Qualified one-way costs shifting: defendant can set off against costs awarded to claimant
In Faulkner v Secretary of State for Business, Energy And Industrial Strategy, the Queen’s Bench Division of the High Court considered the Kafkaesque issue of whether a defendant failing to set aside a notice of discontinuance could then rely on that discontinuance to set off its costs (automatic on discontinuance) against the costs order made against it on its failed application.
I strongly suggest an ice-band around your head before you read on, or you could limber up with something comparatively simple, like TS Eliot’s The Waste Land. In a classic understatement, the High Court judge here said: “It is not without irony that the defendant sought to set aside a notice of discontinuance which, albeit served late in the day, had had the effect of saving it money”.
Here, the claimant in a personal injury case, protected by qualified one-way costs shifting (QOCS), discontinued shortly before trial. The defendant applied to set aside the notice of discontinuance and to have QOCS protection set aside. The application was dismissed and the unsuccessful applicant, that is the defendant, was ordered to pay the costs of the application to the claimant. The claimant, by virtue of discontinuing, was of course the loser in the litigation with an automatic, but on the face it unenforceable, costs order against him. That was the reason for the defendant’s application to have the discontinuance disapplied, rather than have the claim struck out.
This could only happen in a QOCS case. Bizarre hardly begins to do the process justice. It is the equivalent of a winning football team demanding a replay, or indeed a wholly successful litigant launching an appeal.
The judge, Turner J, put it elegantly in explaining, at paragraphs 4 and 5 of the judgment, that the preliminary hearing never took place because the claimant served pre-emptive notice of the discontinuance of his claim. However, in responding, the defendant appled to set aside the notice of discontinuance, hoping that, following the exhumation of the claimant’s claim, it could immediately apply to extinguish it once more by striking it out. The judge explained that, rather than amounting to no more than an “arbitrary wanton posthumous desecration followed by a prompt and unceremonious reinterment”, there was “method in the madness” of the procedural manoeuvre. The judge explained:
“In short, the claimant enjoyed the protection afforded by the QOCS regime against the enforcement by the defendant of any costs orders against him. The service of a notice of discontinuance does not, of itself, remove such protection. Under CPR 44.15, however, the protection of the QOCS regime is stripped away where proceedings have been struck out on one or more of the grounds therein identified. Accordingly, the defendant hoped to reanimate the claim solely for the purpose of striking it out in such a way that it could proceed thereafter to enforce an order for costs against the claimant.”
Initially, the defendant argued that its liability to pay costs of the failed application (£7,000) should be reduced by £3,500, being the sum awarded to the defendant in costs in any event in relation to an earlier application. In other words, the £3,500 should be set off against the £7,000, reducing the defendant’s liability to £3,500, coincidentally the same sum as the original costs order.
The judge raised the issue of whether the entire costs of the successful defendant came into play due to the automatic liability of a discontinuing claimant for the defendant’s costs. The effect would be to extinguish any liability on the defendant’s part, which would mean that the effect of the claimant winning the application would be that it had, by virtue of the set-off, to pay its own costs of winning the application.
It should be noted that the QOCS rules, contained at CPR 44.13 onwards, allow enforcement of a costs order against a personal injury client “only to the extent that the aggregate amount in money terms of such orders does not exceed the aggregate amount in money terms of any orders for damages and interest made in favour of the client” (CPR 44.14(1)). The costs awarded to the claimant do not come into play as part of the fund to be enforced against.
However CPR 44.12, appearing immediately before the QOCS rules, does allow set-off against costs awarded to a claimant, or indeed a defendant.
CPR 44.12(1) reads:
“Where a party entitled to costs is also liable to pay costs, the court may assess the costs which that party is liable to pay and…
(a) set off the amount assessed against the amount the party is entitled to be paid and direct that party to pay any balance…”
The facts here were, for all intents and purposes, identical to those in Darini v Markerstudy Group, where the circuit judge, on appeal, rejected the defendant’s argument and refused to allow set-off, although in that case the district judge, correctly as it will now be seen, had allowed the set-off. However in Howe v Motor Insurers’ Bureau, the Court of Appeal found the opposite and held that set-off was not a form of enforcement. It pointed out that CPR 44.14 enables enforcement without the permission of the court, whereas CPR 44.12 requires a court order before one set of costs can be set off against another. Consequently, Darini was wrongly decided and the defendant here succeeded in its argument that the costs order in its favour could be set off against the costs order in favour of a QOCS protected claimant. However, the court here also held that the circuit judge had been correct in Darini in saying that set-off was at the discretion of the court, and, as in Darini, the High Court here exercised its discretion against allowing set-off by the defendant.
