CALDERBANK OFFER HAD NO EFFECT ON OUTCOME IN RELATION TO COSTS:
Some parties make “Calderbank” offers in place of Part 36 offers. The effect of a Calderbank offer and whether it should affect an order for costs was considered by the Court of Appeal today in Coward -v- Phaesetos  EWCA Civ 1256. There are some interesting observations on the interplay between Part 36 and Part 44.
The claimant sought declarations that he was the owner, or in some instances the co-owner, of the copyright in software being used by IKOS and the owner of database rights in associated databases. He further sought an order for delivery up and/or destruction of copies of the software in which he owned the copyright and an injunction to restrain IKOS from infringing his copyright and associated database rights, together with an enquiry as to damages or an account of profits.
After a 12 day trial the claimant was unsuccessful and the defendants successful in relation to parts of their counterclaim. The claimant was ordered to pay the costs with a 15% reduction (According to the Telegraph those costs were £6 million for the claimant and £13 million for the defendants).
THE CALDERBANK OFFER
During the course of the action the claimant had made a Calderbank offer. His argument was that the defendants had not done substantially better than the offer and the judge had erred in not taking that offer into account. The judgment on these issues is of some significance.
Approach to appeals on costs
- There was no dispute between the parties as to the approach to be adopted by this court in reviewing the exercise by the judge of her discretion as to costs. The relevant principles and approach have been restated many times and it is sufficient for present purposes to cite what Davis LJ said in F&C Alternative Investments (Holdings) Ltd v Barthelemy  1 WLR 548,  EWCA Civ 843 at :
“Decisions on costs after a trial are pre-eminently matters of discretion and evaluation. Further, it is particularly important to bear in mind that a trial judge – especially after a trial such as this one – will have a knowledge of and feel for a case which an appellate court cannot begin to replicate The ultimate test, of course, for the purposes of an appeal of this kind is whether the decision challenged is wrong. But it is well established that an appellate court may only interfere if the decision on costs is wrong in principle; or it if involves taking into account a matter which should not have been taken into account or failing to take into account a matter which should have been taken into account; or if it is plainly unsustainable.“
Submissions on appeal: general
- In appealing against the costs order, it is submitted for Dr Coward that the judge was wrong not to order either that IKOS pay Dr Coward’s costs from the date of the Calderbank offer or at least that from that date each side should bear its own costs. Further, it is submitted that in any event the deduction of 15% from the total costs payable was too small. Mr Bloch, in presenting the appeal on behalf of Dr Coward, made clear that he was not submitting that the result was obviously absurd. The appeal was based on submissions that the judge had made certain errors of principle which undermined the exercise of her discretion, and that accordingly her order should be set aside and the discretion exercised afresh.
- In resisting the appeal, Ms Talbot Rice QC submitted that the judge was clearly right in her assessment that IKOS had achieved significantly more at trial than had been contained in the Calderbankoffer, and that the Calderbank offer was in any event not capable of acceptance without further clarification. Ms Talbot Rice also made the logically prior submission of principle, that IKOS did not have to demonstrate that they had achieved significantly more at trial than the Calderbank offer. It was enough that it had achieved something more than the Calderbank offer. The court should apply, by analogy, the principle now set out in CPR 36.14(1A) that any advance on the terms of the offer is sufficient to entitle the offeree to its costs. She emphasised that the judge, after a three week trial and the preparation of a detailed judgment, was in the best possible position to assess the significance of the additional points on which IKOS had succeeded and that an appellate court should be very slow indeed to interfere with that assessment. As regards the discount of 15%, the judge’s assessment was again based on a detailed understanding of the case and there was no material which could justify an appellate court in increasing the discount.
Submission on appeal: the Calderbank offer
- The suggested errors of principle in the judge’s approach identified by Mr Bloch are best considered in the context of those features of the final order which the judge considered materially exceeded the terms of the Calderbank offer.
- As earlier mentioned, there were four points relied on by IKOS which the judge accepted were material improvements on the Calderbank offer.
- First, there was the undertaking by Dr Coward, in place of an injunction, not to make any use of the 2009 Software. This was the software downloaded by Dr Coward in November 2009. IKOS accepted, at any rate by the start of the trial, that it was not being used by Dr Coward in the software for his new business, except perhaps through the use of the Gardening Leave Code which Dr Coward agreed in February 2013 to delete. The Calderbank offer proposed an order for the handing over to IKOS or the destruction of all copies of the 2009 Software. Mr Bloch submitted to the judge, as he did to this court, that an order in these terms would give IKOS all that it could sensibly require. If Dr Coward were secretly to retain any copy of the 2009 Software, he would be in breach of the order and in contempt of court, without the need for any injunction to restrain any use by him of the software. It followed that an injunction would make no material difference to IKOS.
- The judge dealt with this at - where she said:
“42. (d) is that there was no injunction included in favour of IKOS. Mr Bloch says in that regard that there was insufficient threat of continued use of the 2009 Software and so that was something which was beside the point. Mr Abrahams points out that what actually has transpired is that Dr. Coward has undertaken to cleanse the New Venture Software of the 2009 Software and he also points out that Dr Coward sought a negative declaration that the New Venture Software was not subject to any rights vested in the defendants. Therefore he says it was very important and the effect of the finalised order is that the cleansing take place.
