Why so many cases?

There have been at least seven cases about Part 36 since our June update, five of them in the Court of Appeal. These followed the ten or more cases already decided this year, including the Court of Appeal decisions in Walsh v Singh, Seeff v Ho and C v D. Litigation about the effect of Part 36 and non-Part 36 offers has mushroomed. Costs have become the hardest fought-over part of most cases because the sums involved are disproportionate to the claim. This is invariably because a 100 per cent success fee is claimed. There have also been several problems and misunderstandings caused by the new version of Part 36 introduced in April 2007, C v D being the most important attempt by the Court of Appeal to stem further litigation about defective Part 36 offers.

There is, however, a more fundamental problem at the heart of the courts’ approach to offers of settlement. This is the existence of two parallel systems of offers – those that comply with Part 36 and those that do not. Those that do not include Calderbank offers, which may intentionally or unintentionally fail to comply with Part 36, and Part 36 offers which have been withdrawn. Completely different rules apply to each system. A perennial concern is whether offers which fall outside the Part 36 regime can provide the same costs protection as Part 36 offers.

The tension between the two systems and judicial confusion about the correct approach can be seen in the recent Court of Appeal decision in Medway Primary Care Trust v Marcus. The claimant brought proceedings against a doctor and a primary care trust alleging that he had to have his leg amputated because they had negligently failed to promptly diagnose ischaemia. He claimed £731,255 plus general damages (agreed at £525,000 shortly before trial). The defendants admitted liability but the claim failed on causation because the amputation would have been necessary even had the correct diagnosis been made earlier. The claimant recovered £2,000 for the additional pain and suffering caused by the delayed diagnosis.

Neither party had made any offers of settlement. The judge below held that the claimant had been successful and awarded him 50 per cent of his costs. On appeal the defendants were awarded 75 per cent of their costs. The costs incurred by the claimant were greater than the size of his claim (£525,000). The majority of the Court of Appeal was unable to accept that the defendants should have protected themselves by making a Part 36 offer for £2,000. Even if they had done so at the first reasonable opportunity, they would have had to pay the claimant’s costs which, including a success fee and premium, exceeded £100,000. At no stage could the defendants have made a Part 36 offer without incurring a liability in costs wholly disproportionate to the outcome and they should not be penalised for failing to do so. The defendants could, however have made a Calderbank letter offering £2,000 or £3,000 plus costs proportionate to that recovery and their failure to do so justified depriving them of 25 per cent of their costs.

Jackson LJ dissented. The defendants should have made a Part 36 offer and paid the claimant’s costs on the standard basis. The court had to proceed on the basis that these would be no more than is reasonable and proportionate (although we know that Jackson LJ thinks that the present Home Office v Lownds test fails to achieve this). If the defendants had offered £3,000 at the outset and that offer had been refused, they would have been entitled to recover all of their costs incurred since the date of the offer.

As for the suggestion that the defendants should have made a Calderbank offer, this would have given them no effective protection. Unless they also offered to pay the claimant's costs to date assessed on the standard basis, such an offer would have been of no practical benefit to the claimant. The claimant had a good claim for £2,000 and the defendants refused to pay anything. The only way the claimant could recover the £2,000 due to him was by issuing proceedings and pressing on until the defendants agreed or were compelled to pay £2,000 damages and costs assessed on the standard basis.

Jackson LJ concluded that parties need to know where they stand and understand the costs consequences of their actions. The problem is that disproportionate costs caused by 100 per cent success fees combined with the inability under the present system to ensure proportionate costs at assessment lead to hard cases and as we know this leads to bad law. The present muddle means that parties haven’t a hope of understanding the costs consequences of their actions so we can look forward to a continuing stream of satellite litigation on this topic. Below are some of the most important of the latest offerings.

Defective Part 36 offers and Calderbank offers

In Howell v Lees-Millais the Court of Appeal looked at the costs protection afforded by defective Part 36 offers where there is a good reason for the failure to comply. The offer in question had been made after judgment and the only dispute remaining concerned the allocation of costs between trustees and beneficiaries. The trustees had made an offer, described incorrectly as a Part 36 offer, which specifically excluded the offeree from recovering all of her costs. For that reason it did not comply with CPR 36.2 and so could not be a Part 36 offer. Nonetheless, the court held that where the offeror could not have framed the offer so as to fall within Part 36 but it complies as much as possible with the requirements of Part 36 and was treated by both parties as having been made under Part 36, the offer should be given substantially the same effect as a Part 36 offer.

