Part 36 and Calderbank Offers: Settlement Offers That Shift the Costs

Win your case and you would expect the other side to pay your costs. Not always. The most powerful lever on who pays — and how much — is often a settlement offer made months earlier, in the right form, and then beaten at trial. Get the form right and a claimant who recovers at least what it offered can be awarded its costs on the indemnity basis, enhanced interest of up to 10% above base rate, and an additional sum on top of its damages of up to £75,000. Get caught on the wrong side of an opponent's offer and you can win the case yet still pay that opponent's costs from the moment the offer expired.

That asymmetry is deliberate. Costs-shifting offers exist to make litigants confront settlement early and to penalise those who press on unreasonably. The rules are technical, the deadlines are unforgiving, and a single drafting slip can turn a protective offer into a worthless letter.

This guide explains how settlement offers shift costs in three common law jurisdictions — England & Wales, Hong Kong and Australia. It covers the formal regimes (Part 36, sanctioned offers, offers of compromise) and the older, more flexible Calderbank offer that still fills the gaps the formal codes do not reach.

The logic: an offer the other side fails to beat

Every regime in this guide rests on a single idea. A litigant who makes a reasonable offer to settle, which the opponent rejects, should not bear the costs of the litigation the offer would have avoided. If the case then ends at or beyond the level of the offer, the party who refused it has wasted everyone's time and money — and the costs order is adjusted to say so.

Two features make these offers bite. First, they are kept from the judge deciding the merits, so they cannot prejudice the trial. Second, they are revealed only at the costs stage, once liability and quantum are fixed, when the court compares the judgment with the offer. If the judgment is no better for the refusing party than the offer was, the costs consequences follow. For the wider framework into which these orders slot, see our guide to how costs orders work.

England & Wales: CPR Part 36

In England and Wales the formal regime is CPR Part 36. The courts treat it as a self-contained procedural code with its own rules and its own consequences, a characterisation confirmed by the Court of Appeal in Gibbon v Manchester City Council [2010] EWCA Civ 726. That matters: ordinary contractual reasoning about offer and acceptance does not apply, and an offer that does not comply with Part 36's formalities does not attract Part 36's consequences.

The costs consequences following judgment are set out in CPR 36.17. (This rule was numbered 36.14 before the rules were recast on 6 April 2015, so older guides may still refer to the old number.) The consequences split according to who made the offer and who beat it.

Where a claimant matches or beats its own offer

This is the aggressive end of Part 36. If a claimant makes an offer, the defendant rejects it, and the claimant then obtains a judgment at least as advantageous as that offer, the court must — unless it considers it unjust — award the claimant a stacked set of benefits under CPR 36.17(4):

Indemnity costs from the date the relevant period expired (CPR 36.17(4)(b)). On the indemnity basis, doubts about costs are resolved in the receiving party's favour and proportionality falls away, so recovery is materially higher than on the standard basis.
Enhanced interest on the sum awarded, excluding costs, at a rate of up to 10% above base rate from expiry of the relevant period (CPR 36.17(4)(a)), and the same enhanced rate of up to 10% above base on the indemnity costs themselves (CPR 36.17(4)(c)).
An additional amount (CPR 36.17(4)(d)). This is calculated as a prescribed percentage of the sum awarded: 10% of the damages up to £500,000, plus 5% of any amount above £500,000. It is capped at £75,000. So it is not a flat 10% of everything — the 10% applies only to the first £500,000.

The combined effect can be severe: a defendant who turns down a sensible claimant offer and then loses faces standard costs to the offer's expiry, then indemnity costs, enhanced interest and a five-figure top-up payment after it. That is what drives so many cases to settle once a well-pitched claimant offer is on the table.

Where a claimant fails to beat a defendant's offer

The mirror image protects defendants. If a defendant makes a Part 36 offer, the claimant rejects it, and the claimant then fails to obtain a judgment more advantageous than the offer, CPR 36.17(3) provides that — unless the court considers it unjust — the claimant must pay the defendant's costs from the date the relevant period expired, plus interest on those costs.

