Originally published in Precedent Magazine

In a post-Civil Procedure Act era, parties engaging in litigation are now acutely aware of their obligation to participate in negotiations and exhaust all potential avenues of resolution before a matter can be brought before the judiciary. In this regard, offers of compromise and Calderbank offers can be a litigator's best friend, as their very function is to encourage settlement and provide costs protection for the party brave enough to make the offer.

Traditionally, offers of compromise and Calderbank offers were very distinct, each with their specific advantages. However, in recent years, offers of compromise have been subjected to considerable legislative changes in Victoria. The trend began with amendments to offers of compromise in the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (Supreme Court Rules), which came into effect on 1 September 2013. This was then followed by similar amendments to the County Court Civil Procedure Rules 2008 (Vic) on 7 October 2013. On 1 August 2014, the Magistrates' Court General Civil Procedure (Offers of Compromise Amendments) Rules 2014 (Vic) also fell into line and effected similar amendments. NSW has adopted similar legislative change. The effect of these legislative changes has been to make the two offers near identical in formula and utility, with a few notable differences.

This article explores the current composition of both types of offers, with particular reference to the Supreme Court Rules, and assesses the benefits of each option.

The Court's discretion as to costs

It is important to remember that the Court's'broad, unfettered discretion'[i] when it comes to making costs orders continues to operate regardless of the operation of Calderbank offers or offers of compromise. Indeed, s24 of the Supreme Court Act 1986 (Vic) provides that'the Court has full power to determine by whom and to what extent the costs are to be paid'.

Pursuant to r63.28 of the Supreme Court Rules, the Court has a discretion to decide the basis on which costs shall be taxed. This discretion is to be exercised in accordance with established principles.[ii] The usual assessment of costs is the'standard basis', being costs that are'reasonable in amount and reasonably incurred'. [iii] A costs order on a standard basis is akin to an award of party/party costs against an unsuccessful party at the conclusion of a hearing.

The court can alternatively choose to make an order for costs on an indemnity basis. It is usually made as a punitive measure, and effectively means the court requires the unsuccessful party to pay the other side's solicitor/client costs. An example of a situation where it is appropriate to make an order for costs on an indemnity basis was provided by Forrest J in the recent case of Sellers & Anor v Michael Faltermaier Lawyers [2016] VSC 341. His Honour held that an indemnity basis should be used where a party has commenced proceedings disingenuously.

Despite these broad-ranging powers, the court's capacity to award costs is often guided by the making and rejecting of offers between the parties to resolve the claim prior to proceeding to a hearing. A formal offer of compromise or the existence of a Calderbank offer can have a significant impact on the court's decision to award costs between the parties.

What is an offer of compromise?

An official offer of compromise is a formal document that is prepared in the same format as an ordinary court document, and must comply with stringent guidelines within the respective court rules in order to be considered valid.

(a) Formalities

Order 26 of the Supreme Court Rules sets out the formalities of an offer of compromise. In order to be valid, the offer of comprise must be:

• in writing;
• be prepared in accordance with rr27.02 and 27.04;
• contain a statement to the effect that it is served in accordance with O26; and
• state whether costs are inclusive or exclusive.[iv]

(b) Timing of offers

Rule 26.03 affords parties with a certain amount of flexibility in regards to the time for making offers of compromise. Not only can an offer of compromise be made at any time before judgment, but a party may make more than one offer of compromise. The party can also choose to include a time limit on the other party for responding to the offer; however, that time limit cannot be less than 14 days after the date the offer was made.

(c) Multiple defendants

Where there are multiple defendants and the plaintiff seeks to make an offer of compromise, r26.07(2) provides that the offer must be made to all defendants and is an offer to compromise the claim against all of them. Where there are multiple defendants and one defendant seeks to make an offer of compromise to the plaintiff, the rule provides that the offer must be to compromise the claim against all defendants and that those defendants offer to be jointly, or jointly and severally, liable to the plaintiff for the whole amount of the offer.

(d) Cost consequences of failure to accept

Rule 26.08 sets out the costs consequences of failure to accept an offer of compromise by either the defendant or the plaintiff.

If the plaintiff makes an offer of compromise that is not accepted by the defendant(s) and subsequently obtains a judgment which is no less favourable than the terms of the offer, the plaintiff is entitled to the following costs:

• if the claim was for personal injury or death, costs will be taxed on an indemnity basis; and
• in the case of any other claim, costs will be taxed on a standard basis up until two days after the offer was made, and then on an indemnity basis.

If the defendant makes an offer of compromise that is not accepted by the plaintiff and the plaintiff subsequently obtains a judgment which is no less favourable than the terms of the offer, the plaintiff is entitled to the same costs as outlined above.

If the defendant makes an offer of compromise that is not reasonably accepted by the plaintiff and the claim is then either dismissed or judgment is entered in favour of the defendant, the defendant is entitled to costs on an indemnity basis after the time the offer was made. Before that time, the defendant will still be obliged to pay the plaintiff's costs on a standard basis.

