Using Calderbank offers in arbitration – Seven tips

Nino Sievi

Calderbank offers are a useful cost management technique in international arbitration. They can offer significant protection against an adverse costs award. However, a Calderbank offer must be drafted carefully and presented in the right procedural environment. The present blog post offers seven tips for making a Calderbank offer.

What is a Calderbank offer?

A concept originating form English law, Calderbank offers are settlement offers made to the other party (“without prejudice save as to costs”) with the intention of shifting the allocation of litigation costs. If the offeree rejects the settlement offer and later on obtains a litigation result that is worse than the settlement offer received, it shall bear the costs of the proceedings, unless it can demonstrate that refusing the offer was reasonable under the circumstances.

This rule is based on the reasoning that such litigation costs are considered unnecessary. The offeree had the option of accepting the more or equally favourable settlement offer and thereby avoiding the litigation costs altogether or at least part of it (i.e. as of the moment when the offer was made).

Example: Company A sues Company B for USD 10 million. Company B make a Calderbank offer proposing to pay USD 7 million. Company A rejects the offer, and the litigation continues. The tribunal awards USD 6 million to Company A, but orders Company A to bear all litigation costs (including Company B’s attorney fees) incurred after the Calderbank offer.

Accordingly, the offeree risks having to bear the costs of the proceedings despite winning on the merits of the case. A Calderbank offer enables a party to reduce its costs risk that stems from the general cost allocation rule pursuant to which the loser bears the costs.

Importantly, Calderbank offers are not disclosed to the court until the allocation of costs thereby avoiding any influence on the merits decision. This is usually ensured by submitting the refused Calderbank offer to the court in a sealed envelope (only to be opened after the decision on the merits). Procedurally, the costs order is only issued after the decision on the merits (see Rule 47.1, Civil Procedural Rules; https://www.justice.gov.uk/courts/procedure-rules/civil/rules/part-47-procedure-for-detailed-assessment).

Why use Calderbank offers?

Protection of costs: By making a Calderbank offer a party can reduce its costs risk in an arbitration or litigation.

Incentive to settle: A Calderbank offer puts the other party under pressure as it increases their costs risks. This serves as an incentive for settlement which would also avoid any future litigation or arbitration costs.

How are Calderbank offers regulated in international arbitration?

Only very few institutional rules address the issue of Calderbank offers directly (e.g. Arbitration Rules of the Swiss Association of Engineers and Architects). Frequently, institutional rules are silent on the issue but grant a tribunal a wide discretion in allocating costs. There is general consensus, that tribunals have the discretion to infer cost consequences from a Calderbank offer; however, they are under no obligation to do so.

A procedural issue stemming from the differences between international arbitrations and English civil litigation is the timing of submission for a Calderbank offer. While in English civil litigation, the costs are typically decided on in separate proceedings after a final decision on the merits, a final award in an arbitration contains both, a decision on the merits and on the allocation of costs.

Thus, one must tweak the arbitration procedure a little bit, in order to submit a Calderbank offer while ensuring confidentiality of the offer until the allocation of costs stage. Ideally, the parties can agree on a specific procedure to submit Calderbank offers in the Terms of Reference or the Procedural Order No. 1, respectively. Alternatively, a party may apply for a bifurcation of the proceedings or simply submit the Calderbank offer in a sealed envelope (English litigation style) and see whether the tribunal will accept such conduct. Finally, a party may also seek assistance from the administering institution when putting a Calderbank offer to the tribunal (see e.g. ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration, paras. 267-270; https://iccwbo.org/content/uploads/sites/3/2020/12/icc-note-to-parties-and-arbitral-tribunals-on-the-conduct-of-arbitration-english-2021.pdf).

Tips when making a Calderbank offer

  1. Make the offer early on: The earlier the offer is made the higher the potential costs saving, as the rule generally applies only to costs incurred after the offer.
  2. Mark the offer clearly “without prejudice save as to costs”. This ensures that the other party may not bring the offer to the tribunal’s attention in the merits stage of the proceedings.
  3. The offer should be clear, precise and unconditional. In particular, leave no doubt about the scope of the offer (i.e. which issues/claims are covered and which not). Otherwise, a tribunal might come to the conclusion that it was reasonable for the offeree to reject the offer; or the tribunal might even find that is impossible to determine whether the result obtained in the arbitration is better or worse than the settlement offer made, as the offer covered issues outside of the arbitration.
  4. The issue of costs should be clearly dealt with in the offer, i.e. the offer should state whether the offer is inclusive or exclusive of the costs of the dispute.
  5. The offer must state the time in which the offer must be accepted and the offer must give a reasonable time for acceptance. If the offeree is provided with insufficient time to assess the offer made (which depends amongst others on the complexity of the matter), a rejection of the offer may be deemed reasonable.
  6. It is advisable to make reference in the offer to the principles of a Calderbank offer and to explicitly reserve the right to tender the offer on an application for costs if the offer is rejected.
  7. If you are considering making a Calderbank offer, be proactive in the structuring of the arbitration proceedings. Try to have a section on Calderbank offers included in the Terms of Reference or Procedural Order No. 1. This section should set out whether the tribunal will generally take into account Calderbank offers when deciding on the allocation of costs and also the procedure to be followed when submitting such offer to the tribunal.
 
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