A recent judgment has clarified that "winner takes all" no longer applies to recovery of costs in litigation. The formula to be used by trial judges in deciding the most appropriate costs order is now much more complicated. In the costs judgment in Multiplex v Cleveland Bridge [2008], the judge set out eight principles that should be considered when reaching a decision on who pays the costs and how much that party has to pay. The principles involve looking at the entirety of the parties' conduct, and that includes taking into account any failures to make settlement offers or negotiate with the other side at an appropriate time in the proceedings. Such conduct can lead to the guilty party being penalised in costs. The penalty is not just restricted to reducing a successful party's costs. The court can, as this case demonstrates, increase the percentage of the costs that are recoverable by a successful party.

Read our analysis of this case for an outline of the eight principles and for an insight into how these principles are applied in practice.

Analysis

When involved in litigation you want to know how much you are likely to recover and how much it is going to cost you. In the past, advice on costs has always been that the successful party is likely to be awarded the majority of its costs. Although that is still the starting position, the recent case of Multiplex v Cleveland Bridge [2008] demonstrates the complicated process the courts can go through in deciding the percentage of the costs to be recovered from the other side. The process involves looking at the entirety of the parties' conduct, and that includes taking into account any failure to make settlement offers or negotiate with the other side at an appropriate time in the proceedings. Such conduct can lead to the guilty party being penalised in costs. The penalty is not just restricted to reducing a successful party's costs. The court can also increase the percentage of the costs that are recoverable by a successful party.

Failure to make or consider reasonable and timeous offers of settlement in litigation led the Judge in the above case to state that the parties were "bicycling over the edge of the precipice and plunging into the abyss". He noted that as costs escalated and huge amounts of management time were being deployed, it was all for no useful purpose because the failure of the parties to make or accept reasonable offers of settlement meant that, "no one was going to escape from the abyss with any financial benefit".

The court's judgment, which is number seven in the long running dispute between Multiplex and Cleveland Bridge, is of interest for two reasons:- 

  • It sets out eight principles which the court should follow when making costs orders; 
  • It demonstrates the extent to which a party's failure to make offers of settlement or negotiate at an appropriate point in the proceedings can impact on the costs order being made.

The eight principles

The Judge stated the following eight principles to apply when considering an appropriate costs order:

  1. Where each party claims or asserts that a balance is owing in its favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action.
  2. In exercising its discretion, the court should take as its starting point the general rule that the successful party is entitled to an order for costs.
  3. The judge must then consider what departures are required from that starting point, having regard to all the circumstances of the case.
  4. Where the circumstances of the case require an issue-based costs order, that is what the judge should make. However, the judge should hesitate before doing so, because of the practical difficulties which this causes and because of the steer given by Civil Procedure Rule (CPR) 44.3(7) (which states that if practical the court must instead make an order that a party must pay a proportion of the other party's costs, or costs from, or until, a certain date).
  5. In many cases the judge can, and should, reflect the relative success of the parties on different issues by making a proportionate costs order.
  6. In considering the circumstances of the case, the judge will have regard not only to any part 36 offers made, but also to each party's approach to negotiations (insofar as admissible) and general conduct of the litigation.
  7. If (a) one party makes an offer under part 36 or an admissible offer within rule 44.3(4)(c) which is nearly, but not quite sufficient, and (b) the other party rejects that offer outright without any attempt to negotiate, then it might be appropriate to penalise the second party in costs.
  8. In assessing a proportionate costs order the judge should consider what costs are referable to each issue and what costs are common to several issues. It will often be reasonable for the overall winner to recover not only the costs specific to the issues which he has won, but also the common costs.

Applying the principles

The judgment in Multiplex v Cleveland Bridge gives an interesting insight into how these eight principles are applied in practice and the result that it produces. The judge went through the following steps when applying the 8 principles:

Step 1

The Judge concluded that the starting point was that Multiplex should be considered as the successful party because considering all successful claims and counterclaims, a payment was to be made by Cleveland Bridge to Multiplex. Prima facie Multiplex was entitled to an order for costs.

Step 2

The judge noted two significant factors. Firstly, that Multiplex was comprehensively defeated on Issue 3 and secondly, that it failed by a wide margin to beat Cleveland Bridge's offer in relation to Issue 1.

Step 3

The judge confirmed that an issue-based cost order was not appropriate on the basis of the guidance given by the court (in particular CPR 44.3(7)). His view was that it was perfectly practicable to make a proportionate costs order which would do justice between the parties.

Step 4

The judge then considered what costs should be attributable to each element of the case. In doing so, he took account of Principle 8; that the overall successful party should normally be entitled to the common costs. On the facts of this case, he reached the following conclusions (in brackets is the name of the party who was successful in the issue):

  • Issue 1 (Multiplex): 10%
  • Issue 2 (Multiplex): 30%
  • Issue 3 (Cleveland Bridge): 40%
  • Common costs (Multiplex): 20%

Step 5

The judge then had regard for the circumstances of the case, each party's approach to negotiations and the conduct of the parties. In doing so he took account of the factors noted under step 2. The judge reached the following conclusions:

  • Issue 1: nil recovery for Multiplex of the 10% of costs because they acted unreasonably in failing to accept an earlier offer made by Cleveland Bridge (which was substantially greater than the amount awarded by the judge). This was despite the fact that the offer was only made after approx. 50% of these costs had already been incurred.
  • Issue 2: 100% recovery for Multiplex of the 30% of costs because Cleveland Bridge acted unreasonably in failing to enter into any dialogue in relation to settlement of this issue.
  • Issue 3: As Multiplex only recovered nominal damages, the judge viewed Cleveland Bridge as the successful party in relation to this issue and decided that it should recover 100% of the 40% of costs.
  • Common costs: 100% recovery of this 20% of costs for Multiplex because Cleveland Bridge did not enter into any discussions to settle the entire proceedings.

Using the figures above, Multiplex were to recover only 10% of the costs of the action (being the 50% for Issue 2 and the common costs, reduced by 40% on Issue 3).

Step 6

The judge then considered whether any adjustment was required to this 10% figure because of the conduct of the parties. Although he thought both parties' conduct was open to criticism, he was of the view that the greater share of the blame rested with Cleveland Bridge. They had failed, after the preliminary hearing (when it became obvious a payment was due to Multiplex) to make any offer of settlement or enter into negotiations in relation to the entire proceedings. Although Multiplex also threw away golden opportunities to settle, the judge was of the view that this behaviour was less culpable than Cleveland Bridge's obstinate refusal to make any global offer of settlement. In the circumstances, he decided to increase Multiplex's costs recovery by 10% to 20%.

Comment

If the Judge's eight propositions are followed in the future then a failure to make an appropriate offer of settlement or to negotiate is a matter which should be taken into account when deciding the percentage of costs to be recovered against a specific issue, and whether the final figure should be reduced or increased.

The lessons to learn from this case are that a party should:

  • make a genuine and realistic offer of settlement at an appropriate time in the litigation proceedings
  • actively consider any offers of settlement made by the other side
  • ensure that it has made an offer of settlement if ultimately money is due from it to the other side.

The court does not expect a party to make an offer at an "inappropriate time" (for example before a preliminary hearing on a specific issue of liability), but once the appropriate time has come, a party runs a high risk of being penalised in costs if no offer, or attempt to negotiate, is made or a party fails to consider and accept a reasonable offer.