Why settlement offers are also a costs strategy
Litigation costs are rarely fully recoverable. A well-timed settlement offer is both a path to resolution and a tool to shift the costs equation.
In commercial litigation in Australia, the costs recovered by the successful party are usually much less than the costs actually incurred. That gap is the reason settlement offers, made strategically and at the right time, are not only a mechanism to resolve a dispute but also an effective tool to control cost exposure.
There are two common ways in which costs are assessed by a court.
The default position is to assess costs on standard, or party-party, basis. The successful party typically recovers only a fair and reasonable amount, generally around two thirds of the legal fees incurred. Where the parties are unable to reach agreement, a cost assessor may be appointed.
The Court may award costs on an indemnity basis in exceptional circumstances. Examples include misconduct in the conduct of proceedings, or unreasonable refusal of a settlement offer. Indemnity costs allow recovery of a larger portion of the legal costs incurred, but usually still not the full amount.
Used strategically, a settlement offer may help a party have costs assessed on a more favourable basis. This may occur where the other party rejects a reasonable offer and then fails to obtain a better outcome at trial.
In practice, settlement offers commonly take two forms: a Calderbank letter or an offer of compromise.
A Calderbank offer is relatively more flexible. It can be made both before and after the commencement of proceedings. The offer can address costs-related arrangements. That said, the offer must still be labelled 'without prejudice'. A Calderbank offer can be withdrawn at any time before acceptance. If the offer is unreasonably rejected, the court has a discretion to award indemnity costs.
An Offer of Compromise can only be made after proceedings have commenced and is more formal. It must meet court-prescribed requirements under the relevant rules. Costs-related arrangements should not be included. An Offer of Compromise cannot generally be withdrawn during the acceptance period without leave of the court. Where the judgment is less favourable than the offer, the court will ordinarily award indemnity costs against the rejecting party, who bears the onus of persuading the court to order otherwise.
In practice, General Counsel should map the strengths and key risks of the claim or defence before the first offer is sent, and ensure any settlement offers are well-timed for maximum strategic impact. General Counsel should also set out clear and precise terms capable of acceptance, with a reasonable time for acceptance. The offer should reflect a genuine compromise, rather than a mere restatement of the full claim, and clearly articulate why the offer should be accepted.
Where costs are themselves a central commercial issue, an Offer of Compromise may not be the most appropriate vehicle, since it does not allow flexible cost arrangements.
Short-window offers from a counterparty should not be ignored. Careful consideration should be given to both the terms of the offer and the reasoning behind it. If rejection is intended, reasons should be documented contemporaneously, since those may inform future costs orders if the opponent obtains a more favourable judgment.
This article summarises one chapter of Ironbridge Legal's General Counsel Guide. The full guide covers privilege, regulatory investigations, dispute resolution pathways, settlement offers and costs strategy, stakeholder communications, litigation funding and insurance, and the policies that build dispute readiness. Download your copy.
