There are many factors that must be considered when making an offer to settle a dispute. Whether an offer is reasonable will affect whether there is a costs benefit in making the offer.
There are many factors to consider when making an offer to settle a dispute, including:
- the prospects of receiving a favourable judgment;
- the costs of proceeding to judgment;
- how valuable the vindication of a judgment may be;
- the loss of privacy that results from a published judgment that may be freely available online;
- adverse publicity;
- whether it is important to maintain cordial relations with the opposing party after the dispute is resolved;
- the distraction to management of dealing with the dispute; and
- what it will take to settle the dispute.
With the exception of the first two, these are largely commercial factors.
However, if the dispute is likely to proceed to judgment, there is a further legal matter to consider: recoverable legal costs. The making of a settlement offer may entitle a successful party to recover their legal costs from the unsuccessful party on a more generous basis than had the offer not been made. Whether this entitlement arises depends, in part, on whether the rejection of the offer by the recipient was unreasonable. Whether the rejection of the offer is unreasonable is logically connected to the reasonableness of the offer. The reasonableness of rejecting an offer (and hence the reasonableness of the offer) was recently examined in two decisions of the Supreme Court of Victoria, each dealing with a very different situation.
Costs – the general rule
A party who receives judgment in their favour will generally receive an order that some of their legal costs be paid by the unsuccessful party. The amount they will receive depends partly upon whether their recoverable legal costs are calculated on a "party and party" basis or the more generous "indemnity" basis.
The precise names for these two bases may change from court to court. For example, in the Federal Court they are known as "costs as between party and party" and "costs on an indemnity basis", while in the Supreme Court of Victoria they are known as "standard basis" and "indemnity basis".
If a party makes an offer to settle, their offer is rejected and they ultimately obtain a judgment that is at least as favourable as their offer, they may be entitled to some of their legal costs on an "indemnity" basis, usually from the time the offer was made. However, if it was reasonable for the opposing party to reject the offer, "indemnity" costs will not be granted.
Two cases, two different results
Brown v Owners Corporation SP021532U  VSC 127 and Strategic Property Reservoir Pty Ltd v Condec Pty Ltd  VSC 29 considered the reasonableness of rejecting an offer in almost opposite situations.
Brown concerned an offer made by the plaintiff under the court rules during the trial of the matter. Strategic concerned an offer made by the defendant outside the court rules (often referred to as a "Calderbank offer") some eight months prior to trial. Opposite results were reached in the two cases.
In Brown the rejection of the offer was held to be unreasonable while in Strategic it was held to be reasonable. Both cases listed many of the same factors when determining whether the rejection of the offer was reasonable, including:
- the stage in the proceeding when the offer was received;
- the time allowed to consider the offer;
- the extent of the compromise offered;
- the offeree's prospects of success at the time of the offer;
- whether the offer was expressed clearly; and
- whether the offer foreshadowed "indemnity" costs if the offer was not accepted.
In Brown, the plaintiff offered to accept $260,000 to settle his claim for $750,000. The plaintiff was ultimately given judgment for almost $600,000. The rejection of the offer by the defendant was held to be unreasonable since:
- the offer represented a significant compromise by the plaintiff;
- the defendant was well placed to consider the offer since it had just seen the entire case of the plaintiff presented at trial; and
- the offer was made as a genuine attempt to settle rather than as a tactic to obtain "indemnity" costs.
In Strategic, an offer of $25,000 was made by the defendant to settle a claim of $21 million made by the plaintiff. The plaintiff ultimately failed in its claim. The rejection of the offer by the plaintiff was held to be reasonable since:
- "the offer was so modest as to be uncommercial" and "tantamount to a demand to capitulate";
- the offer was made for tactical reasons as it was set to expire less than a week before a mediation, at which the plaintiff had an opportunity to discuss the issues of the dispute and perhaps obtain a more favourable offer; and
- the plaintiff was not well positioned to consider the offer since certain difficulties with its claim only became apparent after cross-examination of witnesses at trial.
Although the rejection of the offer in Strategic was reasonable, it does not follow that it was not sensible to make the offer. If the defendant had increased its offer so that it was not "tantamount to a demand to capitulate", it would have been offering more money to settle a claim that was ultimately going to fail. The defendant presumably knew it had good prospects of success and gave weight to that factor when making its offer.
These cases underscore the importance of giving careful consideration to the merits of making settlement offers at different stages of a proceeding having regard to the likely costs benefits in making the offer at any given point in time.
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