43. It seems to me that the mixture between the New Venture Software and the 2009 Software, and the way in which it is dealt with, and the fact that an undertaking has been given, is important in this case, given the fact that both the defendants and the claimant pursue the very same kind of business.“
- The second point was that the removal of the Gardening Leave Code from the New Venture Software, agreed shortly before the start of the trial, was not in the Calderbank offer. As to this, the judge said at :
“Once again, Mr Bloch says that these matters are trivial and very small. He referred once again to the clock procedure. It seems to me, nevertheless, that the intermingling, as I have already said, of these two elements and the way in which they were interrelated was hotly disputed at the time and this was part of the issue in relation to infringement and security for both defendants and claimant. The extent of it was unclear and it seems to me that it was important.“
- The third point related to the Burns and Steyning materials. The Calderbank offer provided for the destruction of the Burns material but did not refer to the Steyning material. Mr Bloch relied before the judge, as he did before this court, on the fact that IKOS did not pursue its counterclaim in respect of the Burns and Steyning materials. It was, he submitted, of no substantial value. The judge dealt with this at :
“Mr Abrahams, on the other hand, says that this all boils down once again to Mr Bloch’s assertion that all these matters were only housekeeping, whereas in fact they have taken up a huge amount of time and the security in knowing how this information has been dealt with and that it has been properly destroyed is of particular importance to the parties in this case. It is clear to me, given the huge amount of time which has been taken in relation to these details, that it is of some considerable importance.”
- The fourth and final point was that, unlike the order, the Calderbank offer contained no provision for the execution by Dr Coward, at the request of IKOS, of such documents as might be reasonably necessary to transfer to IKOS title to all copyright in respect of any software which Dr Coward created for the purpose of the business of IKOS or to perfect, evidence, register and/or enforce such copyrights of IKOS. These are, for shorthand, referred to as confirmatory assignments. The judge said at :
“Mr Bloch says that that could have been agreed. Although that may be the case, it seems to me that such assignments would be extremely useful, given the huge importance of the software to the businesses concerned. That was not a term of the offer as it stood.“
- The errors of principle which the appellant submits were made by the judge are as follows. First, the very limited extent to which it might be said that the order at trial was better than the Calderbankoffer could not justify an order that Dr Coward should pay many millions of pounds in costs to IKOS in respect of the period after the date of the Calderbank offer, and indeed should have led the judge to order IKOS to pay his costs for that period. Mr Bloch submitted that the judge failed to stand back and compare the result of her costs order with the overall result of the case. In this respect, she failed to follow the right approach: see Walker Construction (UK) Ltd v Quayside Homes Ltd  EWCA Civ 93 and Fulham Leisure Holdings Ltd v Nicholson Graham & Jones  EWHC 2428 (Ch). Secondly, in analysing and ruling on the various points put forward by IKOS as representing significant improvements of the final order over the Calderbank offer, the judge confused the 2009 Code and the Gardening Leave Code, which led her into error in respect of the points which related to those codes. Thirdly, contrary to the approach required by the decision of the Court of Appeal inRoache v News Group Newspapers Ltd (19 November 1992)  EMLR 161, the judge should have disregarded those terms which IKOS would in any event have obtained as part of a settlement following acceptance of the Calderbank offer. Fourthly, the judge applied an all or nothing approach to the Calderbank offer, concluding that if there were any significant improvement in the order at trial over the terms offered in the Calderbank offer, it followed that IKOS was entitled to all its costs.
(i) The Calderbank offer
- I shall first consider the judge’s assessment of each of the points of difference on which she relied, and I shall then look at the overall result, in each case having regard to the errors of principle which the appellant submits infected the judge’s approach.
- The undertaking provided by Dr Coward in place of an injunction was the only feature of the order which, Mr Bloch submitted, could arguably be regarded as a substantial improvement over the terms of the Calderbank offer.
- In my judgment, the submission that an undertaking by Dr Coward not to use the 2009 Software (in place of an injunction to the same effect) was not a significant improvement on the terms of theCalderbank offer is unsustainable. There are a number of reasons for this.
- First, the grant of an injunction, or the extraction of an undertaking in place of an injunction, is by the very nature of the remedy a serious step. The court will not grant an injunction unless in all the circumstances it is satisfied that it is appropriate to do so. If the other orders to be made by the court give the applicant all that it can reasonably require, it is not the practice of the court to grant an injunction which by definition is unnecessary. Dr Coward has not sought to appeal the requirement that he give an undertaking in order to avoid the grant of an injunction. He cannot therefore argue that it was required inappropriately or on insubstantial grounds. With her detailed knowledge of the issues, the course of the litigation and the parties, the judge considered that it was appropriate to grant an injunction. There is no basis on which this court can interfere with that approach. That being so, the undertaking in place of the injunction represents a significant improvement on the terms of theCalderbank offer.
