Unreasonable refusal of Calderbank offer proves costly for employee in adverse action proceedings

Parties involved in proceedings under the Fair Work Act 2009 (Cth) should be aware that an unreasonable refusal to accept an offer of compromise could result in an order that the refusing party pay some of the costs of the other party (or parties) to the dispute, even where the refusal was based on legal advice.

The recent decision of Judge Brown of the Federal Circuit Court in Adamczak v Alsco Pty Ltd (No 4) [2019] FCCA 7 provides a reminder to parties to disputes under the Act that a failure to act reasonably when an offer is made can prove very costly. It also illustrates the commercial benefits of making reasonable offers of compromise at an appropriate stage of a dispute.

General protections disputes: a (mostly) costs free jurisdiction

Parties to proceedings under the Act are generally required to bear their own costs, regardless of the outcome. However, the Act provides courts with discretion to award costs in workplace disputes against a party in limited circumstances, pursuant to section 570 of the Act. Section 570(2) of the Act states:

"The party may be ordered to pay costs only if:

...the court is satisfied that the party's unreasonable act or omission caused the other party to incur the costs… "

Federal Circuit Court Decision: background to Adamczak v Alsco

In Adamczak v Alsco Judge Brown considered the discretion of the courts under paragraphs (a) and (b) of section 570(2). This matter related to an adverse action claim and breach of contract claim brought by the employee Mr Adamczak against his former employer, Alsco Pty Ltd and four of its employees.

On 31 August 2016, the proceedings were dismissed against each of the employees following an application by Alsco to dismiss this aspect of the application on the basis that it had no reasonable prospect of success. The remaining aspects of the application were dismissed in May 2018.

Alsco sought orders for costs pursuant to section 570(2)(b), on the basis that Mr Adamczak's failure to settle the proceedings after 12 August 2016 following a reasonable offer of comprise represented an unreasonable act or omission on his part, which caused Alsco to incur costs.

The settlement negotiations

On 12 August 2016, Alsco had offered to settle proceedings for $60,000.00 inclusive of costs and asserted that based on the available evidence Mr Adamczak's claim would be unsuccessful in its current form. In a letter dated 22 September 2016, Alsco had increased its offer to $80,000.00, stating that the offer was made "purely in the interests of commerciality and resolution of the matter prior to incurring further costs". Mr Adamczak responded with counter-offers of $185,000 and later $179,500, also alluding to potential prejudice to Alsco if issues relating to its business and management were ventilated in public (ie. a threat).

On 26 July 2017, Alsco's solicitors wrote again reducing the offer to $70,000 on the basis of further costs incurred, and expressing their opinion that Mr Adamczak was acting unreasonably in respect of the litigation, and not bona fide in attempting to resolve the matter.

On 7 December 2017, Mr Adamczak's solicitor wrote to Alsco asking if it could provide a "middle of the road figure".

On 8 December 2017, Alsco's solicitors responded stating that they had made offers that they considered "quite generous" given their view of Mr Adamczak's prospects, purely in the interests of reaching a commercial resolution. They noted Mr Adamczak's attitude was unrealistic, and that the legal costs they had incurred now exceeded any reasonable settlement sum.

The principles: applying section 570(2)(b) in the context of an offer of compromise

Given the beneficial nature of the Act, and its recognition that there is often a great disparity between the financial resources in workplace disputes of the employer and employee, Judge Brown expressed the view that costs will only be awarded in rare cases and must be exercised very carefully.

Nevertheless, a failure to accept a reasonable offer of compromise will constitute an unreasonable act in the right circumstances.

In determining whether a refusal to accept an offer was unreasonable, Judge Brown indicated that it is necessary to retrospectively consider the situation of the parties assessed prospectively when the relevant offer was made. The full evidence available at the time of a final hearing would not usually have been available to the parties at the time the offer was made, and therefore what may seem unreasonable at the end of a proceeding may have seemed a reasonable course of action based on the information available to the relevant party at the time an offer was made. A refusal to accept what would be a "derisory offer" at the time the offer was made, even if it appears to be a reasonable offer in hindsight, will not be unreasonable for the purposes of section 570(2)(b).

Judge Brown considered that the relevant factors to consider when determining whether a refusal was reasonable include:

• the quantum of money being offered;
• the knowledge of the offeree at the time the offer was made regarding the evidence which will be led; and
• the timing of the offer.

Was the refusal of the offer of compromise "unreasonable"?

Judge Brown found that Mr Adamczak needed to give careful and commercial consideration to the offer and the prospects for his claim. Instead of carefully considering these matters Mr Adamczak responded with threat and innuendo. This response was unreasonable and highly imprudent, and justified the making of a costs order pursuant to section 570(2)(b) for $35,000.

Conclusion: careful consideration necessary in the context of an offer of compromise

In light of this, parties to a workplace dispute should be alert to the possibility of a cost order in the circumstances where a reasonable offer of compromise is made. The costs order in Adamczak v Alsco could have been significantly higher ($114,491.71) if costs had been awarded on an indemnity basis, as argued for by Alsco. Even with the lower amount for the costs order, the overall loss to Mr Adamczak from refusing the offer was $115,000, as well as his own legal fees incurred following the refusal to accept the offer.

In appropriate cases, when managing risk and costs in Fair Work Act proceedings, employers should consider the potential for a commercial offer and threaten seeking orders for costs if the offer is not accepted. This can assist in forcing resolution and minimise costs for all parties.