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Practice and procedure – offers of compromise – indemnity costs orders…

Common law (Calderbank) offer of compromise – whether rejection of offer imprudent or unreasonable

In Hardingham v RP Data Pty Ltd (No 2) [2021] FCAFC 175 (1 October 2021), the Full Court of the Federal Court of Australia (Greenwood, Rares and Jackson JJ) considered the question of what content was required to constitute an effective offer of compromise under the principles in Calderbank v Calderbank [1976] Fam 93 (Calderbank).

The court also considered, in a case where the offer was rejected and the offeree failed to better the offer in judgment, whether rejection of the offer by the offeree qualified as “imprudent or unreasonable” such as to give rise to an indemnity costs order in favour of the offeror.

Background

At trial, the primary judge held that copyright in certain photographs and plans held by Hardingham and exclusively licensed to Real Estate Marketing Australia Pty Ltd (REMA) was not infringed by RP Data Pty Ltd (RPD). Note that the role played by another party, Realestate.com.au Pty Ltd, in the trial and appeal is not considered in this casenote and is excised for the sake of clarity.

The basis for the decision was that the contract between REMA and RPD was to be construed such as to contain a term allowing for use of the photographs and plans by RPD, which term was either to be inferred from their course of dealing or implied in order to give business efficacy to their agreement. Costs of the trial were ordered to be borne by Hardingham and REMA.

Hardingham and REMA appealed to the Full Federal Court. In the course of correspondence after institution of the appeal, Hardingham and REMA informed RPD that, although they had litigation funding for the costs of the trial, it did not cover an adverse costs order at trial nor did it cover the appeal proceedings (which were being conducted by Hardingham and REMA’s lawyers on a speculative basis).

The offer

After the filing of the notice of appeal by Hardingham and REMA, but before the parties had filed their outlines of argument on the appeal, the solicitors for Hardingham and REMA sent a letter to the solicitors for RPD proposing terms of compromise of the appeal (Offer).

The Offer proposed that the appeal be dismissed save that the costs order of the primary judge be varied, such that each party bear their own costs of the trial, and further that each party bear their own costs of the appeal.

The Offer was described as being a “walk away” offer, on the basis of the impecuniosity of the appellants and the impact of COVID-19 on the appellants’ business.

Importantly, the Offer did not constitute an offer of compromise under Part 25 of the Federal Court Rules 2011 (Cth), as it was not open for a minimum of 14 days as required by rule 25.05(3) and was not in accordance with the form required by rule 25.01(1).

Therefore, if the Offer were to be effective as an offer of compromise with consequences for the making of costs orders, it could only be so under the common law principles enunciated in Calderbank.

The heading of the Offer contained the words “without prejudice save as to costs”. The Offer did not express itself as being made pursuant to the principles in Calderbank, nor otherwise refer to Calderbank.

The Offer did not refer to the potential of being relied on in support of an argument for indemnity costs and did not engage with the merits of the parties’ cases on appeal, nor explain why the Offer was a reasonable one.

The Offer was rejected by RPD. The appeal proceeded and judgment was ultimately delivered in favour of Hardingham and REMA, with the question of costs reserved.

The question of costs fell to be decided by reference to the Offer. RPD accepted that they should pay Hardingham and REMA’s costs of the appeal on a party-and-party basis, but opposed that they should pay Hardingham and REMA’s costs on an indemnity basis from the date of the expiry of the Offer.

Decision

In contradistinction to an offeror’s entitlement to certain costs orders where an offer was made under Federal Court Rules Part 25 (and analogues such as Supreme Court (General Civil Procedure) Rules 2015 (Vic) Order 26), where an offer was made under common law principles, the making of any costs orders remains in the discretion of the court.

Case law has established that a rejected Calderbank offer may result in an indemnity costs order where the rejection was “imprudent or unreasonable”, although there is no presumption in favour of such an order merely because the offeree has failed to better the offer in judgment.

Form of the Offer

There is no rule that the offeror must provide a reasoned explanation of the weaknesses in the offeree’s case and the reasonableness of the offer (at [22]). Further, the requirement that parties comply with the overarching purpose of facilitating a just resolution of disputes as quickly, inexpensively and efficiently as possible is taken into account when the court exercises its discretion as to costs, and this in effect requires the offeree to consider the reasonableness of the offer whether or not the offeror has explained its supposed reasonableness (at [23]).

The court flatly rejected the submission that the Offer did not qualify as a Calderbank offer merely because it did not explicitly cite Calderbank or because it did not explicitly refer to the seeking of indemnity costs.

Given the inclusion of the words “without prejudice save as to costs” in the Offer, RPD could not have been in any doubt as to the basis on which the Offer was made and the indemnity costs consequences thereof. Regardless of the Offer, success on the appeal would have ordinarily led to a party-and-party costs order in favour of Hardingham and REMA anyway, so the only consequence of the Offer can have been in respect of indemnity costs (at [24]-[25]).

Given the quantum of legal costs in commercial litigation, it was recalled that an offer to “walk away” at a certain point in litigation did represent a genuine compromise, as the offeror was thereby foregoing the possibility of recovering its legal costs incurred to date.

Reasonableness of rejection of the Offer

The reasonableness of an offer falls to be determined from the perspective of the offeree at the time of the offer, but this question does not involve considering what other offers might hypothetically have been made or other outcomes might hypothetically have been negotiated (at [30]).

The court held that the rejection of the Offer was imprudent and unreasonable due to several factors. First, RPD was aware that Hardingham and REMA were impecunious and that their litigation funding did not cover the adverse costs order below, so there was no real prospect of RPD recovering those costs anyway.

Second, RPD was aware that Hardingham and REMA’s litigation funding did not extend to the appeal, such that even if the appeal were ultimately dismissed, any legal costs of the appeal incurred by RPD would likely end up being irrecoverable as well. Third, RPD was aware that Hardingham and REMA’s impecuniosity had been aggravated by the then-current COVID-19 lockdown.

Fourth, RPD was indeed able to assess the reasonableness of the Offer because it was aware of the strengths and weakness of the parties’ respective cases: the notice of appeal had already set out the legal issues to be argued by the appellants and RPD was already familiar with the factual issues, which were the same as in the trial below (at [28]).

Accordingly, the court ordered that RPD pay Hardingham and REMA’s costs of the appeal on a party-and-party basis up to the time of the expiry of the Offer, and thereafter on an indemnity basis.

Anthony Lo Surdo SC is a barrister, arbitrator and mediator at 12 Wentworth Selborne Chambers, Sydney, Lonsdale Chambers, Melbourne, William Forster Chambers, Darwin and Outer Temple Chambers, London and Dubai.

Dr David J Townsend is a barrister at 3rd Floor Wentworth Chambers, Sydney.

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