Turner J explained that there was an obvious danger in attempting to lay down general rules concerning the exercise of a pure discretion, and that the whole purpose of affording the court a procedural discretion is to provide for the flexibility necessary to achieve the overriding objective in circumstances of infinite potential permutation; therefore, the judge would not conclude that the discretion to set off costs against costs was to be exercised against the defendant in every case in which it unsuccessfully applied to set aside a notice of discontinuance of a claim falling within the QOCS regime. Each case had to be decided on its own facts.
The judge continued that, in this case, it became readily apparent that the application to set aside the notice of discontinuance was very weak. The bid to strike out the resurrected claim under CPR 44.15 was “doomed to failure”. If the defendant had ever considered that such a strike out application had realistic prospects of success, it could and should have made it whilst the claim was still proceeding. Furthermore, it should have done so weeks before the notice of discontinuance had been served. In the judge’s view, it was entirely inconsistent for the defendant to proceed towards the hearing of a preliminary issue in a case in which the claimant’s case was so weak that it could have been struck out without the need for any such issue to be heard. The judge stated that the tactical reasons behind the defendant’s application, although understandable, were deeply flawed. The claimant’s evidence was vulnerable on certain grounds, and the defendant was doubtless fairly confident that the preliminary issue would be determined in its favour:
“Nevertheless, the strength of its case was never such as to justify a strike out application falling within one of the narrowly defined circumstances set out in CPR 44.15 and that is why one was never made until after the claim had already been discontinued.”
Turner J also expounded that, if the claimant had not served notice to discontinue, the hearing of the preliminary issue would have gone ahead and the defendant would have incurred further costs. However, even if the claimant had lost the issue, it would still have enjoyed the full protection of the QOCS regime. In the judge’s view, it was not without irony that the defendant sought to set aside a notice of discontinuance which, although served late in the day, saved it money:
“I can well understand the defendant’s frustration that the notice was not served earlier but the resilience of the QOCS regime is such as to limit very strictly the inroads which can be made into the scope of its application.”
The court was told that the defendant would have wanted to deploy the decision against claimants in later similar cases, in the event of success on the preliminary issue. However, this was not a “lead case” in a group litigation order in which there was any restriction imposed by the court regarding settlement or discontinuance. Turner J suggested that, if the defendant remained eager to pursue such a procedural path in future, suitable lead cases must be selected for that purpose.
The judge concluded, at paragraph 27:
“It follows that, in the circumstances of this case, I exercise my discretion against allowing the defendant to set off any sum against the claimant’s costs of successfully resisting the application to set aside the notice to discontinue. The claimant is, therefore, entitled to a costs order in his favour in the sum of £7,000.”
At paragraph 21 of the judgment, the court had quoted Darini, with approval, in relation to the discretion issue. The judge in Darini said that:
“But for the defendant’s application, the position would have been simple. The claim had been discontinued, the defendant’s ability to enforce the deemed costs order in its favour by virtue of CPR 38.6 would have been effectively nil.”
In Darini, the court explained that CPR 44.14(1) applied because there were no damages, and none of the exceptions in CPR 44.15 or 44.16 applied. The claimants would have incurred such costs as they incurred in bringing their claim unsuccessfully, but would have had no further liability. “The QOCS regime would have operated as intended.”
The court’s view in that case was that “it cannot be correct that a defendant is able thereafter to bring an unsuccessful application which is dismissed with costs but, as a result, places the claimants in a worse position than they would have been but for that application.” It explained that, had it not been for the application, the position would have been as set out above. The application was brought and caused the claimants to incur additional costs:
“The court has held that the claimants should be entitled to those costs in principle, thereby placing the claimants back in the position they would have been but for the application. However, the effect of the set-off is then to prevent the claimants from being placed back in that same position, but rather to leave them effectively paying their own costs for the defendant’s failed application.”
A correct decision and a helpful analysis of an incredibly badly written section of the CPR, not that that narrows it down much.