Applicability of Calderbank Offers in Arbitration: Does the Winner Take it All?

[Sanjana is a student at Gujarat National Law University.]

Calderbank offers, originating from England and having applicability across particular common law jurisdictions, are essentially a strategic settlement mechanism enforced through contractual principles of law. They refer to offers made without prejudice save as to costs, which attaches cost-based deterrents or incentives for the parties involved, in cases where a reasonable settlement offer is rejected. Their applicability extends to both litigation disputes as well as arbitration proceedings, as has been confirmed by the ICC International Court of Arbitration (ICC) Commission’s Report. The following piece discusses the procedural mechanism of Calderbank offers and its applicability in international arbitration.

Introduction

The COVID-19 pandemic forced a shift within global businesses to adopt a cash conservation mindset, making them insecure about every extra penny spent on protracted legal battles. Faced with the prospect of piling up on arbitrator, counsel and expert fees, companies are increasingly seeking mechanisms to shift the risk of runaway costs and bring disputes to a swift close. Enter into picture: the Calderbank offer, i.e., an offer made without prejudice save as to costs. Essentially, it puts the offeree on notice that rejecting a reasonable settlement could later tip the cost award against them. 

Calderbank offers enjoy normative recognition across the common law world. While it finds its origins in the courts of England and Wales, this mechanism has seeped into the civil procedure regimes of Australia, New Zealand, Singapore and Hong Kong as well. Major arbitral institutions such as the ICC, the London Court of International Arbitration (LCIA), the Singapore Court of International Arbitration (SIAC), and the likes thereon have treated rejected Calderbank proposals as a key factor when allocating costs between parties, as confirmed by the ICC Commission Report. 

Precedential Aspect

The Calderbank practice is grounded in the English Court of Appeal’s decision in Calderbank v Calderbank. In a divorce dispute, Mrs Calderbank had offered Mr Calderbank approximately €12,000 to settle through cash or alternate property before the hearing. However, Mr Calderbank chose to press on, following which the Family Court ultimately awarded him only €10,000 plus his own costs. Relying upon her earlier offer, Mrs Calderbank argued that he should bear the brunt of the legal fees incurred after the offer date. The Court of Appeal concurred, holding that a party who rejects a reasonable settlement proposal and then secures a less favorable judgment must face consequences with regard to costs. 

Come to think of it as a strategic cost management tool – by using the Calderbank tactic, the offeror successfully shifts the burden of costs (from the date of the Calderbank offer) to the offeree, mitigating its losses.

Thus, the principle was derived; settlement negotiations conducted without prejudice save as to costs may be kept confidential for all liability issues, yet can be thrown open when the court determines who should bear the costs of litigation. By framing her proposal as without prejudice save as to costs, Mrs Calderbank was able to invite unbiased dialogue on equitable asset distribution without fear of prejudicing the judge. Parallelly, the save as to costs meant that once rejected, her pre-trial offer could be reproduced at the costs stage to penalize her ex-husband, insofar as the ultimate award fell below the amount that she had already proposed.

Procedural Mechanism

An arbitrator may assess the following factors in deciding whether a Calderbank offer was properly made: 

• The offer should be in writing and state that it is “without prejudice save as to costs”. 

• The offer should identify the claims, causes of action and counterclaims covered by the offer. 

• The offer should be in clear terms and immediately acceptable without the need for further clarification. 

• The offer should be clear as to its monetary value and be a full and final settlement inclusive of any ancillary matters such as interest and expenses, legal costs, arbitrator’s costs, and costs for experts and witnesses. 

• The offer should be an unconditional and genuine attempt by the offeror to settle the dispute. 

• The offer should include an offer to pay the costs of the other party up until at least the time of the offer. 

• The offer should remain open for acceptance for a reasonable period of time.

