Defendant awarded its costs where claimant failed to beat withdrawn Part 36 offer, as the offer should have been accepted when it was on the table

In circumstances where a claimant failed to beat a defendant’s Part 36 offer, the High Court has granted the defendant a favourable costs order, very similar to the costs consequences that would have applied under CPR Part 36, despite the defendant having withdrawn the Part 36 offer before trial: Blackpool Borough Council v Volkerfitzpatrick Ltd [2020] EWHC 2128 (TCC)

The automatic costs consequences under CPR Part 36 do not apply to a withdrawn offer, but the offer may still be taken into account in the court’s decision regarding costs. The critical issue has been held to be whether the offeree acted reasonably in rejecting the offer while it was available – though other issues may also be relevant, and each case will turn on its facts.

In deciding the question of reasonableness, the court said, the focus must be on the facts and matters relevant to the merits of the claim as they ought reasonably have appeared to the claimant at the time of the offer, not the wider commercial factors, and the court must not simply decide the case with the benefit of hindsight. This is a point that does not appear to have been addressed in previous case law. On the facts of this case, the court was satisfied that the claimant had acted unreasonably.

The case serves as an important reminder that a party who withdraws a Part 36 offer loses the costs protection associated with Part 36 and has to rely on the court’s general discretion – and while the result for the defendant in this case may have been similar, the outcome will be far less predictable than where the Part 36 offer has remained on the table. It is also worth noting that here the offer in question was a defendant’s Part 36 offer; the risks of withdrawing a claimant’s offer are particularly stark, given that the Part 36 costs consequences for a claimant’s offer are not within the court’s general discretion on costs, and so cannot be awarded simply by analogy to Part 36 (as considered in this post).

Background

The claimant council contracted with the defendant to construct a new tram depot. It later brought proceedings against the defendant on the grounds that significant parts of the depot were defective and not suitable for the depot’s coastal location. It claimed over £6 million in damages.

In August 2019 the defendant made a Part 36 offer of £750,000 in respect of certain parts of the claimant’s claim. The claimant put forward its own Part 36 offer to accept just under £2.4 million for the entire claim in November 2019. Neither offer was accepted. The defendant’s offer was withdrawn in January 2020.

The trial took place in February 2020 and the judge awarded the claimant just over £1.1 million, far less than the amount claimed. The amount awarded in respect of the items that had been included in the defendant’s Part 36 offer was £631,510, ie less than the amount of the offer.

Under CPR 36.17, where a claimant fails to obtain a judgment that is more advantageous than a defendant’s Part 36 offer, the court must (unless it considers it unjust to do so) award the defendant its costs from the date on which the relevant offer period expired. This does not apply where a Part 36 offer has been withdrawn, but under CPR 44.2 the court will still have regard to a withdrawn offer in deciding on the appropriate costs order.

Decision

The High Court (HHJ Stephen Davies sitting as a High Court judge) ordered that the defendant should pay 80% of the claimant’s costs up to the end of the relevant period for acceptance of the defendant’s Part 36 offer (5 September 2019) and that the claimant should pay 80% of the defendant’s costs thereafter.

Who was the successful party

The court noted that this can be a more complicated question than at first appears, particularly where the award of damages is very modest in comparison with the amount claimed. The approach adopted in the authorities is to consider who as a matter of substance and reality has won – which is often, though not always, the party who ends up receiving the cheque.

On the facts, the court found that the claimant was properly to be regarded as the successful party. It had succeeded on six out of seven heads of claim and recovered a substantial amount, even if it was significantly less successful than it had hoped.

The starting point was therefore that the claimant should be awarded its costs. However, the court had a discretion to make a different order taking into account all the circumstances including the defendant’s withdrawn Part 36 offer.

The defendant’s withdrawn Part 36 offer

The judge noted that, had the defendant’s Part 36 offer of £750,000 not been withdrawn, it would have been more advantageous to the claimant than the judgment on that part of the claim, ie £631,510. The defendant would therefore have been entitled to its costs on that part of the claim from the expiry of the 21 day period for acceptance of the offer, unless the court considered such a result to be unjust.

While the judge accepted that the withdrawn offer could have no costs consequences under Part 36, it was a factor that should be taken into account in exercising the court’s discretion on costs.

The judge considered the guidance given by the Court of Appeal in Thakkar v Patel [2017] EWCA 117 as to how to treat a withdrawn Part 36 offer. In that case the Court of Appeal held that the crucial question is whether the offeree acted reasonably or unreasonably in failing to accept the offer while it was on the table – though the judge said it would be wrong to treat that as the only relevant question, and each case would turn on its facts.

The judge noted that, in Thakkar, the Court of Appeal did not address whether the question of reasonableness is to be considered by reference to the claimant's reasonable perception of its own interests or by reference simply to the eventual outcome of the case. In his view, the court must put itself into the position of the claimant at the time of the offer and not simply decide the case with the benefit of hindsight. The issue was the reasonableness of the refusal, bearing in mind facts and matters relevant to the merits of the claim as they ought reasonably to have appeared to the claimant at that time, not by reference to wider commercial factors.

Applying these principles, the court found that the claimant had acted unreasonably in rejecting the Part 36 offer when it was available for acceptance: the claimant was in a position to undertake its own assessment and valuation of the case. It had the benefit of its own investigations, experts' views and advice from its legal team. There was nothing which the defendant had which the claimant did not. The judge concluded that the claimant knew or, at least, was in a position to know, that its case had become significantly weakened on several significant aspects and that, as a result, there were real risks that if it went to trial it would not recover more than was on offer from the defendant. Therefore it acted unreasonably in not accepting the offer. As the judge put it: “It was taking a commercial risk in the knowledge that it could end up recovering less than the amount of the offer.”

That meant that the claimant should pay the defendant’s costs on the aspects of the case included in the defendant’s Part 36 offer from the end of the relevant offer period, ie 6 September 2019. Rather than making an issue-based costs order, however, the court made a percentage order.