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Civil Litigation Section

Kerry Underwood's part 36 update

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Kerry Underwood looks at where we stand with part 36 in light of recent judgments and Lord Justice Jackson’s proposals on fixed recoverable costs.

Position after judgment 

Defendant’s offer

  • Defendant gets costs from expiry of the relevant period
  • Defendant gets interest on costs but not enhanced interest, so that provision in CPR 36.17 adds nothing.

The basis of assessment of the defendant’s costs, that is standard or indemnity, is not stated.

The courts in general order the costs on the standard basis, although there have been occasions when they have been ordered on the indemnity basis, and there is no doubt that the court has that discretion.

Claimant’s offer

  • Claimant gets costs on the indemnity basis from expiry of the relevant period and also gets interest on both damages and costs. That interest is enhanced up to a maximum of ten per cent above base.
  • Claimant gets a ten per cent bonus on damages up to a maximum of £75,000.

These provisions apply even in cases subject to fixed costs and thus, where judgment is entered, part 36 trumps fixed costs – see .

Position on late acceptance

Where a claimant accepts a defendant’s offer late, then the consequences are the same as when a claimant fails to beat a defendant’s offer at trial.

The key, unanswered question is what happens when a claimant’s part 36 offer is accepted late by the defendant, that is whether the claimant get ordinary costs or indemnity costs, and in a fixed costs case whether the claimant gets:

  • fixed costs
  • ordinary, unfixed standard costs, or
  • indemnity costs.

There are first instance and Circuit Judge appeal examples of all three decisions. Regional costs judge District Judge Besford has famously given conflicting decisions in Sutherland v Khan, Kingston-Upon-Hull County Court, 21 April 2016, case number A81YM424, where he held that indemnity costs applied, and in Whalley v Advantage Insurance Co Ltd, Kingston-Upon-Hull County Court, 5 October 2017, case number B58YM864where he held that in such cases the claimant was only entitled to fixed costs.

There is no superior court decision on the point, and therefore I can give no useful guidance, except to say that if you are a claimant, go for indemnity costs; if you are a defendant, argue for standard costs, or in a fixed costs case, fixed costs.

It seems to me that in a fixed costs case, the answer must either be fixed costs or indemnity costs, and that there is no logical argument for the halfway house (a judgment of Solomon if ever there was one) of allowing a claimant to escape fixed costs but awarding standard, rather than indemnity, costs.

Lord Justice Jackson’s proposals

On 31 July 2017, Lord Justice Jackson published his report on fixed recoverable costs. He reports that in general the existing fixed costs regime works well. He proposes making no changes, apart from uprating the figures for inflation. Any other issues are for the Civil Procedure Rules Committee.

However, Lord Justice Jackson made an exception in relation to part 36, saying that it was the ‘one issue which cannot be ducked’. His comment and proposals apply to all cases covered, or to be covered, by fixed recoverable costs, that is the existing scheme in relation to most personal injury cases, as well as the proposed scheme for all civil cases in the Fast Track and for most civil cases in the new Intermediate Track, covering claims between £25,000 and £100,000.

In Broadhurst v Tan [2016] EWCA Civ 94the Court of Appeal held that a claimant who matches or beats its own part 36 offer when judgment is entered gets indemnity costs, and not fixed costs. In Lowin v W Portsmouth & Co Ltd [2016] EWHC 2301 (QB)the Queen’s Bench Division of the High Court adopted the same reasoning in relation to provisional assessment proceedings where there is a cap of £1,500 plus VAT and court fees.

The appeal in Lowin was heard by the Court of Appeal on 5 December 2017 and the decision is awaited.

In Phonographic Performance Ltd v Raymond Hagan [2016] EWHC 3076 (IPEC)the Intellectual Property Enterprise Court, part of the Business and Property Court, adopted the same line of reasoning in relation to the system of capped costs in IPEC cases.

The effect of these decisions is that part 36 trumps fixed and capped costs, resulting in an award of indemnity costs when a claimant matches or beats its own part 36 offer and obtains judgment, and possibly on late acceptance by a defendant where there is no judgment.

