Summary

In an important decision, the court was asked to consider whether acceptance of acceptance of a Part 36 Offer made by a sub-contractor to a contractor, gave the sub-contractor the right to recover the costs of prior adjudication proceedings in addition to the costs of the litigation.

The Facts

A dispute arose over £86,469.21 in unpaid invoices. An adjudication was subsequently commenced by the Claimant, Futures, although no decision was given as the adjudicator subsequently resigned.

On 11 February 2016, the Claimant's lawyers threatened court proceedings against the Defendant. On the same day, the Claimant made what was said to be a without prejudice Part 36 offer to the Defendant agreeing to settle for £65,000 plus VAT. The offer went on to state that if accepted "…at a point which is more than 21 days from the date of this offer you will be liable for all of our legal costs incurred in this case". The claim went to adjudication and in September 2016, the adjudicator upheld the Claimant's claim in full. However, having not paid the Award, the Claimant commenced enforcement proceedings in the TCC. On 4 November 2016, the Defendant accepted the Part 36 Offer of 11 February.

Both sides accepted that a binding compromise based on the 11 February 2016 letter had been concluded between the parties. The dispute centred on (i) whether the offer was, in fact, a Part 36 Offer so that the part 36 provisions as to costs applied, and (ii) whether the offer made to pay the "legal costs incurred in this case" included the costs incurred in the prior previous two adjudication proceedings in 2015 and 2016 as well as the cost of the court proceedings.

Decision

Mr Justice Coulson held that the offer constituted a valid Part 36 Offer. It related to imminent court proceedings. The acceptance repeated the reference to the Part 36 Offer. Accordingly, it was made and accepted on the basis that it was a valid Part 36 Offer. In addition, the offer as to costs was not inconsistent with the cost provisions stated in Part 36.

As the offer was a valid Part 36 Offer, Part 36.13(1) referred to the Claimant recovering the "costs of the proceedings". On a proper interpretation of the Part 36 Offer, that is what was being offered, and that was what the Defendant accepted. The Defendant was liable to pay the cost of the proceedings threatened in February, but not commenced until later. The Claimant was not entitled to the costs of the two previous adjudications.

The judge commented that even had the offer not been a valid Part 36 Offer because it did not formally comply with that Rule, the Claimant was not entitled to recover the costs of the previous adjudications as the offer purported to be a Part 36 Offer. When it was made, it was presupposed that there would be legal proceedings. In addition, the judge referred to the fact that (i) in the ordinary case a party is not entitled to (and cannot seek) the costs of an adjudication, and (ii) the costs of pre-action mediation is similarly not recoverable as costs of the legal proceedings.

Therefore, as a matter of construction, the offer made was in relation to the costs of the court proceedings, and did not include the costs of the previous adjudications.

Conclusion

Parties should take this as a warning, before committing to alternative dispute resolution procedures such as adjudication, that the cost implications of each need to be considered separately. Bear in mind that the different rules governing arbitration may have their own cost provisions too, and that the tribunal has considerable discretion when awarding costs.