The sting is that the claimant may still have won. A claimant who recovers £40,000 after rejecting a £50,000 offer has succeeded on liability but failed to beat the offer, and will typically pay the defendant's costs for the whole period after the offer should have been accepted — often wiping out, or exceeding, the damages recovered. Defendants' Part 36 offers are therefore a potent defensive tool, alongside other costs-protection mechanisms such as security for costs.

Calderbank offers: where Part 36 does not fit

Part 36 is rigid by design, and not every offer fits inside it — for example offers on costs-only or certain interim matters. For those, the older Calderbank offer survives, taking its name from Calderbank v Calderbank [1976] Fam 93 (also reported at [1975] 3 All ER 333), a Court of Appeal decision in an ancillary-relief matter.

"Without prejudice save as to costs" — the offer is hidden from the judge deciding the merits, but may be produced once liability and quantum are settled, when the court turns to the question of who pays.

A Calderbank offer does not carry Part 36's automatic, prescribed consequences. It falls outside Part 36 and is dealt with under the court's general costs discretion in CPR 44. The court weighs it as part of the parties' conduct: it can order indemnity costs against a party who unreasonably refused a good offer, but it is not obliged to, and there is no enhanced-interest or additional-amount entitlement. Because the "without prejudice save as to costs" mechanism is what lets the offer be shown to the court at all, getting that label right is essential — our guide to without prejudice communications explains how the protection works and how it can be lost.

Hong Kong: sanctioned offers and sanctioned payments

Hong Kong's formal regime sits in Order 22 of the Rules of the High Court (Cap. 4A), with a parallel regime for the District Court under the Rules of the District Court (Cap. 336H). Order 22 governs sanctioned offers and sanctioned payments. It was introduced by the Rules of the High Court (Amendment) Rules 2008 and commenced on 2 April 2009 as part of the Civil Justice Reform, replacing the old "payment into court" regime.

The terminology carries a substantive distinction. A sanctioned payment is made by a defendant by way of an actual payment into court. A plaintiff cannot make a sanctioned payment — a plaintiff makes only a sanctioned offer. A defendant may make either, but where the defendant is offering to pay money the usual route is a sanctioned payment.

The consequences echo the English model. If a plaintiff fails to do better than a defendant's sanctioned offer or payment at trial, the court may — unless it considers it unjust — order the plaintiff to pay the defendant's costs, including indemnity-basis costs from the latest date the offer could have been accepted, together with interest. Where a plaintiff makes a sanctioned offer and then matches or beats it, the consequences run the other way and can include indemnity costs and enhanced interest of up to 10% above the judgment rate. As under Part 36, the prescribed consequences follow unless the court considers it would be unjust to impose them.

As in England, the formal machinery does not cover every situation. Calderbank offers — again made "without prejudice save as to costs" — remain available in Hong Kong for cases the Order 22 machinery does not fit, with the court applying its general costs discretion rather than the prescribed consequences. A party who wants the certainty of the automatic sanctions should use a properly constituted sanctioned offer or payment; the Calderbank offer is the fallback.

Australia: offers of compromise and the Calderbank principle

Australia runs the two systems in parallel and openly: a court-rules regime of offers of compromise, and the common law Calderbank discretion. Which one applies depends on how the offer is made, and the costs consequences differ accordingly.

Offers of compromise under the court rules

In New South Wales, an offer of compromise is made under Part 20 of the Uniform Civil Procedure Rules 2005 (NSW) — specifically rule 20.26, which sets out how the offer must be made. The costs consequences, however, live in a different Part. Under rule 42.14, where a plaintiff makes an offer the defendant does not accept and the plaintiff then obtains a judgment no less favourable than the offer, the plaintiff is ordinarily entitled to indemnity costs from the day after the offer was made. Rule 42.15 is the mirror for a defendant's offer that the plaintiff fails to beat. Both operate "unless the court orders otherwise". The offer must comply with Part 20, but the costs penalty lives in Part 42 — do not conflate the two.

