The strategic use of an offer of compromise has much potential to end a dispute effectively and to focus the parties’ minds on the risks of litigation and commercial realities.
Under the Uniform Civil Procedure Rules 2005 (UCPR), in very broad terms, if an offer of compromise is made, but not accepted by the offeree, then provided that the offeror does the same or better than the offer, then the offeror would be entitled to indemnity costs from the offeree from the day after the offer is made.
To illustrate the principle, if a claimant is claiming $200,000, but you think that his best outcome is likely to be $100,000 only, then it may be in your interest to submit an offer of compromise for $100,000. If it comes to pass that the claimant succeeds in obtaining judgment for $80,000 only, then you would be entitled to an order for indemnity costs from the day after you made your offer. The benefit of obtaining an indemnity costs order in your favour is that the offeree will have to pay most of your costs.
Negotiation involves many facets and adding the possibility of an indemnity costs order changes the risk matrix for both parties. While pitching an offer too low provides little benefit to the offeror and might not be conducive to achieving settlement, pitching an offer that’s too high could mean giving away more than you need to. A negotiation strategy needs to be formulated that takes into account the view of risks on both sides and then executed in a manner that extracts the best possible outcome for the client.
The preparation of an offer of compromise requires attention to the technical provisions of the UCPR and a well-drafted compromise would contain fall-back provisions in the event that the offer of compromise is found to be non-complying for some reason.