Legal costs are a legitimate business concern for any organisation particularly those involved in litigation. One only needs to recall the C7 litigation a decade ago to realise the enormity of legal costs incurred by mostly unwilling participants.1 The C7 case involved litigation between the Seven Network and virtually every major media organisation in Australia. It involved allegations of anti-competitive conduct by Seven in the granting of television rights to Seven’s rivals. In that piece of ill-fated litigation Justice Sackville of the Federal Court estimated legal costs incurred by the parties to be in the region of $200 million.
In this series of newsletters David Shearman of Moulis Legal comments on the legal mechanisms available to parties to prevent exposure to exorbitant legal costs when involved in litigation.
For many years the Calderbank offer has served as an invaluable litigation tool in the early resolution of litigation. The concept of a Calderbank is that where a reasonable ‘without prejudice save as to costs’ offer has been made by a party during the course of litigation, and it has not been accepted, and the non-accepting party receives a less favourable judgment, there should be an adverse cost consequence to the party not accepting the offer. This is typically by way of an indemnity costs order. In a jurisdiction like Australia where an unsuccessful party is likely to pay the opponents’ costs as well as its own, the parties have a commercially sound incentive to bring litigation to a prompt conclusion.
The basic requirements
There are certain form and substance requirements that must be adhered to before a court will uphold the offer as valid and effective. The Calderbank offer must:
- be precise, clear and unambiguous in the terms the offer is making;
- state a reasonable timeframe for acceptance of the offer;
- make reference to the offer being made in accordance with the principles outlined in Calderbank v Calderbank2;
- state that costs will be separate to the principal sum being offered;
- be clearly marked ‘without prejudice save as to costs’;
- demonstrate a genuine compromise of the offeror’s position coupled with an unreasonable rejection by the offeree; and
- state that an indemnity costs order will be sought and provide a summary of the reasons why the offer should be accepted.
The offer must be clear, precise and unambiguous
A Calderbank offer must be carefully drafted to ensure that its terms are unambiguously clear and precise and capable of being accepted. As was stated in Grabavac v Hart,3 the offer must:
leave the offeree in no reasonable doubt as to the nature and extent of what is being offered.
Or as Tadgell JA in Grabavac remarked:4
It would ordinarily, I should think, be pre-eminently necessary to consider whether the terms of the offer were unambiguously clear. It would be necessary also to consider whether the attention of the offeree has also been fairly drawn to the purpose for which, and intention with which, the offer has been made.
An offer must also be capable of being accepted in clear and precise terms and within a range of possible outcomes clearly envisaged by the parties. For example, in Kemp v Ryan,5 the ACT Supreme Court found that a provision in an offer used to calculate future interest payments under an instalment plan was unclear because it was susceptible to a number of possible interpretations. On appeal the ACT Court of Appeal agreed, finding the interest provision to be ambiguous, confusing and capable of at least two different interpretations. On this basis the offer did not constitute a valid Calderbank offer and indemnity costs were not awarded.
A reasonable time frame for acceptance must be provided
The party making the offer must provide a reasonable time frame for the other party to consider the offer and take legal advice before deciding whether or not to accept the offer. Whether a time frame is reasonable will depend on many factors including the complexity of the case, at what stage of the proceedings the offer is made and for how long the offer is left open for acceptance.
In Meldov v Bank of Queensland (No 2)6 indemnity costs were ordered against Meldov for its failure to accept a genuine offer of compromise made by the Bank of Queensland 12 months prior to the court’s determination and with the offer being left open for acceptance for a period of 12 days. The court considered that Meldov had ample time to consider and accept the offer and its failure to do so was unreasonable in the circumstances. Conversely, however, in Edwards Madigan Torillo Briggs Pty Ltd v Stack,7 an offer left open for 14 days and made early in the proceedings was held to have afforded the offeree insufficient time to properly consider the offer and to respond to it.8 It would appear from the judgment that the court was heavily influenced by the fact that the litigation was complex and the issues in dispute had not been adequately defined.9
In MGICA Pty Ltd v Kenny & Good Pty Ltd,10 Lindgren J of the Federal Court described a Calderbank offer left open for one day as “an extreme case”.11 Similarly, in Ghuniam v Bart (No 2)12 the NSW Court of Appeal described a period of three hours afforded to an offeree to accept an offer on the first day of the trial as a “period so brief it might be regarded as derisory”.
