Costs penalties for parties who should have settled sooner (High Court)

There is a considerable body of authority on the court's approach to costs where a Part 36 offer has been made. The principles are set out in Practice note, Part 36: costs consequences.

Where a claimant fails to obtain a judgment more advantageous than a defendant's Part 36 offer, the normal costs order is that the claimant pays the defendant's costs from the expiry of the relevant period (as defined in CPR 36.3(1)(c)) (CPR 36.14(2)).

However, the court will not make a costs order in these terms if it considers it unjust to do so. The court should have regard to all the circumstances, and look at the matter as it affects both parties (Smith v Trafford Housing Trust [2012] EWHC 3320 (Ch)), see Legal update, Part 36: Claimant failed to beat offer but costs order against him would have been "unjust" under CPR 36.14(2) (High Court).

When considering the circumstances of the case, the court should have regard to the parties' approach to negotiations and general conduct of the litigation, as well as any Part 36 offers (Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd and another [2008] EWHC 2280 (TCC)). Multiplex is authority that relative success of the parties on different issues can be reflected by the court making a proportionate costs order. Alternatively, the court can make an issue-based costs order. See Legal update, Wembley litigation costs judgment penalises parties for not settling.

A claimant may be deprived of some or all of its costs if it pursues exaggerated claims (Brit Inns Ltd v BDW Trading Ltd (No 2) [2012] EWHC 2489 (TCC)), see Legal update, Successful claimants ordered to pay majority of defendant's costs (TCC).

A Calderbank letter is a letter containing a settlement offer and written "without prejudice save as to costs". This means that, if the offer is not accepted, the letter cannot be referred to during the course of the legal proceedings relating to the claim itself, but it can be referred to the court on the question of costs. For more detail, see Practice note, Calderbank letters.

A dispute arose between an engineering company (S) and a house builder (B). The project suffered delays of about 32 weeks and S sought damages. The parties referred the dispute to adjudication and S was awarded about £1 million, which included about £401,000 in respect of prolongation costs. This award was net of retention for defects which would be payable by B to S at the end of the contractual defects liability period.

Although it paid S the entire amount of the adjudicator's award, B disputed the amount of prolongation costs. The parties adopted the procedure prescribed in the Pre-Action Protocol for Construction and Engineering Disputes in relation to B's claim based on the adjudication award.

In June 2011, S requested a retention payment of £146,955. B withheld payment on the grounds that B's intended claim exceeded the value of retention it held.

In March 2012, B issued proceedings claiming about £527,000 "gross of retention" (representing the prolongation costs, increased costs and associated interest). B accepted liability for 12 weeks' worth of the prolongation costs. However, B required S to prove the actual costs incurred for the entire period of delay. S counterclaimed for the £146,955 retention monies.

During this period, S continued to work on remedying defects. There was evidence that, by the end of August 2012, the parties accepted that the remedial works were almost completed.

On 18 October 2012, S made a Part 36 offer to accept £1 in full and final settlement of all claims and counterclaims, on the basis that B would be liable for S' costs to date. B did not accept the offer.

In January 2013, B paid S the retention monies of £146,955. At the same time, B made a Part 36 offer to accept £225,000 plus costs. B also made a separate offer to accept £200,000 in respect of its costs to date.

In April 2013, S reminded B that its part 36 offer remained open for acceptance. S offered to settle on the basis that each party bore its own costs incurred since 8 November 2012. After continued negotiation, the parties agreed to settle on the basis that S would pay B £146,953 in full and final settlement of all claims and counterclaims, with costs and interest to be dealt with by the trial judge. This settlement resulted in S making a net recovery of £2. The parties filed a Tomlin Order on the day fixed for trial.

The parties' combined costs exceeded £1 million. B sought to recover all its costs on a standard basis on the grounds that B had had to pursue the claim towards trial to achieve any recovery. S submitted that B should pay its costs because S had, in effect, been the winner in the litigation and the outcome was at least as advantageous to S as its Part 36 offer.

Akenhead J determined the issue of costs. He noted what is just or unjust is very much dependent on the particular case, its facts and history, and the negotiations and offers which are disclosable to the court (following Smith v Trafford).

Akenhead J said that B's claim was realistically no more than £350,000, given that B had accepted liability for some of the prolongation costs awarded by the adjudicator. The parties' costs (including the cost of expert evidence) were always going to be large relative to the value of this claim. In the circumstances, both parties should have pro-actively sought to settle the case sooner rather than later.

When making a costs order, the court was entitled to draw inferences from the undisputed background facts and the settlement actually achieved. Akenhead J rejected S' submissions that its settlement offers had been simply nuisance or commercial offers. Taking into account the counterclaim for retention, S' Part 36 offer to accept £1 represented some acknowledgment that the adjudicator's award had resulted in an overpayment of prolongation costs.

The judge inferred that, in commercial terms, the retention had not become payable until the remedial works had been completed. In any event, B was entitled to set off the retention money against its counterclaim.

Akenhead J held that the offer made by S in October 2012 had been a valid Part 36 offer. If it had been accepted, it would have resolved the claim. In accordance with CPR 36.14(2), he was required to take into account the justness of applying the normal costs consequences. There was injustice in that, if B had accepted the offer, it would have had to pay both sides' costs to date.

However, the judge noted that B could have protected its position (and avoided the costs consequences of accepting S' Part 36 offer) by making a Calderbank offer in late October or early November 2012. This approach had been recognised in Fairclough Homes Ltd v Summers [2012] UKSC 26 (see Legal update, Supreme Court ruling on applications to strike out dishonest claims).

Akenhead J considered the state of the account between the parties at different points in time. On this basis, he considered the costs position in "time-slices".

The decision demonstrates the difficulties that can arise when determining liability for costs. Here, the judge took a practical approach and considered the respective position of the parties at different stages of the proceedings, and made costs orders accordingly. The result was that each party was liable to contribute towards the other's costs. As Akenhead J commented (referring to the time after January 2013):

(Paragraph 46, judgment.)

Akenhead J gives two clear messages to litigating parties:

Guidance on making offers "without prejudice as to costs" can be found in Practice note, Calderbank letters.

The judge noted that there is no express provision in the CPR for a party to accept a Part 36 offer during the "relevant period" whilst referring issues of costs to the court. This is an apparent lacuna because the court has express authority to make costs orders where a Part 36 offer is accepted after expiry of the relevant period for acceptance (CPR 36.10(4)). (See Practice note, Part 36: costs consequences: Accepting offer after relevant period.) In these circumstances, an offeree could make a "without prejudice save as to costs response" saying that it would accept the offer subject to the court deciding costs issues. However, Akenhead J suggested that the Civil Procedure Rules Committee might want to consider this issue.

Bellway Homes Ltd v Seymour (Civil Engineering Contractors) Ltd [2013] EWHC 1890 (TCC) (4 July 2013).