Australian court awards indemnity costs despite ‘six-day’ Calderbank offer

Gemma Thomas of Pinsent Masons in Melbourne was commenting after the Queensland Supreme Court found that a contractor’s failure to accept a Calderbank letter was unreasonable in all the circumstances, giving rise to an award of indemnity costs, despite the offer being open for a mere six days, only two working days of which the contractor was in possession of the principal’s written submissions. Central to the court’s conclusion in the case was that the parties’ claims had their origin in payment claims or schedules and had been the subject of statutory security of payment adjudication.

A Calderbank offer is an offer to settle a dispute that is made on a “without prejudice” basis “save as to costs”, and which complies with certain common law principles.

Thomas, who specialises in construction advisory and disputes, said: “Numerous factors can sway a court’s decision on whether a party’s non-acceptance of a Calderbank offer was unreasonable in all the circumstances. In complex construction disputes, it can be difficult to predict whether a Calderbank offer will ultimately be effective in providing costs protection. While the offeror in this instance was successful, a different factor here or there could easily have led to a different outcome.”

Ordinarily, costs are said to “follow the event”, meaning that the successful party is entitled to payment of its costs by the unsuccessful party on a standard basis – those being costs which are reasonably incurred and of a reasonable amount. This rule, however, is not always easy to apply. First, it is not always clear-cut which party is successful and which is unsuccessful. Second, it can be displaced in certain circumstances, including where the unsuccessful party unreasonably rejected a Calderbank offer. If this can be shown, the successful party may be entitled to its legal costs on a more generous indemnity basis.

Courts throughout Australia have recognised that the question of whether the rejection of a Calderbank offer was unreasonable should be determined in light of all the circumstances, having regard to at least six matters: the stage of the proceeding at which the offer was received; the time allowed for the offeree to consider the offer; the extent of the compromised offer; the offeree’s prospects of success, as assessed at the date of the offer; the clarity with which the terms of the offer were expressed; and whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.

In contrast to Calderbank letters, ‘offers of compromise’ issued in accordance with the relevant rules provide more concrete pathways to obtaining costs protection, with the downside being that the terms upon which such offers must be made are more rigid. For example, some jurisdictions’ rules provide for different timeframes for which valid offers of compromise must remain open, and some jurisdictions permit costs to be included within the settlement figure, whereas other jurisdictions do not.

The costs case before the Queensland Supreme Court stemmed from a dispute between Paladin Projects Pty Ltd (Paladin) and Visie Three Pty Ltd (Visie). Visie was the principal for a project in which it engaged Paladin as contractor under a contract for the design and construction of 36 townhouses, together with certain civil works.

In May this year, in accordance with the Building Industry Fairness (Security of Payment) Act 2014 (Qld) (BIF Act), an adjudicator issued a determination in relation to a dispute between the parties pertaining to payment. Paladin challenged the adjudicator’s decision before the Queensland Supreme Court, which ruled in September, and subsequently issued a final order on 2 October, largely in Visie’s favour. While Paladin succeeded in defeating one of Visie’s claims on the basis of jurisdictional error, Visie successfully resisted the exclusion of another of its claims and retained its claim for liquidated damages. The costs decision arose in relation to the September judgment. In Queensland, civil procedure rules provide for costs to “follow the event".  

In considering liability for costs, the court considered that the starting point would usually be that Paladin be ordered to pay Visie’s costs of and incidental to the proceedings on a standard basis. It went on to consider whether the circumstances around the Calderbank offer in this case should change that position.

Visie had issued a Calderbank offer to Paladin’s solicitors at 5.16pm on Wednesday 12 June 2024, which remained open for acceptance until 2pm on Tuesday 18 June 2024. Paladin received Visie’s written submissions on Friday 14 June 2024, leaving it around two working days to consider the offer together with the submissions.

Visie argued that Paladin should pay its costs of the proceeding until the date of its Calderbank offer on a standard basis and on an indemnity basis thereafter. Paladin contended that the parties bear their own costs, or alternatively that if it were ordered to pay Visie’s costs, it should only do so on the standard basis.

Jack Tivey of Pinsent Masons said the court’s analysis of whether Paladin ought reasonably to have been able to assess its prospects of success as at the date of the offer would be of interest to businesses in the construction industry.

Tivey said: “Often, acceptance of an offer requires the recipient to carefully consider its terms, come to a full and proper assessment of its prospects of success, reach internal consensus from relevant stakeholders, and obtain any internal approvals necessary to agree to settle the dispute on the terms of the offer. For many contractors there are constraints on how quickly these steps can be undertaken, especially when approval needs to be sought and obtained from overseas counterparts. Nevertheless, in this case, Justice Williams found that Paladin did have a reasonable amount of time to make a decision on the offer Visie made, assessing that the claims’ background, being the industry norm security of payment regime, and simplicity of the case justified the short window for acceptance.”

In this regard, the judge considered that through the BIF Act procedure the matters in dispute had been clearly identified through payment claims, payment schedules, adjudication application, adjudication response and the adjudication decision, such that the issues and legal principles were sufficiently known at the time of the offer to enable Paladin to weigh up the risks of proceeding to trial. Justice Williams further considered that the grounds available to challenge an adjudicator’s decision were relatively narrow and that the complexity of the submissions would have been able to be evaluated in the time the offer remained open.

Thomas commented that, in certain cases, “it may be equally arguable that a failure to accept a Calderbank letter within the standard 14 days or even longer might not be unreasonable because of the complexity of the case, for example, where the parties rely upon voluminous and highly technical expert reports; and/or as a result of the offeror amending or continuing to develop its case, such that it is very difficult for the recipient to properly assess its prospects within the nominated window for acceptance of the offer”.

“Ultimately, this case highlights the inherent uncertainty present in the protection granted, or not granted, to parties issuing Calderbank letters,” Thomas added. “As Justice Williams remarked in the case, the question of whether a Calderbank offer was unreasonably rejected, in all the circumstances, ‘will always involve matters of judgment and impression’.”