Offers of compromise can now be inclusive of costs

Commercial Disputes eBulletin - 22 November 2013

Summary

One of the notable recent changes to the County and Supreme Court Rules on offers of compromise is that the offer of compromise must now state whether the settlement sum offered is inclusive or exclusive of costs.

However, if an offer of compromise is inclusive of costs, the party making the offer may find itself having to persuade a court that the successful party would have obtained a better outcome by accepting the offer of compromise rather than proceeding to judgment.

In this eBulletin, we discuss how the courts are likely to determine whether offers of compromise that are inclusive of costs are better than the judgment obtained by the successful party in light of the recent decision in Metricon Homes Pty Ltd v Frederick Sawyer & Ors. In this matter, the Supreme Court looked at whether VCAT had properly considered whether a cost inclusive offer of compromise made in accordance with the VCAT Act would have been a better outcome for the successful party than the VCAT decision.

We also offer some practical tips for making offers of compromise.

 

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Offers of compromise and Calderbank offers

Calderbank offers are often used when a party wants to make a cost inclusive offer (which was previously not permitted in an offer of compromise) or where they want to resolve an issue that is not yet before a court. However, they do not provide the same certainty as an offer of compromise in relation to who should pay the costs of a proceeding, should the offer not be accepted.

Cost inclusive offers of compromise will provide better costs protection if used for making settlement offers, while Calderbank offers still offer more flexibility to settle disputes that are not the subject of court proceedings.

 

Cost inclusive offers of compromise

Previously, offers of compromise were effectively required to be silent about costs. However, if a party was paid a settlement sum under an offer of compromise, it was also entitled to be paid its costs in addition to the settlement sum. The rules now require that the offer of compromise state whether it is inclusive of costs or whether costs will be paid or received in addition to the settlement sum offered.

If a cost inclusive offer of compromise is made and is not accepted, the challenge faced by the party which made the offer will be to later persuade a court that the successful party would have obtained a better result if they had accepted that offer, rather than the result that they received at trial.

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Comparing offers of compromise with the judgment given

In the Victorian Civil and Administrative Tribunal (VCAT), cost inclusive offers of compromise have always been permitted. In the recent Supreme Court case of Metricon Homes Pty Ltd v Frederick Eli Sawyer & Ors1, an appeal was brought from a VCAT decision in relation to a cost order made by VCAT, following the rejection of a cost inclusive offer of compromise.

One of the matters that the Supreme Court considered was what (if anything) VCAT should have done in order to determine whether the award of $65,436.96 plus costs was more favourable to the owners than the cost inclusive offer of compromise of $90,000.

The Supreme Court decided that in the case of a costs inclusive offer of compromise, VCAT was required to compare "like with like" and adopt a process to quantify the costs that would have been ordered in favour of the owners (the successful party) as at the date of the cost inclusive offer of compromise.

VCAT should have formed an opinion as to whether the orders it made in the proceeding were (or were not) more favourable to the owners than the cost inclusive offer of compromise. According to the Supreme Court, to assist it in forming its opinion VCAT could have ordered that:

  • the invoices or accounts provided by the owners' legal advisers and experts be produced;
  • the owners bring in a draft bill of their costs and disbursements up to the date that the builder made the cost inclusive offer of compromise; as well as
  • the owners' costs be assessed by the Costs Court up to the date of the cost inclusive offer of compromise.

VCAT could have then adjourned its decision as to what order it would make about costs until those costs had been assessed.

The Supreme Court said that recourse to the Costs Court in particular and the taxation process would have disclosed whether VCAT got it right or wrong in relation to whether the cost inclusive offer of compromise was better than the decision made in favour of the owners. By failing to take steps that were readily available to it, VCAT acted unreasonably and the builder's appeal in relation to the costs order made by VCAT was consequently allowed.

In our view, this decision provides insight into how the courts will compare all inclusive offers of compromise made under the new Supreme and County Court rules with the judgment subsequently obtained by the successful party.

If there is any argument about whether a successful party would have obtained a more favourable outcome by accepting a cost inclusive offer, it is likely that the courts will need to make an informed finding as to the costs the court might have ordered at the date of the cost inclusive offer of compromise, and then compare that amount to the settlement sum in the offer.

In order for the court to make an informed finding, the party which made the cost inclusive offer of compromise may need to seek specific orders from the court to compel the other party to provide information about its costs up to the date of the cost inclusive offer of compromise if the other party does not voluntarily provide that information and it is likely the courts will make such orders.

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Practical tips for making offers of compromise

  • You must now specify in an offer of compromise whether the settlement sum being offered is inclusive of costs, or whether costs will be paid in addition to the settlement sum being offered.

  • If you want to make a cost inclusive offer, you can now do so either under the court rules as well as by way of a Calderbank offer. Whilst both can be effective, there is more certainty as to how a court will subsequently assess costs if you do so by way of an offer of compromise.

  • If a cost inclusive offer of compromise is not accepted, you may have to seek orders from the court requiring that the other party's costs be effectively "taxed" before the court can accurately assess whether that other party has beaten the offer of compromise. This can add cost, delay and uncertainty. It may therefore be preferable to make offers of compromise that are exclusive of costs, particularly if you think there is a good chance the offer will not be accepted.

  • Regardless of whether an offer of compromise or a Calderbank offer is made, courts always have the discretion to decide what cost orders should be made.

Authors
Geraldine Cini, Lawyer
Nicole Feeney, Special Counsel

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Further information


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