Offers of compromise and Calderbank offers 

Costs ordinarily follow the event: the successful party recovers costs from the unsuccessful one, on the ordinary or party–party basis. Offers to settle disturb that default. They shift the costs risk onto a party who refuses a reasonable offer and then does no better at trial, and they are the principal pressure toward settlement in civil litigation.

There are two mechanisms, and confusing them is a common and expensive error.

Formal offers of compromise

A formal offer is made under the rules of court — in New South Wales, pt 20 div 4 of the Uniform Civil Procedure Rules 2005.¹ Its defining feature is that the costs consequences are prescribed rather than discretionary — if the offer is not accepted and the offeror does better at trial, the specified consequence follows unless the court orders otherwise.

The rules impose strict requirements. Typically the offer must:

• be in writing and identify the proceeding and the claim to which it relates;
• be exclusive of costs, so that costs are dealt with by the rules rather than the offer;
• remain open for a prescribed period, which varies with how close the trial is; and
• not be expressed to be without prejudice, since the whole point is that it will be disclosed on the question of costs.

Non-compliance is not fatal to the offer's usefulness, but it takes the offer outside the rules. A defective formal offer can still operate as a Calderbank offer, which is a weaker position because the consequences become discretionary.

The usual consequence where a plaintiff makes an offer and obtains a judgment as favourable or more favourable is indemnity costs from the day after the offer. Where a defendant makes an offer and the plaintiff recovers no more than the offer, the plaintiff typically recovers costs to the date of the offer and pays the defendant's costs on an indemnity basis thereafter.

Calderbank offers

A Calderbank offer is an ordinary written offer marked "without prejudice save as to costs". It is privileged for the purposes of liability but may be disclosed to the court once judgment has been given, on the question of costs.

Its advantage is flexibility. It need not comply with the rules, it may be inclusive of costs, it may be open for any period, and it may propose terms a formal offer could not — a non-monetary term, an apology, a walk-away.

Its disadvantage is that the costs consequence is discretionary. Beating a Calderbank offer does not entitle the offeror to indemnity costs. The court asks whether the offeree's rejection was unreasonable, and only then considers a special costs order.

Assessing unreasonableness

The factors courts weigh include:

• the stage of the proceeding when the offer was made, and what the offeree knew at that point;
• the time allowed for consideration — an offer open for a few hours before a hearing is unlikely to found an order;
• the extent of the compromise offered. An offer that is a token discount, or a demand for capitulation, offers nothing to compromise;
• the offeree's prospects as they reasonably appeared at the time, judged without hindsight; and
• whether the offer was clearly expressed, so that the offeree could evaluate it.

Practical points

An offer should state plainly which mechanism it invokes. A document headed "offer of compromise" that does not comply with the rules, and is not marked without prejudice save as to costs, may achieve nothing at all.

Offers may be made at any stage and may be repeated as the case develops. An offer that is rejected and later improved does not lose its effect for the earlier period.

Acceptance of a formal offer generally results in judgment or a consent order in the terms of the offer, with costs governed by the rules.

Applying this in a problem question

1. Classify the offer first — formal, defective formal, or Calderbank.
2. For a formal offer, check compliance against the specific rule, including exclusivity of costs and the period it remained open.
3. Compare the judgment with the offer precisely, remembering that interest and the treatment of costs can decide whether the offer was bettered.
4. For a Calderbank offer, argue unreasonableness by reference to the factors above rather than asserting it.
5. State the costs order sought, with the date from which the changed basis runs.

Self-check

• Have I identified which mechanism the offer engages?
• Have I checked the offer against the actual rule, not a general description?
• Have I compared judgment to offer on a like-for-like basis?
• Have I treated the Calderbank consequence as discretionary rather than automatic?