- Second, the counterclaim specifically sought an injunction in these terms. The framing of the Calderbank offer in terms which did not include an injunction or an undertaking in similar terms was clearly a deliberate decision on the part of Dr Coward. The omission of an injunction or undertaking in the Calderbank offer in these circumstances reasonably raised concerns in the mind of IKOS. The fact that Dr Coward also resisted the grant of an injunction at the hearing in July 2013 would only serve to strengthen the concerns of IKOS. Where an injunction has been sought against Dr Coward but has not been included in his offer of settlement and is subsequently granted against his opposition, it would be almost perverse to say that IKOS has not done better at trial.
- Third, the omission of an offer of an injunction or undertaking in the Calderbank offer must be seen in the context of the other terms of the offer. Under the terms of the offer, Dr Coward was willing to accept that there was no breach of his copyright in the software being used by IKOS. At the same time, however, it was his case that he was entitled to use the 2009 Software in his own operating systems or otherwise. Although he offered to deliver up or destroy all copies of the 2009 Software, he did not offer to cleanse his software of any content which involved use of the 2009 Software. Ultimately, that issue was resolved on the eve of the trial by his agreement to cleanse his software of the Gardening Leave Code. No such offer was made in July 2012. Seen against that background, the injunction sought by IKOS was very important.
- Fourth, even after the resolution of the issues relating to the New Venture Software, IKOS was concerned that copies of the 2009 Software remained in third party hands. Such copies would not fall within an order that Dr Coward deliver up or destroy all copies of such software in his possession, custody or power. There remained the possibility, about which IKOS had legitimate concerns, that subsequently Dr Coward could come into possession of a copy of the 2009 Software. Without an injunction to restrain the use by him of such software, IKOS was exposed to the risk that he would indeed use such software.
- For all these reasons, it seems to me that on this ground alone the judge was right to conclude that IKOS had achieved a significant advance at trial on the terms of the Calderbank offer. That is probably sufficient for the purposes of this appeal, but, the points having been fully argued, it is right to consider the other aspects of the final order which the judge regarded as significant improvements on theCalderbank offer.
- As regards the second point, the judge regarded as significant the undertakings given by Dr Coward shortly before trial to delete the Gardening Leave Code. The judge was surely right to regard this as a significant matter. The Calderbank offer contained no provision to deal with the Gardening Leave Code. The full circumstances of the creation of the Gardening Leave Code were not established until the admissions voluntarily made by Dr Coward in February 2013, prompting him to offer the undertaking to remove the Gardening Leave Code from the New Venture Software. IKOS was content with this outcome because its case that the New Venture Software contained elements of the 2009 Software rested entirely on features found in the Gardening Leave Code. From the point of view of IKOS, the removal of the Gardening Leave Code was important. It was open to Dr Coward in July 2012 to make the disclosures and admissions which were finally made in 2013. If he had done so and had at that time offered an undertaking to cleanse the New Venture Software of the Gardening Leave Code, he would have met this point. As it is, the undertaking offered by Dr Coward in February 2013 was achieved only by the non-acceptance of the Calderbank offer and by continuing with the proceedings. It is in my judgment impossible to see it as anything other than a substantial improvement on theCalderbank offer.
- It is in her treatment of these first two points, particularly the undertaking in place of an injunction, that Mr Bloch suggests that the judge confused the 2009 Software and the Gardening Leave Code. She said at  that Dr Coward had undertaken “to cleanse the New Venture Software of the 2009 Software” and in  that it seemed to her that “the mixture between the New Venture Software and the 2009 Software, and the way in which it is dealt with, and the fact that an undertaking has been given, is important in this case”. It is true that the undertaking given by Dr Coward was to cleanse the New Venture Software of the Gardening Leave Code, not the 2009 Software. But at  the judge correctly referred to the undertakings given to remove the Gardening Leave Code from the New Venture Software. Reading the judgment as a whole, and in particular -,  and , and taking account of her order which deprived IKOS of those parts of the costs of its counterclaim relating to its claim that the New Venture Software incorporated the 2009 Software, it seems to me clear that the judge was well aware of the distinction between the 2009 Software and the Gardening Leave Code. The reasons for regarding the undertaking in place of the injunction as a significant improvement on the terms of the Calderbank offer are in no way vitiated by what was at most a slip in -.
- As regards the Burns and Steyning materials, the judge was, in my view, fully entitled to come to her assessment in her judgment at , quoted above. The Steyning material had been the subject of the counterclaim at the time of the Calderbank offer. No term of the Calderbank offer dealt with it. The decision by IKOS not to pursue its counterclaim in this respect was taken on the basis of Dr Coward’s proposal made in March 2013 to establish a regime for dealing with the Burns and Steyning materials. The details of that regime remained to be agreed and they were indeed the subject of dispute before the judge on 30 July 2013. Against this background, the judge was entitled to conclude that dealing with this material was not an insignificant matter.
