Civil litigation is a costly process.
The general rule in relation to legal costs is that “costs follow the event”. This means that the successful party to litigation will typically receive an order for costs in their favour and, consequently, the losing party must pay the successful party’s legal costs (and their own). A court will usually order costs called “costs on the standard basis” or “ordinary costs” or, in earlier times, “party and party costs”. In rarer instances, the court may also order “indemnity” or “solicitor and own client costs”. The differences between these are dramatic and a successful party who receives the benefit of a costs order may only expect to recover one half to two thirds of what they pay in legal costs.
Of course, parties must remember that costs in any legal proceeding are discretionary. As noted above, the general rule is that they follow the event should the judge be minded to award/order them.
For this reason, in addition to trying to resolve the overall dispute, steps can and should be taken well in advance to provide protection for legal costs if your litigation does not settle before trial. The aim for a litigant is to maximise their prospect of recovery and, if relevant, recovering on an indemnity basis.
A recent Supreme Court of Queensland decision has highlighted the importance of considering your settlement strategy and understanding the consequences of your decision to accept or reject any offers.
In the context of this decision, we consider the different types of offers to settle and the often significant cost consequences.
Costs Refresher
Indemnity Costs
- Awarded when there is a genuine, documented offer of compromise or settlement that\’s been rejected by the unsuccessful litigant & the successful litigant has won more than the amount offered.
- Alternatively, awarded where: the case was hopeless and continued despite no reasonable chance of success; there\’s been an abuse of process; or, there\’s been unreasonable conduct (fraud or perjury).
- A higher amount of costs, that includes some aspects of solicitor client communication, but generally the cost assessor allows more for material that has been invoiced by the successful parties solicitor.
- Successful litigant may be awarded up to 80% or more of the professional costs incurred in the matter.
Solicitor/Client Costs
- Often used interchangeably with indemnity costs.
- However, solicitor / client costs are believed to be higher than indemnity costs as it is the total legal costs charged to a client for legal services provided by a solicitor.
- If the matter is about a contractual dispute, the contract must expressly state \”solicitor/client\” or \”indemnity\” costs.
- Originating process should also expressly claim \”solicitor / client\” costs – otherwise interpreted to be party/party costs.
Party/Party Costs
- Also known as \”ordinary\” or \”standard\” costs, this is the most common costs order.
- Determined by a costs assessor.
- Party/party refers to communications / documents that pass between parties to the proceedings (not communications between solicitors & client).
- Successful litigant is usually awarded approximately 60% to 70% of the professional costs incurred in the matter.
What are the different types of offers in Queensland?
The most commonly encountered offers to settle in Queensland are:
- an informal offer known as a ‘Calderbank’ offer; and
- a formal offer made in accordance with the provisions under the Uniform Civil Procedure Rules (UCPR) known as an offer under the ‘Rules’.
Calderbank Offer
A Calderbank offer comes from the English decision of Calderbank v Calderbank[1], which established the well-settled principles on common law offers to settle and the legal cost consequences that flow from making an offer to settle.
A Calderbank offer can be oral or written but requires the following elements to be deemed effective:
- The offer must be marked “without prejudice save as to costs”;[2]
- The offer must be clear, precise and certain;[3]
- The offer must state the time in which the offer must be accepted and give reasonable time for acceptance,[4] whereby it is recommended that providing at least 14 days is deemed “reasonable”;
- The offer must refer to the principles in the decision of Calderbank v Calderbank and that the offeror reserves its rights to tender the offer on an application for costs if the offer is rejected; and
- The offer should include reasons as to why the offer should be accepted.[5]
If a party makes an offer, which is rejected, the offer may be placed before the Court at the time of considering the question of legal costs. If the Court considers that the other side unreasonably rejected the offer, which may include if the offer was more favourable than the judgment for the party who received the offer, then the costs awarded for the successful party will likely be reduced.
In other words, whether the offer is more favourable than the judgment sum ultimately obtained is relevant, but it will not automatically result in an indemnity costs order. The party who makes the application for indemnity costs bears the onus of proving that rejecting the Calderbank offer was unreasonable.[6]
Unlike a formal offer under the Rules, discussed below, a Calderbank offer merely provides a basis for the Court’s discretion to depart from the general rule that costs follow the event on the standard basis.
Rules Offer
A Rules offer is one that is made in accordance with the UCPR.[7]
Unlike a Calderbank offer which can be made at any time and include anything that a party desires – if it meets the minimum requirements outlined above – a “Rules” or formal offer can only be made in a proceeding as that is defined in Rule 352 of the UCPR.
The UCPR has been designed to encourage parties to make and accept reasonable offers to settle out of court. Accordingly, a party who fails to make or accept a reasonable out of court settlement can incur considerable penalties.
An effective Rules offer must:
(a) be in writing and contain a statement that it is made under Part 5;[8]
(b) state that it is an offer to settle one or more of the claims in the
proceeding;[9]
(c) specify that the offer is open for acceptance for not less than 14 days
after service;[10] and
(d) be served on the other party.
A Rules offer must comply with these requirements, otherwise it will not comply with the UCPR, and therefore, the statutory benefits will not be available.
Rule 360 of the UCPR contains the rules which apply if the plaintiff makes an offer to settle. Rule 361(1) of the UCPR describes the conditions that apply to defendants that make an offer to settle the proceedings and the implications that apply if the offer is accepted or rejected.
A Rules offer is more black or white. That is, the parties are either below or above the threshold with the respective consequences.
