Late-acceptance of Part 36 offers: Do fixed costs apply?

News | Tue 14th Feb, 2017

It’s a little over a year now since the Court of Appeal gave judgment in Broadhurst v Tan, a decision which dramatically raised the stakes in fixed cost EL/PL and RTA cases where Part 36 offers are in play. Practitioners in this area will be very familiar with the case, which was discussed at the time by Thomas Crockett of 1 Chancery Lane in an earlier blog post. In the twelve months since the decision we have seen a much greater use of Part 36 offers by claimants and a greater willingness in response by defendants to take those offers seriously. By beating a Part 36 offer at trial, the array of benefits set out in rule 36.17(4) is engaged and a defendant may be left with a bill of damages and costs several times what would have been awarded had fixed costs applied, particularly if the offer was made early in proceedings or even pre-action.

By accepting a Part 36 offer within the relevant period (usually 21 days from the date of the offer), a defendant forgoes the opportunity to defend the claim but their liability for costs is limited to fixed costs.

But what are the cost consequences if an offer is accepted after the expiry of the relevant period? It’s not at all uncommon for defendants’ assessment of prospects to change late in the day – for instance if a witness is unable or unwilling to attend trial – by which time an offer could have long expired. The issue was not addressed in Broadhurst.

Rule 36.13(4) and (5) provide that where a claimant’s offer (which relates to the whole of the claim) is accepted after the expiry of the relevant period and the parties cannot agree a liability for costs, then unless the court considers it unjust to do so, the claimant will be awarded costs (i) up until the expiry of the relevant period and (ii) from that date until the date of acceptance. The rule is however silent as to the basis on which those costs are to be assessed. The commentary on this rule in the 2016 edition of the White Book, citing the High Court decision of Coulson J in Fitzpatrick Contractors Ltd v Tyco Fire and Integrated Solutions (UK) Ltd [2009] EWHC 274 (TCC), states that ‘there is no presumption that the court would order a late-accepting party to pay the other party’s costs on an indemnity basis. The usual basis will be the standard basis unless (say) conduct is in issue, in which event r.44.2 will apply’. The Court therefore has a discretion to award costs on either basis.

Further, the Court has a discretion under rule 45.29J to award more than fixed costs where there are ‘exceptional circumstances making it appropriate to do so’.

But the critical point about applications either under rules 36.13(4)(b) (according to Fitzpatrick) and 45.29J is that it is the party seeking the order for indemnity costs (or more than fixed costs) to satisfy the Court that it is appropriate. This is to be contrasted with a claimant who beats their own Part 36 offer at trial. In that situation, the effect of rule 36.17(4) is that the claimant is entitled to (among other things) indemnity costs ‘unless the Court considers it unjust’. In other words, the presumption is reversed, in favour of the claimant being awarded indemnity costs.

Two decisions at County Court level now lend support to the view that late acceptance of a Part 36 offer should be treated in much the same way as an offer which is not accepted and then beaten at trial in that there should be a presumption in favour of indemnity costs.

In Sutherland v Khan (unreported, 21 April 2016, Kingston Upon Hull County Court), District Judge Besford, the regional costs judge, concluded that on a true construction of Part 36, a late-accepting party could be ordered to pay costs on the indemnity basis without there needing to be any exceptional circumstances or unreasonable conduct. The Court also considered that without the risk of indemnity costs being awarded against it, there was no disincentive for a defendant in accepting a Part 36 offer after the expiry of the relevant period. The burden of the Court’s reasoning on the construction of Part 36 is at paragraphs 21 to 28.

Rule 36.13(6) requires the Court, in considering whether it would be unjust to order an offeree to pay the offeror’s costs (including costs from the date of the expiry of the relevant period to the date of acceptance) to ‘take into account all the circumstances of the case including the matters listed in rule 36.17(5)’ (my emphasis). Rule 36.17(5) is as follows:

‘In considering whether it would be unjust to make the orders referred to in

paragraphs (3) and (4), the court must take into account all the circumstances of the

case including…’

(There then follows a list of matters, including the terms of the offer, the stage of proceedings at which it was made (etc).

At paragraph 23 of Sutherland, DJ Besford construed rule 36.13(6) as requiring him to consider ‘whether it would be unjust to make the orders that would normally flow under 36.17(4)’. He then went on at paragraph 25 as follows ‘So, by looking at 36.13(6), I have regard to all the circumstances of the case including the maters (sic) listed in part 36.17(5). Part 36.17(5) starts with the premise that the claimant is entitled to the benefits under sub-section (4) which should only be denied if it would be unjust. The factors that I have to have regard to under 36.17(5) are the terms of the part 36…’

It is respectfully submitted that the reasoning is wrong on two grounds:

1. Rule 36.13(6) only deals with the period for which the offeree is liable for the offeror’s costs, not the basis of assessment of those costs; and
2. In determining the appropriate period, the Court is required to take into account the ‘matters listed’ under rule 36.17(5). It is not required to (and indeed would be wrong to) take into account the premise of the rule, i.e. that the costs consequences of rule 36.17 (3) and (4) apply unless it would be unjust.

In other words, the rules require the Court to apply the same factors (that is, those listed under rule 36.17(5)) in two circumstances: (i) where an offer is accepted late and the period for which costs are payable is disputed and (ii) where a claimant has beaten his offer at trial and it is disputed whether it would be just to order the consequences under rule 36.17(4). Instead of applying the ‘matters listed’ to rule 36.13(6), the Court inserted into that rule a presumption in favour of (among other things) indemnity costs. That construction is irreconcilable with the silence in rule 36.13(5) as to the basis on which costs are to be assessed and is also contrary to the decision of Coulson J in Fitzpatrick.

Another argument against the approach taken in Sutherland is that the scheme of Part 45 does in fact encourage defendants to accept Part 36 offers within the relevant period. Taking rule 45.29C for instance (which applies to claims started under the RTA protocol), costs are determined by the stage of proceedings the claim has reached by the date of settlement. By timing a Part 36 offer to expire on the various staging points (the date of issue, allocation, listing and trial) the effect of a defendant accepting an offer late would render them liable for increased fixed costs. So for instance, were an offer to expire on the date a claim is listed for trial, the claimant would be entitled to a further £775 in costs were the defendant to accept the offer one day late.

Sutherland is now being relied on by claimant practitioners whenever an offer is accepted late and (according to an article on the Association of Costs Lawyers website at least, relating to a decision in the Stoke County Court) appears to be being followed. This is an issue which is bound to crop up with increasing frequency in light of the risks and benefits which are now understood to flow from Part 36 offers and will inevitably find its way to a higher court before long.