PART 36, THE COMPENSATION RECOVERY UNIT AND COSTS: A SIGNIFICANT COURT OF APPEAL DECISION

In Crooks -v- Hendricks Lovell Limited [2016] EWCA Civ 8 the Court of Appeal considered some significant issues in relation to the interrelationship between Part 36 and the CRU situation in personal injury cases.

KEY POINTS

• A claimant who recovered more damages at trial, after a review of the CRU certificate,  than he would if had accepted a Part 36 offer stated to be inclusive of CRU, had “beaten” the Part 36 offer and was entitled to all the costs of the action.

• The claimant was not liable to pay the defendant’s costs after expiry of the Part 36 offer.
• The courts would not become involved in a speculative exercise in relation to whether a claimant should have accepted the offer and appealed the CRU certificate at the time of the offer.
• The courts will look at defendant’s Part 36 offers on the basis of what the claimant actually receives rather than the sum that the defendant pays out.

PRACTICE POINTS

• One real issue here is for defendants and the approach they take to CRU when making a Part 36 offer.  This is a decision that makes matters for more difficult for defendants.

THE CASE

• On the 12th September 2012 the defendant made an offer to settle on the standard form N242A, the offer was stated to be “£18,500 net of CRU and inclusive of interim payments in the sum of £18,500”.

• “On the second page of the form, in the section headed “To be completed by defendants only”, the box against the statement “This offer is made without regard to any liability for recoverable benefits under the Social Security (Recovery of Benefits Act) 1997” was ticked. The alternative would have been to tick the box against the statement “This offer is intended to include any relevant deductible benefits for which I am liable under the Social Security (Recovery of Benefits Act) [sic] 1997”. No figure was entered in the space left for stating an “amount … offered by way of gross compensation”. No limit of time was imposed upon the offer.”

• At trial the claimant recovered £29,550, comprising of £4,000 for general damages, £25,500 for past loss of earnings and £50 miscellaneous expenses.
•  The judgment recorded recorded that the defendant had discharged the judgment by virtue of the interim payments and deductible benefits. The deductible benefits then stood at £16,267.76.
• Because the CRU Certificate was being reviewed the recorder adjourned the consideration of costs for further submissions.
• The CRU Certificate was reviewed and the deductible benefits reduced to £9,502.65.
• The defendant’s solicitors consequently sent the sum of £9,502.65 to the claimant’s solicitor which was returned.
• The parties then made submissions on costs. The recorder set aside part of his earlier order. He ordered that the defendant pay the claimant’s costs up to 21 days after the Part 36 offer and the claimant pay the defendant’s cost thereafter.

THE WORDS “NET OF CRU”

Lord Justice Lindblom considered whether the offer was a valid Part 36 offer.

1. I am in no doubt that this was a valid Part 36 offer. I see no contradiction between the concept of the offer being made “net of CRU” and its being made “without regard to any liability for recoverable benefits”. This was plainly an offer made under CPR 36.15(3)(a), and therefore it was not required to state the amount of gross compensation under CPR 36.15(6)(a).

2. The crucial point here, in my view, is not the amount of gross compensation contemplated by Hendricks Lovell when the offer was made. The offer was entirely silent about that. The crucial point is the meaning of the expression “net of CRU”, which is the way in which the offer was actually framed. I think one has to approach that question keeping in mind the purpose of the offer in the litigation. This was a defendant’s Part 36 offer to a claimant. It was made by Hendricks Lovell, as defendant, with a view to bringing about a settlement of the proceedings. It encouraged Mr Crooks, as claimant, bearing in mind the predictable consequences in costs, to consider whether he would be better off accepting the settlement now offered to him than he would be if his claim proceeded to trial. It must be understood, therefore, as representing the potential advantage to him of accepting what he was now being offered. The potential advantage to him would be the total monetary value of the offer to him as offeree, no matter how much it would cost Hendricks Lovell, as offeror, to settle the claim in this way.

3. What then does the Part 36 offer mean? More particularly, what do the words “net of CRU” mean? The natural meaning of the expression “net of” in a context such as this is familiar. It is that the amount stated to be “net of” something else is the amount that remains after a deduction of tax or other contributions. The appropriate definitions in the New Shorter Oxford English Dictionary (4^th edn.) is “(of an amount, weight, etc.) free from or not subject to any deduction, remaining after all necessary deductions have been made; (of a price) to be paid in full, not reduceable; …”. Construing the expression “net of CRU” as “remaining after all necessary deductions of benefit [under the statutory scheme administered by the CRU]” seems to me to make good sense in an offer under CPR 36.15(3)(a) – an offer “made without regard to any liability for recoverable amounts”. This, I believe, is the meaning of the words “net of CRU” in Hendricks Lovell’s Part 36 offer. They cannot sensibly be read in any other way.

