“THE SOMETIMES HARSH, EVEN BRUTAL, DEFAULT CONSEQUENCES OF 36.17 MUST BE APPLIED IN THE PRESENT CASE”: RECOVER £10 IN DAMAGES AND STILL GET COSTS ON THE INDEMNITY BASIS
In Shah & Anor v Shah & Anor [2021] EWHC 1668 (QB) Mrs Justice Collins Rice upheld the decision of the trial judge that the defendants should bear the normal Part 36 consequences when the claimants had made a Part 36 offer to settle for £1 and the trial judge awarded nominal damages of £10. It is a reminder of how “harsh and brutal” the Part 36 regime can be.
“Litigation consumes public resource. It is both discouraged and constrained by rules of court, on the basis that it should be a last resort, avoided where possible. That is particularly relevant to contract disputes within families: litigation is costly, adversarial and delivers binary outcomes on limited issues, so is likely to solidify rather than dissolve the grievance and controversy of long-standing personal quarrels. The rules of litigation justice, and the discretions judges can and must exercise in the interests of fairness to both sides, and in the public interest, will in those circumstances produce results that a disappointed party may find very hard to come to terms with.”
THE CASE
The claimants/respondents to the appeal brought proceedings in a protracted (and expensive) family dispute. The claimant made a Part 36 offer offering to settle for £1. At trial the claimants succeeded, but only recovered nominal damages of £10.00. The judge awarded the claimants their costs up to the date of the Part 36 offer and then with the Part 36 benefits thereafter. The defendants/appellants appealed this offer.
The judge set out the general principles.
(i) Awarding Costs
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The starting point is that the award of costs is at the discretion of a Judge (CPR 44.2). In exercising that discretion, a Judge must have regard to all the circumstances of the case. Those include the conduct of the parties; whether a party has succeeded on part of its case, even if it has not been wholly successful; and whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim. The decided cases give further guidance, but are also clear that the discretion is broad, and highly fact sensitive.
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Part 36 of the Civil Procedure Rules is ‘a self-contained procedural code about offers to settle’. Its policy is to encourage settlement of disputes without recourse to litigation. One of the ways it does that is by setting out the components and procedure for parties to make settlement offers the refusal of which can have adverse costs consequences. Where a claimant has made a Part 36 offer, the defendant does not accept it, and the case goes to trial, then if judgment is given against the defendant which is at least as advantageous to the claimant as the proposals contained in the claimant’s Part 36 offer, the costs penalties set out in CPR 36.17(4) will fall on the defendant. Those consequences are mandatory, unless a court considers it would be ‘unjust’ to impose them. The caselaw confirms that the test of injustice sets a high bar or ‘formidable obstacle’ for a defendant (Smith v Trafford Housing Trust [2012] EWHC (Ch) 3320 at [13]).
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In cases involving effective Part 36 offers, the award of costs will be a two-part process. The offer will contain a date at which a failure to accept it will trigger the costs penalties. Costs arising after that date fall to be assessed on the more onerous Part 36.17 basis. Costs arising before that date fall to be assessed on the usual CPR 44 basis.
THE DECISION OF THE JUDGE OF FIRST INSTANCE
The judgment sets out the relevant part of the first instance judgment in detail.
8. In my judgment, the proper place to start must be CPR 36.17 and the sometimes harsh, even brutal, default consequences of 36.17 must be applied in the present case.
9. I am satisfied that this action was contested with disproportionate investment of time, energy and cost on both sides, as I am satisfied that it forms only the latest chapter in a sad story of family dysfunction. However, I am not satisfied that the claim was an abuse or motivated solely out of the vindictiveness of the Claimant towards, or the economic oppression of, the Defendants. The damages, in the way they were claimed, were contrived and the evidence in support of that claim, contorted, but, properly thought out to the point of proof, there may have been some recoverable legal expenses in there somewhere and a rethink about the consequences of a delayed registration of title could have yielded a more viable claim for loss of use of the property. I infer that by the time the Part 36 offer was made, with so much already invested in the action, the Claimants are more likely than not to have concluded that re-working their financial claim and the supporting evidence was too risky and too expensive to be worth further pursuit. In colloquial terms, they saw the writing on the wall on damages. Something of the sort must have been in their minds given their Part 36 attempt to trade the damages claim for an acceptance of liability and costs. Unpromising though the claim for damages was, as then configured, the Claimants were entitled to consider that, despite its flaws, they might still recover something.
