In brief - Correctly phrased offers of compromise provide almost certain award of indemnity costs
Offers of compromise, pursuant to rule 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), are often used as a tool by both plaintiffs and defendants in encouraging early settlement negotiations, given the potentially adverse costs implications if the matter is run to a hearing and a better outcome is not achieved.
Offers of compromise also serve as an effective mechanism for costs protection when dealing with an "unreasonable" opponent. If made correctly, an offer of compromise provides an almost certain award of indemnity costs from the day following the date of service.
Rule 20.26 of the Uniform Civil Procedure Rules 2005 (NSW)
Rule 20.26(2) of the UCPR specifically provides that:
...an offer must be exclusive of costs, except where it states that it is a verdict for the defendant and that the parties are to bear their own costs.
Redefining the correct form for offers of compromise
Traditionally, solicitors have drafted offers of compromise on a "plus costs to be agreed or assessed" basis. The rationale behind the addition of the phrase "as agreed or assessed" is to ensure that the offeror has the option to have the costs assessed in the event that a negotiated settlement on costs could not be reached.
At the end of last year, in the case of Old v McInnes and Hodgkinson  NSWCA 410, the Court of Appeal, somewhat controversially, rejected a claim for indemnity costs on the basis that the offers of compromise included the phrase "as agreed or assessed".
Meagher JA held that:
... Neither of the offers made on behalf of Mr McInnes was "exclusive" of costs or within the exception in r 20.26(2). Each provided that Mr McInnes should pay Mr Old's costs "as agreed or assessed". For that reason, neither was an offer in fact "made under rule 20.26" for the purposes of UCPR r 42.13 and accordingly each was of no effect for the purposes of the offer of compromise regime under the UCPR... 
Meagher JA also noted that:
... Each offer was stated as being made pursuant to the UCPR. Neither contained any statement that it was to operate as a Calderbank offer ... In the circumstances, neither could be relied upon on that basis.
Therefore, Mr McInnes was unable to argue that if the offer could not be classified as an offer of compromise, it should be treated as a Calderbank offer, because the offer did not expressly mention the principles raised in Calderbank v Calderbank.
"Acceptable" offers of compromise revisited by NSW Court of Appeal
On Friday 4 May 2012, the Court of Appeal revisited the issue of what constitutes a valid offer of compromise in the matter of Vieira v O'Shea (No.2)  NSWCA 121. The Court of Appeal, which included Meagher JA, noted that:
The first respondent disputed that the offer complied with the relevant rule for three reasons. First, it was said that the offer failed to state that it was "exclusive of costs", as it was required to be by UCPR 20.26. However, the rule does not require such a statement, but merely requires that the offer "must be exclusive of costs": r 20.26(2). The evident purpose of that requirement is that the effect of the offer, whether accepted or rejected, will be to engage the relevant costs rule in Pt 42. The offer did not purport to be inclusive of costs and there was no reason to infer that it was, so as to invalidate its operation under r 20.26, with which it purported to comply. (emphasis added) 
The decision in Vieira v O'Shea (No.2) goes some way to softening the effects of the earlier decision in Old v McInnes and Hodgkinson. However, the decision does not expressly reject the Court's earlier approach that offers of compromise that include the phrase "as agreed or assessed" do not comply with rule 20.26 of the UCPR.
Beware the phrase "as agreed or assessed" in offers of compromise
To err on the side of caution, parties should review any files in which offers of compromise have been made and ensure that the offers made, and any future offers, do not include the phrase "as agreed or assessed". This is particularly pertinent where offers have been made for the purpose of costs protection.
It may also be worthwhile including in the cover letter attaching the offer of compromise reference to the offer also being made in the alternative in accordance with the principles contained within Calderbank v Calderbank.
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