The offer is made by reference to the principles outlined in Calderbank v Calderbank
A Calderbank offer must clearly make reference to the fact that the offer is being made pursuant to the principles enunciated in Calderbank v Calderbank. It is also preferable to make reference to the fact that the decision has been affirmed by the Australian courts. Reference to the decision in Calderbank is required as the name in itself implies that an offer is being made and there is a strong presumption that indemnity costs may be awarded. For example, a paragraph such as the wording suggested below should be included in the letter of offer:
This offer is made in accordance with the principles stated in Calderbank v Calderbank  3 All ER 333 as affirmed by the courts in GlaxoSmithKline (Aust) Pty Ltd v Reckitt Benckiser (Aust) Pty Ltd (No 3)  FCA 183, Leichhardt Municipal Council v Green  NSWCA 341 and SMEC Testing v Campbelltown City Council  NSWCA 323. This offer will remain open for a period of 28 days from the date of this letter at which time it will lapse and the matter will proceed to hearing. In the event that this offer is not accepted we will rely on this letter in any application for indemnity costs.
The offer should state that costs will be separate to the principal sum being offered
While offers of compromise under the Uniform Civil Procedure Rules require that any offer must be exclusive of costs, a line of judicial reasoning has evolved over the past 10 years that Calderbank offers may be inclusive of costs. Calderbank offers that are inclusive of costs can, however, lead to confusion and best practice dictates that Calderbank offers should always be made exclusive of costs. As Greenwood J noted in Perry v Comcare:13
[The] authorities recognise the importance of isolating the term as to costs in a way which is clear and capable of proper assessment independently of the principal claim, as part of a Calderbank letter. The failure to make the content of the term as to costs transparently clear is generally fatal to qualifying a “without prejudice” letter (reserved as to costs) as one which should influence the discretion in the result.
The NSW Court of Appeal affirmed the view that Calderbank offers should be expressed on a ‘plus costs’ basis in Elite Protective Personnel Pty Ltd v Salmon14 but despite a long line of authority the majority (Beazley P and Basten JA with McColl JA dissenting) stated in that decision that an offer inclusive of costs may, in appropriate circumstances, give rise to an order for indemnity costs. As Beazley P commented in Elite:
I do not agree that an offer which is inclusive of costs cannot ever be the basis upon which the court exercises its discretion to award indemnity costs. The award of indemnity costs involves the exercise of [the court’s] discretion. The application of an overarching ‘rule’ or ‘principle’ that only offers exclusive of costs could ground a favourable exercise of the court’s discretion and operate as a fetter on that discretion by introducing a rigidity to the making of so called Calderbank offers which has no basis in principle.
The difficulty in making an all-inclusive offer is that the court may not be able to readily discern whether or not it was reasonable for the offeree to accept the offer. Further, it may be difficult for the court to assess whether the offer was equal to or better than the result received at a contested hearing. For these reasons Calderbank offers should always drafted on a costs-exclusive basis.
Offer to be clearly marked “without prejudice save as to costs”
At common law, communications between two parties that are marked ‘without prejudice’ are generally inadmissible as evidence in court proceedings.15 They are aimed at allowing the parties to negotiate freely without the fear of such confidential negotiations coming to the courts’ attention. There are some exceptions and these relate primarily to the issue of costs.
This common law exception relating to costs is derived from the High Court decision in Field v Commissioner for Railways (NSW).16 The exception has now been codified in State and Territory statute pursuant to section 131(2)(h) of the Evidence Act 1995 (Cth) and now allows for ‘without prejudice’ correspondence to be admissible where “the communication or document is relevant to determining liability for costs”.17 Without prejudice Calderbank offers are therefore admissible in determining liability for costs at the conclusion of a hearing.
The offer must demonstrate a genuine element of compromise coupled with an unreasonable rejection of the offer
Giles J in Hobartville Stud v Union Insurance Co18 explained that compromise normally entails giving something away:
Compromise connotes that a party gives something away. A plaintiff with a strong case, or a plaintiff with the 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.
Whether a court will find that an offer conveys a genuine element compromise is an evaluative judgment made on a case-by-case basis. Offers demonstrating an element of compromise have been found in the following cases:
- In Amaca Pty Ltd v Hicks (No 2)19 a 5 percent discount on the verdict sought was found to have a real element of compromise. Amaca had made an offer of $340,000 plus costs with the plaintiff receiving $354,423 plus costs at the hearing.
- In Maitland Hospital v Fisher (No 2)20 a case in which a plaintiff, responding to an appeal, offered to accept $6,090 less than her judgment sum of $206,090 (equating to a 2.5 percent discount). The court noted that the diminution was “real and not trivial or contemptuous.”
