In Firstmac Limited v Zip Co Limited (No 2)  FCA 1074 (Firstmac No 2), Markovic J considered whether it was appropriate to make an order for the payment of indemnity costs in circumstances where the unsuccessful party, Firstmac, had refused three without prejudice settlement offers made by Zip Co Limited and Zipmoney Payments Pty Ltd (Zip Companies) which were more favourable than the ultimate outcome of the proceedings.
While the substantive first decision was uncontroversial, the second decision in respect of indemnity costs, which forms the basis of this article, offers timely guidance to solicitors preparing Calderbank offers in proceedings before the Federal Court of Australia.
The principles regarding the award of indemnity costs against a party found to have rejected a reasonable Calderbank offer are well established and were summarised by the full Federal Court in Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2)  FCAFC 112.
In short, mere refusal of an offer which was more favourable than the result at trial is insufficient to attract an order to pay indemnity costs. Rather, the refusal must be ‘unreasonable’. A non-exhaustive list of factors relevant to the inquiry as to reasonableness was set out in the joint judgment, including:
- The stage of the proceeding at which the offer was received.
- The time allowed to the offeree to consider the offer.
- The extent of the compromise offered.
- The offeree’s prospects of success, assessed as at the date of the offer.
- The clarity with which the terms of the offer were expressed.
- Whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.
A further consideration was relevant to the decision of Moshinsky J in Merial Inc v Intervet International BV (No 4) (2017) 124 IPR 1 (Merial) who found that it was difficult, if not impossible to determine whether it was reasonable to reject a Calderbank offer involving the grant of a royalty-free licence because this was not commensurate with a possible outcome in the proceeding.
More recently, in Vector Corrosion Technologies Limited v E-Chem Technologies Ltd  FCA 519, a rejected Calderbank offer was held to give rise to an order for the payment of costs on an indemnity basis in a Patent proceeding. Justice Jagot found that the offers justified the order because the offers contained exceptionally favourable terms, were serious, and involved a real compromise of value to the addressee.
Guidance from Firstmac
The Settlement Offers
During the proceedings, three distinct settlement offers were made by Zip Companies, all of which were rejected. Firstmac made a counteroffer to the second of the three offers made by Zip Companies, which incorporated the terms of the second offer.
Justice Markovic held that it was not unreasonable for Firstmac to reject the first offer because it was made shortly after Zip Companies had filed its defence, and before any evidence had been filed by either party. Accordingly, at that stage of the proceeding, Firstmac was not in a position to properly consider its position.
Similarly, her Honour held that the two later offers, although made at an appropriate time, were, much like those in Merial, not “commensurate with a possible outcome in the proceeding” because they would have required a Firstmac to assist Zip Companies to obtain and maintain registrations of ZIP trade marks in foreign jurisdictions and that Firstmac assign its ZIP registrations to Zip Companies. The trial judge was not in a position to make orders of this kind at trial.
In refusing to award indemnity costs, Markovic J said that these requirements made it “difficult, if not impossible” to assess whether Firstmac’s rejection of these offers was unreasonable in the circumstances.
The “Rubric” Argument
Zip Companies argued that ‘because Firstmac’s counter offer incorporated [the disputed terms] of the [second offer], Firstmac effectively accepted that they were within the “rubric” of the commercial dispute [such that] it would follow that the terms were “commensurate with a possible outcome of the proceeding”’.
This novel argument seems to have been squarely rejected by Markovic J, who made clear that the words “commensurate with a possible outcome in the proceeding” will be interpreted narrowly.
Thus, the scope of the words “possible outcome” in Merial is restricted to orders that can actually be made by the Justice presiding, within jurisdiction, and will not extend to an outcome that might be achieved as an adjunct to the litigation by freely negotiating parties.
- When offers are made before evidence has been filed by either party, it may be difficult, if not impossible, to establish that the offeree has been unreasonable by rejecting that offer.
- When offers are made without prejudice save as to costs, the offeror must be vigilant to ensure that the terms of the offer are commensurate with a possible outcome in the proceeding.
- The meaning of the words “possible outcome” from the test in Merial is restricted to those orders that can actually be made by the Justice presiding.