If you have been involved in a dispute, you may be familiar with the process of negotiating a settlement out of court. While this process can include anything from formal mediations to informal telephone calls between solicitors, negotiating a settlement will often include exchanging offers and counter offers by way of letter or email.
As part of these exchanges, parties will often label an offer or a counteroffer with one of three titles:
- Without Prejudice
- Without Prejudice Save as to Costs or
- Offer of Compromise
In this article, we examine what these labels mean, what the difference is between them, and when they should be used.
Without Prejudice Offer
Making an offer without prejudice may be best understood as making the offer without prejudicing the offering party’s position at court. In other words, it prevents either party from using the contents of the without prejudice offer against the other during litigation.
The purpose of this is to encourage open and meaningful settlement discussions without a party being concerned that they may consequentially injure their prospects of success at court. For example, if a party offers to pay or accept $500,000 on a $1,000,000 claim, the other party can’t use this as evidence in court that the offering party was prepared to accept a lower amount than that claimed.
Without Prejudice Save as to Costs
An offer made on a without prejudice save as to costs basis carries the same meaning as that discussed above, except that either party may use the offer in court when it comes to the question of costs.
What are ‘costs’?
Generally speaking, a successful party to litigation is entitled to be paid their legal costs by the unsuccessful party. The reasoning behind this is quite straightforward – if you were successful in your claim, the other party could have spared you both legal costs by agreeing to pay your claim (or comply with your requests) at the outset. Generally, a successful party will only be awarded costs ‘on a standard basis’. When this happens, the successful party will typically recoup between 40-70% of their actual legal costs. In some circumstances, the successful party will be awarded costs on an indemnity basis. When this happens, the successful party may recover as much as 90% of their actual legal costs.
A party will often be entitled to indemnity costs in circumstances where:
- A settlement offer has been made and rejected;
- The offering party was successful; and
- If the unsuccessful party had accepted the offer, they would be in a better position than they are at the end of litigation.
Example
Party A is suing Party B for $1,000,000. Party A makes an offer to accept $500,000 in full and final satisfaction of the claim. Party B rejects the offer.
The parties therefore do not settle, and the dispute goes to trial. At trial, Party A is successful, and Party B is ordered to pay Party A $900,000, plus costs.
Because Party B would have had to pay less if it accepted the $500,000 offer, Party B is would have been in a better position if they accepted the offer.
Party B is therefore ordered to pay Party A’s legal costs on an indemnity basis.
Marking an offer ‘without prejudice save as to costs’ means that the parties can admit the offer into evidence at court only to determine whether costs will be payable on a standard or indemnity basis.
Do you need to mark your offer as without prejudice or without prejudice save as to costs?
The without prejudice save as to costs categorisation of correspondence spawns from a 1975 case called Calderbank v Calderbank. Without prejudice save as to costs offers are synonymously referred to as ‘Calderbank Offers’. The use of without prejudice in settlement negotiations dates back even further than this.
Despite the common usage of these phrases, they have effectively been replaced by the Evidence Act 1995. Section 131 of the Evidence Act codified the legal principes around without prejudice save as to costs offers that arose in Calderbank v Calderbank. This section states that communications between persons in a dispute which are related to attempts to negotiate a settlement cannot be admitted as evidence in court, unless it is relevant to the question of costs. This means that whether a settlement offer is marked without prejudice, without prejudice save as to costs, or not at all, it will generally be treated with the same protections.
That’s not to say that there is no merit in labelling your offer as without prejudice save as to costs. One purpose is that it can effectively convey to the person receiving the letter that the correspondence contains a settlement offer. Another purpose is that it may help remove any doubt as to whether section 131 applies at all (ie, whether the communication is genuinely related to settlement negotiations). So, while using the Calderbank wording may no longer be necessary, that doesn’t mean it is now meritless, as it can still help in removing the risk of your letter being misinterpreted by the other party or the court.
Offer of Compromise
An offer of compromise follows a similar line of reasoning as a without prejudice offer. If an offer of compromise is made and rejected, and the rejecting party is worse off because of it, the offering party is entitled to costs on an indemnity basis.
There is a key difference, however. Where an ordinary offer is made, pursuant to section 131 of the Evidence Act, the court may consider the offer on the question of costs. Where an offer of compromise is made, this displaces the court’s discretion, and indemnity costs must be awarded (subject to certain exceptions).
When making an offer of compromise, certain court rules need to be complied with. These differ slightly from state to state, however generally include the following:
- The correspondence must state the details of the case, such as the party names, the name of the court, and the proceeding number;
- It must refer to the relevant court rule under which offers of compromises are made;
- The offer must be open for at least 14 days;
- It must state whether it is inclusive of costs, or whether costs will be paid separately.
Further, certain rules apply to offers of compromise that don’t apply to without prejudice offers. For example, they can’t be withdrawn within the period they are open for (even if another offer of compromise is sent in that same period).
So, what type of offer should I use?
The key benefit to an offer of compromise is that it displaces the court’s discretion as to costs. Its key detriment is its lack of flexibility as to form and content. As stated, it must comply with specific time periods and content, and cannot be withdrawn.
Normal offers, on the other hand, give the offeree this flexibility. They are also less onerous when it comes to what needs to be contained within the offer. You may find yourself in a situation where you and a counterparty are going back and forth over email or even text, haggling over a settlement sum. It would be quite a task to ensure each message complied with all the form requirements of an offer of compromise. By contrast, normal offers will be fall under section 131 of the Evidence Act, regardless of their form (subject to certain exemptions).
Further, offers of compromises can generally only be served once proceedings are on foot, and pleadings have been filed. Normal offers, however, can be exchanged in the very early stages, before court proceedings have even commenced in court.
Normal offers or without prejudice offers are therefore appropriate where you want a degree of flexibility in your negotiations. Offers of compromise should be used where you are willing to sacrifice the flexibility for a more certain costs order.
Summary
| Â | Without Prejudice | Without Prejudice Save as to Costs | Ordinary Settlement Offer | Offer of Compromise |
| Indemnity costs | Normally | Normally | Normally | Almost always |
| Prescribed form | No | No | No | Yes |
| Admitted into evidence | No, save as to costs | No, save as to costs | No, save as to costs | No, save as to costs |
| Able to be withdrawn | Yes, at any time | Yes, at any time | Yes, at any time | No |
| Prescribed time period for acceptance | No | No | No | Yes, minimum 14 days |
| Made at any time | Yes | Yes | Yes | No, usually after pleadings have been filed |
Need Help? Contact Us
At Allied Legal, we work closely with business from all over Australia with their commercial litigation. If you need expert legal advice, or if you need assistance with resolving a dispute, you can get in touch with one of our startup experts on 03 8691 3111 or send us an email at hello@alliedlegal.com.au.