10. What was really left of the action in monetary terms were the prodigious costs. Regrettably, this will not have been the first nor the last action which turns out, during the course of the litigation, to be more about costs than the substance of the case. The Claimants were entitled to take this into account as they were entitled to consider that, whatever losses could be proved, their case on breach of the Tomlin Order was strong. Vindication in respect of a transaction that had been completed years previously was not the only issue engaged by April 2020. In my judgment the relevant point is that the costs had become unavoidably entangled in the litigation as a whole. Whilst the parties (particularly the First Claimant) may have become fixated on costs, this is hardly surprising; neither is it, unfortunately, unusual.
11. I cannot depart from the default position under CPR 36.17 simply because the rules themselves may appear harsh or produce a harsh result. The whole object of Part 36 is to drive litigating parties towards a reality check such that they are prepared to “give” as well as to “take” and to demand that reassessment is made, on all sides, of entrenched positions. The Claimants had on several previous occasions invited the Defendants to acknowledge their breach of the strongly worded Tomlin Order, but to no effect.
12. By this Part 36 Offer the Claimants were prepared to bend. The Defendants were, at least by then, unbendable; despite having previously made unsuccessful offers to settle of their own. Whilst much of the costs would already have been incurred by April 2020, there were still substantial savings to be made by the Defendants in the event that their defence was unsuccessful and there remained a risk, for them, that a Court would in addition to finding against them on liability, award something in damages to the Claimants.
13. I am not persuaded that this case is a mirror image of those in which a Claimant has offered to accept the full amount of a claim in order to try and take an illegitimate, tactical advantage over a Defendant simply to recover the uplifts awarded under Part 36.17. I am satisfied that this Part 36 Offer was a genuine attempt to settle the action; to have done with it. As things turned out, it was an Offer that got very close to the final conclusion of the Court.
14. CPR 36.17(1)(b) applies to this situation. The “… judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant’s Part 36 offer“.
15. I am not too concerned about the fact that the Part 36 Offer to settle for nominal damages was £1.00 whereas the judgment was for £10.00. The fact of the matter is that the Claimants offered to settle for nominal damages and that is precisely what they were awarded having proved their case on breach of contract. Therefore the Judgment is at least as advantageous as the Offer. There may be room for argument in other cases as to whether the precise amount of an expressly nominal sum has the same importance or impact as small difference in substantial damages. The point is not necessary to decide in the present case.
16. I do not accept the submission that up until the date of the Part 36 Offer the Defendants would be entitled to their costs which in some way, it is submitted, justifies the Defendants’ intransigence on liability. Of course, the CPR 44.2 factors are important and relevant, but they can only be seen, in a case such as this, in the context of Part 36. If there is any tension between the Part 44.2 factors and Part 36, the starting point must be Part 36 due to its clear, underlying purpose. 36.17(5) engages certain factors that must be taken into account in the determination of whether it is unjust to follow through on the default Part 36 consequences, but these are not to the exclusion of factors such as those itemised within Part 44.2.
17. The Court’s usually wide discretion on costs in these circumstances is much more limited. Departure from the costs consequences of Part 36.17 whether in principle or in terms of the additional sums awarded can only be avoided where it is unjust to apply the rules or apply them to their full effect.
18. The authorities are clear. This is a high hurdle. In Ayton v RSM Bentley Jennison & Ors [2018] EWHC 2851 (QB); a case in which the court considered whether it would be unjust to order the default Part 36 costs consequences after the claimant beat his Part 36 offer, Lewison LJ noted that “the cases are unanimous in stating that the test of injustice is a high hurdle…“. Elsewhere, Biggs J (as he then was) described the burden on a claimant in this regard as a “formidable obstacle“.
19. It is sufficient for me to recognise and accept the submissions made on behalf of the Claimants in paragraphs 18 (1)-(11) of Mr Bheeroo’s skeleton argument. In the light of my findings, the Claimants are not able to demonstrate that applying the consequences of Part 36.17 would lead to an injustice.
20. In more detail, it is submitted on behalf of the Defendants as follows.
20.1 The Defendants were the successful party. I reject this submission.
20.2 The Defendants attempted to engage the Claimants in settling the claim. This is correct but they were unsuccessful.
20.3 The manner in which the Claimants pursued the litigation is relevant and was demonstrably motivated by malice. I have rejected this submission.
20.4 The Claimants’ exaggerated their claim. I have accepted that the damages claim was flawed as presented to the Court.
20.5 The Claim was an abuse and designed for an improper purpose. It was not, in my judgment.
20.6 When considering the Claimants’ Part 36 Offer the Court should take into account that:
20.6.1 the offer was not ‘at least as advantageous‘ as the judgment obtained. It was.
20.6.2 It would be unjust to award the Claimants costs or any of the enhanced awards because
(a) the terms of the Offer were an abuse.
(b) The stage of the proceedings when the offer was made being after the costs had been largely incurred.
