My April 2020 blog examined the extent to which costs orders, made in favour of losing parties, could be set off or enforced against costs orders, damages and interest awarded in favour of winning parties in cases proceeding within the Qualified one-way costs shifting (QOCS) regime (Section II of CPR 44), The rationale behind QOCS, which were implemented on 1 April 2013, was to lower the burden falling on defendants if costs ceased to be recoverable from losing claimants, rather than the case where defendants continued to be responsible for success fees and after the event insurance premiums when the claimants were successful.
At that time, enforcement was possible without the permission of the court, where there had been a court order to pay damages and interest, which was capped at the combined amount (CPR 44.14). That way, claimants could never be required to put their hands in their pockets, except if the action had been struck out (CPR 44.15), or if the court made a ruling that the claim had been “fundamentally dishonest” (CPR 44.16).
In addition, costs awarded to defendants could be set off against costs orders made in favour of winning claimants in QOCS cases if the court gave permission under CPR 44.12. Thus, in Howe v Motor Insurers Bureau (MIB) (Howe), the Court of Appeal permitted costs orders made in favour of MIB to be set-off against those awarded to Mr Howe because that was just, as Mr Howe’s appeal had been struck out, albeit due to a change in the law. Lewison LJ said:
“First under the general law, set-off is not a species of enforcement….secondly, Part 44.14 enables enforcement without the permission of the court, whereas 44.12 requires the permission of the court or at least a court order in order for one set of costs to be set off against another”.
That was then. Now is now. Has anything changed?
The answer to that is “Yes”, as the Supreme Court’s decision in Ho v Adelekun (Ho) has ruled that Howe was wrongly decided. Before explaining the Supreme Court’s ruling, the inter-relation between CPR 44.12 and CPR 44.14 needs to be examined in more detail, which can be best explained by looking at the facts in Ho.
Miss Adelekun was injured in a road traffic accident. She issued a claim in the Pre-Action Protocol for Low Value Personal Injury Claims in RTAs against Mrs Ho. The case settled for £30,000 under the terms of a Tomlin Order in which the obligation to pay the damages appeared in a schedule, together with a provision for “reasonable costs… on the standard basis to be subject to if not agreed”. The Court of Appeal (see Ho v Adelekun (No 1) (Ho (No 1)) held that that wording did not displace the fixed costs regime under CPR 45, contrary to Miss Adelekun’s contention that it did. It followed that Mrs Ho owed Miss Adelekun fixed costs of £16,700 and no more. There would be no detailed assessment of her “reasonable costs”.
Could Mrs Ho set off against the £16,700, the costs which Miss Adelekun was liable to pay her for her Court of Appeal costs estimated at £48,000? Mrs Ho could not look to the £30,000 damages for that purpose and deduct from them what Miss Adelekun owed her in costs, as the action had been settled using a Tomlin order. That meant that the obligation to pay damages had been recorded in a Schedule which was not an order of the court. It was merely a record of a settlement intended to be binding so CPR 44.14 was unavailable (Cartwright v Venduct Engineering Ltd (Venduct)). Set-off under CPR 44.12 was her only hope. However, Miss Adelekun’s claim was for personal injury so she had QOCS protection. Did that make a difference?
No, said the Court of Appeal in Ho v Adelekun (No 2) (Ho (No 2)). Mrs Ho had incurred substantial costs in vindicating her rights; even with an order for set-off under CPR 44.12, she was going to be left with a large shortfall. It was just to make an order that the costs due from her should be set off against the costs payable to her by Miss Adelekun. Although Miss Adelekun could keep her damages in their entirety, since without a court order, the damages were protected from any enforcement attack under CPR 44.14, set-off was different. Under CPR 44.12, Mrs Ho could set off and thereby extinguish the fixed costs she owed of around £16,700 against the £48,000 due to her for her costs in the Court of Appeal.
Game over? Far from it. The differently constituted Court of Appeal in Ho (No 2) was not convinced that such an outcome was right, but considered itself bound by Howe. Newey LJ said:
“As I see it, CPR 44.14 is designed to bar any enforcement of costs orders against claimants in excess of damages and interest unless CPR 44.15 or CPR 44.16 applies, not merely to bar enforcement without the permission of the court. Were the position otherwise, the protection afforded to claimants by QOCS would be severely curtailed”.
Next stop the Supreme Court, whose view was that the differences ought to have been a matter for the Civil Procedure Rule Committee (CPRC) to sort out.
The Supreme Court found unanimously against the Court of Appeal’s decision in Howe and endorsed its decision in Ho (No 2), where the Court of Appeal had been right to doubt whether Howe had been correctly decided. The Supreme Court reasoned that:
- The issue was one of construction of the language of the QOCS provisions in CPR 44.14.
- Set-off between costs orders is a means of enforcement. However, CPR 44.14 creates a monetary cap on the amount which a defendant can recover in costs from a claimant, set at the level of the aggregate amount in money terms of all court orders for damages and interest in a claimant’s favour.
