Court of Appeal decision recognises practical limitations on use of Part 36 offers where claim is exaggerated

The Court of Appeal has overturned an order that a party which exaggerated its claim should recover its costs on an indemnity basis because it had recovered more than its (very low) Part 36 offer. Instead the court gave effect to the opponent's prior "without prejudice save as to costs" or Calderbank offer which put forward a reasonable costs-inclusive figure: Walker Construction (UK) Ltd v Quayside Homes Ltd [2014] EWCA Civ 93.

The decision helpfully recognises the practical limitations of Part 36 where a party is facing an exaggerated claim, as the Part 36 regime does not permit a "costs inclusive" offer. Here, the court said, the relevant party could not realistically have made a Part 36 offer once the action was well underway, as the effect of CPR 36.10 would have been to make it liable for all the costs of the proceedings if the offer was accepted. That would have been wholly disproportionate in circumstances where the claim was inflated and only a small proportion of the claim was recovered.

The decision will therefore give some comfort to defendants who are facing an exaggerated claim and wish to put forward a "costs inclusive" offer (outside Part 36). Each case will however turn on its facts. There are clear advantages in making an offer under Part 36 where that is feasible, and where an offer is "costs inclusive" it may be more difficult for the court to assess whether or not the offer was a reasonable one.

It is also noteworthy that in this case it was assumed (though the point was not addressed expressly) that the formal roles of claimant and defendant were reversed for the purposes of assessing the effect of the Part 36 offers, since the counterclaim was for a much greater sum than the claim. There has previously been some confusion in the case law on the treatment of Part 36 offers in the context of counterclaims.

Background

Where a party obtains a more advantageous result at trial than its own Part 36 offer, the court must apply the Part 36 costs sanctions unless it considers it unjust to do so. For claimants’ offers made before 1 April 2013 (as in this case) the principal costs sanction is an order for indemnity costs from expiry of the relevant offer period. Where a party makes an admissible offer to settle which does not bear the Part 36 costs sanctions (such as a “without prejudice save as to costs”, or Calderbank offer) it will still be taken into account by the court in exercising its discretion on costs.

This case involved a construction dispute. The claimant's claim (following receipt of sums awarded on adjudication) was for approximately £1,800. The defendant's counterclaim was quantified at approximately £169,000 though it was later reduced to £87,000.

Each party put forward various offers to settle the claims and counterclaims, both under Part 36 and as Calderbank offers. The relevant offers for present purposes were:

• The claimant's Calderbank offer dated 5 January 2011 to pay the defendant £30,000 inclusive of costs (the "Calderbank Offer").
• The defendant's Part 36 offer dated 3 May 2011 to accept a payment of £100 plus payment of its costs in accordance with CPR 36.10 (the "Part 36 Offer").

At trial the judge awarded the defendant £10,885 inclusive of interest. Simplifying slightly, the claimant was ordered to pay the defendant's costs on the standard basis up to 24 May 2011 (the relevant date for acceptance of the Part 36 Offer) and thereafter on the indemnity basis on grounds that the defendant had beaten the Part 36 Offer. (Note that this treated the defendant's offer as, in effect, a claimant's offer for the purposes of Part 36.)

The claimant appealed against the costs order. The defendant cross-appealed against the dismissal of certain aspects of its counterclaim, but this summary focuses on the costs appeal.

Decision 

The Court of Appeal (Laws, McFarlane and Gloster LJJ) overturned the costs order. Although an appellate court should not lightly interfere with a trial judge's exercise of discretion in relation to costs, the court concluded that in this case the judge was plainly wrong and his order was unsustainable.

The Court of Appeal therefore exercised its discretion afresh and substituted an order that the claimant should pay 50% of the defendant's costs on the standard basis to 19 January 2011 (the date by which it held the defendant should have accepted the Calderbank Offer) and thereafter the defendant should pay the claimant's costs on the standard basis.

