Calderbank offers: when will indemnity costs be awarded?
The recent decision of Teo & Anor v Twyford bht Cunningham (No 2)  NSWSC 1626 provides a useful reminder of the Court’s approach to exercising its discretion to award indemnity costs where a settlement offer has been made during the course of litigation.
Two vendors and a purchaser entered into a contract for sale of land located at Tanja, New South Wales (Contract).
Prior the completion of the Contract, the purchaser’s solicitors served a notice on the vendors purporting to rescind the Contract on the basis that the purchase had been assessed as a “mentally ill person” under the Mental Health Act 2007 (NSW). It was asserted that the purchaser was entitled to do under clause 34 of the Contract.
The vendors disputed the notice and issued a notice to complete, with which the purchaser did not comply. The vendors issued proceedings seeking a declaration that the Contract was valid and enforceable.
At an early stage in the proceedings, the purchaser made a “walk away” settlement offer to the vendors, that is, primary term was that the vendors discontinue the proceedings against him and each party would bear their own costs (Offer). The Ofer was expressed to be open for acceptance from 17 days from its date, and made in accordance with the principles outlined in Calderbank v Calderbank  3 All ER 333 (Calderbank). The letter containing the Offer set out the reasons why the purchaser contended that he was entitled to rescind the Contract under clause 34 and the vendors’ claim would fail, and indicated that the Offer that it would be relied on for costs if the matter proceeded to hearing.
The vendors rejected the Offer and made a counteroffer, which the purchaser rejected.
On 30 November 2023, Justice Henry dismissed the vendors’ claim and made an order that the vendors were to pay the purchaser’s costs as agreed or assessed.
On 7 December 2023, the purchaser made an application seeking that costs be paid on the ordinary basis up to and including the date of the Offer, and on an indemnity basis thereafter due to the Offer not having been accepted.
Justice Henry refused to exercise the Court’s discretion under sections 98 of the Civil Procedure Act 2005 (NSW) to award indemnity costs.
In reaching this decision, her Honour, referring to the NSW Court of Appeal’s decision in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2), stated that whilst the rejection of a Calderbank offer in circumstances where the final outcome is less favourable may enliven the discretion, it does not create any prima facie right to such an order. Rather, to warrant making an indemnity costs order, the offer must
“embody a genuine compromise and be shown by the party seeking to rely on it that it was unreasonable for the unsuccessful party not to accept it”.
Referring to another NSW Court of Appeal decision in Valmot Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 3), her Honour stated that, in determining whether non-acceptance of a Calderbank offer is reasonable, a number factors are relevant:
- the stage of the proceedings at which the offer was received;
- the time allowed for acceptance;
- the extent of the compromise offered;
- the offeree’s prospects of success assessed at the date of the offer; and
- whether the offer foreshadowed an application for indemnity costs in the event of its rejection.
Her Honour found that:
- The Offer was not reflective of a genuine compromise. The only compromise made by the purchaser was to not seek costs he was likely to recover on an ordinary basis if the offer were accepted. As the purchaser’s costs were “substantially less than $10,000” at the time of the Offer, her Honour said that he made no “real concession or genuine compromise”, even in the context of him being an individual litigant who may have had to bear some or all of those costs personally.
- The stage of the proceedings did not make the rejection unreasonable. At the time of the Offer, the purchaser was yet to serve his lay evidence, and neither party had served expert evidence. The vendors were also yet to issue subpoenas, including on the medical facility at which the purchaser was assessed under the Mental Health Act. Therefore, her Honour concluded that, at the time of the Offer, the vendors were not “in a position to properly test the purchaser’s assertions” and “make a realistic assessment of the probable outcome of the proceedings”.
- The vendors’ prospects of success were not unreasonable. The outcome of the proceedings was binary as it involved an “all or nothing” case based on the Court’s construction of clause 34 of the Contract and an objective consideration of the totality of the evidence. As the vendors’ claim was not frivolous or vexatious (which would support an indemnity costs order against them), it was said the purchaser did not establish that it was unreasonable for the vendors to have rejected the Offer.
While Calderbank offers may prove to be a powerful tool in triggering favourable costs orders, this decision serves as a reminder that costs awards are in the discretion of the Court. There is no right to indemnity costs simply because a party made a Calderbank offer in terms more favourable than the final outcome. The Court must decide that the offerees rejection of the offer was unreasonable, in all the surrounding circumstances.
Practitioners should turn their minds to the relevant factors when preparing a Calderbank offer, to ensure the offer is reasonable and will adequately support any future indemnity costs application. Also, if there is scope for a “Rules of Court” offer to be made instead or at the same time, this may provide more costs protection than a Calderbank offer.