Indemnity costs and offers of compromise

Industrials Intellectual Property Patents & Trade Marks

In brief

How is the Federal Court currently handling the issue of offers of compromise and indemnity costs? Lawyer Phoebe St John recaps Reckitt Benckiser v GSK Australia (No 2) to find out the latest.

How does it affect you?

The relationship between offers of compromise and indemnity costs is a tricky one for the courts to navigate. Although one party may strongly believe it is in the best interests of the case that proceedings should settle, the other might have just as strong reasoning for it to continue. Where does one draw the line regarding the reasonableness of refusing an offer to settle?

In the recent case of Reckitt Benckiser (Australia) Pty Ltd v GlaxoSmithKline Australia Pty Ltd (No 2) ([2018] FCAFC 153 (14 September 2018), the Full Court of the Federal Court had to decide exactly that.

The facts

In June this year, GlaxoSmithKline (GSK) served a notice of offer of compromise on Reckitt Benckiser, as per rule 25.01 of the Federal Court Rules, while appeal proceedings were on foot. The offer essentially stated that the appeal be dismissed and there be no order as to costs in relation to those proceedings. The offer was open for 14 days after service, but Reckitt did not respond.

Reckitt was ultimately unsuccessful in the proceedings, so GSK sought an order for Reckitt to pay its costs of the appeal – before the date of the offer on a party-and-party basis, and after the date of the offer on an indemnity basis. Essentially, GSK was seeking indemnity costs to penalise Reckitt for maintaining a cause of action with minimal prospects of success, for wilful disregard of the law, for an ulterior motive, or for simply being unreasonable. The basis of GSK's argument was that its offer was one of genuine compromise; that Reckitt's prospects of success were low; and that additional costs in preparing for, and attending, the appeal would have been avoided if Reckitt had accepted its offer.

However, the Full Court was not persuaded that the rejection of the offer was unreasonable in all the circumstances, nor that any order for indemnity costs was appropriate. It stipulated that the grounds of appeal upon which Reckitt relied were genuinely raised and reasonably arguable (even if they did not succeed before the court). Moreover, the appeal was clearly very commercially important to Reckitt. Indeed, the primary judge had declared that it had engaged in misleading or deceptive conduct, and made false representations in contravention of the ACL. The court did not find it unreasonable for Reckitt to persist with its legal action in order to defend its commercial conduct. Accordingly, it ordered Reckitt to pay GSK's costs on a party-and-party basis, not on an indemnity basis.

What does it mean?

The significance of this decision is that the mere refusal of an offer to settle does not, of itself, warrant an order of indemnity costs if the litigation goes ahead. It is important to keep this in mind, even if in making the offer, you truly believe that the opponent's prospects of success are low.