Sugar Hut Group Limited and Ors v A J Insurance Service (a partnership) [1] is one of a number of recent cases in relation to settlement offers made under Part 36 of the Civil Procedure Rules (CPR). Where a Part 36 offer is validly made and is not accepted, and where the offering party then equals or does better than its offer at trial, then the party who failed to accept faces the automatic sanction of having to pay the offering party’s costs of the litigation from the date of expiry of the “relevant period” – usually 21 days from the date of the offer.

In this recent case, the Court of Appeal considered the effect of a Part 36 offer where the figure for one particular head of loss formed part of the calculation of a global offer for all losses.

Background

The claimants were the owners and operators of a nightclub which was partly destroyed by a serious fire. The defendant was the claimants’ insurance broker. The claimants claimed loss under various heads, including business interruption (BI) losses of £1,345,794.

There was a compromise in respect of liability, so that it was agreed the defendant was to pay 65% of the claimants’ recoverable losses. The parties were able to agree amounts for certain heads of loss and the defendant made a number of payments on account. The parties were unable to reach agreement in some areas, including regarding the BI losses.

At a trial to assess the amount of damages to which the claimants were entitled, it was held that BI losses were recoverable in the sum of £568,670 (before application of the agreed 65% recovery). Accounting for the payments already made, the effect of the judgment was that a further £277,021 was payable by the defendant to the claimants.

The defendant’s Part 36 offer

Part 36 and Calderbank offers (the latter a type of settlement offer outside the Part 36 regime) had been made by both sides. It was common ground that none of the offers had been effective, because each of the claimants’ offers had been for sums higher than the sums recovered, and each of the defendant’s offers had been for sums lower than the sums recovered. The defendant’s last Part 36 offer, made on 23 May 2014, offered to settle the claim by way of payment of a further sum of £250,000 (in addition to the payments on account already made). The letter explained that the basis for the calculation was a figure of £600,000 for BI losses.

The costs order

At a costs hearing after the trial, the judge allowed the claimants their costs up to and including 13 June 2014, subject to a reduction of 30% due to the issues on which the claimants had failed at trial and essentially ordered that, from 13 June 2014, the claimants should receive no costs and should pay the defendant’s costs. (13 June 2014 was significant because it was 21 days after the date of the defendant’s last Part 36 offer.)

The claimants appealed against those parts of the costs order relating to the period from 13 June 2014. They argued that the judge had effectively treated the defendant’s last Part 36 offer as having been successful. In addition, the judge had justified his order by concluding that the claimants had, after 13 June 2014, acted unreasonably in pursuing a claim for BI losses in excess of the £600,000 figure on which the Part 36 offer was based. The claimants argued that this amounted to a double penalty, because the judge had already reduced the claimants’ recoverable costs in respect of the period up to 13 June 2014 by 30% to reflect the issues on which they had failed at trial.

The Court of Appeal’s decision

The Court of Appeal agreed with the claimants and found that the costs award fell outside the scope of reasonable decision-making.

Practical points

The following practical points to note arise out of this case:

  • There is no “near-miss” rule. It was common ground that the claimants had “beaten” the defendant’s Part 36 offer. On that basis, the defendant accepted that it could not rely on its Part 36 offer to benefit from the automatic consequences that ordinarily follow from a successful Part 36 offer. Although the offer was “just shy” of the claimants’ recovery sum, a “near-miss” cannot trigger the Part 36 regime.
  • Separately from any consideration of Part 36 offers, the court has discretion as to whether costs are payable by one party to another, the amount of those costs, and when they are to be paid. The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, but the court may make a different order.
  • The court will have regard to all the circumstances, including the conduct of the parties; whether a party has succeeded on part of its case; and any admissible offer to settle which is not an offer to which Part 36 costs consequences apply. CPR2(5) provides, so far as is relevant in Sugar Hut, that the conduct of the parties includes whether a claimant exaggerated its claim.
  • The judge had treated the 23 May letter as containing a distinct offer in relation to BI losses, which the claimants could and should have accepted, despite acknowledging that such an offer could not in fact be accepted without also accepting the offer contained in the letter of £250,000. That approach was wrong in principle.
  • The judge had effectively characterised as misconduct the claimants’ pursuit of a claim for BI losses in excess of £600,000 after receipt of the defendant’s 23 May letter – converting what was not an offer to compromise the claim in respect of BI losses at £600,000 into just such an offer.
  • It cannot be misconduct, or unreasonable conduct, simply to pursue a claim in an amount greater than that at which it is valued by the opposing party. Something more is required to render pursuit of the claim unreasonable.
  • Nowhere in his main judgment did the judge describe the claim or any part of it as “exaggerated”. While it was true that significant parts of the BI claim failed, that did not mean that the claim was exaggerated.
  • The claimants were justified in complaining that they had been penalised twice – the conduct which the judge used to justify his unusual order was the same that he had used for withholding 30% of the claimants’ costs incurred up to 13 June 2014, i.e. the total failure of aspects of the BI claim.

WM Comment

The judgment is helpful in confirming that there is no “near-miss” rule – a Part 36 offer is either effective or it is not. Parties should be very careful to ensure that offers in respect of individual heads of loss are made as separate offers, and are not bound up as part of a global offer in respect of all losses.