- The fourth point on which the judge relied was the inclusion in the final order of the obligation on Dr Coward’s part to provide confirmatory assignments of copyright, if reasonably requested. Mr Bloch submits that this is precisely the sort of consequential provision which, if requested in the course of finalising the precise terms of the compromise order, would have been readily agreed by Dr Coward. In this respect he relies on the decision in Roache v News Group Newspapers Ltd. In that case, the defendant newspaper paid sums totalling £50,000 into court before the trial of a libel action. At trial the jury found for the plaintiff and awarded precisely that sum in damages. The trial judge granted an injunction against re-publication and, notwithstanding the payment into court, ordered the defendant to pay the plaintiff’s costs of the action on the grounds that the plaintiff had to pursue the case to judgment in order to obtain the injunction. The order for costs was reversed on appeal and the plaintiff was ordered to pay the defendant’s costs from the date of the payment into court. Having reviewed a number of earlier authorities, Sir Thomas Bingham MR said at pp 168-169:
“The upshot of these cases is in my judgment clear. The judge must look closely at the facts of the particular case before him and ask: who, as a matter of substance and reality, has won? Has the plaintiff won anything of value which he could not have won without fighting the action through to a finish? Has the defendant substantially denied the plaintiff the prize which the plaintiff fought the action to win?“
- The Master of the Rolls considered it plain that the payment into court of a substantial amount made clear that the defendants did not wish to fight the action and he continued at 171:
“Given that wish, it is in my view incredible that they would have allowed a settlement to founder for want of an undertaking by them not to republish. No reason has been suggested why they should have acted in such an uncommercial way. I do not accept the judge’s view that “the plaintiff had to pursue the matter to judgment in order to obtain an injunction”. The overwhelming probability is, in my view, that if he had chosen to accept the money in court he could have had an undertaking, equivalent in effect to an injunction, for the asking.“
Judgments to the same effect were given by Stuart-Smith LJ and Simon Brown LJ.
- I accept Mr Bloch’s submissions on this point. There does not appear to be any good reason why Dr Coward, having agreed to a declaration that he owned no part of the copyright in the software used by IKOS, should not have agreed to execute assignments of copyright that he did not claim to own. No reasons were suggested by Ms Talbot Rice. While the principle set out in Roache applied to this aspect of the order, it is in my judgment clear for the reasons already given that it did not apply to those other aspects of the order which represented substantial improvements on the Calderbank offer.
- The upshot therefore is that the judge rightly identified three aspects of the final order which represented substantial improvements on the Calderbank offer. She carefully considered the Calderbankoffer and the submissions on it made on behalf of Dr Coward but, by reason of these differences, she concluded that it would not justify a departure from the usual rule that, if there is to be any order as to costs, the costs should be paid by the unsuccessful party. This exercise of the discretion vested in her by the Rules cannot in my judgment be faulted.
- Finally, as regards the detail of the Calderbank offer, Mr Bloch draws attention to two respects in which it provided for a better outcome for IKOS than it achieved at trial. First, it offered compensation of £50,000, as against the £1000 nominal damages awarded at trial. Secondly, it would have given IKOS 100% of its costs down to the date of acceptance of the offer, rather than 85% of such costs as a result of the judge’s order. The difference is about £650,000.
- It is right that account should be taken of these features, but the difficulty lies in assessing their importance as against the other respects in which IKOS achieved a better result at trial. This is not a problem which arises in respect of a money claim, even one involving a number of different elements. The court will usually be concerned to compare the total amount offered with the total amount recovered, irrespective of how it may have been divided between the different elements. This uncomplicated approach is not possible in a case which involves non-monetary relief. The court must there assess the comparative significance of the different elements.
- The judge had in mind the larger offer of compensation contained in the Calderbank offer: see . Mr Bloch criticises the judge for not having considered, or reconsidered, her assessment of theCalderbank offer after she had decided that there should be a discount of 15% on the costs recoverable by IKOS. I do not consider this to be a well-founded criticism. Although the judge dealt with the principle of which side was to pay the costs first and then decided whether there should be a discount and, if so, the amount of the discount, it is unrealistic to suppose that she was not aware that the effect of applying a discount of 15% to IKOS’s costs meant that, in that respect, IKOS recovered a smaller amount in respect of its pre-Calderbank offer costs than it would have done if it had accepted the offer. It is unrealistic to suppose that she did not remain of the view that a comparison of the Calderbank offer and the final order tilted the balance significantly in favour of IKOS. In any event, this difference in the outcome as to costs cannot reasonably affect the judge’s conclusion that IKOS achieved substantially more at trial than was contained in the Calderbank offer.
(ii) Further clarification of the Calderbank offer
- The judge also accepted the submission made on behalf of IKOS that the Calderbank offer was not one which was capable of acceptance or rejection without further clarification. Such clarification was sought by IKOS’s solicitors in their letter of 10 August 2012. The judge dealt with this matter shortly at  where she said:
“…the offer was not one without which further clarification and addition could have been accepted in July of 2012. The queries raised by Herbert Smith, on behalf of the defendant, were not dealt with at all in correspondence between July and the further counter-offer which was made in December.“
- Looked at in a purely contractual sense, the Calderbank offer was in terms which were capable of acceptance so as to give rise to a contract. That is not, however, the point on which I think the judge was relying. In determining whether and, if so, how to take account of an offer, as required by CPR 44.2(4)(c), the judge is entitled to consider whether an offeree acting reasonably would require further clarification before considering whether to accept the offer. In this case, the response of Dr Coward’s solicitors was to say that the offer was no more and no less than that stated in their letter of 30 July 2012. At that point, if the offer had contained substantially all that IKOS obtained at trial, it might be that even a reasonable desire for further clarification would not entitle the court to disregard the offer in deciding the liability for costs incurred after the offer.