4. It follows that when an offer made in such terms has to be compared to damages awarded by the court so that the court can resolve the question in CPR 36.14, it is necessary to consider the amount of damages in the judgment award after any corresponding adjustments for recoverable benefit have been made to it. The words “without regard to any liability for recoverable amounts” do not mean that the court is to have no regard to the amount of recoverable benefit when deciding whether or not the claimant has obtained a judgment more advantageous than the defendant’s Part 36 offer. In undertaking that task the court must obviously have regard to any necessary subtraction of the final figure for recoverable benefit from the total figure in the judgment award. Otherwise, it would not be comparing like with like. By contrast, an offer made under CPR 36.15(3)(b), which deliberately includes “any deductible amounts”, would have to be compared to the total amount of the judgment award without such adjustment.

5. In my view the recorder was clearly right to regard Hendricks Lovell’s Part 36 offer as an offer made under CPR 36.15(3)(a). One can only make sense of the offer in that way, giving the words “net of CRU” their natural meaning and the meaning they must bear in the context of Hendricks Lovell’s election that the offer was one “made without any regard to liability for recoverable benefits …”. But if, in paragraph 57 of his judgment, the recorder was intending to interpret the offer as meaning “£18,500 net of CRU plus a payment to CRU for £16,262.76 and inclusive of interim payments in the sum of £18,500”, he was in my view mistaken. The offer was not made in those terms. It was for £18,500, leaving aside any liability in respect of recoverable benefits once such liability had crystallized. So far as Mr Crooks was concerned, the words “net of CRU” meant that the £18,500 already paid to him by Hendricks Lovell would not be reduced by their liability for recoverable benefits, whatever that liability might turn out to be. The final amount of recoverable benefit was at that stage unknown. When it was made, the offer did not seek to anticipate the result of the CRU process, after any review or appeal. It did not identify a hypothetical gross sum, including any notional deductible amounts. It did not set any level or limit to repayments that might in due course fall to be made under the statutory scheme. It acknowledged the statutory scheme only in stating that it was made “net of CRU”. That is how Hendricks Lovell chose to express their offer, and that is how it had to be read when the time came for the court to consider whether, after trial, Mr Crooks had secured a more advantageous result.

THE APPROPRIATE WAY TO APPROACH THESE ISSUES

1. As I have said, when considering whether a defendant has beaten a Part 36 offer, it is necessary to compare the offer with the judgment award on the same basis, allowing for any necessary subtraction of the figure for recoverable benefit from the total figure for damages in the judgment award if that was the nature of the offer – as it was here – or including the figure for recoverable benefit if the offer was made in those terms – which here it was not. This is simply common sense. It is consistent with the approach taken by the Court of Appeal in Fox v Foundation Piling Ltd. – though that was a case in which a Part 36 offer had been made inclusive of recoverable benefit. In his judgment in that case, with which Ward and Moore-Bick L.JJ. agreed, Jackson L.J. referred (at paragraph 33) to what were then the provisions of CPR 36.10(8), which stated that in determining whether the claimant had obtained a more advantageous result than the defendant’s offer, one had to look at the net sum paid to the claimant, not the gross sum including monies payable to the CRU. Having reviewed the relevant jurisprudence on Part 36 (in paragraphs 36 to 50), he went on to consider what had happened in that case (in paragraph 51):

“The gross sum which the defendant offered on 29 September 2008 amounted to £63,000.00, inclusive of payments to the CRU. The gross sum which the defendant ultimately paid amounted to £37,500.00, inclusive of payments to the CRU. At first blush, therefore, it may be thought (as the defendant argued below) that the claimant failed to beat the defendant’s Part 36 offer. However (as the defendant concedes in this court), that analysis is not correct. The net sum which the defendant offered to pay to the claimant in September 2008 was £23,550.79. The net sum which the claimant finally recovered was £31,702.53. Accordingly, as the defendant now accepts, the claimant is the successful party in this litigation. Therefore the starting point must be that the defendant should pay the claimant’s costs of the action.”

1. I cannot accept Mr Withington’s argument that the CRU’s review decision made no difference to the true comparison between the Part 36 offer and the recorder’s judgment. The thrust of Mr Withington’s argument appears to be that the position was no different because, both under the certificate of 14 August 2013 and on the fresh certificate issued after the review, Hendricks Lovell would have had to pay out precisely the same amount. That, in my view, is to look at the matter in the wrong way. It is to consider the effect of the offer and the effect of the judgment from the standpoint of Hendricks Lovell as defendant, without regard to the value of each to Mr Crooks as claimant. It ignores the comparison between the value of the offer to Mr Crooks and the value of the judgment award that he had managed to secure, seen in the light of the CRU’s revised certificate of recoverable benefit. The real measure of whether, after the CRU’s revised certificate had been issued, Mr Crooks had bettered the Part 36 offer was whether the total payment he would actually receive as a result of the recorder’s judgment on the claim was more or less than the amount of the offer. That proposition is consistent with the approach indicated in CPR 36.14(1), (1A) and (2). Those provisions focus on the question of comparative advantage to the claimant, as between offer and judgment, not disadvantage to the defendant.

