New Part 36 costs sanction refused where claimant beat own offer made shortly before trial

In the first case we have seen addressing the new costs sanction introduced by the Jackson reforms for claimants' Part 36 offers made on or after 1 April 2013, the High Court has declined to order the new sanction: Feltham v Bouskell [2013] EWHC 3086 (Ch).

For claimants' offers made before 1 April 2013, the relevant costs sanctions were an order for indemnity costs, plus enhanced interest on both damages and costs (at up to 10% above base rate), from the expiry of the relevant period. For offers made since that date, the Jackson reforms have introduced an additional sanction (the "new sanction"). The new sanction takes the form of an uplift on damages, calculated as 10% of the first £500,000 awarded and 5% of the next £500,000. The maximum uplift is therefore £75,000. (Click here to read more about the change.)

The present decision suggests that the court may be less likely to order the new sanction where a claimant's Part 36 offer is made very late in the day. Unlike other Part 36 costs sanctions, which increase over time and therefore incentivise a party to make an early offer, the new sanction is calculated as a lump sum which does not vary depending on when the offer is made. At the time the government was considering legislation to implement the new sanction, there was some debate as to whether it would sufficiently encourage early settlements. This decision suggests that parties wishing to benefit from the new sanction would do well to make their offers sooner rather than later. That is not to say the new sanction will not be awarded unless an offer is made early: here there were other important factors, including that key allegations and documents were raised only at or shortly before trial.

There is an appeal in this case due to be heard in March 2014. However, it is unclear whether the issues under appeal include the question of whether payment of the new sanction should be ordered (as opposed to the substantive issues in the case). 

Background

Where a claimant is awarded more at trial than a Part 36 offer it has made, the court must apply the Part 36 costs sanctions unless it considers it unjust to do so. Part 36 offers must specify a "relevant period” of at least 21 days within which the defendant will be liable for the claimant's costs if the offer is accepted. The Part 36 costs sanctions do not apply to Part 36 offers made less than 21 days before trial (unless the court has abridged the relevant period).

In the present case the claimant made a Part 36 offer of £700,000 a mere 25 days before trial started in June 2013, so that the relevant period expired immediately before trial. At trial the claimant was awarded £650,000 plus interest at 1.5% from  August 2009. Since Part 36 offers are treated as inclusive of interest to the end of the relevant period, this meant that the claimant beat its own Part 36 offer.

The defendant argued that it would be unjust for the court to order the new sanction on the basis that: the offer was made at the last minute; the claimant only just beat the offer; a key allegation was raised very late (in opening the case at trial); and certain important documents were disclosed just before trial.

Decision

The judge (Mr Charles Hollander QC sitting as a Deputy High Court Judge) declined to order the new sanction on the basis that it would be unjust to do so. The relevant factors were:

• The last minute nature of the offer. One of the factors the court may take into account in considering whether it would be unjust to apply the Part 36 costs sanctions is "the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made". The judge commented that where enhanced interest is in issue, the length of time since the offer is necessarily reflected in the award. But since the new sanction is a lump sum, expiry of the relevant period only a very short period of time before the trial, as here, may be a factor rendering it unjust. 
• That a key allegation was not pleaded and was only raised in opening. That was the principal (though not only) ground on which the judge decided liability.  
• That important documents were only disclosed on the eve of trial.

The fact that the claimant only just beat the offer made no difference to the judge's decision.

The judge did award the claimant indemnity costs and enhanced interest on damages and costs from the end of the relevant period. He commented that given current interest rates, which were rather different when the rule was first devised, "it would be quite wrong to order a sum anywhere near 10% as that would be effectively penal". Allowing for a "generous uplift in usual rates to reflect the purpose of the rule", he awarded 3.5% above base from the end of the relevant period.