- In reaching her final decision as to costs, the judge took account of the offer, without prejudice save as to costs, made by IKOS in December 2012, which she considered dealt with all of the issues left outstanding by Dr Coward’s Calderbank offer. This, too, was a matter which the judge was entitled and indeed bound to take into account in determining her order for costs.
(iii) The overall result
- Looking more generally, Mr Bloch submitted that the judge failed to have regard to the disparity between the liability to pay a very large sum by way of costs to IKOS and the limited extent to which the order at trial represented an improvement on the terms of the Calderbank offer. He submitted that the proper approach is illustrated by the decision of this court in Walker Construction (UK) Ltd v Quayside Homes Ltd and the decision of Mann J in Fulham Leisure Holdings Ltd v Nicholson Graham & Jones.
- In the former, Quayside Homes Limited recovered £10,885 on a counterclaim of approximately £169,000, reduced to a little under £87,000 in the year before trial. Nonetheless, Walker Construction (UK) Limited was ordered to pay costs which, before assessment, amounted to almost £346,000. In making that order for costs, this court concluded that, when considering the history of the matter and assessing the various Part 36 and non-Part 36 offers, the judge “failed adequately to take into account the commercial reality of this litigation, how it was conducted on each side, its ultimate outcome, and who, on an objective basis, was the more successful party”: see  per Gloster LJ. Having regard to the overall result, and without taking into consideration the various offers, Gloster LJ observed at  that “one might have thought that Quayside should only have been entitled to recover costs attributable to a counterclaim of £10,035.” At , she observed that:
“The present case was essentially one where the exercise of the discretion to award costs had to reflect the reality that Quayside had substantially failed on its counterclaim, which on any basis was substantially exaggerated. Moreover consideration clearly had to be given to whether an issue based, or partial, costs order was appropriate.“
As regards the various offers made by the parties, the court concluded that the judge had failed adequately to consider whether Walker’s Calderbank offer of £30,000 inclusive of costs represented a reasonable offer to settle, having regard to the judgment ultimately achieved by Quayside and the appropriate proportion of its costs that Walker might reasonably have expected to pay on the basis of such a recovery.
- The outcome in Fulham Leisure Holdings Ltd v Nicholson Graham & Jones was on the figures even more startling. The main claim was for a sum of £7.75 million, being the loss which, the claimant alleged, was caused by negligence by its solicitors in the preparation of documents for a commercial transaction. Mann J held that the defendants had been negligent but were not liable for that loss. There was an additional claim for a little over £100,000 in respect of professional fees allegedly incurred in dealing with the results of the negligence. Mann J allowed £6,750 of that claim. The trial was heard over 25 days. The issues of liability and causation/quantum each formed a very significant part of the case. The claimant had succeeded on the former and almost completely failed on the latter. The judge considered that the costs incurred on each issue were approximately equal and that the appropriate order would be that neither side should recover any costs. In this context, the recovery of £6,750 was “utterly insignificant”. The claim was brought in order to recover substantial damages alleged to arise from the defendants’ negligence, as was shown by the claimant’s only settlement offer, at a figure of £6 million plus costs.
- The defendants in Fulham Leisure Holdings Ltd v Nicholson Graham & Jones made a Part 36 payment into court of £500,000 a few months before trial and the judge ordered that the costs consequences under Part 36 should apply as regards costs incurred after the acceptance date for that offer. For the reasons just mentioned he would have made no order for costs as regards the period before the acceptance date, were it not for a Calderbank offer made by the defendants a year earlier on a drop hands basis. In considering the effect of that Calderbank offer, Mann J said at :
“That is what the position would be but for the “drop hands” offer. However, that offer now affects the position. Since that letter offers a drop hands settlement and no order as to costs, it is in substance the same as the end result of the litigation. It is true, of course, that the claimant did recover the small amount of £6,750, but that is insignificant for these purposes. In the light of what I say the proper costs would otherwise be, this was an offer that the claimant ought to have accepted. I do not think that the £6,750 makes any difference – this litigation was never about that small sum of money. Since it was an offer which ought to have been accepted, the costs since the date when it should have been accepted ought not to have been incurred. That they were incurred is the responsibility of the claimant. Accordingly the defendants should have their costs from the date when that offer ought to have been accepted (14th January 2005, on the terms of the letter).“
- The significance for present purposes is that in assessing the effect of the Calderbank offer made by the defendants, Mann J ignored as trivial the sum of £6,750 recovered at trial by the claimant.
- Mr Bloch submitted that the approach adopted by the courts in these two decisions points to the right approach in the present case. Even accepting that IKOS did better at trial than the Calderbank offer, it was not an improvement which could justify the court in ignoring the Calderbank offer in the order for costs which it made.