2. In this case the amount of recoverable benefit in the original CRU certificate was not included in the Part 36 offer (see paragraph 25 above). The final certificate issued by the CRU after its review did not serve to vary the terms of the offer. In my view, therefore, the recorder was wrong to answer the question he had posed for himself in paragraph 55 of his judgment – “what is the effect of the Review Decision on the Defendant’s original Part 36 offer?” – by finding, in paragraph 57, that the Part 36 offer had now become an offer of “£18,500 plus one payment to [the] CRU of £6,760.11 and another payment to [Mr Crooks] (of the balance of the proceeds of the CRU appeal) of £9,502.65”.

3. The approach I think the recorder should have taken, but did not, was to consider the effect of the CRU’s review decision on the composition of the judgment award, once the final figure for recoverable benefit was incorporated in the amount awarded for loss of earnings. This was the comparison required under CPR 36.15(3)(a) and CPR 36.15(8). It is the comparison between the respective net sums, after the deduction of recoverable benefits under the statutory scheme. Had the recorder made that comparison, he would have had to acknowledge that the judgment award of £29,550 contained, as the relevant deductible amount under the CRU’s review decision, the sum of £6,760.11, leaving the figure of £22,789.89 as the amount that was net of recoverable benefit. This is the figure that ought to have been compared to the figure of £18,500 “net of CRU” in the Part 36 offer – which had of course remained unchanged – because this was the value of the judgment award “net of CRU”. Before the CRU’s review decision, the amount of recoverable benefit was certified as £16,262.76, which meant that the element of the judgment award of £29,550 that was net of recoverable benefit was only £13,287.24 – £5,212.76 less than the Part 36 offer of £18,500 “net of CRU” and including the interim payments already made to Mr Crooks. After the CRU’s review of the certificate of recoverable benefit in the light of the recorder’s judgment, the amount of recoverable benefit had been reduced by £9,502.65 – the difference between £16,262.76 and £6,760.11. So the element of the judgment award that was now net of recoverable benefit, or “net of CRU” – the figure of £22,789.89, was £4,289.89 more than the sum offered to Mr Crooks “net of CRU” in the Part 36 offer – £18,500. Thus the judgment award, once it reflected the true amount of recoverable benefit in the light of the CRU’s review decision, left Mr Crooks in a better position – by £4,289.89 – than he would have been in had he accepted the Part 36 offer. In other words, he had beaten the Part 36 offer.

4. That analysis, I believe, reflects the reality of the situation as it was when the recorder made his decision on costs, which is that the value of the judgment award to Mr Crooks was greater after the CRU’s review decision than it had been before. This is to recognize the operation of the statutory scheme for the recovery of benefits, including the arrangements for the reduction of compensation payments in section 8 of the 1997 Act, and the provisions for review and appeal in sections 10, 11 and 14 and regulation 11 of the 1997 regulations.

5. Was the recorder entitled to have regard to the fact that if Mr Crooks had accepted the Part 36 offer when it was made in September 2012, he could have appealed the CRU certificate and might then have been in a better position than he secured by the judgment on the claim? Mr Withington submitted that he was; Mr Barnes that he was not. But, as the recorder said, this was only a “secondary point” in his analysis. It does not seem to have been essential to his conclusion on the question of whether Mr Crooks had done better than the Part 36 offer. Nor should it have been. In Fox v Foundation Piling Ltd. Jackson L.J. was not attracted by an argument that the claimant in that case could have achieved a better outcome by accepting an offer that had been made some time before trial and then appealing against the assessment of sums due to the CRU. He said (at paragraph 55) that “[it] would have been hypocritical if the claimant had accepted the defendant’s original offer on the basis of several years’ disability and had then appealed against the CRU assessment on the basis that his disability benefits were not referable to the accident …” and in any event “the outcome of any appeal was uncertain”. Mr Withington pointed out that in that case the court was considering the exercise of the court’s discretion as to costs under CPR 44.3, the claimant having rejected a Part 36 offer, but having accepted a later offer not made under Part 36. But I think Mr Barnes was right to submit that, in the circumstances of this case, if Mr Crooks had accepted Hendricks Lovell’s Part 36 offer he would have had nothing to gain by challenging the certified amount of recoverable benefit by way of review or appeal at that stage. Once judgment on his claim had been given, however, the review was clearly worthwhile.

