You are faced with a claim for personal injuries and you make a Part 36 offer with a view to affording costs protection. It transpires that your Part 36 offer is successful and you look to recover your costs. By way of illustration:
- Claim for personal injuries intimated in January 2014.
- Liability admitted March 2014.
- Defendant makes a Part 36 offer of £30,000 in January 2016 following disclosure.
- Claim concludes after a two-day trial: judgment is £27,500.
- Costs order: claimant’s costs up to the expiry of the Part 36 offer, thereafter the defendant’s.
- Claimant’s costs up to expiry of Part 36 offer: £30,000.
- Defendant’s costs post expiry of offer: £50,000.
Does the equitable remedy of set-off of costs assist or is the balance ultimately taken from claimant’s damages?
The equitable remedy of set-off provides the defendant with the ability to secure all or, if not all, a greater extent of the costs incurred in making a Part 36 offer. If set-off does prevail, qualified one-way costs shifting (QOCS) limits costs recovery to that secured in damages giving rise to a shortfall.
What comes first, the chicken or the egg? Well, in the world of QOCS, this is a very important question to any party facing a claim for personal injuries when taking the decision as to whether or not to make a Part 36 offer to engage costs protection. Arguably, if set-off does not take place first, the defendant is likely to recover only a proportion of its expenditure in having to defend a claim that the claimant took to trial, as illustrated above. This appears to be contrary to what any person in the street would perceive as the fair administration of justice.
The concept of set-off of costs is not new and it is permissible under CPR 44.12. It dates back to 1750, as discussed by Derham on the Law of Set-Off, and it is evident within the 1915 decision of Reid v Cooper. Derham contends that set-off per se is an equitable remedy set against the conflicting authorities of Scott LJ confirming that set-off of costs was an equitable remedy within Lockley v National Blood Transfusion Service; whereas more recently Brooke LJ within R (on the application of Burkett) v London Borough of Hammersmith and Fulham, whilst agreeing with the decision of Scott LJ about the discretionary nature of the right of set-off, did not regard it as equitable.
Derham goes on to conclude that the law of set-off was developed by the common law courts long before the Judicature Act and that “the true basis of set off is the court’s inherent jurisdiction”; its purpose is to do what is fair. Surely the consequences should be obvious if a party seeks to protect its position via Part 36 and an opponent adopts a path to test that position.
The courts recognise and acknowledge that one judgment or order for payment of a sum may be set-off against another; however, there appears to be little evidence of this being applied since the onset of QOCS.
QOCS does not prevent the making of an order for a party to pay costs. It simply has an impact on the enforcement of those costs, unless specific circumstances such as fundamental dishonesty prevail, which are rare.
Set-off should not be viewed as a way in which to burst the protective bubble of QOCS, simply a preliminary step within the decision-making process as to whether leave should be granted to enforce a costs order.
For this reason, and contrary to the views of many commentators, set-off should not be seen in conflict with QOCS. Rather, to mitigate the expenditure of a successful party and highlight the importance to all parties of sensible early Part 36 offers, it should be viewed as an equitable remedy open to the court to address the imbalance that exists by permitting a party to litigate in a risk free environment. Any defendant, having succeeded in their Part 36 offer, should consider set-off as the first port of call in recuperating expenditure and minimising the impact of QOCS generally.
