What is an Offer of Compromise?

Author: Ian Aldridge, Progressive Legal

An offer of compromise is a formal offer to settle proceedings according to the rules of the relative Court.  

If you are involved in a dispute with another person or business, going to trial/hearing can be expensive, time-consuming, distracting and uncertain. It is always a good idea to consider the possibility of reaching a compromise with the opposing party to save you both time and money.  

Offers of compromise can also be made when parties run out of money and are unable to continue with their case at trial.

Want to settle your dispute outside of court?

The legal system promotes out of court settlements between disputing parties. Even if you are confident in your case, you should still carefully evaluate an offer of compromise if it is proposed. If rejected, it may result in harmful consequences and end up costing you a lot of money if you ultimately lose in court. 

Courts want the parties to settle as many disputes outside of Court as possible to reduce the amount of litigation matters there are (as Courts are typically overburdened with matters) and at the end of the day usually only one party wins at Court, and even then most of the time they aren’t fully happy with the outcome.  

At least if a matter settles, then both parties have agreed to compromise their case on what they think is right and they are prepared to sacrifice something in the aid of reaching a compromise. No one will think they have one but at least no-one fully loses out. 

Serving your Offer of Compromise

An offer of compromise may be served at any time from commencement of proceedings before the judgment of the claim/cross-claim. The offer usually involves a proposal for a specific sum of money or other terms of settlement. If the offer is accepted by the opposing party, it results in the dispute being resolved between the parties.  An offer of compromise must represent an honest attempt to negotiate a settlement. 

Offers of compromise are made on a ‘without prejudice’ basis which means that neither party can provide any correspondence that was made regarding the offer of compromise as evidence in court except when determining the issue of costs.  

What happens if you reject an Offer of Compromise? 

If you reject an offer of compromise, it can result in serious and harmful consequences. This is why it is critical to carefully examine an offer of compromise if it has been proposed to you. The purpose of an offer of compromise is to provide cost consequences if an attempt at settlement has been unreasonably rejected.  

If a party makes a valid offer and receives an equal or better outcome at the final hearing after the offer was rejected, they can claim for indemnity costs. The order for indemnity costs is automatically applied except in rare circumstances where the court ‘otherwise orders.’ Indemnity costs refers to the legal costs that you may incur throughout the court proceedings including fees, charges, expenses and remuneration.  

The indemnity costs include the costs from the time the offer was rejected up until the final decision. In this situation, the law is advocating that the other party should have accepted the offer to save everyone time and money and the Court in having to deal with the matter. Due to their refusal and the subsequent outcome, the Court requires the other side to cover a higher proportion of legal costs than usual. 

Example of an Offer of Compromise: 

Let’s say, you are involved in a dispute against John. You propose an offer of compromise to him valued at $100,000 before the beginning of court proceedings. John chooses to reject your offer. If the court decides in favour of your case at trial and awards John to pay you $250,000, he will also be required to pay indemnity costs. John will have to pay a very high proportion of your legal fees from the date you sent him the offer up until the decision date. 

Given that John unreasonably rejected the offer of compromise proposed to him, he now must face severe consequences. It is now costing him a lot more money than it would if he had accepted the offer in the first place. This is why it is so important to carefully consider all offers of compromise when attempting to reach a settlement outside of court.  

What are the elements of an Offer of Compromise? 

An offer of compromise is a defined concept under the Law. Whilst each Tribunal and Courts have their own rules that should be observed, generally, an offer of compromise must meet these key requirements for it to be recognised.  

An offer of compromise must: 

• be made in writing and have a statement indicating that it is being served in accordance with the Order or Section it is under. 
• be made without prejudice. 
• propose a settlement that is exclusive of legal costs. 
• state that it is an official letter of compromise and refer to the appropriate law. 
• contain sufficient detail about the offer; it must specify the amount of money and when that money must be paid. 
• remain open for acceptance for a minimum period according to the law. 

An offer of compromise cannot be withdrawn during the time it is open to be accepted unless the Court otherwise orders.  

What are the relevant rules in each Jurisdiction? 

Offers of compromise are governed by the rules and procedures set out in the relevant state or territory legislation, depending on the jurisdiction in which the legal dispute arises. 

For example, the relevant requirements for an Offer of Compromise in NSW state that it must (as found in Rule 20.26): 

• be in writing 
• state the claim which it relates to 
• be made exclusive of costs  
• include a statement declaring that it is an offer of compromise, made according to Rule 20.26 of the UCPR 
• specify the time period the offer is open for acceptance 
• provide at least 28 days to the other party to evaluate the offer 

If the receiving party does not accept the offer within the given time frame, it will no longer be valid. Alternatively, if the other party accepts it, it becomes a legally binding agreement on both parties. 

When should I make an Offer of Compromise? 

You can make an offer at any time before or during the proceedings of a dispute. The timing of when it is appropriate to make on offer depends on each case’s circumstances.  

An offer served prematurely may not provide the desired costs protection. There must be enough information available to allow the offeree to assess the offer, for example, after the parties have filed their evidence.  

It is recommended to make an offer at a time in proceedings where there is a genuine incentive to compromise. If a party has already paid for most of the costs to prepare for the hearing, the offeree is less likely to accept an offer of compromise.  

What are the benefits of an Offer of Compromise over a Calderbank offer? 

Offers of compromise and Calderbank offers are both settlement options that diminish the need for litigation in Court.  Whilst they are very similar in nature, an offer of compromise are more formal because they require strict adherence to certain rules and entitlements as to costs.  

The relevant rules in each jurisdiction provide clear requirements on how to make an offer of compromise and the consequences if they are not followed.  

Offers of compromise are also usually automatic and predictable unless exceptional circumstances arise. Conversely, Calderbank offers may be more difficult for legal practitioners to discern a clear indication of the amount of costs the Court may award.  

If you would like more in-depth information on Calderbank offers, have a look at our article, ‘What is a Calderbank Offer?’ 

Key Takeaways  

An offer of compromise may benefit you because it can act as a form of costs protection or save you from costly and lengthy court proceedings.  

Before deciding whether to make, accept or reject an offer of compromise, it is important to understand that there may be implications of your decision. Each individual case is different.  

If you have any questions about resolving a dispute with an offer of compromise, contact our experienced dispute resolution lawyers on 1800 820 083 or request our advice below and our team will be in touch.