Generally, in most civil court proceedings “costs follow the event”. This means that the unsuccessful party will usually be ordered to pay the successful party’s costs of litigation. Normally, a portion of the successful party’s legal costs will be recoverable, often equating to about 65% of the actual costs paid to their lawyers. However, by making an offer of compromise or a Calderbank offer, a party can improve their chance to recover a higher percentage of their legal costs from a party who unreasonably does not accept an offer of settlement – often referred to as “indemnity costs”
What is an Offer of Compromise?
An offer of compromise is a formal court document that must represent an honest attempt to negotiate a settlement. For an offer of compromise to be valid in New South Wales courts, it must strictly comply with the guidelines within Rule 20.26 of the Uniform Civil Procedure Rules 2005 (UCPR).
In summary, an offer of compromise must be in writing and identify the claim or part of the claim which the offer relates to. It is required to be exclusive of costs and specify the period of time that the offer will be open for acceptance.
What is a Calderbank offer?
A Calderbank offer is an offer of settlement in writing which is made on a “without prejudice save as to costs” basis. This means that the offer cannot be used as evidence in court except when a party brings the offer to the notice of the court to determine the question of costs.
Although a Calderbank offer is less formal than an offer of compromise, to be effective it is still required to be a genuine offer of compromise that is clear, precise and certain. It must also provide for a reasonable time for acceptance of the offer.
How do Offers of Compromise and Calderbank offers increase your chance of recovering a higher percentage of legal costs?
The use of either offers of compromise or Calderbank offers are designed to put a party in a position of risk of having to pay a higher percentage of legal costs if they are unsuccessful. This is designed to encourage parties to be reasonable in litigating.
If a party does not accept an offer of compromise or a Calderbank offer and the offering party receives a result that is as favourable or more favourable as their offer then they may be entitled to claim from the unsuccessful party a larger portion of legal costs from the date that the offer was made, which are known as indemnity costs.
Generally, all other things being equal, an offer of compromise is more likely to have this effect than an identical Calderbank offer.
The recent case of Braye v Tarnawskyj (No 2)  NSWSC 659 provides a good example of the successful party claiming a larger portion of legal costs as a result of the defendants’ failure to accept one of two offers of compromise.
In this case, the plaintiff’s solicitors sent by email two offers of compromise to the respective solicitors acting for the first and second defendants. Neither offer was accepted by the first or second defendant.
The Plaintiff argued that the failure of the defendants to accept either offer, and the fact that the plaintiff obtained a judgment no less favourable to it, meant that the plaintiff is entitled to an order for costs to be assessed on an indemnity basis from the date of the offer.
The Court found in favour of the plaintiff and ordered that the first and second defendant’s pay the plaintiffs costs on an indemnity basis from the date of the offer.
Use of offers of compromise and Calderbank offers have a number of advantages, including:
- Encouraging the opponent to settle; and
- Increasing the prospects of recovering a higher proportion of your legal costs in the event the matter does not settle, and the result is more favourable than the terms of the relevant offer.
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 One exception is family law proceedings, where the general position is that parties bear their own costs: see s.117 of the Family Law Act 1975 (Cth). Even there, however, there is a discretion to order costs if one side has made an offer of settlement: s.117(2A)(f).
 In the Small Claims Division of the Local Court, where claims are under $20,000, while costs “follow the event”, the amount recovered by way of partial indemnity is severely limited, so as to discourage parties from using lawyers to litigate in small claims, and to encourage settlement of small disputes without resort to litigation: see s.37 of the Local Court Act 2007, Local Court Rules 2009, r. 2.9(2) and Local Court Practice Note Civ 1, 36.6. As as example, on a claim for $15,000, the most that can be ordered to be paid by the other side is $1,259.20. This represents only a very small proportion of the legal costs likely to be incurred by a party in bringing, or defending, such a small claim. However, an offer of settlement can have a small benefit by increasing by 25% the amount of costs recoverable, which in the example would then be $1,574.
 The Local Court, the District Court and the Supreme Court.
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