Both are distinct legal instruments, and their incorrect use may have adverse consequences for certain transactions.
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Making a reasonable pre-litigation settlement offer prior to commencing court proceedings can be an effective strategy to either settling a dispute before proceedings start or giving you a better argument at the end of a successful trial to recover all your reasonably incurred legal fees.
We experience many solicitors resorting to a standard “Letter of Demand” which simply provides little to no value for their client in most circumstances.
This article looks at the purpose, benefits and risks of a pre-litigation settlement offer which we find, when appropriately used, adds an exceptional amount of value for our clients.
Settle the dispute
Costs at the end of the proceeding
The real benefit of a pre-litigation settlement offer comes from the person rejecting the offer. This is a strategy, almost a ‘trick’. You often want the defendant to reject your first offer, only to later realise that they will lose and have to pay your legal fees. This, in turn, puts you in a much better negotiating position, as the longer negotiations continue, the more they may need to pay.
It is not uncommon that you will make a settlement offer knowing full well that it will likely be rejected. In circumstances where you predict that the settlement offer will be rejected, you may choose to offer a more reasonable amount (but an offer you will still be happy with if the defendant accepts your offer).
This strategy can put you in a very strong position in later settlement negotiations, or at the end of trial if you win.
When coupled with a reasonable formal settlement offer, you should increase your chances of recovering almost all of your legal fees if you win. The court has stated that a pre-litigation settlement offer, and later a formal offer, creates a “near insurmountable task” for a defendant to say why they should not pay a plaintiff’s costs on the indemnity basis (all your reasonably incurred legal fees).
However, you must comply with several technical legal rules to make both offers valid before this will be considered by the courts, and a Magistrate or Judge still has a discretion not to award indemnity costs if they can find a reason not to.
Magistrates and Judges have considerable discretion when it comes to awarding costs. That is why it is important to give yourself as much ammunition to seek an indemnity costs order as possible, and why it is very important for your solicitor to perfect your communication to your opponent. You want the Magistrate or Judge to consider you reasonable and the defendant’s actions unreasonable.
A pre-litigation settlement offer provides a two-for-one benefit (assuming you win). You both look reasonable, and you give the Magistrate or Judge a legal basis to find in your favour with respect to indemnity costs.
The only real risk with this strategy is that if the defendant does accept the offer, you should be happy with that outcome, and you may have to play your hand a little earlier than usual (as such, we need to consider the legal strategy for each matter on a case by case basis).
It is a very rare occasion where we have regretted sending a pre-litigation settlement offer, because they are so effective. A pre-litigation settlement offer is one of the first steps to achieving top 1% reasonable plaintiff status with the courts and improves your chances of an indemnity costs order.
A pre-litigation settlement offer
A pre-litigation offer is very similar (in some commentary, the same) to a Calderbank offer. A “Calderbank” offer is named after an old English Court of Appeal case “Calderbank v Calderbank”. In that case, the wife made a reasonable offer to settle the dispute. The husband rejected the offer, and the wife ended up with a better result. The judge considered that the husband was unreasonable by rejecting the offer.
Calderbank offers are now accepted in almost all proceedings, with the notable exception of criminal proceedings (and sometimes even then).
We have an extensive list of elements to comply with a Calderbank offer in our article Essential Elements of a Calderbank Offer. There is no legal basis to depart from these elements in a pre-litigation offer.
As such, it is very important to get the offer right. You’ll see from reviewing the elements of a Calderbank offer that some of the elements are difficult to apply prior to litigation. In our view, you should strictly comply with the elements of a Calderbank offer so that you can vigorously oppose any notion that the defendant should not pay your legal costs. You should not leave a Magistrate or Judge a reason to find a technicality to only award you some of your legal costs.
A pre-litigation settlement offer is very similar in purpose to a Calderbank offer, but it lacks certainty in two ‘elements’; because a pre-litigation offer is made before proceedings even commence, the main issue is whether you can effectively give the defendant the information needed to determine whether they should accept or reject the offer, and whether the defendant can appropriately determine their own prosects of success in defending the matter.
If the defendant does not have the ability to properly consider a settlement offer, rejecting it may not be considered unreasonable.
Whilst the strategy for any legal matter will depend on the circumstances, in many cases, Gibbs Wright Lawyers will draft your court documents (a Claim and Statement of Claim) and attach them to a letter to the other side before commencing proceedings.
Any information the Statement of Claim is not able to provide can be included in the letter to help support your claim and give the other party the information they need to consider the offer. The pre-litigation settlement offer will be sent in a separate letter immediately afterwards.
Use with Calderbank and formal offers
The Courts have found that when a plaintiff has consistently offered to settle (and the settlement offers are reasonable), there would need to be very significant considerations to not award indemnity costs.
As such, it may be advantageous to make several Calderbank offers throughout proceedings. Additionally, making a formal offer (in conjunction with a pre-litigation settlement offer) is a way to help secure an indemnity costs order.
If the defendant rejects a reasonable formal offer, and you later win more than the offer (i.e. if you offer $100,000 and you are awarded $105,000), then “the court must order the defendant to pay the plaintiff’s costs calculated on the indemnity basis unless the defendant shows another order for costs is appropriate in the circumstances.”
A reasonable pre-litigation offer helps disarm the argument that another order for costs is appropriate.
Being in the top 1% of reasonable plaintiffs
The strategy of offering a pre-litigation settlement offer in conduction with a later formal offer is about trying to be in the top 1% of reasonable plaintiffs and skilfully persuading a Magistrate or Judge to award all of your legal costs. The whole purpose of a pre-litigation offer is to be able to say to a Magistrate or Judge something along the lines of:
“My client did not want to commence proceedings, they were forced to commence proceedings. The defendant did the wrong thing, and my client, gratuitously, attempted to settle this matter before proceedings had even commenced by providing a draft Statement of Claim and a very reasonable pre-litigation settlement offer. The defendant refused or neglected to respond, despite having all of the information they needed to make an informed decision to accept or reject the offer. The defendant ought to have known their prospects were limited, and they ought to have appreciated the reasonableness of my clients offer. But my client did not stop there, they made a further formal offer during proceedings. Pursuant to Rule 360 of the UCPR, the court must order the defendant to pay the plaintiffs costs calculated on the indemnity basis unless the defendant shows another order for costs is appropriate in the circumstances. In the circumstances where my client has afforded the defendant every opportunity to settle, and including providing a pre-litigation offer, those circumstances do not exist. The Queensland Court of Appeal has suggested that a defendant that has rejected a reasonable pre-litigation offer and a reasonable formal offer “faces a near insurmountable task” to establish why they should not pay an indemnity costs order. With respect, the only appropriate order is to award costs on the indemnity basis.”
A pre-litigation settlement offer is a way to demonstrate to the court that you have been entirely reasonable throughout the proceedings, and in conjunction with a formal offer, that there is no other appropriate order for costs except for an indemnity costs order.
The content of this publication is intended as general commentary only and may not be suitable or applicable to your personal circumstances. It is not intended to replace independent legal advice. You can contact us at our Brisbane Office for a free consultation on a range of litigation matters on (07) 3088 6364.
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