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There is an old Chinese idiom of “Drawing a snake and adding legs.” It tells of a snake drawing competition and the artist who was ahead decided to add legs to the snake he was drawing, thinking this addition would guarantee victory. However, on the contrary he lost, as his drawing (now having legs) was no longer of a snake.

This is a cautionary tale against the adding of unnecessary things for the sake of being creative, as it risks very negative consequences. The purpose of Offers of Compromise, in addition to the primary purpose of attempting to resolve a claim, is to attract the recovery of costs on an indemnity basis where a judgment exceeds – is greater in the case of a Plaintiff or is less in the case of a Defendant –the terms of the offer. The practice is that offers of compromise are usually kept simple and expressed alternatively as a Calderbank offer, and this is to ensure the offer of compromise is effective for indemnity cost purposes.

The recent decision of Farmer v Broadspectrum (Australia) Pty Ltd (No.3) [2024] NSWSC 53, by Garling J, is a decision with respect to whether offers of compromise were valid and would attract indemnity cost. The particular offers of compromise made by the Plaintiff in this case were creative and was found non-complaint and incapable of attracting indemnity costs, and reads of a cautionary tale to practitioners against such creativity.

This decision is with respect to a personal injury case where the Plaintiff was successful against both the First Defendant and the Second Defendant. The Plaintiff had served at separate times on the First Defendant and Second Defendant offers of compromise.

The Plaintiff had initially served on the First Defendant only, prior to the joining of the Second Defendant, an offer of compromise with the following terms:

The plaintiff offers to compromise the plaintiff’s claim on the following terms:

  1. [Broadspectrum] to pay the plaintiff the sum of $700,000 plus costs.
  2. The plaintiff’s costs are to be paid clear of any previous costs orders made.
  3. The above offer is clear of any payments made by Fullerton Health Pty Ltd.

The costs ordered at the proposed order (2) referred to a past court order that the Plaintiff is to pay the First Defendant for their costs thrown away by a vacation of a trial date by the Plaintiff (c.f. [22]).

Subsequently, after the joining of the Second Defendant, the Plaintiff served an offer of compromise separately to each Defendant with the following terms:

The plaintiff offers to compromise the plaintiff’s claim on the following terms:

  1. [The Defendants] to pay the plaintiff the sum of $900,000.
  2. The plaintiff’s costs are to be paid clear of any previous costs orders made.
  3. The above offer is clear of any payments made by Fullerton

These offers were not accepted, and the court ultimately found in favour of the Plaintiff with damages assessed at $1,086,100. As the amount of these damages exceed the notional amount contained in each offer of compromise, the Plaintiff sought recovery of costs against each Defendant on an indemnity basis – on and after the date of the first offer with respect First Defendant, and on and after the date of the second offer with respect to the Second Defendant.

However, the court determined the two offers of compromise were not compliant and incapable of attracting indemnity costs. There were several key considerations:

  1. The offers were not expressed alternatively as Calderbank offers (at [69] – [71]).
  2. As they weren’t Calderbank offers they needed to comply with UCPR r20.26, which the court found they did not.
  3. The offers contained a peculiarly worded cost term: “The plaintiff’s costs are to be paid clear of any previous costs orders made” which his Honour found opaque and unclear (at [75] to [78]) and was not described with sufficient precision to comply with UCPR r20.26
  4. Another fact was that the offer contained another peculiarly worded term: “The above offer is clear of any payments made by Fullerton Health Pty Ltd” which his Honour found vague and imprecise, additionally the court had no evidence of the amounts supposedly paid by Fullerton Health Pty Ltd, and it was also decided that this term did not comply with UCPR r20.26 (at [79] to [84]).

More fundamentally his Honour determined that the offers failed as an offer (at [85]) as it had not dealt with the previously made cost order as against the Plaintiff in favour of the First Defendant:

neither of the Offers identified “… the proposed orders for the disposal of the claim …” as required by r 20.26(a)(ii) of the UCPR… when a costs order had been made, but the plaintiff’s offer was that he not have to pay the costs which had been ordered, then a further order of the Court was required to vacate the first costs order. That is because the first costs order stands until set aside or vacated. The costs term did not suggest any costs order, but rather related to the money amount which was sought.

His Honour concludes (at [86]):

An Offer of Compromise requires the formality of identification of the proposed orders (r 20.26(a)(ii) of the UCPR) because once an offer is accepted “… any party to the compromise may apply for judgment to be entered accordingly”: see r 20.27(3) of the UCPR. Such application does not require notice to be given to the other party, nor does it require the other party’s consent. For this reason, at least, clarity of expression and formality of the orders offered, are essential. Neither [offer] had either the necessary clarity or essential formality, required for compliance with r 20.26 of the UCPR.

In other words, these offers of compromise were not able to be made as a final order by the court to finalise the litigated proceedings, it was unclear and left matters inconclusive with respect to the court, and as such was not compliant with the UCPR and is an invalid Offer of Compromise.

The application of the Plaintiff was accordingly dismissed and in a cruel twist of fate the Plaintiff was ordered to pay the Defendants’ costs with respect to this application.

There are a few takeaways from this decision for practitioners:

  1. Offers of Compromise must be in terms that are clearly able to entered as a final order to a legal proceeding to wholly dispose of the claim;
  2. Avoid being too creative with the terms of an Offer of Compromise, as that risks losing clarity, and where possible use terms which are standard and precedent; and
  3. Always make sure Offers of Compromise are in the alternative made as Calderbank Offers.

    Matthew Lo is Special Counsel at Kerin Benson Lawyers