Indemnity costs against defendant who failed to accept Part 36 offer that was withdrawn before trial

A recent decision illustrates that the court may award indemnity costs to penalise unreasonable behaviour, including an unreasonable failure to accept a settlement offer: Walter Lilly & Company Limited v MacKay [2012] EWHC 1972 (TCC). That includes a Part 36 offer that has been withdrawn so that it does not carry the usual Part 36 costs consequences.

Background

The claimant had substantially succeeded in its claim and the defendant's counterclaim had been reduced to a small fraction of what had been sought, resulting in an award of close to £3 million in the claimant's favour (inclusive of interest). Ordinarily this would mean the claimant was entitled to costs on the standard basis, but the claimant sought an award of costs on the more favourable indemnity basis. This was said to be justified, in part, because the defendant had failed to accept (or even acknowledge) the claimant's Part 36 offer of £1.85 million which had been made about 5 months before trial and withdrawn a week before trial.

Under CPR 36.14, where a claimant obtains a judgment that is at least as advantageous as its Part 36 offer, the court will (unless it considers it unjust to do so) award the claimant indemnity costs and enhanced interest on both damages and costs from the date the relevant offer period expired. This does not apply to a Part 36 offer that has been withdrawn, but such an offer can be taken into account in exercising the court's discretion on costs under CPR 44.3. The recent Court of Appeal decision in F & C Alternative Investments (Holdings) Limited & Ors v Barthelemy & Anor [2012] EWCA Civ 843 established that the court cannot simply apply the Part 36 costs consequences “by analogy” to award indemnity costs and enhanced interest where those consequences do not apply under Part 36 (see post).

Decision

In the present case the court reviewed the authorities relating to the award of indemnity costs. These establish that (where Part 36 does not apply) there must be some conduct or circumstance which takes the case out of the norm, and where unreasonable conduct is relied on such conduct must be unreasonable to a high degree. 

The judge (Akenhead J) said that here it was legitimate to award indemnity costs from the expiry of the relevant Part 36 offer period, taking into account the defendant's unreasonable conduct in failing to engage in the settlement process and rejecting the claimant's offers without any commercially sensible counter-offers, as well as the manner in which the defendant pursued his defences and counterclaims as almost a "vendetta" against the claimant and his "unimpressive" conduct at trial.

Comment

This decision illustrates that an award of indemnity costs can be justified, outside of the Part 36 regime, where a party fails to accept a reasonable settlement offer and its conduct has been unreasonable. As established in the F&C Alternative Investments decision, the court cannot simply apply Part 36 "by analogy" to justify an award of indemnity costs where it does not apply directly, but the court can and will take into account a party's conduct in relation to any admissible settlement offers in deciding what costs order is appropriate on the facts. Where a party acts unreasonably in refusing an offer, or where that is part of an overall picture of unreasonable conduct, an order for indemnity costs may be justified.

The decision is also a reminder of the downside of withdrawing a Part 36 offer; a withdrawn offer will no longer bear the Part 36 costs consequences, but will merely be one factor the court can take into account in exercising its discretion on costs. Where a party has become more confident of its position since making a Part 36 offer, it may be better to vary the original offer so as to make it less favourable to the opponent. In these circumstances, it seems that the Part 36 costs consequences will still apply from the date of the original offer, so long as the opponent has not beaten the revised offer (see CPR 36.14(6)(b)). If however a Part 36 offer is intended to vary an earlier offer, this must be made very clear - see our post on the Court of Appeal decision in Gibbon v Manchester City Council [2010] EWCA Civ 726.