Litigation, we are told, should be the last resort for parties in dispute. The courts and practitioners are exhorted to encourage parties to settle their disputes early and at both reasonable and proportionate cost. Case law increasingly shows the courts frowning upon parties (and their advisers) for failing to settle before trial or to control the associated costs. Easier said than done, sometimes: not least where there are different rules and costs consequences governing an offer depending on how it is made. 

This article will look at two cases concerning the disparate regimes of without a prejudice save as to costs offers (Calderbank offers) and offers expressed to be within part 36 of the CPR (Part 36 offers), and draw attention to the most significant changes contained within the new and continually evolving Part 36. 

COWARD V PHAESTOS 

Coward v Phaestos involved a divorce case, related intellectual property litigation and a subsequent costs appeal. The costs of the IP litigation alone totalled £19 million, divided somewhat unequally between the claimant, Dr Coward (£6 million), and the defendants (IKOS) at £13 million. Dr Coward had developed quantitative trading computer software which IKOS used in their hugely successful hedge fund. 

It was alleged in the contested IP litigation that when he left IKOS, Dr Coward had taken extremely valuable proprietary software with him. At first instance, the court found that the software was owned by the defendants. Accordingly, as the substantially successful party, Mrs Justice Asplin awarded IKOS 85% of their costs. 

THE CALDERBANK OFFER

Dr Coward appealed, perhaps unsurprisingly, given the contested issues and sums at stake. He had made a Calderbank offer during proceedings in a letter dated 30 July 2012 which, he argued, offered IKOS substantially all that it had achieved at trial (the “Calderbank offer”). Asplin J should therefore have ordered either that IKOS pay his costs from the date of the Calderbank offer or that from that date onwards each side should bear its own costs.  

The Calderbank offer on which Dr Coward relied contained:

  • a declaration that IKOS' software and databases were not subject to any copyright or database rights owned by Dr Coward;
  • an order that all specified software be either delivered up to IKOS or destroyed;
  • an order for Dr Coward to pay £50,000 in settlement of all IKOS' claims to financial relief, including interest; and
  • an order for Dr Coward to pay IKOS' costs up to acceptance of the offer or 21 days from the date of the offer, to be assessed on the standards basis if not agreed. 

On receiving the Calderbank offer, IKOS wrote requesting clarification of certain of its terms. In response, Dr Coward's solicitors stated that while they were prepared to negotiate with a view to settling all disputes in all jurisdictions, they considered the original offer to be clear and specific and therefore capable of acceptance. This was to prove critical. 

Five months later, IKOS made its own, without prejudice save as to costs offer (the IKOS offer). IKOS argued that its offer reflected the terms of Dr Coward's Calderbank offer. It did however require Dr Coward to meet their costs to date - which had gone up by some £4 million since July. Dr Coward rejected the IKOS offer. 

THE COURT OF APPEAL

At first instance, the court awarded IKOS only £1,000 in financial relief, as against the £50,000 Dr Coward had offered in July 2012. Dr Coward and his advisers could therefore be forgiven for thinking that the Calderbank offer had been more than adequate to settle the case. However, Asplin J held, and the Court of Appeal agreed, that the order IKOS achieved at trial was materially better than the terms contained in the Calderbank offer. 

Under Asplin J's order, IKOS had been awarded an undertaking from Dr Coward not to use certain key software. The Court of Appeal held that this was a very significant improvement on the Calderbank offer. Although IKOS had not been awarded the injunction they sought, the undertaking provided comparable relief in real terms. 

According to Mr Justice David Richards, "the omission of an offer of an injunction or undertaking in the Calderbank offer must be seen in the context of the other terms of the offer... Although [Dr Coward] offered to deliver up or destroy all copies of the 2009 Software, he did not offer to cleanse his software of any content which involved use of the 2009 Software. Ultimately that issue was resolved on the eve of the trial by his agreement to cleanse his software of the Gardening Leave Code. No such offer was made in July 2012.  Seen against that background, the injunction sought by IKOS was very important" (para 60). 

THE COURTS' APPROACH TO CALDERBANK OFFERS 

Coward clearly shows that the courts will approach the question of costs differently according to whether the parties have made a Calderbank offer or a Part 36 offer. 

"Part 36 and Part 44 are separate regimes with separate purposes", held Richards LJ (para 93). He went on to describe Part 36 as "a self-contained code dealing with offers of settle to make in accordance with and subject to the terms of Part 36, which specifies particular consequences in the event that such offers are not accepted. That those consequences include features which go far beyond that which might be ordered by way of costs under Part 44 only serves to underline that it is a separate regime from part 44.” 

The Court of Appeal went on to contrast the prescriptive nature of Part 36 with Part 44, noting that it contains no rules as to how the court is to have regard to offers. In particular, the court drew attention to the fact that there is no provision equivalent to CPR 36.14 (1A). This means that where Part 44 applies, the courts should not apply as rigid and inflexible a test. The correct approach for the courts in applying their discretion as to costs is to have regard to all the circumstances of the case, including those set out in CPR 44.2(4). The disadvantage to this inherent flexibility is "some uncertainty and some scope for argument as to costs" (para 101). 

