Costs awarded against claimant who failed to beat non-Part 36 offer

A recent High Court decision illustrates that a defendant's offer to settle made outside the Part 36 regime may lead to a similar result as a Part 36 offer, although it will not carry automatic costs consequences: Brit Inns Limited (in liquidation) v BDW Trading Limited [2012] EWHC 2489 (TCC). Claimants on the receiving end of such offers should therefore consider their position carefully.

Background

In the main action, a subrograted claim by insurers in respect of flood damage, the claimants recovered about a quarter of the sum they had claimed (approximately £157,000 against a claim of some £660,000).

During the case the defendants had taken a much more realistic view of quantum than the claimants and this was reflected in the offers made. There was no effective Part 36 offer (the claimants' offer had been too high and the defendants' slightly too low) but in May 2012, about a month before trial, the defendants had made a "without prejudice save as to costs" (or Calderbank) offer of approximately £267,000 plus costs, which was said to be open for 14 days.

Under CPR 36.14, where a claimant fails to obtain a judgment more advantageous than a defendant’s Part 36 offer, the court will (unless it considers it unjust to do so) award the defendant its costs from the date on which the relevant offer period expired. Where an offer is made outside Part 36 but "without prejudice save as to costs", the offer is one factor to which the court must have regard in exercising its broad discretion on costs under CPR 44.3.

Decision

The court awarded the claimants 60% of their costs (excluding the costs of its expert evidence) up to 30 May 2012 when the defendants' offer expired. Thereafter the claimants were ordered to pay the defendants' costs.

After reviewing the case law, the court summarised the applicable principles as follows:

1. In a commercial case, the successful party will usually be the party that recovers money from the other;
2. The only certain way for a defendant to shift its potential costs liability is to make a Part 36 offer which it then betters at trial;
3. The pursuit of exaggerated claims may deprive the claimant of some or all of its costs, but it is usually only where the exaggeration is deliberate that the claimant has been ordered to pay the defendant's costs;
4. In general terms, for costs to be shifted as a result of conduct, so that the claimant who recovers something at trial still has to pay the defendant's costs, there needs to be more or less total failure on the issues that went to trial or a failure to accept a Part 44 offer that would have put the claimant in a better position than going on. [our emphasis]

Here the claimants were entitled to be treated as the successful party, at least down to 30 May 2012, as they had recovered sums under their two principal heads of claim. However, the court said that it would be "manifestly unjust" for the claimants to recover the whole of their costs to that date; one of the principal reasons why the case fought was because of the claimants' exaggeration of the claim. Since the exaggeration was not deliberate, it was not appropriate to order the claimants to pay any part of the defendant's costs for that period. Instead the defendant was ordered to pay 60% of the claimants' costs, excluding the costs of  the claimants' expert evidence given its "fundamental inadequacies".

From 30 May 2012, the appropriate order was for the claimants to pay the defendants' costs, since the claimants would have been almost £100,000 better off accepting the defendants' offer than going to trial. The court said that the defendants' May 2012 offer:

"marked the point where only the claimants' unreasonable conduct and unrealistic expectations could explain their decision to go ahead to a trial; it therefore marked the point, when the offer was not accepted by 30 May 2012, when the claimants became liable to pay the defendant's costs".

Comment

The court referred to the recent case of F&C Alternative Investments (Holdings) Ltd v Barthelemy [2012] EWCA Civ 843 in which the Court of Appeal stressed the importance of Part 36 and reiterated that non-Part 36 offers should not be treated as having the same effect as offers under Part 36. In the present case, however, the defendants were awarded their costs from the expiry of their offer, the same result as if the offer had been validly made under Part 36.

This illustrates a difference of approach for claimants’ and defendants’ non-Part 36 offers, as highlighted in our post on the F&C case.

• Where a claimant fails to beat a defendant’s Part 36 offer, the normal costs consequence is to shift the costs burden so that the defendant is awarded its costs from the end of the relevant period. This sanction is well within the court’s discretion under CPR 44.3 and so may be applied even where (as here) the offer is made outside Part 36.
• In contrast, the normal costs consequences for an effective claimant’s Part 36 offer is an award of indemnity costs and enhanced interest. Although the court can make such orders outside Part 36, they will not be justified by a simple failure to accept what turns out to have been a reasonable settlement offer, as the F&C case demonstrates. Such orders can however be justified where the defendant's conduct has been unreasonable (as in Walter Lilly & Company Limited v MacKay [2012] EWHC 1972 (TCC) - see post).

However, even if defendants' non-Part 36 offers may sometimes lead to the same result as a Part 36 offer, it should be remembered that the only sure way to obtain the costs advantages of Part 36 (which the court must award unless it considers such an order to be "unjust") is to make an effective Part 36 offer. Where an offer is made outside Part 36, the court has a wide discretion and the result is much more difficult to predict.