- In my judgment, there is no analogy to be drawn between those cases and the present case. First, in both of those cases, the claimants recovered only a small fraction of their claims. In Walker Construction (UK) Ltd v Quayside Homes Ltd, the defendant could on any basis expect to recover only a fraction of its costs, representing that part which was attributable to the element of its counterclaim on which it had succeeded. In Fulham Leisure Holdings Ltd v Nicholson Graham & Jones, the claimant’s recovery was so trivial as to be irrelevant to the proper order for costs in a case which had been brought and fought by the claimant for a quite different and massively larger loss. There is no parallel with the present case, where IKOS succeeded entirely in its defence of the claim and to a very substantial extent in its counterclaim.
- Equally, in my judgment, there is no parallel between the offers made in those cases and the Calderbank offer in the present case. For the reasons explained in the judgments, the offers provided the nominally successful parties with everything that they recovered or, in the case of Fulham Leisure Holdings Ltd v Nicholson Graham & Jones, everything except a trivial sum. In the present case, for the reasons already given, the order at trial represented a significant improvement on the terms of the Calderbank offer. It may be true to say that, by accepting the Calderbank offer, IKOS could have obtained the bulk of what it received under the final order. But that would have been at the price of giving up the significant additional elements. I can see no basis on which it can be said that IKOS should have given up its claim to those additional elements. Contrary to the submissions of Mr Bloch, it is not disproportionate for a claimant to pursue a claim for substantial relief to which it is held at trial to be entitled. Rather, instead of attempting to induce IKOS to bargain away some of its rights, it may be said to have been disproportionate on the part of Dr Coward not to concede the relief identified in the Calderbank offer and then limit his resistance to the other items of relief.
Apportionment of costs
- Separately from the effect of the Calderbank offer, Dr Coward appeals specifically against the apportionment of the costs of IKOS’s counterclaim. The judge accepted that Dr Coward must have the costs of that part of the counterclaim relating to the New Venture Software that was not pursued by IKOS. The parties were agreed that, in accordance with the approach of the House of Lords inMedway Oil and Storage Co Ltd v Continental Contractors Ltd  AC 88, costs common to both the claim and the counterclaim were not to be treated as costs of the counterclaim. There should be attributed to the relevant part of the counterclaim only the amount by which the costs of the proceedings as a whole had been increased. There is also no challenge to the approach adopted by the judge, of deducting a proportion of the costs payable by Dr Coward to IKOS to reflect the costs incurred on the New Venture Software element of the counterclaim by both IKOS and Dr Coward. The issue for the judge, and the aspect which is challenged by Dr Coward, was the appropriate amount of the deduction.
- The problem faced by the judge was that, as she said in her judgment at , she had “very little to go on”. The evidence filed on behalf of Dr Coward provided some analysis of the factual and expert evidence, and disclosure, to determine the amount attributable to the counterclaim as a whole. Mr Bloch on behalf of Dr Coward submitted to the judge that she should take a 50/50 approach, dividing equally the entire costs between the claim and the counterclaim.
- The judge did not accept that an equal division of costs in this manner was appropriate. She was not satisfied that the element of the counterclaim relating to the New Venture Software, albeit “hotly contested and important to both parties, would have taken up as much as 50% of the costs overall of this matter”. The only evidence before the court which attempted to identify the costs specifically attributable to the New Venture Software element of the counterclaim was contained in the witness statement of a partner at IKOS’s solicitors. The conclusion of this evidence was that approximately 5-6% of the total costs were attributable to this element. Although accepting that this evidence was given in good faith, the judge felt that it was likely to be an underestimate, given in particular the content of the experts’ reports and the “extraordinarily heavy” costs in the case. She concluded that a more reliable estimate was that 10% of the costs incurred by IKOS related to the New Venture Software element of the counterclaim. Insofar as Dr Coward challenges on this appeal the judge’s estimate, it must in my judgment fail. There is no further evidence before this court than was before the judge and, given her far greater understanding of the detail of the issues in the case, there is no basis for challenging her estimate, which in any event appears reasonable on the basis of the evidence before her.
- On the basis that the costs incurred by IKOS in relation to the New Venture Software element of the counterclaim represented 10% of its total costs, the judge estimated that 5% of Dr Coward’s costs were attributable to that element. She accordingly reduced the total amount of costs payable by Dr Coward to 85% of IKOS’s costs. Dr Coward challenges the figure of 5%, on the grounds that the judge should also have taken a figure equal to 10% of IKOS’s costs as being the costs incurred by Dr Coward on that part of the counterclaim. This would result in a deduction of 20%, rather than 15%. The judge’s approach was to apply the same percentage, 10%, to the costs of each of IKOS and Dr Coward. Because the total amount of costs incurred by Dr Coward was approximately half that incurred by IKOS, 10% of his costs equated to 5% of the costs incurred by IKOS. For that reason, the reduction in the costs incurred by IKOS to be paid by Dr Coward was increased from 10% to 15%. In my judgment, the logic of the judge’s approach cannot be faulted.
- More generally, Mr Bloch submits that a reduction of 15% is not a fair reflection of Dr Coward’s success in respect of the New Venture Software element of the counterclaim. As I do not consider that the judge’s estimate of the appropriate apportionment of costs in accordance with established principles can be faulted, I see no grounds on which this general plea for fairness can succeed.
- It follows that, even when accepting Mr Bloch’s invitation to stand back and look at the overall result, the order for costs made by the judge cannot be faulted as an exercise of her discretion. In truth, this result flows almost inevitably from the analysis of the significance of the points not covered by the Calderbank offer.
