Costs in legal disputes can quickly escalate. There is benefit in all parties seeking to compromise their differences, rather than agitate their dispute through the Court system.
The Courts recognise a number of initiatives which promote early settlement of claims. In this article, we consider the use of Calderbank settlement offers, settlement offers made under the rules of the Court and how the use of these instruments can provide costs protection in litigation.
Costs – the general principles
There is a longstanding principle that the costs of a legal dispute “follow the event”. What this means is that a successful party to a proceedings will receive a costs order in their favour, so that the losing party has to pay not only their own legal costs but also the successful party’s legal costs.
The costs awarded by a Court will generally be on what is called an ordinary basis or party/party basis, being only those costs actually incurred by a party which were necessary or proper for the attainment of justice. Party/party costs generally fall within the range of 60-75% of the actual legal costs incurred.
A Court can also award costs on an indemnity basis, which allows the successful party to recover all of its reasonable costs incurred in respect of the dispute. Indemnity costs can amount up to 95% of the actual costs incurred.
The usual order of a Court is that costs are awarded on a party/party basis, unless there are special circumstances which warrant the order of costs on an indemnity basis. One such circumstance is when a party makes an offer to settle, their offer is rejected and they ultimately obtain a judgment that is at least as favourable as their offer. In this way, settlement offers are important tools which can provide parties with some costs protection when involved in legal proceedings.
A Calderbank offer is named after the decision in Calderbank v Calderbank  2 ALL ER 333. It is a settlement offer which is a written, made in full and final settlement of a claim, inclusive of any claim for legal costs and made on a “without prejudice” basis.
If the offer is rejected and the party which made the offer can show that, given the final result, it was unreasonable for the other party to reject their offer, it can seek an order that its costs be paid on an indemnity basis from the date of the offer to the end of the litigation.
In considering an award of costs, the Court will take into account whether:
- the terms of the offer were clear, precise and certain;
- the offer represented a genuine compromise and attempt to settle the litigation;
- the offer stated the intention of the offeror to bring the offer to the Court’s attention (by stating that the offer was made in accordance with the principles set out in Calderbank v Calderbank); and
- rejection of the offer was reasonable in the circumstances.
A Calderbank offer provides a flexible approach to settling a dispute and can be made before proceedings have commenced.
Offers of compromise
A party can also make a more formal offer to settle proceedings under the rules of the Court. The rules are designed to encourage early settlement through the use of offers of compromise and relatively certain costs penalties follow depending on the outcome of proceedings.
The rules of the Court set out formal requirements which must be followed when making an offer of compromise. It is critical to adhere to the rules when making an offer of compromise, as a failure to comply with the requirements can invalidate the offer for the purposes of costs. We recommend that you examine the court rules of the state in which you are located to understand the relevant requirements or have your solicitor explain them to you.
Making an offer to settle a claim can be an effective tool in facilitating an early resolution of a dispute as well as providing a form of costs protection. In making a settlement offer, you should consider a reasonable offer, which takes into account the risks of your case and the legal costs which might be incurred if the matter were to proceed to final hearing.
If you or someone you know wants more information or needs help or advice, please contact us on 02 9790 7000 or email [email protected].