In brief - Correctly phrased offers of compromise provide
almost certain award of indemnity costs
Offers of compromise, pursuant to
rule 20.26 of the
Uniform Civil Procedure Rules 2005 (NSW) (UCPR), are often used
as a tool by both plaintiffs and defendants in encouraging early
settlement negotiations, given the potentially adverse costs
implications if the matter is run to a hearing and a better outcome
is not achieved.
Offers of compromise also serve as an effective mechanism for
costs protection when dealing with an "unreasonable"
opponent. If made correctly, an offer of compromise provides an
almost certain award of indemnity costs from the day following the
date of service.
Rule 20.26 of the Uniform Civil Procedure Rules 2005
Rule 20.26(2) of the UCPR specifically provides that:
...an offer must be exclusive of costs, except where it
states that it is a verdict for the defendant and that the parties
are to bear their own costs.
Redefining the correct form for offers of compromise
Traditionally, solicitors have drafted offers of compromise on a
"plus costs to be agreed or assessed" basis. The
rationale behind the addition of the phrase "as agreed or
assessed" is to ensure that the offeror has the option to have
the costs assessed in the event that a negotiated settlement on
costs could not be reached.
At the end of last year, in the case of
Old v McInnes and Hodgkinson  NSWCA 410, the Court of
Appeal, somewhat controversially, rejected a claim for indemnity
costs on the basis that the offers of compromise included the
phrase "as agreed or assessed".
Meagher JA held that:
... Neither of the offers made on behalf of Mr McInnes was
"exclusive" of costs or within the exception in r
20.26(2). Each provided that Mr McInnes should pay Mr Old's
costs "as agreed or assessed". For that reason, neither
was an offer in fact "made under rule 20.26" for the
purposes of UCPR r 42.13 and accordingly each was of no effect for
the purposes of the offer of compromise regime under the
Meagher JA also noted that:
... Each offer was stated as being made pursuant to the
UCPR. Neither contained any statement that it was to operate as a
Calderbank offer ... In the circumstances, neither could be relied
upon on that basis.
Therefore, Mr McInnes was unable to argue that if the offer
could not be classified as an offer of compromise, it should be
treated as a Calderbank offer, because the offer did not expressly
mention the principles raised in Calderbank v
"Acceptable" offers of compromise revisited by NSW
Court of Appeal
On Friday 4 May 2012, the Court of Appeal revisited the issue of
what constitutes a valid offer of compromise in the matter of
v O'Shea (No.2)  NSWCA 121. The Court of Appeal,
which included Meagher JA, noted that:
The first respondent disputed that the offer complied with
the relevant rule for three reasons. First, it was said that
the offer failed to state that it was "exclusive of
costs", as it was required to be by UCPR 20.26.
However, the rule does not require such a statement, but merely
requires that the offer "must be exclusive of costs": r
20.26(2). The evident purpose of that requirement is that the
effect of the offer, whether accepted or rejected, will be to
engage the relevant costs rule in Pt 42. The offer did not
purport to be inclusive of costs and there was no reason to infer
that it was, so as to invalidate its operation under r 20.26, with
which it purported to comply. (emphasis added)
The decision in Vieira v O'Shea (No.2) goes some
way to softening the effects of the earlier decision in Old v
McInnes and Hodgkinson. However, the decision does not
expressly reject the Court's earlier approach that offers of
compromise that include the phrase "as agreed or
assessed" do not comply with rule 20.26 of the UCPR.
Beware the phrase "as agreed or assessed" in offers
To err on the side of caution, parties should review any files
in which offers of compromise have been made and ensure that the
offers made, and any future offers, do not include the phrase
"as agreed or assessed". This is particularly pertinent
where offers have been made for the purpose of costs
It may also be worthwhile including in the cover letter
attaching the offer of compromise reference to the offer also being
made in the alternative in accordance with the principles contained
within Calderbank v Calderbank.