Costs consequences of a withdrawn offer

While it has been accepted for some time that withdrawn offers should be taken into account when exercising the general jurisdiction to award costs under CPR 44.3, what has not been clear is whether the costs protection of a withdrawn offer can be as good as that applying to a Part 36 offer remaining on the table. This issue was considered in Owners of the Samco Europe v Owners of the MSC Prestige. At first sight this collision case might not seem to be of general applicability because CPR 61 applies specific rules to offers in Admiralty claims. (Just to muddle us all still further, CPR 61 was not amended in line with Part 36 in April 2007 and still requires an offer to include a term that it remain open for 21 days.) In fact, Teare J approaches the issue of the cost effectiveness of a withdrawn offer as one affecting all types of case and rejects a separate approach for collision actions.

He follows the approach taken in Trustees of Stokes Pension Fund v Western Power Distribution. This requires the court to ask what has caused the costs incurred after the expiry of 21 days from the offer to be incurred. If it is the unreasonable conduct in failing to accept an offer which ought to have been accepted then the offeree will usually have to pay those costs. In those cases where an offeree wishes later on to settle on the terms that have been withdrawn, the offeree can protect himself against future costs by making his own offer in the same terms.

Where a “successful” offer is made and is then unreasonably not accepted, the cause of the costs incurred thereafter is likely to be the unreasonable non-acceptance. In such circumstances, it will usually be appropriate for those costs to be paid by the offeree. The focus is not therefore on the offeror’s reasons for withdrawing the offer but on whether the rejection of the offer was unreasonable. The most likely factor preventing the rejection from being unreasonable is where the offer was withdrawn before the offeree should have accepted it. This was not relevant in the present case where the offer had remained on the table for more than 16 months but it may be where an offer is withdrawn too quickly.

This occurred in Hall v Stone where the court refused to give weight to an offer that was withdrawn before the claimant had been able to obtain medical advice. This case and others concerning the interrelationship between Part 36 and CPR 44.3 and the effect of withdrawn offers were usefully summarised by Jackson LJ in Fox v Foundation Piling Ltd. He repeated what he said in Medway Primary Care Trust v Marcus (see above), namely that in personal injury cases where the claimant has a strong case on liability but quantum is inflated, if the defendant fails to make a sufficient Part 36 offer at the first opportunity, it cannot expect to secure costs protection. He also confirmed that the new CPR 36.14 (1A) reversing the effect of Carver v BAA concerning the meaning of “more advantageous” under CPR 36.14 will come into effect in October 2011.

Costs consequences under CPR 36.14

When a claimant succeeds in obtaining judgment against the defendant which is more advantageous to them than the proposals in their Part 36 offer, they are entitled to the benefits set out in CPR 36.14 of indemnity costs and enhanced interest on the claim and the costs. Two particular issues have vexed this rule. The first is whether the claimant can obtain all or any of these benefits where, for good reason, the offer is not a Part 36 offer and so the court is awarding costs under CPR 44.3. For example, CPR 36.14 cannot apply where there has been summary judgment but no trial but in Petrotrade Inc v Texaco Ltd the claimant was awarded indemnity costs and enhanced interest under CPR 44.3 in those circumstances. The second issue is when, if ever, it is appropriate to deprive the claimant of all or some of these benefits.

The second issue arose in Shovelar v Lane. The judge below held that it would be unjust for the defendants to have to pay the additional penalties in CPR 36.14. This was because the size of the claimant’s costs meant that it was not reasonably possible for the defendants to accept the offers made, the outcome of the case could not be predicted until after evidence had been given and the fact that the offer was not accepted could properly be taken into account under CPR 44.3. The Court of Appeal found that each of these reasons was flawed.

Applying the same approach as Jackson LJ in Medway and Fox (see above), the court held that that the proper amount of costs to be paid was a matter for assessment by a costs judge. This was a conclusion reached with regret given that the defendants were faced with the claimant’s costs of £320,000 (100 per cent success fee) fighting over a £134,000 estate. As for the difficulty in predicting the outcome, this is almost inevitable in all litigation. The judge’s final reason was misconceived. Part 36 is a self-contained code which trumps CPR 44.3. If the offer is one to which the costs consequences in Part 36 apply, those consequences must be applied and the offer cannot instead be taken into account under CPR 44.3. The defendants were ordered to pay indemnity costs with interest on the costs at base rate plus 3.5 per cent.

Costs consequences of pre-action offers

In Udogaranya v Nwagw a costs judge held that where a Part 36 offer is made by the defendant and accepted by the claimant before proceedings are commenced, the claimant is unable to claim costs on the standard basis in accordance with CPR 36.10 because there are no proceedings. Where there is a disagreement about the costs to be paid by the defendant, the claimant’s Part 8 claim to recover costs falls to be dealt with under CPR 44.12A (costs-only proceedings) and not under the Part 36 regime. The High Court has now held in Thompson v Bruce that the opposite is correct. “Proceedings” in CPR 36.10 should be given a purposive effect so as to include steps prior to the issue of proceedings even where proceedings are never begun. This is the outcome anticipated in our comment on Udogaranya in the May update and must be preferable since it gives effect to the purpose of Part 36 which is to encourage parties to settle as early as possible.