6. Was the recorder wrong to set aside paragraphs 1 and 2 of his order of 25 June 2014 and to reinstate the part of his order of 15 November 2013 in which he had referred to the then relevant amounts of recoverable benefit under the CRU certificate of 14 August 2013? In my view he was. He ought to have referred in his order of 17 October 2014 – as he had in his order of 25 June 2014 – to the amount of recoverable benefit under the CRU certificate of 20 March 2014: £6,760.11, comprising £4,642.43 for Employment and Support Allowance (Contributory) and £2,117.68 for Industrial Injuries Disablement Benefit.

7. The final question to be considered here, raised in ground 2 of the respondent’s notice, is contingent on the status of Hendricks Lovell’s offer of 12 September 2012. If that offer was not, in truth, a Part 36 offer, should the recorder still have made the order for costs that he did? As will be clear, this question does not in my view arise, because I am satisfied that the offer of 12 September 2012 was a Part 36 offer, properly made in accordance with CPR 36.15(3)(a). But if that were not so, and the court had to exercise its discretion as to costs in the circumstances referred to in CPR 44.3(4)(c) – where an “admissible offer to settle” has been made – I would still have concluded that Mr Crooks was the successful party in the litigation and that costs should have been awarded in his favour under the general principles in Part 44. Not only did the judgment award comfortably exceed the level of damages admitted by Hendricks Lovell in their “Counter Schedule of Special Damages”, though of course it fell far short of the level of damages claimed (see paragraph 14 above); it also exceeded the offer made by Hendricks Lovell on 12 September 2012. In those circumstances an award of costs in Mr Crooks’ favour would clearly have been justified under Part 44.

8. For the reasons I have given, I think the recorder was wrong to conclude that Mr Crooks had failed to beat Hendricks Lovell’s Part 36 offer. Mr Crooks did, in the end, obtain a more advantageous result than the Part 36 offer, and he had to pursue his claim to do so (see paragraph 46 of Jackson L.J.’s judgment in Fox v Foundation Piling Ltd.). And in my view there would be no injustice here in giving effect to the consequences provided for in CPR 36.14(2). As Jackson L.J. said in Fox v Foundation Piling Ltd. (at paragraph 63), in personal injury litigation “where a claimant has a strong case on liability but quantum is inflated, the defendant’s remedy is to make a modest Part 36 offer”, and “[if] the defendant fails to make a sufficient Part 36 offer at the first opportunity, it cannot expect to secure costs protection”.

9. The outcome of the appeal, however, should not flow merely from this court’s disagreement with the costs order made by the recorder. It is necessary for us to consider whether the basis upon which he exercised his discretion as to costs has been shown to be flawed (see the judgment of Chadwick L.J. in Summit Property Ltd. v Pitmans [2001] EWCA Civ 2020, at paragraph 26). For the reasons I have given I think this was so. It would follow, in my view, that we can properly set aside the order made by the recorder on 17 October 2014, and that, in the exercise of our own discretion, we should make an order that Hendricks Lovell are to pay Mr Crooks’ costs of the proceedings, subject to detailed assessment if not agreed.

RELATED POSTS ON PART 36

• Part 36: when the normal costs penalties may not apply
• Is this a claimant’s or defendant’s offer? Another important decision on Part 36
• Clarification of a Part 36 offer has a major effect on costs.
• Costs where a claimant accepts a Part 36 offer late: two cases where the claimant came to grief
• Another case where there was an invalid Part 36 offer
• Is this a Part 36 offer I see before me? That’s an important question
• How relevant are Part 36 offers to issue based orders?
• Knowing the risks and advantages for the claimant in the new Part 36.
• The costs consequences of Part 36 offers: do they always apply? The cases in detail.
• Costs consequences of Part 36 offers: some interesting examples
• Costs, conduct, Part 36 and the “Winning Party”.
• Interest and costs when a claimant beats their own Part 36 offer.
• Costs of £7 million: Part 36 bites hard on claimants who cleared a first hurdle but fell at the second.
• Claimant beats own Part 36 offer and receives an additional £75,000 in damages.
• The dangers of a Part 36 offer: Claimant pays three times more in costs than he receives in damages.
• Another example of a successful defendant not recovering all of its costs (and of the advantages of a Part 36 offer).

• Percentage costs orders after a claimant beats their own Part 36 offer: a High Court decision.
• Very important decision on Part 36 offers, assessment of costs and additional amounts when offers not beaten.
• Increased interest and costs after claimant beats its own Part 36 offer.
• Part 36 offer does not override the need to serve the claim form.