Although many authorities, including the Court of Appeal and the High Court, consider that necessary to give claimants in fixed costs cases an incentive to make part 36 offers, it takes away one of the central points of a fixed costs scheme, which is that the parties know the maximum extent of their liabilities when they embark upon bringing or defending litigation.

Allied to that is the fact that it then triggers detailed assessment of costs, bringing a further layer of expense and delay into what is meant to be a certain situation.

In my book Personal Injury Small Claims, Portals and Fixed Costs (see pg 1,237) and in my submissions to Lord Justice Jackson, I said the following.

‘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 maintain the existing system, where the Claimant escapes fixed costs if s/he matches or beats its 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 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 etc.’

Lord Justice Jackson proposes replacing indemnity costs in such circumstances with a percentage uplift of either 30 per cent or 40 per cent, and states that this proposal is a clear issue of policy to be addressed in the consultation exercise following his report, which at the time of writing has not begun.

Lord Justice Jackson does not suggest 30 per cent for one case and 40 per cent for another, but rather that the figure for everything should either be 30 per cent or 40 per cent.

In relation to the current pilot scheme in Commercial Court cases valued at between £100,000 and £250,000, the part 36 uplift is fixed at 25 per cent of ordinary costs. In that scheme, costs are capped, not fixed. In due course, it would be beneficial if a single percentage uplift across all cases could be introduced.

Lord Justice Jackson does not express any view as to whether the 30/40 per cent uplift should apply on late acceptance as well as on judgment.

He sets out the different views on part 36 generally at paragraph 2.6 of chapter 5 of his report (pg 80), as follows:

‘2.6        Broadhurst v Tan and the effect of an order for indemnity costs. The one issue which cannot be ducked, however, is Broadhurst v Tan [2016] EWCA Civ 94; [2016] 1 WLR 1928. This decision, unless its effect is modified by rule change, will impact upon fixed costs generally. This issue is equally important in relation to higher value claims, but I deal with it here and will not repeat the discussion in later chapters. Views on this issue are sharply divided:

(i) Nine of my assessors consider that, although CPR Part 36 must continue to bring rewards for claimants who make effective Part 36 offers, in the context of a fixed costs regime it would be better for there to be a percentage uplift on the fixed costs rather than an order for indemnity costs. This will avoid the need for a detailed assessment of costs. Also, it will provide certainty for litigants. Certainty is an essential feature of an FRC regime. As to the level of percentage uplift, views range between 25% and 50%.

(ii) Five of my assessors take the opposite view. Nicholas Bacon QC writes: 

“I do not agree with the proposal that we do away with the Broadhurst indemnity costs order. These cases on indemnity costs are not clogging up the courts with detailed assessments. It is a powerful message for a party to consider rejection/acceptance.  A 30% enhancement is not sufficient to redress the failure to accept an offer. It ignores the fact that as between solicitor and client more than the fixed costs will have been incurred by the client. Why should a client not be entitled to be reimbursed for their actual legal spend, rather than fixed costs, where a party has misconducted themselves or caused a party to incur costs unnecessarily because an earlier offer should have been accepted.

I have set out the competing arguments, because this is the only issue on which my assessors are sharply divided. After considering the powerful arguments on both sides, on balance, for the reasons set out in sub-paragraph (i) above, I favour replacing indemnity costs with a percentage uplift of 30% or perhaps 40%. BUT this is a clear issue of policy, which will need to be addressed in the consultation exercise following this report.”’

Unreasonable conduct

In cases of unreasonable litigation conduct, the report proposes that the court should have the power either to award a percentage uplift on costs of 30 per cent or 40 per cent, depending upon which figure is finally chosen, or to make an order for indemnity costs.

The court will exercise that power, having regard to the seriousness of the conduct in question.

One example of such unreasonable conduct, given in the report, might be substantial non-compliance with the relevant Pre-Action Protocol. As to what constitutes unreasonable litigation conduct, Lord Justice Jackson refers to the case of Dammermann v Lanyon Bowdler LLP [2017] EWCA Civ 269at paragraphs 30 to 32.

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