Michael Axe looks at the first Court of Appeal case under the new Part 36 Rules to clarify how the Courts decide whether a Claimant has "truly beaten" a Defendant's settlement offer and the cost consequences for Claimants.
Under the old (pre-April 2007) Part 36 Rules, as long as a Claimant was awarded at trial more than the Defendant had offered to pay in its Part 36 settlement offer, then the Claimant would still (normally) be entitled to have its legal costs paid by the Defendant. The Claimant, therefore, would normally only have to pay the Defendant’s legal costs (or more accurately, the Defendant’s costs incurred after its offer expired) if the Claimant was awarded less than the Defendant’s settlement offer at the end of the trial, i.e. the Claimant had failed to ‘beat’ the Part 36 offer.
Whilst this principle was easy enough to apply to monetary claims and offers, it was often more difficult for a Court to decide if a Claimant had ‘beaten’ a non-monetary Part 36 offer where there was “no yardstick of pounds and pence by which to make the comparison”. Therefore, in non-monetary cases under the old Part 36 Rules, the Courts had adopted a system whereby they would consider all the circumstances of the case in assessing whether the Claimant had ‘beaten’ the Defendant’s Part 36 offer.
When the new Part 36 regime was introduced in April 2007, it revised the definition for whether or not the Claimant had ‘beaten’ the Defendant’s Part 36 offer, stating that the Claimant had to obtain a judgment that was “more advantageous” than the Defendant’s offer.
Many assumed that in monetary claims a “more advantageous” judgment would continue to mean a judgment for a higher monetary value than the settlement offer. This interpretation would, it was argued, provide everyone with certainty and clarity. However, the recent Court of Appeal case of Lisa Carver v BAA plc has somewhat controversially shown that this interpretation is no longer correct.
Liability in this case was accepted in July 2003, and settlement negotiations then began to try to agree the quantum of the Claimant’s losses. These discussions eventually resulted in the Defendant making a Part 36 offer worth £4,520 in June 2006. The Claimant rejected this offer, estimating that her losses were in excess of £19,000. Although further offers were exchanged between the parties in May 2007, an agreement could not be reached and so the matter progressed to trial in June 2007.
At the trial, the Judge awarded the Claimant £4,686.26 inclusive of interest. Both parties agreed that after interest calculations were taken into account, this Judgment was £51 more than the Defendant’s June 2006 offer. The question which was then referred to the Court of Appeal was whether the judgment was “more advantageous” to the Claimant than the Defendant’s Part 36 offer.
The Court of Appeal took the opportunity to clarify how this issue should be approached under the new Part 36 regime, confirming that the change of language in the new Part 36 Rules meant that the Courts should now look at all of the circumstances of the case (i.e. the same approach that had been adopted in non-monetary claims under the old rules).
The Court of Appeal stressed that “money is not the sole governing criterion” in assessing “whether the judgment, which is the fruit of the litigation, was worth the fight”.
Applying this logic, the Court of Appeal ruled that the extra £51 that the Claimant had been awarded was more than outweighed by the irrecoverable costs she had incurred in continuing to pursue her claim, not to mention the additional stress that preparing for trial had caused her. The Claimant’s conduct was also criticised, as was the fact that she had incurred costs of around £80,000 in pursuing a claim worth less than £5,000. On this basis, the Court of Appeal decided that the judgment obtained was not “more advantageous” to the Claimant than the Part 36 offer, and agreed with the Trial Judge’s view that the Defendant was “in practical terms the successful party in this litigation”. The Claimant was therefore ordered to pay the Defendant’s costs from the date its Part 36 offer had expired. This was clearly an expensive catastrophe for the Claimant.
This decision will have a far reaching effect, as prior to this case it was generally accepted that a Claimant would be awarded its costs if it ‘beat’ a Defendant’s Part 36 offer by as little as £1.
Given the degree of uncertainty which has been intentionally introduced by the Carver v BAA case, Claimants will no longer be able to be as confident of recovering their costs if a Defendant makes a Part 36 offer which may be in the region of the sum the Court is likely to award at trial. This will allow Defendants to increase the pressure on Claimants to settle by making competitive Part 36 offers, which in turn will mean that Defendants will be under more pressure to make sure that their offers are competitive if they want to recover their own costs in the event the offer is not accepted.
The net result is that both parties will be encouraged to reach settlement in order to avoid a potentially uncertain decision on costs at the end of an expensive trial. This is no doubt precisely what the Court of Appeal intended when it said “compromise is seen as an object worthy of promotion, for compromise is better than contest, both for the litigants concerned, for the court and for the administration of justice as a whole.”
For further information on this or any other issue relating to litigation, please contact Michael Axe by emailing Michael or by calling him on 08450 990045, or speak to your usual contact in the Commercial Disputes Team.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.