would be unjust, pay the costs of the offeror, together with interest at the rate of 10%, from the date of the expiry of the offer.  

Costs Shifting in International Arbitration  

Calderbank offers have not, to date, been used on a frequent basis in international arbitration. One factor that militates against their use is that arbitral tribunals are usually expected to issue one final award that deals with both the merits of the dispute and the consequent costs position simultaneously (with the result that the Calderbank offer cannot easily be brought to the attention of the tribunal before it makes its decision as to costs4).  

It should be noted though that most sets of international arbitration rules provide arbitral tribunals with a discretion when it comes to dealing with the issue of costs5. In some circumstances therefore, it might be possible to persuade a tribunal to issue a bifurcated award (such that submissions in relation to costs could be made by the parties to the tribunal after an award on the merits has been issued but before the tribunal issues a second award dealing with costs). However, whether such a practice becomes commonplace in international arbitration in the future will depend on the willingness of arbitral tribunals to issue bifurcated awards and, perhaps more importantly, whether the international arbitration institutions themselves embrace the Calderbank concept by expressly providing a framework for such offers in their arbitration rules.  

Conclusions and Practical Considerations  

In the current economic climate, familiarity with the techniques that are capable of facilitating the resolution of disputes is potentially more important than ever before. Japanese companies involved in disputes in common law jurisdictions are likely to find that the tactical use of settlement offers made on a "without prejudice except as to costs" basis is a particularly effective dispute resolution technique.  

When considering whether to make such a settlement offer, the following factors should be borne in mind:  

  • different jurisdictions have different rules as to the way in which offers should be made and it is imperative that these rules are followed;
  • one rule that is very common is that the offer must contain a deadline for acceptance (this is usually the date which is used to calculate the costs consequences of the offer);  
  • timing is very important: the earlier that an offer is made, the greater is the costs exposure for the offeree if it chooses to reject the offer; and  
  • any assessment of the potential implications of an offer will be assisted by an understanding of:
    • the merits of the case being advanced and, where possible, the merits of each individual financial element of the case (thereby enabling an understanding of the likelihood of each of the various possible outcomes to the case occurring); and  
    • the likely legal costs of both parties.