An offer not to be refused: the cost(s) of unreasonable rejection of an offer of compromise

Following its landmark damages decision for patent infringement in Bayer Pharma Aktiengesellschaft v Generic Health Pty Ltd [2017] FCA 250, the Federal Court has now delivered judgment on the only outstanding issue in the matter - the costs of the proceedings - and delivered an important message on the need to consider offers of compromise carefully.

Bayer's offer to compromise the patent infringement proceedings

Bayer had offered to settle proceedings, for close to $20m, by way of an offer of compromise in May 2015. The final award of damages for infringement, of over $25m plus interest, far exceeded the amount of that offer.

Bayer therefore sought orders for costs on an indemnity basis in accordance with a strict application of the Federal Court Rules.

The Federal Court Rules on offers of compromise

Under Rule 25.14(3) of the Federal Court Rules 2011, an applicant is entitled to an order that the respondent pay the applicant's costs:

• before 11.00 am on the second business day after the offer was served - on a party and party basis; and
• after that time - on an indemnity basis;

if the applicant made an offer which was not accepted by the respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer.

However, as noted by the Court, "the rule, and the various statements of principle about its operation are clear, but that does not mean that the application of the rule and the principles to any particular set of factual circumstances is necessarily straightforward." It is open to the Court, in appropriate circumstances, to make an order inconsistent with the Rules.

Assessing a genuine offer of compromise: the Federal Court's approach

A number of factors persuaded Justice Jagot that her Honour should strictly apply Rule 25.14(3), including, importantly, that it was for Generic Health, as the party seeking to rebut the presumption, to persuade the Court that it should make an inconsistent order. Here, it failed to do so.

The offer was a genuine offer of compromise. Generic Health contended that it could not reasonably assess the offer at the time it was made, because Bayer had not by that time quantified its claim for damages or filed its evidence in support. Justice Jagot however found that Generic Health could, had it wished to do so, have sufficiently informed itself of its overall exposure to liability for infringement for the purposes of assessing the offer.

The fact that Generic Health sought no explanation from Bayer as to how it had calculated the amount of the offer, also supported her conclusion that Generic Health was not interested in whether the offer represented a genuine compromise.

It was clear to Justice Jagot therefore that Generic Health had not turned its mind to the question of whether Bayer's offer at the time it was made involved a genuine compromise of its claim. Had it done so, she considered that Generic Health could have readily ascertained that the offer did represent a genuine compromise

While Justice Jagot did not doubt that an offer made before notice of the quantum of the claim might well mean that a party is unable to assess whether an offer represents a genuine compromise, and that such a circumstance might well constitute proper reason to make an order inconsistent with the rules, that did not reflect the full spectrum of circumstances relevant to the present case.

Accordingly, Generic Health's evidence that at the time the offer was made neither the quantum of the claim nor the basis upon which the claim would be calculated were known was not sufficient to rebut the presumption in favour of Bayer and therefore Rule 25.14(3) ought be strictly applied.

Careful attention must be given to offers of compromise

The decision is a stark reminder to all parties involved in litigation, to bear in mind the costs implications that may follow if an offer of compromise or Calderbank offer is unreasonably rejected. Careful consideration of an offer must be given even where the quantum of the claim is not known and parties should ensure that if an offer of compromise or Calderbank offer is to be rejected, a justifiable and clear explanation must be given to the offeror as to the reasons for which the offer is to be rejected. 

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