Calderbank offers

The less formal of the two types of offers, Calderbank offers are usually contained within ordinary correspondence between the parties. Although the formalities are far more relaxed, it must still meet certain specific requirements in order for the court to place reliance on the offer when exercising its inherent costs discretion.

(a) Formalities

Essentially, there are no formal requirements associated with a Calderbank offer, with the only real formality being clarity from the communication that this particular correspondence will be relied upon when the question of costs is considered.[v] The courts are loathe to impose specific restrictions on these offers, and usually seek to ensure that they are not'burdened by technicality'.[vi] However, Kemp v Ryan [2012] ACTCA 15 highlighted the importance of drafting a Calderbank offer that is unambiguous as to its terms, including clearly stating what costs are sought.

(b) Genuine offer of compromise

It is important when drafting a Calderbank offer to remember that courts will consider, when making an order for costs on an indemnity basis, whether the offer is a'genuine offer of compromise'.[vii] In Tickell v Trifleska Pty Ltd (1991) 25 NSWLR, Rogers CJ held that the test is:

? whether in the totality of the circumstances, the offer by the plaintiff represented any element of compromise or whether it was merely, yet another, formally stated demand for payment designed simply to trigger the entitlement to payment of costs on an indemnity basis.' (at 355)

(c) Reasonableness in the circumstances

The authority on reasonableness comes from the case of Hazeldene's Chicken Farm Pty Ltd v Victorian Workcover Authority (No. 2) [2005] VSCA 298. In deciding whether to make an order for costs, the Court held that the Court will look to whether the costs are'reasonable in the circumstances'. Further, in deciding whether to make an order for costs on an indemnity basis, for example, the unreasonable refusal of an offer is, by itself, reasonable grounds for indemnity costs.[viii]

Choosing between a Calderbank or offer of compromise

Previously, a solicitor's primary line of enquiry when considering whether to make a Calderbank offer or an offer of compromise focused on the involvement of costs in the offer itself: if the offer was intended to be inclusive of costs, the most appropriate option was a Calderbank offer, as there was no ability to incorporate costs in a formal Offer of Compromise. However, the amendments to the Supreme Court Rules introduced in 2013 reverse this position, with costs now capable of inclusion in formal offers of compromise.

Today, the decision is usually based on the automation of an award of costs if the offeror is ultimately successful in the proceeding. If a party who has served an offer of compromise receives the same or a better outcome at the conclusion of the trial, the court will automatically award costs in favour of the party making the offer. The burden then shifts to the party who rejected the offer to show good grounds as to why such an order should not be made, and why the court should instead exercise their overriding discretion relating to costs.

The price of such certainty is compliance with the strict formalities enunciated in O26' as each element is expressed as being compulsory, failure to comply with a singular requirement under O26 will disqualify it from constituting an offer of compromise.

That does not mean to say that Calderbank offers no longer have a place in a modern litigator's arsenal. Indeed, a document that fails to comply with the regime in O26 could still form a valid Calderbank offer, given the court's hesitation to impose strict conventions upon them.

Of course, the Calderbank process does not provide the party making the offer with the same sense of certainty that an offer of compromise does. If a party making a Calderbank offer is ultimately more successful at the conclusion of the hearing than the terms of their offer, the court has a discretion to award costs against the unsuccessful party.

The court's primary focus when determining whether costs will be awarded to the triumphant litigant following service of a Calderbank offer is the reasonableness of the rejection of the offer by the other party. The court will consider the entire litigious landscape when making this assessment: the stage of the proceeding when the offer was made, the time allowed to consider the offer, the clarity of the terms of the offer itself, the content of any response proffered by the rejecting party, and any other element it considers appropriate. It will be on this basis that the court decides whether an unusual order of costs is warranted in the circumstances, and thus the award is restricted to a case by case basis.

Ultimately, when deployed appropriately, both Offers of Compromise and Calderbank offers can be effective tools to progress and potentially resolve litigation. Although each comes with its own consequences of costs should the matter proceed to trial, parties should never forget that the court continues to hold an unfettered discretion when an application concerns the award of costs.

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[i] Sellers & Anors v Michael Faltermaier Lawyers [2016] VSC 341, [23].

[ii] Re Veall [2016] VSC 232, [21].

[iii] Practice Note 1 of 2013 of the Supreme Court of Victoria:'The New Scale of Costs and Counsel fees'.

[iv] Supreme Court (General Civil Procedure) Rules 2015 (Vic), r26.02.

[v] See, for example, Whitney v Dream Developments Pty Ltd [2013] NSWCA 188.

[vi] For example, see Giller v Procopets (No. 2) [2009] VSCA 72, where an oral offer was held to constitute a Calderbank offer.

[vii] Leichhardt Municipal Council v Green [2004] NSWCA 341.

[viii] Hazeldene's Chicken Farm Pty Ltd v Victorian Workcover Authority (No. 2) [2005] VSCA 298.