- The bar to enforcement applies to the gross amount of a defendant’s costs orders against a claimant, rather than the net amount.
- A defendant must keep a running account of all costs recoveries made in its favour and cease enforcement once that monetary cap has been reached.
- That cap cannot be extended by adding those costs which have been awarded to the claimant (here £16,700) to that amount.
- Accordingly, a defendant’s ability to set off its costs in a QOCS case is limited to a set off against the maximum aggregate amount of any monetary order for damages and interest made, so that, at worst, a claimant breaks even, so far as costs between the parties are concerned.
The Supreme Court’s decision meant that Miss Adelekun kept her damages of £30,000 and, in addition, Mrs Ho had to pay the fixed costs of £16,700, with nothing of the £48,000 it cost her to win Ho (No 1) being eligible to be set-off or otherwise enforced against either the damages or the fixed costs.
The Supreme Court recognised that such a conclusion could lead to results which, at first, looked counterintuitive and unfair, but as the Justices reasoned:
“…no one has claimed that the QOCS scheme is perfect. It is, however the best solution so far that the opposing sides in the ongoing debate between claimant solicitors and defendant insurers have been able to devise” (paragraph 45, judgment).
What are those potentially unfair results?
Scenario one
Suppose that a defendant in a QOCS claim makes an offer under Part 36 of £25,000. The claimant rejects the offer and recovers £15,000 at trial. The defendant can enforce its costs under CPR 44.14, of say £30,000, payable from the date on which the claimant should have accepted the offer (the relevant period), up to the limit of the damages of £15,000. However, the balance of £15,000 in costs cannot be set-off against the costs which are payable to the claimant for pre-Part 36 costs of the action. If those claimant’s costs are £10,000, they are payable by the defendant meaning that £25,000 must be stumped up, rather than £15,000 as would have been the case had Howe not been overruled. In the wake of the Supreme Court’s decision, it is little wonder that disgruntled defendant insurers have been asking: is that really what the QOCS regime intended?
Scenario two
Suppose, next, that an agreement is reached before trial and by consent, the defendant agrees to pay damages of £25,000 and that the obligation to do so is recorded not in the body of a court order, but within a Tomlin schedule. On the way, the defendant has picked up a costs order for £5,000 for a failed application by the claimant. However, because there has been no order of the court, merely an agreement to pay, the defendant cannot enforce the £5,000 against the damages and must pay £25,000. Once again, so the argument goes, is such a result one that was intended by the QOCS regime?
Scenario three
A critic might say “more fool you, defendant, for settling the case without insisting on an order for damages”, but in Venduct, that was not possible because there were multiple defendants who settled the case using a Tomlin Schedule without involving the defendant with the costs order, who therefore lost out. In these circumstances, it cannot come as any surprise that the reasoning in Venduct has been subject to comment.
Scenario four
Suppose, finally, that a defendant makes a Part 36 offer of £25,000 which the claimant rejects. A year later, the claimant’s prospects of winning more than £25,000 change because adverse surveillance evidence is served and the offer is grabbed out of time. The claimant can bank the £25,000 and claim costs up to the expiry of the relevant period, but the defendant cannot set off or enforce against the damages, the costs due from the claimant thereafter because there has been no order of the court for the payment of damages and interest. As Coulson LJ expressed it in Venduct:
“….acceptance does not require any order from the court, so a settlement in consequence of an acceptance of a Part 36 offer would also be outside the words of rule 44.14(1)” (paragraph 45, judgment).
Once again, defendant insurers ask, did the QOCS regime intend such an outcome? Why should it be different when a Tomlin Schedule is used, or, indeed the case has settled under Part 36? After all, in each case, there will be a fund against which any adverse costs orders can be enforced, but for the existence of CPR 44.14.
So far as a Tomlin Schedule is concerned, the principal argument deployed against it being permissible to enforce costs against the damages, is that sometimes the compensation and costs are rolled into one composite figure. It is then an impossible task to disentangle the two, so that only costs due to the defendant can be enforced against the amount attributable to the damages and not against the costs.
However, that is not the case where a Part 36 acceptance is concerned. The compensation is kept separate from the costs, so that the costs incurred by the defendant after the relevant period expires, are clearly identifiable and potentially available to be enforced against the damages. However, as things stand at the moment, that is not possible even though the claimant might say “We will pay your costs from the date we should have accepted your Part 36 offer”, because CPR 44.14, and now the decision in Ho (No 2) do not permit it. What is more, that will be so even if the claimant has accepted late as a mechanism to avoid having to pay the defendant any costs. The most that the court can do for a defendant in that situation is to deprive the claimant of any pre-offer costs under CPR 36.13(5). Did the Supreme Court have that in mind when deciding to reverse Ho (No 2)?
Whilst the Supreme Court plainly cast doubt on whether QOCS is achieving fairness both to claimants and defendants, it will come as no surprise if the next call on the CPRC’s time is to undergo a full review of QOCS as it approaches its tenth year in operation next April. That way, the legal profession will be told exactly what sort of beasts set-off and enforcement really are in the costs jungle.
