Part 36 and Fixed Costs – A definitive answer at last?

Sean Linley, Costs Consultant at PIC talks about Part 36 Offers and Fixed Costs in his article published in the recent Litigation Funding Magazine.

Part 36 and Fixed Costs – A definitive answer at last?

The stakes are getting higher with the issue of late acceptance of a Part 36 offer by a Defendant finally heading towards the Court of Appeal but how did we get there and where are we now? It’s frankly a mess. Does late acceptance equate to indemnity costs? Does late acceptance equate to standard basis costs (trumping any fixed costs)? Or does it have any material effect at all?

The History

To fully understand these questions it is necessary to take a minor history lesson. In March 1994, the then Lord Chancellor set up the Woolf enquiry. It had a simple aim to look at ways of reducing delay, the accessibility of civil proceedings and of reducing costs (it all sounds terribly familiar). Following the enquiry and Lord Woolf’s report, Part 36 was born on 26 April 1999. Lord Jackson in his review of civil litigation costs in 2009 espoused that even 10 years after the introduction of Part 36 that it should be amended to give “greater certainty about the effect of offers” and for “claimants offers [to] have more ‘teeth’”. A further 8 years on since Lord Jackson’s comments (and 18 years since the introduction of Part 36), Part 36 is still being shaped with ever greater certainty still sought.

The issue of late acceptance of a Part 36 offer by a Defendant stems from the rules themselves. A quick glance at CPR 36.13(5) gets to the heart of the problem. It states that where a Part 36 offer is accepted after the expiry of the relevant period “the Court must, unless it considers it unjust do so order that (a) the claimant be awarded costs up to the date on which the relevant period expired; and (b) the offeree do pay the offeror’s costs for the period from the date of expiry of the relevant period to the date of acceptance.” The silence is deafening and it is to this silence to which we are indebted to the myriad of interpretations that have followed since. The CPR only addresses the issue of late acceptance by a Claimant with no clarity (or ‘certainty’ to borrow Lord Jackson’s own words) on the effect of late acceptance by a Defendant. Indeed, the only guidance for Claimants within the rules is the effect of obtaining a more advantageous judgment (which are set out at CPR 36.17). There isn’t enough space to go through all of the benefits but the one which is most relevant is that the Court will award costs after the expiry of the relevant period on an indemnity basis. Whilst the rules are silent should the effect of late acceptance by a Defendant differ from the effect of a more advantageous judgment?

The reasons the stakes are so high can be found in the case of Broadhurst & Anor v Tan & Anor [2016] EWCA Civ 94 (23 February 2016). In this case, it was a low value personal injury claim where fixed costs applied. The Claimant made a Part 36 offer which was rejected by the Defendant and subsequently beaten at Trial. It was accepted by the Defendant that the Claimants were entitled to indemnity costs pursuant to CPR 36.17. The issue in simple terms was what was the effect of costs on the indemnity basis where fixed costs would ordinarily apply. The Court of Appeal held that this tension be resolved in the favour of the Claimant. Part 36 trumped Part 45. Indemnity costs trumped fixed costs. This meant time basis costs were recoverable from the expiry of the relevant period (i.e. from when the offer became effective). The case of Broadhurst made it plain that Part 36 was a powerful tool for escaping fixed costs. Dominic Regan called it a “stupendous result” and whilst the judgment was not without its critics, it has remained a key component of the case for escaping fixed costs.

This is how we arrive at the issue now faced by the Courts. If indemnity costs apply where a Part 36 offer is accepted late by a Defendant then it would offer an escape route. The lack of clarity in CPR 36 and the judgment of Broadhurst v Tan created a potent mix. Whatever the outcome it is fair to say that there will be wide-reaching financial consequences.

Making your mind up

Fixed Costs Apply Indemnity Costs Apply Standard Basis Costs Apply
Whalley v Advantage Insurance Sutherland v Khan Hislop v Perde
Anderson v Ladler Russell v Noble Richardson v Wakefield Council
McKeown v Venton Car Craft Test Centre & John Martin v Kirsty Trotman & Advantage Insurance Company
Ali v Sabre Insurance Company Ltd
Parsa v DS Smith PLC & QBE Insurance Europe Ltd

 The confusion created is categorised by the swathes of differing County Court judgments with no-one seeming able to come upon with an answer. The table above provides 5 instances where fixed costs were applied and 5 cases where fixed costs were displaced. Chaos seems a generous term.

DJ Besford is someone who has inadvertently ended up at the centre of this confusion.

In the case of Sutherland v Khan, Kingston-Upon-Hull County Court, Case number A81YM424 DJ Besford held that a Defendant who accepted a Claimant’s Part 36 offer late would be liable to pay indemnity costs from the date of expiry of the relevant period.