In deciding whether a Calderbank offer or offer under the Rules is more appropriate, you must consider whether you want to put material before a Judge to consider the question of costs or whether you prefer the certainty of a Rules offer.
Recent Position on Calderbank and Rules Offers
The recent decision of the Supreme Court of Queensland in the case of Built Qld Pty Ltd v Pro-Invest Australian Hospitality Opportunity (St) Pty Ltd (No 3)[11] (the Built case) looked at the principles governing Rules offers and Calderbank offers.
In this case, the Calderbank offer made by the defendant met all the relevant requirements, but the contentious issue was if the plaintiff was unreasonable in rejecting the offer at the time of the offer.[12] Thus, the test of reasonableness was applied. However, two preliminary issues needed to be discussed first; who bears the onus, and what was the effect of a Calderbank offer that is ‘inclusive of all costs’.[13]
It was found that the burden of proof is on the defendant to show that a special cost order, for example, indemnity costs, should be made considering the plaintiff’s rejection of the defendant’s Calderbank offer.[14]
Further, although this Calderbank offer was inclusive of all costs, the court could still exercise its discretion to award indemnity costs.[15]
Regarding reasonableness, the Built case referred to Seven Network Ltd v News Ltd,[16] which identified that the court should consider the strengths and weaknesses of the relevant party’s case ‘prospectively at the time the offer was made’ and the fact that the relevant party failed in the proceeding.[17] An additional factor for the court to consider is whether the plaintiff’s rejection of the defendant’s Calderbank offer, in all the circumstances’ justifies the court exercising discretion to vary the costs as per s 361(2) UCPR and award indemnity costs.[18]
The Built case affirms the decision of Bond J in SHA Premier Constructions Pty Ltd v Niclin Constructions Pty Ltd (No 2),[19] which sets out the legal principles that must be considered and applied when considering reasonableness.[20] These legal principles are as follows:
- Where the court orders the costs of one party to pay for the litigation of another, the order is for an assessment of those costs on a standard basis;
- The Court will depart from the above usual rule where the circumstances of the case validate this;
- Departure is justified when there is a rejection of a Calderbank offer to compromise (must consider whether the rejection of the Calderbank offer, in all the circumstances, justifies a departure from the usual rule);
- The test of reasonableness is applied to balance the encouragement of settlement with not discouraging litigants from partaking in a proceeding;
- When the court is deciding the critical questions regarding the reasonableness of the rejection, this will involve matters of judgement and impression; and
- The discretion for costs must be exercised judicially and is subject to review.[21]
A court should also have regard to: the stage of the proceeding at which the offer was made; how long the offeree had to consider the offer; the extent of the compromise offered; the offeree’s prospects of success (assessed at the date of the offer); the clarity of the terms of the offer were expressed; and whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.[22]
In the current case, the offer was open for 14 days, the compromise in the defendant’s Calderbank offer was considerable and in the plaintiff’s favour, the defendant’s offer was expressed in clear terms and the offer included a clear expiration date.[23]
In the Built case, the court ordered the defendant pay the plaintiff’s costs, calculated on a standard basis and the plaintiff to pay the defendant’s costs, calculated on an indemnity basis.
The Built case is a potent reminder that particular notice must be given to the assessment process for Calderbank offers when you are deciding whether to accept an offer or you are deciding on the format in which you want to make an offer.
Written by GRT Lawyers\’ Kathryn Te\’o (Special Counsel) and Evyana Grespos (Paralegal).
For further information regarding settlement offers in disputes, please contact Ashley Hill (Director). Our team will be happy to talk through the process.
[1] [1975] 3 ALL er 333.
[2] Marking the offer with only the words “without prejudice” will prevent the communication from otherwise becoming inadmissible on the question of costs as the Court does not have the discretion to admit otherwise inadmissible evidence.
[3] See Kemp v Ryan [2012] ACTCA 12, where the Court of Appeal commented that the offer needs to be “sufficiently clear” and not open to multiple interpretations.
[4]Meldo Pty Ltd v Bank of Queensland [2015] NSWSC 2015 (No. 2), where 12 days was considered “plenty” of time.
[5] Although this is not required, it does assist in arguing the “reasonableness” of the offer: NMFM Properties Pty Ltd v Citibank Ltd [2001] 109 FCR 77 (No 2).
[6]Bellino v Queensland Newspapers Pty Ltd (No 2) [2019] FCA 1691.
[7]Uniform Civil Procedure Rules 1991 (Qld), Chapter 9, Part 5.
[8] Uniform Civil Procedure Rules 1991 (Qld), r 353(3).
[9]Uniform Civil Procedure Rules 1991 (Qld), r 353(1).
[10]Uniform Civil Procedure Rules 1991 (Qld), r 355(1).
[11] [2022] QSC 62.
[12]Build Qld Pty Ltd v Pro-Invest Australian Hospitality Opportunity (St) Pty Ltd (No 3) [2022] QSC 62 [222]-[223].
[13] Ibid [224].
[14] Ibid [227].
[15] Ibid [235].
[16] (2007) 244 ALR 347 [65]-[66].
[17]Build Qld Pty Ltd v Pro-Invest Australian Hospitality Opportunity (St) Pty Ltd (No 3) [2022] QSC 62 [236].
[18] Ibid [237].
[19] [2020] QSC 323.
[20]Build Qld Pty Ltd v Pro-Invest Australian Hospitality Opportunity (St) Pty Ltd (No 3) [2022] QSC 62 [238].
[21] Ibid.
[22] Ibid.
[23] Ibid [245], [251], [252], [256], [258].