The Court of Appeal identified a number of flaws in the judge's reasoning, including the following:

• The judge failed adequately to take into account the commercial reality of the litigation and the question of who, on an objective basis, was the more successful party. In circumstances where the defendant recovered such a small proportion of its counterclaim, it was impossible that a proportionate, or principled, result in costs terms could be that the claimant should have to pay the defendant's costs in an amount of £345,758.73 (subject to detailed assessment).
• When considering the Calderbank Offer the judge should have given appropriate weight to the fact that the claimant could not realistically have made a Part 36 offer at that stage because it would have meant the defendant was entitled to all its costs of the proceedings to date under CPR 36.10(1). The court referred to Medway Primary Care Trust v Marcus [2011] EWCA Civ 750 where Tomlinson LJ commented that in such circumstances a Part 36 offer can have unjust and disproportionate cost consequences.
• The judge should have considered that the Calderbank Offer (£30,000 inclusive of costs) represented a reasonable offer to settle, bearing in mind the judgment ultimately achieved by the defendant and the amount of the defendant's costs the claimant might reasonably have been expected to pay on the basis of such a recovery. The defendant should therefore have accepted the Calderbank Offer.
• The judge's conclusion that the claimant should have accepted the Part 36 Offer and therefore should pay indemnity costs was also flawed. Even if the judge considered that CPR 36.14(1)(b) applied (because the Part 36 Offer had been bettered at trial) he should have considered whether it was unjust to apply the Part 36 costs sanctions.

Comment

As noted above, this decision is of comfort to parties who are faced with exaggerated claims and wish to put forward a costs inclusive offer outside the provisions of Part 36. The court said it was "not impressed" by the submission in this case that a Calderbank offer should not be all-inclusive, that it could not provide costs protection or that, for the judge to have paid more regard to the Calderbank Offer, would have wrongly elevated such offers to the same status as Part 36 offers.

The court found that in the particular circumstances of the present case, where a Part 36 offer would have led to a disproportionate and unjust result, the judge should give effect to the Calderbank Offer.

However, even though non-Part 36 offers may sometimes give costs protection, 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. 

It is also of interest that it was assumed in this case, though the issue is not addressed expressly in the judgment, that the defendant's Part 36 offers were to be treated as claimants' offers for the purposes of assessing cost sanctions under Part 36. This contrasts with the first instance decision in The Procter & Gamble Company v Svenska Cellulosa Aktiebolaget SCA and another [2012] EWHC 2839 (Ch) (see post). It is however consistent with the prior Court of Appeal decision in AF v BG [2009] EWCA Civ 757 where it was held that a defendant could be treated as a claimant in respect of its counterclaim and be deemed to have made a “claimant’s Part 36 offer” in circumstances where the defendant was, in substance, the main claimant (see post).

Finally, the judgment is also of interest for the court's approach to determining which party is the successful party overall, and so is prima facie entitled to its costs (before consideration of admissible offers to settle). The defendant submitted that success in litigation could easily be determined by deciding who has to write the cheque at the end of the case, relying on the statement of Jackson J (as he then was) in Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2008] EWHC 2280 (TCC) that:

"In commercial litigation, where each party has claims and asserts that a balance is owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action."

However, the Court of Appeal said that, as Jackson J himself recognised in Multiplex, that is not the only consideration. The judge must consider, having regard to all the circumstances of the case, what departures are required from the starting point that the successful party should be awarded its costs. For example, should the parties' relative success on different issues be reflected by making a proportionate costs order? Or should there be any adjustments based on the conduct of the litigation?

This suggests that, whichever party is considered to be successful on a simplistic "who writes the cheque" assessment, the question of who is entitled to costs and to what extent is a more nuanced question, taking into account not only who receives the cheque but the extent to which that party has achieved what it set out to achieve as well as the conduct of the parties in the litigation – before the court seeks to assess the effect on costs of any admissible offers to settle.