The door opens on Calderbank letters in class actions

What you need to know

• A recent Federal Court decision has departed from previous case law which suggested that Calderbank letters and Offers of Compromise will rarely be effective in class action proceedings where (as is common) the ultimate potential liability to group members is not known when the offer is made.
• The judgment indicates that the Court will take a practical approach in considering whether it was reasonable for the other party to reject an offer in a Calderbank letter, having regard to (among other things) what was known about the potential liability when the offer is made.
• While it remains to be seen how the court will apply that standard, parties to class actions should consider using Calderbank letters as a way of incentivising settlement, or to gain the benefit of costs protection if the other side does not accept.
• Parties should also consider how to respond to Calderbank letters in class actions, given the potential adverse costs risk from an unreasonable rejection of the offer.

The issue of whether a Calderbank letter was effective in a class action arose in Karpik v Carnival plc (The Ruby Princess) (Common Questions and Costs) [2024] FCA 57 (Karpik). Justice Stewart had made findings partly in favour of the applicant on her individual claim, but was asked to reserve costs on the basis that, ultimately, the group members might do worse than a lump sum offer made by the respondents at an earlier stage. The applicant argued that the rejection of the offer was irrelevant in a class actions context, based on McMullin v ICI Australia Operations Pty Ltd [1997] FCA 1426 (McMullin).

Justice Stewart departed from McMullin and reserved costs on the basis that it may have been unreasonable for the applicant to reject the Calderbank offer, depending on the ultimate liability to group members established in the action.

What is a Calderbank offer?

A Calderbank offer is a written settlement offer made on a "without prejudice save as to costs" basis. A Calderbank offer must be stated in clear, precise terms, be capable of acceptance, and state clearly the time in which the offer must be accepted. It should also state that, if the offer is rejected, it can be relied upon for an application for indemnity costs.

The key benefits of making an offer via a Calderbank letter are as follows:

• Calderbank letters offer a means to promote early settlement, by pressing the other party to consider whether they can reasonably reject the offer.
• Since the preparation of a Calderbank letter is typically faster and more informal than attending a formal mediation or negotiation, it offers a less expensive means by which to promote settlement.
• If a Calderbank offer is rejected and following the ultimate determination of the proceeding, the judgment awarded is less than the amount of the Calderbank offer, there may be cost consequences, sometimes on an indemnity basis if it is determined that the rejection of the offer was unreasonable. This means that, even if the Court finds against the offeror, the offeror could still be awarded costs.

Using Calderbank offers in class actions

In Karpik, the applicant on behalf of group members brought a claim against Carnival for personal injury and related damages arising from COVID-19 (COVID) infections on board a cruise ship.

Prior to trial Carnival made an offer to resolve the entire representative proceeding for $15 million. This offer was rejected by the applicant.

In October 2023, Justice Stewart held that the failure of the respondents to prevent or take reasonable precautions against a COVID-19 outbreak onboard the Ruby Princess cruise ship amounted to negligence and a failure to meet the consumer guarantee as to fitness for purpose. The respondents had also engaged in misleading or deceptive conduct. His Honour awarded damages intended to cover the applicant's out-of-pocket losses but declined to award the $360,000 that she had sought for personal injury.

The question of costs was dealt with in February 2024. Carnival submitted that costs for the period after its offer (made on 5 October 2022) should be reserved until after the total recovery to group members was understood, so that the Court could consider whether the rejection of Carnival's settlement offer was unreasonable and ought to have a bearing on costs. The applicant sought to have her costs paid on a party/party basis and submitted there was no justification for departing from the ordinary position that costs follow the event. Relying on McMullin, the applicant argued that it could not have been unreasonable for her to reject the Calderbank offer in the context of a class action, where total quantum could not be reliably determined as the group members and their claims had not been not identified and quantified. This is a common situation in "open" class actions.

In McMullin, Justice Wilcox considered that reliance on a Calderbank offer in a representative proceeding posed "a major problem" as the court could not know whether the settlement represented fair value or reasonably reflected the hazards of individual claims if group members were unidentified when the offer was made. As this information could not have become available without continuing with the case, he declined to depart from the usual costs order.

Justice Stewart in Karpik disagreed with the approach adopted in McMullin and held that it did not necessarily matter that the quantum was not yet known. His Honour considered that there was no reason why the Calderbank offer could not operate in the same way as it would in ordinary litigation, and that determining whether rejection of the offer was unreasonable could be decided at a later point, after the quantum had been established. He noted that the court would, on the occasion of approving the settlement or giving judgment, know whether the offer was more or less than the ultimately determined amount.

His Honour further noted that to deny respondents the mechanism of putting the applicant (or the funder) at risk on costs by making a reasonable global offer of settlement would not serve to encourage the settlement of class action proceedings.

Offers of Compromise

The decision concerned a Calderbank offer rather than a formal offer of compromise under Part 25 of the Federal Court Rules 2011 (Cth). Formal offers of compromise potentially lead to even stronger adverse cost consequences than Calderbank offers.

In Karpik, the respondents initially argued that the offer was made "in accordance with the principles in Pt 25" but ultimately abandoned that point. Practically, there are likely to be challenges with making valid offers of compromise in class actions and the court may in any event reserve a substantial discretion as to costs consequences given the nuanced issues which arise in a class actions context. However, it will be interesting to see if parties seek based on Karpik to utilise the offer of compromise procedures and contend that they can be effective in class actions.

How will the decision impact class action settlement strategies?

In ordinary litigation, Calderbank letters are a powerful tool to press another party to consider settlement, given the risks if it unreasonably rejects an offer. Their impact, from a costs perspective, has been uncertain in class actions, in light of McMullin.

Justice Stewart's willingness to consider imposing cost consequences for the rejection of an offer before those matters were understood potentially enables a party to push for earlier engagement on settlement, and for the other side to take a realistic approach to evaluating the offer.

The decision may also push the parties to engage earlier on the quantification of the claim, to support arguments that the other side knew enough that it was unreasonable for them to reject an offer. All that said, the outcome in Karpik was (at least so far) a significant disparity between the amounts claimed and the amount awarded. It is possible that the Court will be unwilling to impose cost consequences absent what it regards as very clear unreasonableness which can be identified in the absence of the parties having detailed information about quantum. Further, it is as yet unclear whether Justice Stewart will ultimately conclude that the offer was unreasonably rejected in the Karpik case.

Nonetheless, this is a decision to watch closely and potentially provides parties with a new tool to promote engagement on the settlement of class actions and manage their costs risks from those actions.

Authors: Lucinda Hill, Partner; Mark Bradley, Partner; John Pavlakis, Partner; Marianne Hong, Senior Associate; and Stephanie Douvos, Lawyer.