SUGAR HUT GROUP V A J INSURANCE 

What then is the approach of the courts where Part 36 is engaged? 

In Sugar Hut Group v AJ Insurance, the claimants were awarded damages (inclusive of interest) of just over £1 million, including interest. The claimants, whose losses arose out of a fire at a nightclub, were the successful party. The defendants had made a Part 36 offer of £250,000, inclusive of interest. Once their interim payments had been taken into account, the outstanding balance was £277,021.02. The defendants' Part 36 offer was therefore unsuccessful, albeit by a relatively slim margin. 

At the hearing as to costs, Eder J acknowledged that the general rule is that the loser should pay the winner's costs (CPR 44.2(2)(a)). Despite the fact that the defendants' offer was beaten, the court found that the offer letter was still highly relevant to the court in exercising its discretion as to costs. Eder J used his discretion under CPR 44.2(2)(b) to reduce the claimants' recoverable costs by 30%. He also ruled that the claimants could only receive their costs until the expiry of the relevant period under the defendants' Part 36 offer, after which point the defendants should receive their costs on the standard basis. 

It appears that in reaching this decision Eder J placed particular emphasis on the fact that the claimants had not engaged properly with the disclosure process. By pursuing meritless and inflated claims, the claimants had caused the defendants to incur considerable and unnecessary expense. This was relevant to the court's obligation under CPR 44.2.(4)(a) to have regard to all the circumstance including the conduct of the parties. Under CPR 44.2(5)(b), conduct includes whether it is reasonable for a party to pursue or contest a particular allegation or issue (para 16). 

Eder J was however at pains to note that Sugar Hut turned on very specific facts, and there were very good reasons for him to depart from the general rule about costs (para 19). 

THE NEW PART 36

How will the newly amended Part 36 (in force from 5 April 2015) affect the position? 

Under the pre-April regime an offer can be withdrawn after the expiry of the initial notice period only by sending a separate notice. It cannot be automatically withdrawn after that period. 

The new CPR 36.9(4)(b) allows an offeror to make time limited offers, ie an offer allowing for its own automatic withdrawal. This should lead to greater clarity for all parties, provided of course that the offer is correctly drafted. 

As things currently stand, a trial judge cannot be made aware that a Part 36 offer has been made "until the case has been decided". This means that a judge may have to make a costs order after a trial of preliminary issues without knowing whether or not a Part 36 offer has been made. New CPR 36.16 allows the judge to be told of the existence of an offer but not its terms after judgment has been given on the preliminary issues. If the offer relates only to the decided issues, then the terms of the offer can also be revealed. 

New CPR 36.17(5) seeks to address the perceived problem of claimants obtaining the costs benefits of Part 36 where they have made unrealistically high offers. In theory, the costs consequences apply when the claimant has simply made an offer to settle for the full amount and then succeeds in full. The High Court ruled in AB v CD  that a claimant's offer has to contain some genuine element of concession that was of significant value. The new rule adds a new factor for the court to consider when deciding if it would be unjust to order Part 36 costs consequences: "whether the offer was a genuine attempt to settle the proceedings". 

Finally, new CPR 36.2(3) alleviates the confusion over whether the rules apply in a case where the defendant has a substantial counterclaim, by expressly providing that an offer may be made in respect of a counterclaim or other additional claim. 

WHAT TO REMEMBER?

  • Make sure your clients are advised on and understand the difference between making a Calderbank offer and a Part 36 offer; in particular that Part 44 is a separate and relatively less predictable costs recovery regime.
  • Explain to your clients that it is not always straightforward to assess what constitutes a better result than the offer made, particularly where the offer is not just a straight offer to pay a sum of money in settlement. Consider making offers on an issue by issue basis.
  • Think ahead to avoid being penalised on costs: consider all potential areas of agreement at the earliest possible stage, including non-monetary ones.
  • Make sure your offers are clearly drafted and within the letter of the rules, if operating under Part 36. If you are asked for clarification, give it, even if you suspect that games are being played.
  • Advise clients that the courts do not look kindly on people who bring exaggerated or over inflated claims, or who delay or complicate proceedings unnecessarily, and that they express this disapproval in potentially painful costs orders.
  • Dust down your crystal ball. You need to make Part 36 offers (in particular) at the earliest possible point at a level which a court would see as a realistic genuine attempt to settle. To make matters more complicated, you also need to pitch the offer at a level which your client will see as acceptable. While the new Part 36 may improve many aspects of settlement procedure, it is unlikely to assist you in that critical judgment. 

The new regime may increase the risk of satellite costs litigation. By using the checklist above you will hopefully reduce the risk that you end up having to defend your own position.

This article was published in Commercial Litigation Journal in April 2015.