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Part 36 and fixed costs

Practitioners will be familiar with the basic concept of Part 36 and the consequences that flow from that rule.

Here I look at costs, rather than additional damages and enhanced interest on damages and costs.

A successful claimant who fails to beat a defendant’s Part 36 offer forfeits costs from the date of expiry of the period for accepting that offer and has to pay the defendant’s costs for that period, generally on the standard basis.

A claimant who matches or beats its own Part 36 offer, and where judgment is entered, is entitled to indemnity costs from the date of expiry of the time for accepting the offer.

There remains the issue of whether late acceptance by a defendant results in the claimant getting indemnity costs for the period between expiry and acceptance.

However, the interplay with fixed costs has already been the subject of a Court of Appeal decision.

In Broadhurst v Tan and Taylor v Smith, the Court of Appeal held that a claimant who matches or beats its own Part 36 offer in a fixed costs case gets indemnity costs, as well as the other enhancements, such as a 10% increase in damages and additional interest, and so on, arguably in addition to fixed costs.

The Master of the Rolls said that, although this appeal concerned the version of Part 36 which applied before 6 April 2015, “the provisions applicable to this appeal remains substantially the same”; therefore, this is the law in relation to post-6 April 2015 Part 36 offers.

It was accepted that there was a tension between CPR 45.29B dealing with fixed costs and CPR 36.14A. The former states that the only costs to be awarded in a Section III A case are fixed costs, whereas the latter says that, in such cases, CPR 36.14 will apply, subject only to the modifications stated in CPR 36.14A, and following, and none of those modifications affects CPR 36.14(3).

The counterview, rejected by the Court of Appeal, was that although CPR 36.14(3) applies in a fixed costs case, there is no difference between profit costs assessed on the indemnity basis, and the fixed costs provided in Table 6B of CPR 45.29C; that is, they remain fixed, come what may.

It was common ground that, under CPR 45.29J, the court had a general discretion to allow additional costs in exceptional circumstances – the so-called escape clause.

It was also common ground that the matching or beating of a claimant’s Part 36 offer would not, of itself, bring the matter within the escape clause.

As to the practical application of this rule, the Court of Appeal, at paragraph 31, said:

“Where a claimant makes a successful Part 36 offer in a section IIIA case, he will be awarded fixed costs to the last staging point provided by rule 45.29C and Table 6B. He will then be awarded costs to be assessed on the indemnity basis in addition from the date that the offer became effective. This does not require any apportionment. It will, however, lead to a generous outcome for the claimant. I do not regard this outcome as so surprising or so unfair to the defendant that it requires the court to equate fixed costs with costs assessed on the indemnity basis… a generous outcome in such circumstances is consistent with rule 36.14(3) as a whole and its policy of providing claimants with generous incentives to make offers, and defendants with countervailing incentives to accept them.”

Provisional assessment

CPR 47.15(5) provides:

“In proceedings which do not go beyond provisional assessment, the maximum amount the court will award to any party as costs of the assessment (other than the costs of drafting the bill of costs) is £1,500 together with any VAT thereon and any court fees paid by that party.”

Provisional assessment is a form of detailed assessment.

CPR 47.20(4) imports the provisions of Part 36 into the costs of detailed assessment with the appropriate change in terminology. For example, CPR 47.20(4)(a) provides that “claimant” refers to “receiving party”, and “defendant” refers to “paying party”.

In Lowin v W Portsmouth and Co Ltd, the Queen’s Bench Division of the High Court held that where a receiving party matched or beat its own Part 36 offer in provisional assessment proceedings, it was entitled to costs on the indemnity basis under CPR 36.17(4), which overrode the cap of £1,500 plus VAT and court fees contained in CPR 47.15(5).

The paying party had submitted that there is a difference in principle between fixed costs as dealt with in Broadhurst v Tan and capped costs, in that fixed costs are just that: fixed. As a result, unless costs on the indemnity basis could exceed fixed costs, an order for indemnity costs would be meaningless. Indeed, arguably as far as costs are concerned, a claimant’s Part 36 offer would be meaningless.

However, with capped costs, it is possible for costs on the standard basis to be, say, £750, but, say £1,250 on the indemnity basis. An indemnity costs order would therefore still mean something in practice, and would still incentivise a receiving party to make a Part 36 offer.

Thus the argument was that, where the costs cap applied, indemnity costs could be assessed and awarded but would be subject to the cap (see Nizami v Butt).

Here the High Court rejected that approach.

CPR 47.20(4) considered how Part 36 should apply to CPR 47, and it applies to the costs of a detailed assessment, with modifications.

There was a conflict between CPR 47.15(5) and Part 36 because CPR 47.15(5) potentially derogated from the entitlement to costs on an indemnity basis under Part 36.

The court said that the correct view was that taken by the Court of Appeal in Broadhurst, namely that CPR 36.14 continued to have “full force and effect”.

Had the draftsman of the Civil Procedure Rule Committee (CPRC) wished Part 36 to be modified so that the cap would remain, then that would have been stated.

The High Court further stated that the dislodging of the cap would incentivise parties to accept reasonable costs offers because if they did not do so they would be at risk of substantial uncapped costs under Part 36.

Intellectual Property Enterprise Court

In Phonographic Performance Ltd v Raymond Hagan, the Intellectual Property Enterprise Court (IPEC), part of the new Business and Property Courts, held that the fixed costs scheme in that court is displaced when a claimant matches or beats its own Part 36 offer, and thus, the court can award indemnity costs, as well as additional damages and interest on damages and so on.

This decision is consistent with the decision of the Court of Appeal in Broadhurst, and with the decision of the High Court in Lowin.

My proposals for change

If the current Part 36 system is retained, then the parties are still in the position of not knowing what the costs will be, and the apparatus of detailed assessment needs to be maintained.

I propose that, rather than maintaining the existing system, where the claimant escapes fixed costs if they match or beat their own Part 36 offer, and where a defendant gets costs from the date of expiry of its Part 36 offer if the claimant fails to beat it, there should be introduced a new system of calculating Part 36 penalties/rewards.

This would consist of a percentage add-on/deduction to fixed recoverable costs depending upon the stages passed between expiry and acceptance and so on.

For example:

  • A claimant makes a Part 36 offer pre-issue and the defendant accepts within that stage. There is no penalty/reward in costs.
  • A claimant makes a Part 36 offer pre-issue and that is accepted by the defendant post-issue but pre-allocation. The defendant pays an additional 10% costs.
  • The claimant makes a Part 36 offer pre-issue and the defendant accepts post-allocation, that is, two stages later. The defendant pays an additional 20% costs.
  • The claimant makes an offer pre-issue and matches or beats it at trial. The defendant has caused three unnecessary stages and pays 30% additional costs.

Thus there is the 10% penalty/reward for each stage passed when the defendant does not accept the offer.

The same works in reverse: a defendant makes a pre-issue Part 36 offer which the claimant accepts post-issue but pre-allocation and thus has caused one further stage to be engaged. The claimant suffers a 10% reduction in costs and so on and so on.

This is proportionate. The penalty/reward depends upon the stages effectively wasted.

It gives a strong incentive to parties to settle where appropriate, but at any given stage they know to the penny how much the costs will be on late acceptance.

Certainty is one of the great prizes of fixed costs.

Underwoods Solicitors Kerry Underwood

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