The recent Court of Appeal decision in Walker Construction (UK) Ltd v Quayside Homes Ltd suggests that it may not be necessary for a defendant to make a Part 36 offer to secure full costs protection at trial. We look at the circumstances in which a defendant can confidently make a Calderbank offer with a limited costs liability and the implications of the rather confusing message coming from the courts.
The existence of two separate regimes (offers complying with Part 36 and Calderbank offers which do not) is a recipe for confusion. The problem was made much worse by the redrafting of Part 36 in 2007 and the uncertainty that followed about whether offers were valid Part 36 offers. From 2010 the Court of Appeal made a concerted effort to introduce certainty concerning the costs consequences of settlement offers.
The troubling case of Medway PCT v Marcus
The cause of certainty was put back by the majority decision of the Court of Appeal in Medway PCT v Marcus. The court held that where the quantum of a clinical negligence claim was legitimately much higher than the sum recovered by the claimant at trial (quantum was agreed at £525,000 but the claimant only recovered £2,000 because, although he won on liability, he failed on causation), it was fair for the defendant to recover 75 per cent of its costs.
The defendant had not made a Part 36 offer because the claimant’s costs, doubled by a 100 per cent success fee, were from the outset wholly disproportionate to the quantum of the valid part of the claim. The Court of Appeal said that had the defendant made a Calderbank offer for a little more than the sum ultimately awarded, plus costs proportionate to that recovery, it would have been entitled to all of its costs.
Jackson LJ’s dissension in Medway
“There is an acute need for clarity and certainty in the field of Part 36. Parties need to understand (a) the consequences of making or not making Part 36 offers and (b) the consequences of accepting or not accepting such offers. Absent unreasonable litigation conduct or some similar factor, the starting point must be that a claimant who does better than any offer made by the other side recovers costs. In appropriate cases an adjustment can then be made for issues on which the claimant has lost. The defendants made no Part 36 offer in this case and in my view they should accept the consequences.”
What happened next
In a briefing in 2012, we described the burial of Medway in the aftermath of Jackson LJ’s judgment in Fox v Foundation Piling and the Supreme Court’s endorsement of Fox (no mention was made of Medway) in Fairclough Homes v Summers.
At that point, it seemed clear that a defendant could only be confident of obtaining full costs protection from a Calderbank offer accepting only a partial costs liability in the following circumstances:
- Where the claim was dishonestly exaggerated (as in Fairclough).
- Where the claimant’s conduct of the litigation had been unreasonable (as in Brit Inns v BDW Trading).
The decision in Walker
In Walker Gloster LJ resurrects Medway and extends the approved use of Calderbank offers to circumstances where a claim has been exaggerated and the recovery at trial is modest in comparison. The Calderbank offer in question made in January 2011 was for £30,000 including costs. The sum recovered at trial was about £11,000. The judge below should have concluded on a rough and ready basis that £19,000 was a reasonable offer on costs at that date, knowing with the benefit of hindsight the sum that was recovered.
Gloster LJ says that “a reality crosscheck would have demonstrated that a recovery of £19,000 in respect of costs at the early stages of this case was proportionate”. It would have been disproportionate and unjust to require a Part 36 offer to be made in these circumstances and the Calderbank offer provided full costs protection from the date it expired.
Proportionality and hindsight
While the decision in Walker may well be fair on its particular facts, it does leave some problems when it comes to deciding whether a costs-inclusive Calderbank offer should provide full costs protection. When the Walker offer was made in January 2011, an assessment of costs would have been determined in accordance with Lowndes v Home Office - if the costs are deemed to be disproportionate, a test of necessity is applied to determine whether an item is recoverable.
The Lowndes test continues to apply to all costs incurred in a case which began before April 2013, and applies to pre-action costs incurred before April 2013 where the case began after April 2013.
The new Jackson test requires the judge to assess the bill on an item by item basis and then to stand back to apply a proportionality test to the resulting figure. Necessity is no longer relevant. As the new CPR 44.3(2) says: “costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred”.
Fairness dictates that when assessing the costs protection afforded by a Calderbank offer, the court should apply the test appropriate to the period in question – this is a much more delicate task where relevant costs were incurred before April 2013. Defendants need to bear this in mind when deciding the level at which to pitch a costs-inclusive Calderbank offer.
It is ironic that while the composition of the Court of Appeal is staged to ensure that the Jackson reforms are consistently implemented – one of the Jackson Five must be part of the court where any Mitchell-esque issue arises – there is no such control when it comes to ensuring a coherent approach to Part 36.
A more flexible approach to settlement offers is, on the face of it, good news for defendants (as long as the strict approach continues to apply to claimants’ Part 36 offers), but the loss of certainty and inevitable increase in satellite litigation over costs may come to be seen to be too high a price to pay.
You can read the judgment here.
See our related briefings:
Where litigation goes wrong for everybody – costs in the Brit Inns case