This article looks at the pitfalls of negotiating a settlement and how best to increase your chances of avoiding being ordered to pay your opponent’s costs.

Settlement negotiation

Sometimes resort to the courts or arbitration is unavoidable. Fortunately for clients’ pockets, and a solicitor’s blood pressure, this is quite a rare event. One factor that encourages parties to settle their differences amicably is the risk that they could, in addition to paying their own legal costs, be faced with an order to pay the other side’s costs as well: the English law principle that costs follow the outcome and ‘winner takes all’.  This is in contrast to the costs recovery regimes that apply in many other jurisdictions. 

When you add arbitrator or court fees this can amount to a hefty exposure. That you have been ordered to pay an award of damages and both sides’ costs is unlikely to win friends and influence when reporting to the company board.

We therefore explore below the artful science of making ‘open offers’. This is a tactical device open to any party and designed to avoid such an outcome. It is means by which an offer to settle is made with the purpose of throwing the risk of legal costs on to your opponents.  Technically these are known as ‘without prejudice save as to costs’ offers.

A simple example of this working is in salvage cases but the same principle applies in collision cases where liability is potentially to be apportioned in favour: at 75/25 or 60/40 or, if not 50/50, against at 25/75, 40/60, and so on.

Assume you are the respondent property owners of ship or cargo and you consider 10 per cent of the salved fund is a fair figure for a quick settlement, but the advice you receive is that an award could be as high as 15 percent. Nor can you rule out an award perhaps exceeding that. However, salvors are holding out for 25 percent which you consider, on the merits, far too high.

The parties are far apart and the matter proceeds in arbitration. If nothing is done to protect the position, you will inevitably be faced with an order to pay the claimants’ costs whether the award is low, as you predicted, or high as salvors would have it. They may not recover every penny, as only reasonable costs are allowed, in discretion of the tribunal. Roughly you would expect to have to pay at least two thirds, but frequently more.

There are three key issues to think about if you are to make an effective offer that is to throw the risk of costs on to the opponents: when, at what level and in what precise terms should you make the offer?

As to the precise terms, you will need to take advice. As to timing, the earlier the better and certainly no later than a month before the hearing when the costs will really begin to escalate. The crucial question is how to pitch it at the right level to ensure maximum protection? This can be agonising.

Firstly, because it is difficult to predict with any precision the arbitrator’s award. Secondly, because you may have held back in negotiations from putting your best figure forward, but now feel compelled to do so. Thirdly, because if the offer does not equal or exceed the eventual award, you will still end up paying the claimants’ costs. Fourthly, the offer may, of course, be accepted leaving you wondering if you had paid too much.

It is best, and we say this with the benefit of much experience, to pitch the offer at the very highest level that you can steel yourself to make. This may have to be higher than your top end figure and it may be outside your comfort zone. But there is simply no point making an ineffective offer. It must have a realistic prospect of equalling or beating the award. If it does not make the claimants really sweat, then it is too low. It needs to instil in the opponents’ camp a serious worry (so as to encourage settlement) and real risk that they will end up paying all the costs of taking the matter forward. In a modest case this may still be more than £100,000.

Where claimants are being wholly unrealistic in their expectation of a salvage award this becomes quite interesting and to a degree nerve-racking. It now pays to ascertain the opponents’ bottom line, this with a view to pitching your offer at the highest possible level at which you are certain, or at least as confident as you can be, that they will reject it.

You test the water, reopening discussions at 12.5 percent of the salved fund. Your opponents eventually indicate that they will accept 20 percent plus interest and costs, if offered, but no less. You now indicate informally a willingness to go to 15 per cent, but that is also rejected. You could make the formal offer at that level, but cannot be confident that this will be effective, given the risk that the arbitrator may go higher. You prefer to have a greater margin of safety even if this means pitching it higher than your top figure. You call the opponents one last time and ask, without commitment, whether they would go for 17.5 percent, if offered. As a solicitor, you may put it to them that you have no instructions but would be prepared to recommend to your clients such an offer if they were like minded to recommend the same in turn to their clients.  Again, they say no: their instructions are that it is 20 percent or nothing, and they want their costs and interest on top.

Now you strike, serving your formal offer in writing at 17.5 per cent with interest and costs to be assessed by the arbitrator if not agreed. You are proven right: it is not accepted, as you predicted. In four months’ time when the award is to be made you will have the comfort of a reasonably good insurance against exposure to costs.


Reproduced with kind permission of International Tug & OSV magazine. View original article.