Practical Law

The trial is over. The case is won. The opposition is to pay the costs. The champagne corks are popping. The successful solicitor’s client is happy. But for how long? The battle may be over, but the war may just be starting.

What war? The detailed assessment war, of course. How often is it the case that the claim succeeds but working out how the costs will be paid, who pays what and when, is a disaster? Soon the client ceases to be happy and becomes a very unhappy client because he, she, or it, cannot understand why, having won the case, they end up substantially out of pocket.

The answer to that is that a costs order does not promise, still less does it provide, an indemnity for the client’s outlay. That is trite law. Nonetheless, in detailed assessment proceedings, it is the receiving party who starts off in the driving seat which ought to provide a head start when the recovery process begins.

First, there is CPR 47.20. The receiving party is entitled to the costs of the detailed assessment. No worries, therefore, about the costs of assessing the bill being carved up on a percentage or issue-by-issue basis. On the contrary, as of right, the receiving party is entitled to 100% of the costs of the detailed assessment, subject to justifying them as having been reasonably, necessarily and proportionality incurred.

Second, the receiving party has all the CPR 36.17(4)(a)-(d) benefits at its disposal. Make an offer that complies with Part 36 which is rejected by the paying party and more is recovered from the costs judge, the claimant will be entitled to an additional 10% of the assessed costs (not exceeding £75,000), enhanced interest on those costs at up to 10% above base rate and the costs of the assessment on the indemnity basis. The reason for that is to impose a penalty on a paying party who turns down a reasonable offer, as happened in Cashman v Mid Essex Hospital Services NHS Trust. Even though the bill had been substantially reduced, Mrs Cashman beat her own Part 36 offer and was thus entitled to an additional £17,000, representing the amount by which the NHS Trust was penalised for rejecting it.

Suppose now that the boot is on the other foot and it is reverse champagne corks because the client has lost and is paying the costs. Having regard to the automatic consequences of CPR 47.20, what can be done to minimise the potential penalties which might apply?

The first point to make is that there is no equivalent of CPR 36.17(4)(a)-(d), which applies to a paying defendant. Make an offer for costs which is rejected by the receiving party and less is recovered from the costs judge, the best that the defendant can hope for is costs (emphasis added) from the date on which the relevant period for acceptance expired, and interest (see CPR 36.17 (3)). Costs in this context means standard basis costs, so for the successful defendant, there are no CPR 36.17(4) goodies such as indemnity basis costs, or the equivalent of an “additional sum” such as a penalty deduction of 10% from the assessed costs, and no abatement of interest on those costs.

The second point to make is that this “misalignment”, as it has been called, has not gone unnoticed at High Court level. In the just handed down decision of Coulson J in The Governors and Company of the Bank of Ireland and others v Watts Group Plc, the claimants had not only lost the action, but had also turned down three offers, including two under Part 36. Nonetheless, the court refused to award indemnity basis costs because the relevant offers did not give rise to an automatic entitlement.

“I know this misalignment is considered by some to be unjustified, but it remains the law” opined Coulson J.

Correct, but does that serve the interests of justice? True it is that a paying party who makes no Part 36 offer is their own worst enemy because they are thereby condemning themselves to paying the costs of the assessment under CPR 47.20, but the imbalance between the treasure trove available to a receiving claimant who beats their own Part 36 offer and the penalty that they suffer if they reject an effective paying party’s Part 36 offer, gives the appearance of being wholly out of kilter.

Two alternatives might avail a paying defendant, albeit that the first is not within their control. Part 36 is self-contained and those who trespass outside the highly prescriptive set of rules do so at their peril so far as the CPR 36.17(4) benefits are concerned. An adjustment such as making an offer under Part 36 which leaves out interest cannot be an effective Part 36 offer even if it says that it is (see judgment of HHJ Robert Owen QC in Potter v Sally Montague Hair and SPA). Thus in that case, separating interest out of the offer meant that it had not been made in accordance with Part 36, and similar benefits to those which Mrs Cashman had received under Part 36.17(4) in her case were disallowed.

The other alternative is to make a Calderbank offer. The Practice Direction (PD) to CPR 47.19 provides, at paragraph 19, that:

“Where an offer to settle is made, whether under Part 36 or otherwise [emphasis added], it should specify whether or not it is intended to be inclusive of the cost of preparation of the bill, interest and VAT.”

In Potter, Judge Owen was clear that the word “otherwise” meant that the PD envisaged the ability to make two types of offer, the first under Part 36 and the second outside the parameters of the rule, specifying how interest and so on would be treated.

A Calderbank offer is one that is made “without prejudice save as to costs”; that is to say, an offer the court is not permitted to read except in the context of costs between the parties once the substantive issues have been determined. In contrast to Part 36, there are no automatic costs consequences, but if a Calderbank offer is not beaten at detailed assessment, the court will take it into account when exercising its discretion as to costs under CPR 47.20(1)(b).

That begs an interesting question; could a paying party do better by making a Calderbank offer rather than relying on CPR 36?

In principle, the answer to that must be “yes” because CPR 44.3(1) does not permit the court to allow costs which have been unreasonably incurred or are unreasonable in amount, whether payable on the standard or indemnity basis. In these circumstances, it is open to a paying party who makes an early and effective Calderbank offer, to invite the court to impose a penalty on a receiving party who has turned down the offer, by reducing the assessed costs still further, say by a percentage. To that extent, it could be said that Calderbank offers are more flexible than Part 36 offers, firstly because the costs consequences are entirely at the discretion of the court and secondly, the offer can be in respect of all or part of the costs, inclusive or exclusive of interest, and including or excluding the costs of the assessment.

If there is a consensus amongst paying parties that they are being hard done by, by Part 36, the constant tinkering with the CPR and their PDs creates its own problems. Realistically, the chances of any amendment to CPR 36.17(4) to adjust the imbalance between what a receiving claimant can recover following an effective Part 36 offer and the best that a paying defendant can achieve in similar circumstances, are remote. However, in view of Coulson J’s comments and mindful that he is about to be promoted to the Court of Appeal, his decision in Bank of Ireland might encourage the Civil Procedure Rule Committee at least to have a look.