Pre-Litigation Offers: an opportunity to end proceedings before they begin
Pre-litigation offers are becoming an increasingly powerful tool used to try and resolve disputes well before proceedings are underway and costs skyrocket out of control particularly where parties have engaged in lengthy settlement negotiations before the commencement of any proceedings. Careful consideration must be given by parties to offers received prior to the commencement of any legal proceedings. Rejection of a ‘pre-litigation’ offer may leave a party exposed to an adverse costs order particularly in the context of the Civil Procedure Act 2010 which places obligations on all parties to civil litigation.
The Supreme, County and Magistrates’ Courts in Victoria all have the ability to consider a ‘pre-litigation offer’ when determining orders for costs (see Rule 26.08.1 of the Supreme Court (General Civil Procedure) Rules 2005, Rule 26.08.1 of the County Court Civil Procedure Rules 2008 and Rule 26.08.1 of the Magistrates’ Court General Civil Procedure Rules 2010).
A valid pre-litigation offer is characterised as follows:
a) Before litigation has commenced, a party has made an offer in writing to another party (whether or not expressed to be without prejudice);
b) The offer is a reasonable offer made prior to litigation which is unreasonably rejected;
c) The offer must have been open to be accepted for a reasonable time, but was not accepted; and
d) The offeror obtains an order or judgment no less favourable than the terms of the offer.
In exercising its discretion as to costs, the Court may order the party who received the offer to pay the offeror’s costs of the proceeding on a basis other than the usual order for “standard” costs (which represent about 60%-70% of costs incurred).
The case ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) and Pegela Pty Ltd v The National Mutual Life Assurance Association of Australasia Ltd (2012) VSC 177 (“Pegela”) considered the use of pre-litigation offers. The proceeding went on for many years, with two trials and two appeals taking place. The defendant made a pre-litigation offer before the first trial in October 2001 which was open for two months. The plaintiff chose not to accept the offer and instead commenced litigation. Throughout the various proceedings, the defendant then made three separate offers of compromise (“the offers”). Based on the plaintiff’s failure to accept any of these offers, the judge concluded that Argot should pay the defendant’s costs of the first and second proceedings on an indemnity basis.
In Pegela, the Court considered the established principles in relation to Calderbank offers as set out by the Court of Appeal in Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2). As this and other authorities indicate, indemnity costs are awarded where it is unreasonable in all the circumstances for the plaintiff to refuse the offer. In Pegela, the rejection of the offers was considered “evidently unreasonable”, however these orders were set aside on appeal and replaced with orders for party and party costs (see ACN 074 971 109 PTY LTD (as trustee for the Argot Unit Trust) v National Mutual Life Association of Australasia Ltd  VSCA 241). The Court of Appeal stated that the trial judge erred in deciding that the plaintiffs acted unreasonably in rejecting the offers by the defendant.
New South Wales authorities have given similar consideration to pre-litigation offers. In the case of Ismail v NSW Land & Housing  NSWSC 1434, about three months before any litigation had commenced, the plaintiff sent a written offer to the defendant. The offer, which was said to be open for 14 days, was for less than the amount the defendant later agreed to pay to settle the case (20% more than the settlement). The plaintiff made an application to the New South Wales Supreme Court for indemnity costs and the Court granted the plaintiff these costs. Notwithstanding the absence of specific rules in relation to pre-litigation offers in NSW, this case shows that courts in states other than Victoria are willing to use their discretionary power to award indemnity costs when a detailed and reasonable pre-litigation offer to settle a claim is made by the successful party.
Pre-litigation offers can provide parties with protection on costs if the dispute results in litigation. Particularly in the context of the obligations placed on all parties to litigation under the Civil Procedure Act 2010 (Victoria), if a reasonable offer is made before litigation has commenced, a party is advised to give it due and considered attention. To ignore such an offer would be to do so at one’s own peril.
Maria Kerhoulas, Partner
Joni Burns, Solicitor