Offers of compromise are an important tool in litigation. Aside from ensuring some form of success, or avoiding total defeat, one of the primary purposes of a party making an offer of compromise is to avoid incurring further legal costs. Where settlement efforts are unsuccessful, a court will usually consider the nature and extent of any offers of compromise that were made by the parties in considering how to exercise its discretion in relation to what costs order to make (if any).
Another purpose of making an offer of compromise is therefore to attract an award of costs on an indemnity basis. Costs awarded on an indemnity basis are intended to provide a more complete indemnity to a party than costs awarded on the ordinary basis.
What is a “walk away” offer?
A “walk away” offer is an offer by a defendant that the proceedings be dismissed, or that there be verdict and judgment for the defendant, with no order as to costs (or an order that each party bear their own costs). In this context, “walk away” effectively means the plaintiff choosing to leave the dispute.
In New South Wales, the concept of walk-away offers has been given express legislative recognition under Rule 20.26(2) of the Uniform Civil Procedure Rules 2005 (UCPR). This rule provides that “An offer must be exclusive of costs, except where it states that it is a verdict for the defendant and that the parties are to bear their own costs.”
The courts have justified walk-away offers by explaining that a defendant, unlike a plaintiff, does not have the option of discounting its optimum return by way of compromise. In fact, “the only option for a defendant is not an attractive one; to ‘buy off’ the claim by offering to pay unmeritorious claimants a sum of money to discontinue the litigation”: Leichhardt Municipal Council v Green  NSWCA 341 at . Therefore, a defendant’s offer that both parties walk away from the proceedings may be considered a valid offer of compromise if it entails the saving of substantial costs.
Costs consequences can arise for a plaintiff who rejects a defendant’s walk away offer of compromise, if the result obtained by the defendant is no less favourable to the defendant than the terms of the offer. See Rule 42.15A of the UCPR. Accordingly, where a walk-away offer is made to the plaintiff and the defendant ultimately recovers judgment on the claim, this result will clearly be more favourable to the defendant than the terms of the original offer, and the plaintiff will be exposed to the risk of an adverse costs order, including on an indemnity basis.
The validity of a walk-away offer will turn upon whether the offer represented a genuine compromise in the specific facts and circumstances of the case. In Regency Media Pty Ltd v AAV Australia Pty Ltd  NSWCA 368 the Court held at  -  that where an element of compromise is absent, the offer will be considered “an invitation to surrender, rather than any form of commercial compromise…The offer can be accurately described as derisory”. Thus an offer that has no real element of compromise, and which is merely designed to trigger the costs sanctions, will not be treated as a valid offer of compromise (Leichhardt Municipal Council v Green  NSWCA 341).
In Hancock v Arnold (No 2)  NSWCA 19 the Court noted at  that the epithet “genuine” “probably adds little to the concept of compromise. Indeed, it may be distracting if it suggests that some assessment is required of the subjective intentions of the offeror”.
To establish that a walk away offer involved a compromise will require the offeror to demonstrate a saving in costs of some substance. In Dean v Stockland Property Management Pty Ltd (No 2)  NSWCA 141, the appellant made an offer of compromise a few days after she had filed a notice of appeal. The substance of the offer was that the verdict and judgment in the Court below be set aside and that there be a re-trial, with the costs of the first trial to follow the event of the second trial. The appellant was ultimately successful on appeal, meaning that she was prima facie entitled to an order that the respondent pay her costs of the appeal. In the circumstances, the Court of Appeal held that the appellant’s offer to compromise her entitlement to costs if she succeeded on appeal was of “financial substance”, and therefore, the offer had a real element of compromise.
What is ultimately required in a case where a walk-away offer has been made is that the offer contains some real benefit to a plaintiff, and something more than total capitulation (Bennette v Cohen (No 2)  NSWCA 162 at ).
Townsend v Townsend (No 2)  NSWCA 145
The respondent conveyed an offer of compromise to the appellant that the parties agree to the discontinuance or dismissal of the appeal upon the basis that each party pay their own costs of the appeal. The offer was open for acceptance for 28 days. The appellant rejected the respondent’s offer.
The Court held that, at the date of the offer of compromise, “the respondent's costs of the appeal must have been minimal, and he would not have anticipated any significant costs within the next 28 days….The offer had no real element of compromise, but invited capitulation by the appellant.” Therefore, the appellant had not acted unreasonably in declining the respondent’s offer and the Court declined to make an order that the respondent’s costs be on an indemnity basis.
Leichhardt Municipal Council v Green  NSWCA 341
In this case, the walk-away offer had been made by the defendant five weeks prior to trial, after lengthy pre-trial proceedings had taken place, and the plaintiff rejected the offer. The court considered whether the defendant’s offer that judgement be entered in the defendant’s favour in exchange for each party paying its own costs constituted a genuine compromise.
The Court held that even though the defendant “was not really compromising its position at all — it maintained it was not liable and that the law clearly justified the rightness of its cause”, the defendant’s position “was made in a bona fide attitude designed to reach settlement”, which accorded with the policy of the law in encouraging early termination of litigation (at ). At the time that the offer was made, significant costs had been incurred by both parties. The Court explained that, even though the offer involved capitulation by the plaintiff, this offer was not unreasonable, and, in the circumstances, it was difficult to conceive what the defendant could have otherwise done as an affirmative step towards ending litigation.
Nonetheless, it did not follow that costs sanctions should follow as a matter of course (at ).
The Court concluded (at ) that there was no persuasive policy reason or legal principle which entitled the defendant to costs sanctions on any basis different to that provided for by the Rules. Under the Rules, indemnity costs are only awarded in exceptional circumstances. The defendant’s application for indemnity costs was ultimately dismissed with costs.
Therefore, even though a court may find that a walk-away offer constitutes a genuine offer of compromise this does not, in itself, entitle the offeror to indemnity costs. The court must, as a second step, consider whether there are exceptional circumstances which justify its discretion to order indemnity costs in favour of the defendant.
In circumstances where a plaintiff rejects a defendant’s valid walk away offer, and the defendant obtains a result no less favourable to the defendant than the terms of the offer, the defendant may be entitled to an order against the plaintiff for the defendant’s costs in respect of the claim. The court may also order ordinary costs or indemnity costs. In order to obtain an indemnity costs order against the plaintiff, the defendant must demonstrate that there are exceptional circumstances which justify the making of such an order by the court.
A walk away offer sits on the end of the spectrum of compromise. It provides defendants with an opportunity to attempt to settle litigation without requiring the defendant to pay unmeritorious claimants a sum of money to discontinue proceedings. Regardless of how diminutive a walk away offer of settlement may appear at first glance, it may trigger costs consequences (and in particular an indemnity costs order) if it involves a real element of compromise in the specific facts and circumstances of the case.