Is Part 36 relevant?
- This appeal accordingly fails, whether or not IKOS were to succeed in its submission of principle that the effect of a Calderbank offer is to be assessed by analogy with the terms of CPR 36.14(1A). That submission should nonetheless be addressed, not only because it was fully argued before us but also because it is important to establish the precise basis, or ratio, of our decision.
- Ms Talbot Rice, on behalf of IKOS, submitted that the approach in all cases where there has been an offer to settle, whether under Part 36 or in Calderbank terms, should be the same. The court should simply ask itself whether or not the offer has been beaten, that is, whether the order at trial is better, to any degree, than the offer which was made. Rather than adopt the more “open-textured” approach to the application of a “more advantageous” test adopted in Carver v BAA Plc, the court should adopt the more precise, strict approach exemplified by CPR 36.14(1A) which was introduced in order to reverse the effect of the decision in Carver v BAA Plc as regards money claims.
- There were, it was submitted, a number of significant benefits in adopting this strict approach. First, it aligns the position of non-money claims with money claims and it produces a single approach both to Part 36 offers and to Calderbank offers. There is therefore a consistency of approach. Second, in non-money claims, it is often difficult, if not impossible, to make a meaningful comparison between the additional relief obtained at trial and the amount of irrecoverable costs of fighting on. It is also difficult to assess the importance of the additional relief. Third, the strict approach promotes certainty and therefore prevents or at least reduces the incidence of satellite litigation over costs. Fourth, it is right to adopt a strict approach when it is remembered that the relevance of a Part 36 or Calderbankoffer is to provide grounds for depriving a successful litigant of costs which the unsuccessful litigant would ordinarily have to pay. Fifth, the more general approach may require offerees to accept less than that to which they are entitled and permit offerors to offer less than that for which they are liable, exposing offerees to the risk of having to pay costs for pursuing well-grounded claims. This would be an inequitable result. Sixth, adopting specifically a test of “was it worth the fight?” encourages offerors to increase the amount of costs that the offeree must incur to continue with its claim. The more the costs the offeree has to spend in getting to trial, the smaller the offer can be. The increase in the irrecoverable element of costs will increase the chance of the offeror being able to argue that it was not worth the fight.
- In my judgment, the starting point is to recognise that Part 36 and Part 44 are separate regimes with separate purposes. Part 36 is a self-contained code dealing with offers of settlement made in accordance with and subject to the terms of Part 36, which specifies particular consequences in the event that such offers are not accepted. That those consequences include features which go far beyond that which might be ordered by way of costs under Part 44 only serves to underline that it is a separate regime from Part 44.
- While Part 36 is highly prescriptive in its terms, and highly restrictive of the exercise of any discretion by the court in any particular case, Part 44 confers on the court a discretion in almost the widest possible terms. CPR 44.2(1)(a) provides that the court has a discretion as to whether costs are payable by one party to another. By virtue of 44.2(2), it is only if the court decides to make an order for costs that the general rule that the unsuccessful party will be ordered to pay the costs of the successful party applies, but it is made clear that the court may make a different order. A non-exhaustive list of the orders for costs which the court may make is set out in 44.2(6). The only express limitations on the discretion of the court are set out in 44.2(4) which is cited earlier in this judgment. The breadth of the discretion is illustrated by the requirement that the court “must have regard to all the circumstances” and the limitation is simply that the court “must have regard to” the three matters specified in subparagraphs (a)-(c). It is by sub-paragraph (c) that the court “must have regard to” any payment into court or admissible offer to settle, not being an offer to which the cost consequences under Part 36 apply.
- Attention was drawn to the particular character of Part 36 as a self-contained code and the distinction between it and Part 44 in Gibbon v Manchester City Council  1 WLR 2081,  EWCA Civ 726. Moore-Bick LJ said at :
“It can be seen from Part 36 as a whole, as well as from the extracts cited above, that it contains a carefully structured and highly prescriptive set of rules dealing with formal offers to settle proceedings which have specific consequences in relation to costs in those cases where the offer is not accepted and the offeree fails to do better after a trial. In cases where there has been no Part 36 offer or a Part 36 offer has been bettered the judge has a broad discretion in dealing with costs within the framework provided by Part 44. Rule 44.3(4) provides that when exercising its discretion as to costs the court will have regard to the general rule that the unsuccessful party should pay the costs of the successful party, but will also have regard to the conduct of the parties and any payment into court or admissible offer to settle made by one or other party which falls outside the terms of Part 36. In seeking to settle the proceedings, therefore, parties are not bound to make use of the mechanism provided by Part 36, but if they wish to take advantage of the particular consequences for costs and other matters that flow from making a Part 36 offer, in relation to which the court’s discretion is much more confined, they must follow its requirements.“
- In Fox v Foundation Piling Ltd  EWCA Civ 790, Jackson LJ reviewed the authorities and continued:
“44 From this review of authority I draw the following conclusions. First, where one party makes a Part 36 offer and then achieves a more advantageous result than that proposed in his offer, the provisions of rule 36.14 modify the court’s general discretion in respect of costs. This is important because parties who choose to use the Part 36 mechanism in their settlement negotiations need to have a clear understanding of the legal effects of making, accepting and rejecting offers under Part 36.
