Background
The parties were in dispute concerning a building contract. The defendant initiated Local Court proceedings seeking payment from the plaintiff, Shina Shahista Khan. On 1 June 2023—before those proceedings were commenced—Khan’s solicitors made a settlement offer to the defendant in accordance with Calderbank principles. The offer proposed that the defendant retain the full $28,000 deposit, release Khan from all claims, and that each party bear its own costs. The defendant rejected this offer.
The Local Court proceeded and rendered judgment. Khan appealed to the Supreme Court. On 2 July 2026, Muston J set aside the Local Court judgment, dismissed the proceedings, and ordered the defendant to pay Khan’s costs on the ordinary basis. Khan then applied to vary the costs order to indemnity basis, relying on the rejected settlement offer.
The Court’s Holding
Muston J refused Khan’s application. The court held that Khan bore the burden of establishing entitlement to indemnity costs and had failed to meet it. The analysis proceeded in two stages: first, whether Khan had “bettered” the settlement offer; second, whether the defendant’s rejection was unreasonable. On the first question, the court found that while the outcome was no less favourable to Khan than the proposed terms, she had not actually bettered it. The deposit was retained by the defendant in any event; the practical immunity from future claims she secured through successful defence was not materially better than a contractual release; and although she ultimately recovered costs, the offer was made before proceedings commenced, making pre-offer costs recovery uncertain. The court concluded Khan had at best achieved judgment no less favourable than the offer, not a superior outcome.
On the second question, the court found the defendant’s rejection reasonable. The offer contained little genuine compromise—Khan had made no claim for recovery of the deposit at the time and was not the party seeking payment. The plaintiff’s legal arguments at trial did not align with those made when the offer was made, and the ultimate outcome turned on a construction question she had not advanced. Although accepting the offer would have been commercially advantageous to the defendant, the court found it was not unreasonable for the defendant to have rejected it in the circumstances.
Key Takeaways
- A party seeking indemnity costs following rejection of a Calderbank offer bears the burden of proving entitlement and must establish both that it bettered the offer and that rejection was unreasonable.
- An offer made pre-proceedings requires careful analysis of the element of compromise, particularly where the offeror was not the party seeking payment.
- The outcome of litigation being no less favourable than a rejected offer is insufficient; the party must have actually bettered the offer’s terms.
- Reasonableness of offer rejection is assessed at the time of offer, considering the offeree’s prospects, the clarity of terms, and the extent of compromise, not merely whether acceptance would have been commercially prudent in hindsight.
Why It Matters
This decision clarifies when settlement offers of the Calderbank type can secure indemnity costs awards. It reinforces that courts will not award enhanced costs merely because litigation ensued and proved more expensive than settlement would have been. The decision has practical significance for parties considering pre-proceedings settlement strategies: an offer made before dispute escalation will be scrutinised closely to assess whether it contained genuine compromise, and rejection may be found reasonable even if commercially disadvantageous ex post facto. Practitioners should note that aligning trial arguments with those underlying settlement offers strengthens any later indemnity costs application.