He stated at paragraph 20 of his judgment that I do not find that the court has to find that the defendant has, in some way been guilty of inappropriate behaviour or conduct capable of censor before I can consider making an order for costs on an indemnity basis”. He added later that “[…] for the court to deny the consequences that flow from accepting a part 36 out of time the court has to make pretty exceptional findings and there has to be some very good reason as to why it is unjust not to make the usual order. The very fact that the claimant obtains a ‘windfall’, most certainly does not constitute unjustness, under part 36.17.”

Following the judgment of Broadhurst v Tan, indemnity costs trumped fixed costs.

The judgment in Sutherland v Khan seemed clear but as the matter never progressed beyond the first instance decision a binding authority never appeared.

Moreover, in August of this year DJ Besford did something quite exceptional. In the case of Whalley v Advantage Insurance Co Ltd (2017), sitting in the County Court at Kingston upon Hull, DJ Besford revisited the issue of what costs a Claimant should recover after a Defendant had accepted a Part 36 offer out of time in a low-value personal injury claim where fixed costs would otherwise apply. He looked closely at the conflicting authorities pertaining to when indemnity costs should be awarded, paying attention to the case of Excelsior Industrial and Commercial Holdings v Salisbury Hammer Aspen and Johnson [2002] EWCA Civ 879 (which continues to be good caselaw for those seeking an indemnity basis costs award). DJ Besford held that unless there were ‘exceptional circumstances’ in accordance with CPR 45.29J or conduct justifying an award of indemnity costs, the Claimant was only entitled to fixed costs.

The exceptional part of Whalley can be found at paragraph 47 of the judgment:

“I accept that my conclusion at paragraph 20 [see above] of Sutherland is unsupported and can no longer stand.”

DJ Besford said he was wrong, reversing the earlier triumph for Claimants in place of a victory for Defendants. Coming to a different decision was one thing but to openly criticize his previous decision was extraordinary.

Whalley is another first instance decision which isn’t binding. The fact DJ Besford came to two opposing views highlights that a definitive answer is long over-due.

The Court of Appeal decides

The good news is that a definitive answer may not be too far away and comes in the form of the case of Hislop v Perde, Central London County Court, Claim number: A27YP399.

In the first instance decision the DJ awarded fixed costs. The reasoning was that there was no discretion to award standard basis costs and the case was not suitable for an indemnity costs award.

This was appealed by the Claimant to the Circuit Judge. The Claimant’s argument was that by accepting the Part 36 offer late, the Defendant had avoided any penalty and “such an outcome offends against fairness and encourages parties to delay in settling matters.” The Claimant advanced an argument that an indemnity costs award was appropriate.

The CJ, however, declined to make an indemnity basis costs award on the facts of the case (but did make it clear that the DJ had discretion to make such an award with the appropriate test whether conduct had been ‘out of the norm’). What the CJ did do though was to make a standard basis costs award for the period of time spent after the expiry of the Claimant’s Part 36 offer. The CJ stated that “in the circumstances of a late acceptance of a Claimant’s Part 36 offer, the Court is to assess the costs, so that there are not fixed costs, but the assessment is to be on either the standard or indemnity basis and it is for the Court to determine which is appropriate in all the circumstances of the particular case. Has the late acceptance of the offer been “out of the norm”?”

The issue of late acceptance has now yielded three distinct answers:

  1. An award of indemnity costs;
  2. Fixed Costs apply;
  3. An award of standard basis costs.

Permission to Appeal has now been given in Hislop and with so much confusion within the judiciary it is an issue that is ripe for addressing by the Court of Appeal.

The real question though is will it matter?

 The Final Word?

The final word may not come from the Court of Appeal at all. 8 years on from his review of Civil Litigation Costs, LJ Jackson’s long-awaited Fixed Costs Report was published on 31 July 2017. In the report LJ Jackson considered Broadhurst and the consequences flowing from Part 36 concluding as follows:

“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.”

The comments will come as a disappointment to Claimants but LJ Jackson’s comments are not binding upon the government and his recommendations will be subject to a further consultation in due course.

Moreover, LJ Jackson’s proposals still leave unresolved the issue of whether a Claimant would be entitled to any uplift on late acceptance by a Defendant. None-the-less, the proposals are a dilution of the Broadhurst principle and make the issue something of a misnomer.

The only certainty is that 18 years on from the introduction of Part 36 it is still not clear, and with wide-sweeping reforms on the horizon there may be little time left for any clarity to have a meaningful effect.

To contact Sean about this article or with any other queries, click here