In the Federal Court, offers to compromise are made under Part 25 of the Federal Court Rules 2011: rule 25.01 governs making the offer and rule 25.03 its content. The costs consequences are in rule 25.14 ("Costs where offer not accepted"). Where a respondent does not accept an applicant's offer and the applicant obtains a more favourable judgment, the applicant is entitled to its costs. Where an applicant unreasonably fails to accept a respondent's offer and the proceeding is then dismissed, the respondent is entitled to costs on a party-and-party basis up to 11am on the second business day after the offer was served, and indemnity costs after that. For how an offer of compromise fits into the broader response to a claim, see our guide on responding to a statement of claim in Australia.

The Calderbank principle and the "unreasonable refusal" test

Alongside the rules regime, Australian courts apply the Calderbank principle drawn from Calderbank v Calderbank [1975] 3 All ER 333. A Calderbank offer is a "without prejudice save as to costs" offer that does not comply with (or is made instead of) the formal offer-of-compromise rules.

The critical difference is that a Calderbank offer carries no automatic costs consequence. To obtain indemnity costs, the offeror must persuade the court that there was a genuine offer of compromise and that the offeree's rejection of it was unreasonable in all the circumstances. The onus is squarely on the offeror. Courts assess reasonableness as at the time of the offer — the strength of the case as it then appeared, the clarity and terms of the offer, the time allowed to consider it, and the extent of the compromise offered. A bare offer to settle for slightly less than the claim, with a tight deadline, will rarely be enough.

Drafting traps that defeat a costs offer

The penalties above only arrive if the offer is valid and clear. The recurring mistakes are the same across all three jurisdictions.

Ambiguity. The court has to compare the offer with the judgment. If the offer's terms are unclear — is it inclusive of interest? of costs? net or gross? — the comparison fails and the costs advantage is lost. State a single, unambiguous figure and say expressly what it does and does not include.
The relevant period / time to accept. Each regime has a minimum period for which the offer must be left open before its consequences engage (in England, the "relevant period"). An offer with too short a window, or one expressed to expire immediately, may not attract the prescribed consequences at all. Give the opponent the full time the rules require.
Whole claim versus part. Be explicit about whether the offer settles the entire claim or only part of it, and whether it deals with the counterclaim. An offer that is silent on these points invites argument later about exactly what was on the table — argument the offeror usually loses.
Wrong instrument. Labelling a letter "Part 36" or "offer of compromise" does not make it one. If it fails the formal requirements it is at best a Calderbank offer, with only the discretionary, lower-grade consequences. To get the automatic sanctions, comply with every formal requirement to the letter.

Timing and how judges treat offers at the costs stage

Timing is strategic, not merely procedural. An offer made too early, before the evidence is in, is easy to dismiss as premature and harder to characterise later as one that was unreasonable to refuse. An offer made too late leaves little of the litigation for the penalty to bite on, because the consequences generally run from the offer's expiry forward, not backward over costs already incurred. The sweet spot is usually after the key documents and witness evidence are known but well before trial, when the case can be valued and most of the expensive work still lies ahead.

At the costs stage the judge does not simply rubber-stamp the comparison. Under the formal regimes the prescribed consequences apply "unless the court considers it unjust" (England and Hong Kong) or "unless the court orders otherwise" (the NSW rules), and the court weighs the terms of the offer, the stage at which it was made, the information then available, and whether it was a genuine attempt to settle. Under the Calderbank discretion the inquiry is broader, turning on the reasonableness of the refusal. A token offer dressed up to manufacture a costs advantage will not impress the court; a genuine, well-timed and clearly drafted one usually will.

Whether you are deciding when to make an offer, how to phrase it, or whether to accept one that has landed on you, the consequences turn on detail that is easy to get wrong. Ask CommonBench's Legal Chat to talk through how a settlement offer would work in your jurisdiction and your case before you send or refuse one.

This guide covers general principles of settlement-offer costs regimes in England & Wales, Hong Kong and Australia and is not legal advice. Procedure, fees and authority differ between courts and change over time. Check the current rules for your specific court before making, accepting or rejecting an offer.