The Price of Refusal – costs consequences of unreasonably rejecting Calderbank offers

/in

A Calderbank offer is a special type of settlement offer made in an attempt to resolve anticipated or commenced litigation and derives the name from the case that first established the relevant principles, Calderbank v Calderbank [1975] All ER 333.  It is special in that a valid Calderbank offer may:

  • if you are the successful party in litigation, increase the percentage of legal costs you recover from the unsuccessful party; or
  • if you are the unsuccessful party in litigation, decrease the percentage of legal costs you pay the successful party.

A properly advised litigant will be factoring legal costs into their overall litigation strategy and will use Calderbank offers to strengthen their position by either recovering more costs or paying less costs.  This “costs protection” element differentiates Calderbank offers from standard offers to negotiate or settle litigation.  It also forces a party receiving an offer to give careful thought to the risk involved in not accepting the offer given the potential consequences for legal costs recoverable or payable.[i]

The principles are encouraged by the courts and tribunals because they facilitate the efficient and economic disposal of litigation in accordance with modern case management principles which are directed towards avoiding waste and delay in litigation generally.[ii]

Costs of the proceedings

The costs of the proceedings are typically dealt with after there has been judgment on the substantive issues of the case.  This is because the practical result or outcome of the judgment often determines which party is responsible to pay costs.  This is known as the guiding principle that “costs follow the event” with the event being the practical result or outcome e.g. the plaintiff succeeded in their claim for damages for breach of contract.[iii]

Costs are ordinarily awarded on an “ordinary” basis[iv] but, in special circumstances, may be awarded on an “indemnity” basis.[v]  In simple terms, the indemnity basis (85-95% of actual costs) is a higher percentage of recovery of actually incurred costs compared with ordinary costs (65-75% of actual costs).  In short, the difference will generally be 10-15% higher if recovering on an indemnity basis.

However, costs are always in the discretion of the court or tribunal having regard to various factors. One factor that is weighed in exercising that discretion is the existence of Calderbank offers that were not accepted.  In particular, establishing that you issued a valid Calderbank offer that was a better outcome than the outcome that was obtained by proceeding to judgment may both affect:

  1. the party responsible for paying costs; and
  2. the “basis” on which costs will be assessed.

Examples

The examples below are not automatic or guaranteed outcomes given costs are always at the discretion of the court or tribunal[vi] and there are many competing factors that are taken into account such as delinquent conduct by the party that made the offer in the litigation.  The examples are presented for simplicity and ignoring competing factors that might arise.

Successful Plaintiff that makes an offer

Take the following example:

  • proceedings were commenced on 1 January 2024;
  • a valid Calderbank offer was made on 1 July 2024 by the Plaintiff to settle for $600,000 and rejected (unreasonably) by the Defendant; and
  • judgment was entered on 1 December 2024 in favour of the Plaintiff for $900,000.

As a matter of commonsense, the Plaintiff’s Calderbank offer would have been a better outcome for the Defendant had it accepted the offer rather than proceeded to judgment.

The law recognises this logic and gives effect to it by increasing the percentage of legal costs recoverable by the successful Plaintiff by using the indemnity basis for part of the overall legal costs payable by the Defendant.  Specifically, in our example, the consequence of unreasonably rejecting a Calderbank offer that was better than the ultimate outcome is that the court or tribunal may exercise its discretion to order that:

  • the Defendant pays the Plaintiff’s costs on an ordinary basis between 1 January 2024 to 1 July 2024 i.e. before the offer; and
  • the Defendant pays the Plaintiff’s costs on an indemnity basis between 2 July 2024 and 1 December 2024 i.e. after the offer.

In short, the successful Plaintiff recovers an overall higher percentage of part of their legal costs.

Unsuccessful Defendant that makes an offer

As a variation on that example, let us assume the following facts instead:

  • proceedings were commenced on 1 January 2024;
  • a valid Calderbank offer was made on 1 July 2024 by the Defendant to settle for $600,000 and rejected (unreasonably) by the Plaintiff; and
  • judgment was entered on 1 December 2024 in favour of the Plaintiff for $400,000.

As a matter of commonsense, the Defendant’s Calderbank offer represented a more favourable result for the Plaintiff than the judgment.  In that scenario, the court or tribunal may exercise its discretion to order that:

  • the Defendant pays the Plaintiff’s costs on an ordinary basis between 1 January 2024 to 1 July 2024 i.e. before the offer; and
  • the Plaintiff pays the Defendant’s costs on an indemnity basis between 2 July 2024 and 1 December 2024 i.e. after the offer.

In short, the unsuccessful Defendant manages to recover that part of their legal costs incurred only because the Plaintiff did not settle on reasonable terms.

To Consider

For completeness, the underlying concept of a Calderbank offer has been formalised in Division 4 of Part 20 of the Uniform Civil Procedure Rules 2005 (NSW) as “Offers of Compromise”, however those types of offers are outside the scope of this article.

Noting the costs consequences associated with making and rejecting Calderbank offers, it is crucial that litigants use them in a way that promotes settlement of disputes to achieve their “just, quick and cheap” obligations and, otherwise, to protect their own position on costs.

 

 

[i] Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [24]. Bluth v Boyded Industries Pty Ltd (No 2) [2024] NSWCA 194 at [43].

[ii] See section 56 of the Civil Procedure Act 2005 (NSW) (CPA).

[iii] See rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR); see e.g. New Island Developments Pty Ltd v New Island Investments One Pty Ltd (No 2) [2024] NSWSC 454 at [29].

[iv] In the courts, section 98(1) of the CPA and rule 42.2 of the UCPR. In the Tribunal, section 60(4) of the Civil and Administrative Tribunal Act 2014 (NSW).

[v] See rule 42.5(b) of the UCPR.

[vi] Section 98(1) of the CPA; see e.g. Whitney v Dream Developments Pty Ltd [2013] NSWCA 188 at [25].