‘Without prejudice’ settlement offers provide an opportunity for parties to resolve their disputes without the need for a trial. More importantly, a well-executed offer may provide the party making the offer (the ‘offeror’) with costs protection if the other party (the ‘offeree’) rejects the offer and does not obtain a better outcome than the offer at trial. In such a case, the offeree may be required to pay part of the offeror’s costs on an indemnity basis. Written offers come in one of two forms: offers of compromise and Calderbank offers.
Offers of compromise
Offers of compromise are made in accordance with the court’s rules. In New South Wales, r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (‘UCPR’) sets out the requirements for a valid offer. An offer made under this rule must:
- be in writing;
- identify the claim(s) to which it relates;
- specify the orders for the disposal of the proceedings (e.g dismissal or a judgment for a certain sum); and
- state that it is made under r 20.26 of the UCPR.
Other requirements may apply depending on the nature of the proceeding. Generally, the offer must be exclusive of costs unless it is proposed, for example, that judgment be entered for the defendant with no order as to costs. The offer must also be open for at least 28 days unless it is made within two months of trial (in which case it must be open for a reasonable period). Under UCPR r 42.13A(2), if an offer which is accepted involves an judgment for the plaintiff, the ordinary rule is that the plaintiff is entitled to its costs.
The UCPR prescribes the cost consequences where an offer has been rejected and the offeree has failed to obtain a better result than the offer at trial:
|Offeror||Offeree||Offer compared with outcome||Costs up to and including date of offer||Costs from the day after the offer is made||UCPR|
|Plaintiff||Defendant||Plaintiff obtains an order or judgment no less favourable to Plaintiff than the offer||Defendant pays Plaintiff’s costs on ordinary basis||Defendant pays Plaintiff’s costs on indemnity basis||42.14|
|Defendant||Plaintiff||Plaintiff obtains order or judgment no more favourable than the offer||Defendant pays Plaintiff’s costs on ordinary basis||Plaintiff pays Defendant’s costs on indemnity basis||42.15|
|Defendant||Plaintiff||Defendant obtains order or judgment no less favourable than the offer||Plaintiff pays Defendant’s costs on ordinary basis||Plaintiff pays Defendant’s costs on indemnity basis||42.15A|
The cost consequences described in the table above apply even when the offer is made on or after the first day of trial, except that indemnity costs are payable from 11am the day after the offer was made.
While the cost consequences in the rules are prescriptive, the court retains some degree of discretion. The court will need to be satisfied the offer involved a ‘genuine compromise’. For example, an offer by the plaintiff to settle a $100,000 claim for $99,999 is likely to be viewed by the court merely as an attempt to trigger the indemnity cost provisions of the UCPR rather than a genuine proposal to resolve the dispute (Tickell v Trifleska Pty Ltd (1991) 25 NSWLR 353 at ). The court might therefore decline to apply the indemnity costs provisions of the UCPR depending on the strength of the plaintiff’s case.
Calderbank offers derive their name from Calderbank v Calderbank  All ER 333 (‘Calderbank’). A Calderbank offer is made in a letter, marked ‘without prejudice except as to costs’, setting out the terms of a proposed settlement. Calderbank offers provide offerors with greater flexibility than an offer of compromise. For example, the offer can be inclusive of costs and be open for a short period of time. There are no prescribed rules. However, these variables also mean that there is less certainty around whether the court will order indemnity costs where the offer is rejected. Among other things, those variables can make it challenging for a court to compare whether the offer is better or worse than the judgment. Further, if an offer is open for a very short period without good reason, a court is unlikely to consider the offer to be reasonable.
In determining whether to make an indemnity costs order, the critical question for the court is whether it was ‘unreasonable’ for the offeree to reject the offer. The court’s discretion is guided by the following principles in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2)  VSCA 298; (2005) 13 VR 435:
- the stage of the proceeding at which the offer was received;
- the time allowed to the offeree to consider the offer;
- the extent of compromise in the offer;
- the offeree’s prospects of success, which are assessed at the date of the offer;
- 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 (at ).
With these principles in mind, a Calderbank offer should:
- set out the terms of the compromise clearly;
- explain why the offer is reasonable in the circumstances (e.g. having regard to the evidence or the law);
- allow the offeree a reasonable period in which to consider offer; and
- specify that the offer is made in accordance with the principles in Calderbank and foreshadow that if the offer is not accepted and the offeror obtains a better result in the litigation, the offeror will rely on the letter to apply for an indemnity costs order against the offeree.