In Pankhurst v Lee White and Motor Insurers Bureau1 the Court of Appeal considered the consequences of a defendant failing to better a claimant’s part 36 offer in circumstances where the claimant had entered into a conditional fee agreement (CFA) with his solicitors and purchased after-the-event (ATE) insurance. The case was of particular interest because the leading judgment of the Court of Appeal was given by Jackson LJ, the leading figure in the reform of litigation funding and costs in England and Wales and the author of a significant 2009 report on the topic commissioned by the Ministry of Justice2.

Background

Part 36 of the Civil Procedures Rules 1998 contains provisions relating to the form of settlement offers and prescribes the costs and interest consequences of offers made in the prescribed form on acceptance or following judgment.

CPR 36.14 determines the costs and interest consequences of a part 36 offer following judgment. It provides that where a defendant makes a part 36 offer which the claimant does not accept and then fails to beat that offer at trial, the defendant is entitled to his costs from the expiry of the ‘relevant period’ (typically 21 days from the date of the offer) and interest on those costs. Similarly, where a claimant makes a part 36 offer which the defendant does not accept and the claimant then matches or betters that offer at trial, the claimant is entitled to interest on damages at an enhanced rate; his costs, assessed on the indemnity basis (where costs need not be reasonably incurred to be recoverable and any doubt is resolved in favour of the receiving party); and, interest on those costs at an enhanced rate.

Facts

On 7 June 2003, whilst out cycling, the claimant was struck by a vehicle driven by Mr White and suffered catastrophic injuries. His solicitors commenced proceedings against Mr White and his insurers. Mr White had no active role in the proceedings and the claim was defended by his insurers.

On 30 September 2005, the claimant obtained summary judgment against the defendant on the issue of liability, subject to determination of the issue of contributory negligence. On 4 December 2005, the claimant and his solicitors entered into a CFA. The agreement provided for a success fee of 22.5% if the action settled pre-trial and 100% if the action went to trial (CPR 45.16, which caps “pre-trial” success fees at 12.5%, did not apply because the accident occurred before 6 October 2003). Success was defined as any recovery of damages at all. Given that liability had already been decided, there was effectively no chance of the litigation not being a “success” as defined. The claimant also purchased ATE insurance to cover his disbursements, including any liability incurred for the defendant’s costs.

On 23 May 2006, the claimant made a part 36 offer to accept £3.4m in settlement of his claim. This offer was rejected. On 27 June 2006, following a further one day hearing in the High Court, Wilkie J rejected the allegation of contributory negligence and ordered that the claimant was entitled to damages on the basis of full liability. On 28 May 2008, the defendant made its own part 36 offer, comprising a lump sum and future periodical payments, worth a total of £6.8m. On 10 June 2009, following a six day quantum trial in the High Court, MacDuff J awarded damages comprising a lump sum and future periodical payments, worth a total of £6.1m.

The claimant had therefore failed to beat the defendant’s part 36 offer. This entitled to defendant to its costs from the expiry of the relevant period, and interest on those costs. This effectively meant that the claimant was to pay the defendant’s costs of the quantum trial, estimated to be in the region of £100k.

However, the defendant had also failed to beat the claimant’s earlier part 36 offer. The effect of this was less clear. MacDuff J heard further argument on the issue before delivering his judgment on 18 February 2010.

High Court decision

MacDuff J awarded the claimant enhanced interest on special and general damages, and his costs up to 18 June 2008 (21 days from the date of the defendant’s offer, after which it was agreed that the claimant was to pay the defendant’s costs). These costs were to be assessed on the indemnity basis from 13 June 2006 (21 days after the date of the claimant’s offer). He did not award the claimant any interest on damages referable to future losses (eg future lost earnings) or any interest on his costs.

The net effect of the decision was that, as a result of his part 36 offer, the claimant received only an additional £17k of interest on the damages awarded. The claimant appealed. Jackson LJ gave the leading judgment of the Court of Appeal, with which Leveson and Morritt LJJ agreed.

Court of Appeal decision – damages referable to future losses

CPR 36.14(3)(a) permits the court to award interest on damages at an enhanced rate where the defendant fails to beat a claimant’s part 36 offer. The question was whether CPR 36.14(3)(a) could apply to damages which do not normally attract interest at all, such as damages referable to future losses.

First, Jackson LJ saw merit in the argument that, given that an award of interest under CPR 36.14(3)(a) was intended to reward an appropriate settlement offer rather than be compensatory in nature, such awards ought not, as a matter of principle, be confined to sums which normally attract interest. However, the Court of Appeal had already decided in McPhilemy v Times Newspapers3 that CPR 36.14(3)(a) did not empower the court to award interest on libel damages. Jackson LJ considered this was binding authority for the proposition that CPR 36.14(3)(a) could not apply to any damages that did not normally attract interest.

Second, although Jackson LJ recognised that claimants’ offers under part 36 carried relatively little benefit when compared to defendants’ offers, it was not for the courts to redress this imbalance by extending the application of CPR 36.14(3), particularly where the matter was already the subject of consultation by the Ministry of Justice4 with a view to legislative reform.

Third, although there was prima facie unfairness in that the claimant would pay around £100k for failing to beat the defendant’s part 36 offer, but receive only £17k as result of this own offer, this disappeared once the funding arrangements were taken into consideration. The claimant’s liability for the defendant’s costs was covered by his ATE insurance, the premium for which was a disbursement recoverable from the defendants. The claimant was therefore, in effect, receiving a payout under an insurance policy for which the defendant was paying the premium! As Jackson LJ noted, “[t]he facts of this case illustrate that in case where the claimant has after-the-event insurance with a recoverable premium… the circumstances may distort the normal operation of part 36.”

Interest on costs

Pursuant to CPR 36.14(3)(c), a claimant who matches or beats his own part 36 offer is entitled to be paid interest on his costs by the defendant unless the court considers it unjust to make such an award. The trial judge, MacDuff J, declined to award this interest on the basis that he considered the award of an additional £17k interest on damages as a consequence of the claimant’s part 36 offer to be sufficient. Before the Court of Appeal, the claimant argued that the MacDuff J had failed to address the question as posed in the rule: namely, whether it was unjust to award interest on costs, rather than whether it was just not to.

Jackson LJ declined to disturb the decision of MacDuff J, whom he considered had applied the correct test, albeit who had “expressed himself tersely”. He noted that whilst an award of additional interest on damages under sub-paragraph (a) of CPR 36.14(3) produced a benefit for the claimant himself, an award of interest on costs under sub-paragraph (c) benefited the claimant’s solicitors. Jackson LJ regarded the arrangements made by the claimant’s solicitors as “grotesque”, noting that “in addition to their base costs (ie their proper costs for conducting the litigation) they are extracting from [the defendant] a success fee of £100,000 for running a risk which simply did not exist” (given that liability had been determined before the CFA was entered into). Accordingly, it would be unjust to allow the claimant’s solicitors the further reward of interest on their costs.

Comment

This decision provides useful clarification on the application of Part 36 to claimant offers following judgment and the circumstances in which the courts will displace the normal consequences provided for in the rules on the grounds of injustice. It also gives further expression to judicial concern relating to CFAs and recoverable ATE premiums, which may be addressed in the keenly awaited reform of litigation funding.