Offers to settle: Federal Court Rules c.f. Calderbank offers

In litigation, an offer to settle is an offer by one party to the other to settle the dispute out of Court.  There are numerous advantages to settling a matter out of Court, including reduced legal fees, finality of proceedings and confidentiality of result.  A key issue for litigants when making or receiving an offer to settle is to understand the potential legal costs consequences of rejecting the offer.  In this article, we consider offers to settle in the Federal Court of Australia under both the common law and the Federal Court Rules 2011 (Cth) (Rules).

Common law – Calderbank offers

The seminal case regarding common law offers to settle is the English decision of Calderbank v Calderbank [1975] 3 All ER 333 (Calderbank).  Pursuant to the Calderbank decision, where a party has made an offer, which is rejected, the offer may be placed before the Court at the time of considering the legal costs (but not during the trial).  If the Court considers that the other side unreasonably rejected the offer (generally on the basis that the offer was more favourable than the eventual judgment for the party who received the offer), then the costs awarded for the successful party will likely be reduced.

Ultimately, the award of costs is at the discretion of the Court, however, a Calderbank offer that is unreasonably rejected will be to the benefit of the offering party when costs are ordered.  This is in contrast to the position in the Federal Court, when the Rules provide some more certainty when it comes to costs after an offer is made.

Offers to settle under the Rules

Part 25 of the Rules provides an alternative process that parties to litigation may elect to utilise when making offers to settle (known in the Federal Court as ‘offers to compromise’).  In contrast to Calderbank offers, the Federal Court’s offers to compromise are more structured in their requirements.  However, and more importantly, the implications for parties who reject an offer to compromise are more regulated, and provide litigants with more certainty of how an award of costs may be dealt with.

What happens if a party rejects an offer to compromise?

Rule 25.14 outlines the consequences of rejecting an offer to compromise.  It considers three (3) distinct scenarios.

1. Offer made by respondent at higher amount than the amount received at judgment

Where an offer is made by a respondent and is not accepted by the applicant, and the applicant is awarded an amount at the end of the litigation which is less than that offer:

• the applicant will not be granted any costs for the litigation for the period after 11.00 am on the second business day after the offer was served; and
• the respondent is entitled to an order that the applicant pay all the respondent‘s costs after that time.

2. Offer made by respondent is rejected and the proceedings are later dismissed

Where an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant‘s proceeding is dismissed, the Court can order that the applicant pay:

• the respondent‘s costs (on a party and party basis determined by the Court) for the period before 11.00 am on the second business day after the offer was served; and
• all the respondent‘s costs after 11.00 am on the second business day after the offer was served.

3. Offer made by applicant rejected by respondent, and the applicant wins a higher amount

Where an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is better than the offer, the applicant is entitled to an order that the respondent pay:

• the applicant‘s costs (on a party and party basis determined by the Court) for the period before 11.00 am on the second business day after the offer was served; and
• all of the applicant’s costs for the period after 11.00 am on the second business day after the offer was served.

Takeaways

Litigation is often an expensive exercise for all parties involved and as such, settling the proceedings is often in the commercial interest of all parties. Therefore, it is important that parties give thought to the terms of their offer, noting that it may be in their favour to offer reasonable terms to the other side, which if rejected, may have positive costs implications for the offering party.  Prior to making any offers, parties should consider which method they wish to use to make their offer.

Conversely, parties who receive an offer must consider whether they hold a strong belief that they will receive a better outcome at the judgement, as a rejection of the offer could hold large costs implications if they unreasonably reject the offer.

Links and further references

Legislation

Federal Court Rules 2011 (Cth)

Cases

Calderbank v Calderbank [1975] 3 All ER 333

Further information about litigation and disputes

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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