After years of conflicting decisions we now have authoritative guidance from the Court of Appeal as to the applicable costs consequences when a defendant accepts a Part 36 offer out of time where the claim is subject to fixed costs. The Court of Appeal decided that mere late acceptance of an offer would not be sufficient reason to make an award of indemnity costs.
The two cases share similar facts in that they both arise from claims originally made in one of the portals which deal with low value personal injury claims. Hislop started in the RTA portal while Kaur began in the EL/PL portal. Both cases exited their respective portals but remained subject to fixed costs as a result of having commenced in one of the portals.
In Hislop, the claimant made an offer to settle, by way of Part 36, in the sum of £1,500 on 11 November 2014. There was no response until 9 January 2015 when it was rejected by the defendant. The proceedings continued towards trial which had been listed for 9 June 2016. On 2 June 2016, a week before the trial, the defendant accepted the claimant's Part 36 offer of £1,500. The claimant sought indemnity costs from the expiry of that Part 36 offer.
In Kaur, the claimant made an offer, by way of Part 36, in the sum of £2,000 on 7 September 2016. The offer was rejected on 15 September 2016. The matter progressed towards trial and in January a joint expert's report was produced which in part assisted the claimant, but in other parts did not. The defendant wished to settle the claim but was worried that the claimant might seek indemnity costs. Accordingly, on 6 February 2017 the defendant made an increased offer of £3,000 which was accepted by the claimant. The Claimant then sought indemnity costs from the date her offer of £2,000 could have been accepted.
In Hislop, DDJ Lenon QC rejected the claim for indemnity costs. He said:
"I am not satisfied this is an appropriate case for an order for indemnity costs. I am not satisfied there is anything here which really takes the case out of the norm. It would have clearly been better had the offer been accepted earlier on, but that is not really the point…It seems to me, in addition to the policy reasons adverted to by Mr Justice Coulson [in Fitzpatrick referred to below], that it would be unfortunate if it became customary for late acceptances of Part 36 offers to attract applications for indemnity costs…to make good an application for indemnity costs, there has to be a standout point that can be quickly drawn to the court's attention and which makes it obvious that the case has been conducted abnormally and that, exceptionally, an indemnity costs order is justified."
The claimant appealed to a circuit judge and the decision was overturned on the basis the DDJ had erred in determining fixed costs throughout. However, costs were not awarded on the indemnity basis but were ordered on the standard basis from the expiry of the Part 36 offer.
The defendant appealed to the Court of Appeal.
In Kaur, the costs issue came before DJ Reed in August 2017. The judge allowed fixed costs up until the date of allocation and standard basis costs thereafter. He concluded that if the defendant had accepted the claimant's earlier Part 36 offer the claimant would have been entitled to indemnity costs and therefore that the claimant should not be worse off because the defendant had got around that issue by making a higher offer. He indicated that because of the unusual circumstances this was an exceptional case under CPR 45.29J which justified a departure from the fixed costs regime in any event.
The defendant appealed and the case was leapfrogged to the Court of Appeal and heard with Hislop.
The Court of Appeal summarised the position on the award of indemnity costs generally as follows:
- Indemnity costs are appropriate only where the conduct of a paying party is unreasonable 'to a high degree'. 'Unreasonable' in this context does not mean merely wrong or misguided in hindsight.
- The court must therefore decide whether there is something in the conduct of the action, or the circumstances of the case in general, which takes it out the norm in a way which justifies an order for indemnity costs.
The Court of Appeal said late acceptance of a Part 36 offer may warrant an order for indemnity costs but that each case will always turn on its own facts.
It had been argued in the hearings below the Court of Appeal that the court had discretion to award indemnity costs under CPR 36.13. The Court of Appeal dismissed this saying that 36.13 had no application to fixed costs. Only CPR 36.20 applied to fixed costs where an offer was accepted late (CPR 36.20 deals with the usual costs consequences of acceptance of a Part 36 offer where Section IIIA of Part 45 applies).
Thereafter, Longmore LJ gave 4 reasons as to why this reasoning was correct.
- The fixed costs regime was designed to apply to the relevant pre-action protocol cases, subject to exceptions, without additional argument. So a claimant may only escape fixed costs through exceptional circumstances of if they beat an offer at trial (See Broadhurst v Tan).
- This interpretation preserves the autonomy of Part 45. The entire point of the regime is that the parties begin and end with the expectation that fixed costs is all that will be recoverable. Certainty is provided and it also ensures the costs incurred will be proportionate.
- If a claimant accepts a defendant's offer out of time the CPR makes it clear that any costs payable to the defendant are fixed. It shows that the rules are a mirror image for both parties and there was no reason why the position should be different for a claimant.
- In an exceptional case of delay, it may be possible for the claimant to escape fixed costs by virtue of CPR 45.29J.
The Court of Appeal concluded that a defendant's late acceptance can always be considered an "exceptional circumstance" but referred to Fitzpatrick and also said that there cannot be a presumption to favour an award for indemnity costs in such circumstances.
In Hislop the Court of Appeal did not consider a 19 month delay in accepting a Part 36 offer exceptional saying "If it is not out of the norm, it certainly cannot be exceptional".
Turning to Kaur, the Court of Appeal said that the district judge was not entitled under the rules to make an award of indemnity costs and that the judge had concluded this was an exceptional case based on a false assumption. The claimant had actually achieved a better damages settlement and as the costs award is based on damages recovered, actually made an increased recovery in relation to costs.
We finally have authoritative guidance from the Court of Appeal as to what costs are payable where a defendant accepts an offer out of time. A claimant will be stuck with fixed costs where there is late acceptance in that situation.
Application of the fixed costs regime is always going to involve a swings and roundabouts approach, with some cases settling right at the end of a phase or perhaps just ticking over to the next phase. This is part of the rough justice of fixed costs and therefore this decision can be of no surprise.
If the Court of Appeal had allowed an award of indemnity costs it is likely we would have seen more cases proceeding to trial with defendants hoping to beat a Part 36 offer rather than accepting a claimant's Part 36 offer out of time and having to pay indemnity costs.
The Court of Appeal made it clear that there may be circumstances where the claimant is entitled to indemnity costs based on unreasonable conduct, but these cases will be few and far between. In addition, the Court of Appeal reminded us of the exceptional circumstances escape clause although, again, said this will be a high hurdle and the number of cases which meet this bar will be limited.
For further information, please contact William Mackenzie, Senior Managing Costs Advisor, on 020 7645 9507 or at William.MacKenzie@dwf.law