Where one party fails to beat a Part 36 offer made by their opponent, costs are likely to be awarded on the ‘indemnity’ basis, which in practice means a higher recovery. In this article, which will be of interest to claims handlers and litigators, Laura Marginson and Janet McWhinney discuss the recent case of Downing -v- Peterborough & Stamford Hospitals NHS Foundation Trust [2014] EWHC 4216 (QB) which deliberated the circumstances in which it could be deemed ‘unjust’ to award indemnity costs.

Background

The claimant underwent an operation to improve his snoring. However, it led to what the judge described as ‘catastrophic’ consequences. As well as failing to ameliorate the condition, the claimant suffered an infection resulting in reactive arthritis which eventually led to a disabling pain disorder, making him unable to return to his duties as a warrant officer in the Army Air Corps. It was also later discovered that the operation could never have achieved the outcome that he sought in any event.

Judgment

The judge awarded damages of £1,508,534. The claimant stated that unless ‘unjust’, the court was obliged to award costs on an indemnity basis, as the defendant has failed to beat his earlier Part 36 offer in the sum of £1.2 million.

The defendant argued that the defendant’s failure to accept the offer was due to the late change in the opinion of one of their experts to a less optimistic view of the claimant’s prospects of recovery.  However, the judge did not consider this to be a significant enough reason for it to be ‘unjust’ to apply indemnity costs. He was satisfied that the change in the expert’s opinion was rational, rigorous and evidence based, in comparison to his earlier ‘vague’ comments.

It was indicated that each case should be judged on its own merits; commenting that  for it to be considered ‘unjust’ to apply indemnity costs, would include circumstances where a Part 36 was rejected on the basis of inaccurate or misleading information on the part of the claimant.

Wider case law

Indemnity costs were also considered in Ted Baker Plc -v- AXAS Insurance UK plc [2014] EWHC 3548 (Comm) where the Judge described the burden of establishing injustice as a ‘formidable obstacle’. The imposition of indemnity costs was put in place to encourage the parties to give due consideration to settlement and to minimise costs by avoiding Trial. As such, the bar for what can be classified as ‘unjust’ is much higher than might first have been anticipated.  As a result, defendants should be aware of the risks of not considering realistic Part 36 offers.

New Part 36 rules

However, some protection is afforded to Defendants in the changes to Part 36 coming into force on 6 April 2015 (see the related article by Mellisa Spence). Under the new rule, the court must take into account ‘whether the offer was a genuine attempt to settle the proceedings’ when considering the justice of the indemnity principle. High Part 36 offers by claimants which offer little in the way of concession, i.e. 95%/100% liability, may not be genuine attempts to settle the claim, an argument which could assist a defendant in opposing the application of the indemnity principle.

What should you do?

The message in Downing and also Ted Baker Plc is to take all Part 36 offers seriously. Consider the merits of acceptance with your legal advisers, which may involve seeking further input from experts or Counsel.