A Calderbank offer operates and is enforced like a classic contract, subject to the satisfaction of prior conditions. There needs to be unambiguity in the offer and acceptance of the promise, as well as an intention to create a legal relationship (symbolised by the letter marked with “without prejudice save as to costs”). In this case, consideration is typically the offeree’s restraint from further legal proceedings in exchange for the settlement amount.

One of the core advantages of Calderbank is that it can be made at almost any stage of a dispute, be it early on during proceedings or later when litigation has become more entrenched. Further, the offer can be withdrawn at any point before a costs decision is handed down, allowing the offeror to stay alert as the case evolves. In MEF v. St George’s Healthcare NHS Trust, the English High Court highlighted that unless a Calderbank offer contains a clear expiry date, it can potentially remain open for acceptance long into proceedings. As for the offeree, they need to be mindful to not dismiss the offer lightly, and consider undertaking complete financial due diligence before accepting/rejecting vide a written response. 

Applicability in International Arbitration

Upon perusing arbitral rules of four distinct institutions, namely: ICC, SIAC, LCIA and the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, it is relevant to study how tribunals determine costs of arbitration between the parties. While the former two (i.e., ICC and SIAC) hold that the tribunal shall take into account relevant circumstances such as the conduct of parties – insofar as delaying tactics and frivolous claims are involved – whilst apportioning costs of arbitration, the latter two (i.e., LCIA and UNCITRAL) abide by the general practice of costs reflecting the parties’ relative success and failure in the proceedings, except where a deviation from this principle is deemed necessary as per the tribunal. 

The bottom line is that the tribunal shall apply its mind to the facts and circumstances of the present case, and determines who gets to bear the brunt of these hefty legal costs. Thereafter, where it has been observed that there existed a reasonable Calderbank offer which was rejected, the tribunal can tip the costs upon the offeree, shifting the (in)tangible losses faced by the offeror and the tribunal itself. 

Nonetheless, what needs to be taken with a pinch of salt, is the reality that arbitral tribunals possess discretion to act upon its own mind, unfettered from the black letter of law (or, arbitral rules in this case).

Where Does India Stand? 

Having been inserted in the 2015 amendment, reference shall be made to Section 31-A of India’s Arbitration and Conciliation Act 1996 (A&C Act), which delineates the regime for costs under an arbitration proceeding. This provision expressly empowers an arbitral tribunal to exercise wide discretion in apportioning costs, notwithstanding anything contained in the Civil Procedure Code 1908. The tribunal has liberty to depart from the general rule and have regard to all surrounding circumstances, including “whether any reasonable offer to settle the dispute is made by a party and refused by the other party.”

By marking a settlement proposal “without prejudice save as to costs,” a Calderbank offer squarely qualifies as a “reasonable offer to settle” under Section 31-A(3)(d) of the A&C Act. If the offeree subsequently obtains an award less favorable than the offer, the tribunal is indeed encouraged to take the rejected Calderbank offer into account when allocating costs, as affirmed by the Delhi High Court in National Highways Authority of India v. Ashoka Buildcon Limited and the Apex Court in Oil and Natural Gas Corporation Limited v. Afcons Gunanusa JV. The A&C Act, despite providing statutory recognition to the principle of “loser pays” under Section 31-A(2), is subject to derogation at the discretion of the tribunal, provided that it records its reasons in writing. Further, there is a limitation imposed upon the ability of parties to contractually allocate fees by specifying under Section 31-A(5) that such an agreement will only be valid if it is made “after the dispute in question has arisen.”

Conclusion

Let us come back to the principal question - does the winner really take it all? Highly debatable. Calderbank offers systematically align private incentives with public policy by encouraging speedy and economic disposal of disputes. Litigants and arbitration participants alike are well aware that a reasonable proposal once made, carries real weight: refuse it at your peril, and you may as well pay generously in costs, even if you “win” upon merits. 

In an economic climate where preserving cash can be the difference between survival and collapse, Calderbank offers provide a strategic and financially prudent pathway to resolution by helping parties avoid the gamble of a blown-out formal dispute.