High Court upholds order for Part 36 costs consequences following nominal damages award

The High Court has upheld an order for the claimants to obtain the favourable costs consequences under CPR Part 36, in a case where they had made a Part 36 offer to settle for £1 and nominal damages of £10 were awarded at trial: Shah & Anor v Shah & Anor [2021] EWHC 1668 (QB).

Part 36 is a self-contained procedural code under which a party will face adverse costs consequences if it rejects an opponent's offer and then fails to beat the offer at trial. In particular, CPR 36.17(4) provides that, where a claimant has obtained a judgment which is at least as advantageous as the proposals contained in its Part 36 offer, the court must (unless it considers it is "unjust" to do so) order that the claimant is entitled to certain benefits including an award of costs on the more favourable indemnity basis, and enhanced interest on both damages and costs.

This decision confirms that a high threshold has to be met for the court to consider it "unjust" for the Part 36 costs consequences to apply. While each case will turn on its facts, the upshot is that, even where the claimant has offered to settle for nominal damages and nominal damages are ultimately awarded at trial, the defendant may be liable for adverse costs consequences under Part 36.

Given that a claimant is entitled to costs on acceptance of a Part 36 offer, the defendant can find itself in a difficult position where a claimant makes a very low offer after significant costs have been incurred. To obtain their own costs protection, defendants may be well-advised to consider making their own Part 36 offers at an early stage of any proceedings.

Background

This case concerned an intense and protracted family dispute. Amongst other things, the parties had been litigating over an apartment in India, which culminated in a consent order requiring the defendants to transfer their ownership in the apartment to a company nominated by the claimants by a certain date.

The claimants sued the defendants in the County Court, claiming breach of that obligation and seeking damages in the order of £30,000. Six months before trial, the claimants made a Part 36 offer to settle their claim for £1, with a term providing (in the usual way) that the defendants would be liable for the claimants' costs to date (which stood at more than £200,000). The defendants rejected the offer.

The trial judge held that the claimants had succeeded on liability but had failed to make out their case on quantum properly. He awarded the claimants nominal damages of £10 only, but held that they had beaten their Part 36 offer at trial. He therefore ordered the defendants to pay costs on the standard basis (under CPR 44) up until expiry of the 21 day offer period, and thereafter on the more onerous Part 36 basis (ie the indemnity basis) together with interest at 2.5% above base rate.

The defendants appealed against the costs order.

Decision

The High Court (Mrs Justice Collins Rice) dismissed the appeal and upheld the costs order.

In considering the defendant's appeal, the court noted that costs appeals by their nature were limited in scope, and the appellate court's role was to examine the decision already made for defect of approach, principle or law. The court would not interfere with the trial judge's costs decision unless the judge had erred in principle, taken into account matters which should have been left out of account, left out of account matters which should have been taken into account, or reached a conclusion which was so plainly wrong as to be "perverse".

The court held that the costs order was not obviously perverse on its facts. It therefore went on to consider whether, for the judge's decision on each of the points in issue, he had erred in law or principle, misdirected himself or failed to take the proper factors into account, or failed to explain himself adequately.

Identifying the successful party

The court held that the trial judge was entitled to find that the claimants were the successful parties in the dispute, notwithstanding the award of nominal damages. The court commented that nominal damages may or may not be consistent with success. There was no axiomatic rule and each case turned on its own facts.

Here the trial judge had a tenable basis for concluding that, as a matter of substance and reality, the claimants had won the case. The fact that the claimants were awarded nominal, instead of substantial, damages, was "due to their own litigation missteps and not to the intrinsic substance or merits of their case". The case was therefore factually distinct from the cases where a defeat on quantum had been found to signify an overall lack of success, and there was no basis for interfering with the judge's finding that the claimants were the successful party.

Exercise of discretion under CPR 44

The next question was whether, having found the claimants to be the successful party, the judge went wrong in principle in deciding to award them all of their costs. The court found that he did not.

Although the judge's articulation of his CPR 44 decision was "economical", and some of the explanation was quite condensed, the court did not accept the defendants' argument that he had overlooked the CPR 44 component of his decision, and moved straight to a consideration of Part 36.

Based on the facts of the case and the way in which the trial judge dealt with the costs issue following trial, the court was not persuaded that the trial judge's decision to award full costs within his discretion under CPR 44 was "wholly wrong", or disclosed an error of law, principle or approach such that it warranted interference on appeal.

Application of Part 36

The court upheld the trial judge's decision that the claimants' Part 36 offer was enforceable, and that it was not "unjust" for the usual Part 36 costs consequences to apply.

Firstly, it was clear from previous case law that, for a Part 36 offer to be enforceable, there had to be some genuine element of concession, so that a "lightly disguised request for total capitulation" would not be effective (see AB v CD [2011] EWHC 602 (Ch) summarised here).

Here the trial judge was entitled to find that the claimants' Part 36 offer was a genuine attempt to settle the litigation. This was not the sort of case disapproved by the authorities where a claimant offers to accept the full amount of a claim so that a defendant is manoeuvred into a situation where adverse costs consequences under CPR 36.17 would technically apply. Although there was a clear disproportion in this case between the commercial value of a win on liability, the offer to settle for nominal damages and the scale of incurred and potential costs by both parties, this was not necessarily determinative of whether the offer was enforceable.

Secondly, there was no basis to interfere with the trial judge's decision that it would not be "unjust" for the CPR 36.17 consequences to ensue in this case. The claimants had beaten their own offer by obtaining judgement on liability and a nominal award of damages slightly higher than the sum they had asked for. Although the consequences of Part 36 in the present case were "punishing" to the defendants, whether they were "unjust" was a separate question. A high hurdle has to be met and the judge had not erred in principle in finding that nothing in this case amounted to "injustice" sufficient to set aside the Part 36 consequences.