45 Secondly, parties are quite entitled to make Calderbank offers outside the framework of Part 36. Where a party makes such an offer and then achieves a more advantageous result, the court’s discretion is wider. Nevertheless it may well be appropriate to order the party which has optimistically rejected the Calderbank offer to pay all costs since the date when that offer expired.“
- In F&C Alternative Investments (Holdings) Ltd v Barthelemy, the Court of Appeal reversed the decision at first instance to order costs on the indemnity basis against the unsuccessful party from the date of an offer made by the successful party. The basis of the decision under appeal was that, although the offer was expressly stated not to be made under Part 36, the analogy with the consequences if the offer had been made under Part 36 should guide the court in the exercise of its general discretion under Part 44.3. In giving the principal judgment of the Court of Appeal, Davis LJ pointed out at  that as the offer was not made under Part 36, the judge had no jurisdiction to make a costs order under CPR 36.14 and his jurisdiction fell to be exercised under CPR 44.3. He continued at :
“Once that position is appreciated, however, I have the greatest difficulty in seeing how the costs regime of Part 36, whether indirectly or by analogy, can properly be invoked. Rule 36.14 represents a departure from otherwise established costs practice. It imposes a deliberately swingeing costs sanction, by rule 36.14(3), on a claimant who fails at trial to beat a defendant’s Part 36 offer. That is, for policy reasons, designed to encourage a sensible approach of claimants to offers and to promote settlement (that defendants do not get corresponding benefits under Part 36 may be for reasons in part explained by Simon Brown LJ in para 6 of his judgment in Kiam v MGN Ltd (No 2)  1 WLR 2810). But there is no reason or justification, in my view, for indirectly extending Part 36 beyond its expressed ambit. Indeed to do so would tend to undermine the requirements of Part 36 and the repeated insistence of the courts that intended Part 36 offers should be very carefully drafted so as to comply with the requirements of Part 36. As Mr Browne observed, Part 36 is highly prescriptive with regard to both procedures and sanctions. “
- Part 44 contains no rules as to the way in which the court is to have regard to offers. In particular, and most obviously, even in the case of a money claim, there is no provision equivalent to CPR 36.14(1A). There is no warrant in the terms of Part 44 for applying, by analogy or otherwise, a similarly rigid test. The task of the judge in any particular case is to exercise his or her discretion as to the just order for costs, having regard to all the circumstances of the case, including those specified in 44.2(4). Clearly a payment into court or an admissible offer to settle is unlikely in normal circumstances to be of much if any relevance, if the offeree has achieved significantly more at trial.
- A rigid rule of the type advocated by Ms Talbot Rice would mean that the decision in Fulham Leisure Group v Nicholson Graham & Jones, to ignore the fact that the claimant had done better at trial than the defendant’s offer by an amount of £6,750 out of a total claim approaching £8 million, was wrong. In my view, that decision represented an entirely appropriate exercise by the judge of his discretion under Part 44 in the particular circumstances of that case.
- Likewise, it would mean that Jackson J was wrong when in Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd  EWHC 2280 (TCC), in a passage cited by Gloster LJ in Walker Construction (UK) Ltd v Quayside Homes Ltd, when he said that the considerations which it is open to a court to take into account when considering the exercise of its discretion as to costs includes:
“(vii) if (a) one party makes an offer under Part 36 or an admissible offer within rule 44.3(4)(c) which is nearly but not quite sufficient, and (b) the other party rejects that offer outright without any attempt to negotiate, then it might be appropriate to penalise the second party in costs.“
Insofar as that passage refers to an admissible offer within CPR 44.3(4)(c) (now 44.2(4)(c)), it is in my view entirely correct that in the circumstances there stated it might be appropriate to penalise the offeree in costs. Whether it would be appropriate to do so would of course depend entirely on the facts of the particular case.
- I accept that the broad terms in which the discretion conferred by Part 44 is expressed comes at the price of some uncertainty and some scope for argument as to costs. It is in the nature of a discretionary remedy dependent on the particular circumstances of the case that there is more uncertainty than exists than where there is a rigid rule. But courts are well accustomed to dealing with those cases where it is arguable that the just result is not simply that the unsuccessful party pays the costs of the successful party in full. In any event, a strict approach to offers would reduce uncertainty only as regards one of the many factors which may be relevant to the exercise of the discretion.
- For these reasons, I am satisfied that it would be contrary to the express terms of Part 44 to read across into it a rigid approach drawn by analogy from CPR 36.14(1A).
- This conclusion does not, however, affect the outcome of this appeal which is, in my judgment, that it should be dismissed.
- I began this judgment by referring to the amounts of costs incurred in this litigation, and noting that IKOS’s costs were more than twice those of Dr Coward. The case raised technical, factual and legal issues of some complexity, but even allowing for that the costs seem very large for a case culminating in a three week trial. This appeal is concerned with the liability for costs, not with the amount of costs which may be recovered. The onus at any detailed assessment will be on IKOS to establish that its costs were both reasonable and proportionate.