It is the task of the court to consider whether the particular offer in the circumstances represents a genuine attempt to reach a negotiated settlement, rather than being a trigger to invoke a costs sanction.21 In assessing whether an offer was unreasonably refused, and warranting an indemnity costs order, a non-exhaustive list of relevant factors was suggested by the Victorian Court of Appeal in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2).22 These factors included:
- the stage of the proceedings at which the offer was received;
- the time allowed to the offeree to consider the offer;
- the extent of the compromise made;
- the offeree’s prospects of success, assessed at the date the offer was made;
- the clarity with which the terms of the offer were expressed; and
- whether the offer foreshadowed an application for indemnity costs in the event the offer was rejected.
The timing of the offer and the subjective understanding by the offeree of the matter on liability and quantum issues is therefore an important consideration for determination. Calderbank offers made early in the proceedings have received cautious judicial treatment particularly where the matter has not been thoroughly particularised and the absence of expert reports does not allow the offeree to assess the strengths and weaknesses of the case. As Basten JA commented in Elite Protective Personnel v Salmon:23
Greater sympathy may be afforded a defendant who receives an offer early in the proceedings where there has been no reasonable opportunity for it to assess questions of liability or its likely exposure to costs. However, where a defendant which receives an offer of settlement in circumstances where it reasonably requires more time to consider its position would no doubt be advised to respond to that effect.
The time allowed for an offeree to consider an offer is a more vexed question and will depend on all of the circumstances of the case and discretionary issues. In Young v Young24, the English Court of Appeal stated:
Calderbank offers do not bite until the recipient has had reasonable opportunity to consider the proposed compromise.
The courts will also consider whether there has been a significant or material change in the nature of the case presented and the manner in which the evidence emerges at trial. For example, a successful cross claim brought after the expiration of a Calderbank offer was held by the NSW Court of Appeal to be a significant change in circumstances not warranting the granting of an indemnity costs order.25
The offer must state that the offeror will rely on the letter in relation to the question of indemnity costs and provide reasons prompting acceptance of the offer
It is essential that it is clearly relayed to the offeree that the cost advantage sought will be an indemnity costs order: Danidale Pty Ltd v Abigroup Contractors Pty Ltd.26 In Huntsman Chemical Company Australia Ltd v International Pools Australia Ltd,27 Kirby P state that there are compelling reasons why an interested party should be put on notice as to the risk of an indemnity costs order being made. His Honour stated:
It is a possibility that, in some circumstances, a special costs order will be made, including for indemnity costs. If such order is to be made, it would be preferable that it should follow due and timely warning by the successful party to the unsuccessful that indemnity costs will be sought. Properly proved to the court, it affords the occasion for making the special order in full knowledge that the risk has been appreciated and the party has pressed on regardless.
It some circumstances, where the costs advantage has not been clearly stated, the courts have been prepared to refer to surrounding circumstances, such as legal representation, to support an application for indemnity costs.28
A prudent offeror should properly particularise with specificity the reasons why a Calderbank offer should be accepted. In Wenzel v Australian Stock exchange Ltd,29 Sundberg J stated that a Calderbank offer “must descend to particularity”. Similarly, in NMFM Properties Pty Ltd v Citibank Ltd (No 2)30 Lindgren J stated, albeit with some reservation:
The requirements of ‘sufficient particularity’ and ‘inevitability of failure’ are important. In their absence, it would be open to the parties to put their respective cases to the opposing party urging it to recognise the merit of what is put in the hope that it ultimately finds favour with the court, an indemnity costs order will follow. If this were correct, one might ask rhetorically, why write a letter as distinct from relying on the pleadings?
The degree of particularity into which an offeror must descend will ultimately depend on the circumstances of the case, the nature and complexity of the relevant legal principles applicable to the dispute and the timing of the Calderbank offer.
A Calderbank offer is an important litigation tool and a useful costs saving tactic. When deployed appropriately it can progress and potentially resolve costly litigation and force the parties to undertake a commercial and legal evaluation of their position. To be effective, however, a Calderbank offer must be drafted in prescribed terms and format and convey a genuine element of compromise. Temporal considerations are also important in terms of at what stage of the litigation the offer is made and for how long the offer is to remain open. Despite the majority view adopted in Elite Protective Personnel v Salmon, best practice and caution dictate that Calderbank offers should be made on an exclusive of costs basis. Litigants should nevertheless be aware that whether indemnity costs are awarded shall be determined within the court’s inherent costs jurisdiction alone.