(c) The Claimants had withheld crucial information from the Defendants and the court.
(d) The conduct of the Claimants.
(e) The offer was not a genuine offer to settle the proceedings.
21. The points drawn from the Defendants’ submissions of 20.6.2 above are further developed by Mr Coulter in his written submissions. In the light of the findings I have made I am unable to accept those submissions.
22. I am satisfied that the Part 36 consequences in respect of indemnity costs from 13 May, together with interest at 2.5% above base rate, are not unjust in all the circumstances. A payment on account of costs is warranted, there being no reason to depart from current usual practice and I have assessed this in a sum modestly lower than that sought by the Claimants, namely, £75,000.00.
THE DEFENDANT’S UNSUCCESSFUL APPEAL
The defendant’s appeal against being ordered to pay costs, and the claimant having the normal Part 36 consequences having beaten their own offer, was dismissed.
THE JUDGMENT OF THE HIGH COURT JUDGE
It was held that the decision made was well within the discretion of the trial judge.
The Judge’s hesitation to make a costs decision without written submissions and time to think about them, was prompted by the circumstance of a claimant Part 36 offer to settle on terms of nominal damages, but subject to the payment of substantial incurred costs. He was aware that gave rise to a possible prior question of whether this qualified as an enforceable Part 36 offer at all. Whether an offer is a ‘genuine attempt to settle the proceedings’ is identified in CPR 36 as a factor to be considered in whether it would be ‘unjust’ to enforce it, but some of the authorities approach it as an initial question of whether an offer properly qualifies for Part 36 consequences in the first place.
The Appellants submitted that it did not. They said it was a sham: an acknowledgment that the claim was worth nothing, and an impermissible attempt to use settlement procedure to oppress another party with an excessive costs bill. It was late: both sides had run up the majority of their trial costs, and the Appellants said the Respondents were seeking a last-minute exit from a weak case and trying to make them pay over the odds for it.
The Judge was particularly focused on this point. On appeal, we looked at some of the caselaw giving guidance on the difference between enforceable and unenforceable Part 36 offers. They acknowledge that all Part 36 offers are ‘tactical’ (Wharton v Bancroft [2012] EWHC 91 (Ch) at [22]) and that there are important public policy reasons for working on the basis that they are enforceable, chief among which is certainty:
A party faced with a Part 36 offer ought to be entitled to evaluate it by reference to a rational assessment of his own case (including the risk of incurring unrecoverable costs if he presses on). He should not have to make a significant allowance for the court’s view of factors that are inherently difficult to value… (Gibbon v Manchester City Council [2010] EWCA Civ 726 at [40], cited with approval in AB v CD [2011] EWHC Ch 602).
Where courts have refused to recognise Part 36 offers as enforceable they have therefore not done so lightly. The test was expressed in AB v CD as being whether there is a genuine offer with some genuine element of concession and a genuine attempt to avoid litigation, rather than a ‘lightly disguised request for total capitulation‘ or for submission to the entirety of the relief sought, simply to attach the Part 36 consequences to a successful claim. The offer must include give as well as take (MVN v RB Greenwich [2015] EWHC 2663 (Admin)). It must not be ‘derisory’ (Wharton v Bancroft).
Here, the Judge found the Respondents had made a genuine attempt to settle the litigation and have done with it. They had been entitled to consider they had a strong case on liability and a valuable claim for damages. They were willing to give up something of value. And, while the incurred costs were already high, there were ‘still substantial savings to be made’ for both parties in avoiding the trial, and for the Appellants in avoiding the risk of a damages award. In these circumstances, the Judge was satisfied that the purposes of Part 36 were properly served: there was a genuine basis offered for avoiding litigation and if the Appellants chose to proceed they did so at their own risk.
The Judge reasoned that this was not the sort of case disapproved of by the authorities where a claimant offers to accept the full amount of a claim, simply so as to manoeuvre a defendant into a place where the CPR 36.17 uplifts technically apply. He found the Respondents’ offer a genuine compromise in which they were prepared to settle for less than their claimed entitlement and thus confer a valuable benefit on the Appellants. How much the Respondents cared about their money claim, the state of this aspect of their litigation, and how much they would have to spend to get it into better shape were tactical issues for them, but did not necessarily undermine the validity of the offer.
The disproportion in this case between the commercial value of a win on liability, the offer to settle for nominal damages, and the scale of the costs both incurred and prospective was not lost on the Judge. But it is not necessarily determinative of whether the offer is enforceable. A concession may be genuine even at the price of a large costs bill; giving up any and all claim to a financial remedy may be a significant concession; and ‘as a matter of principle, the implications of costs should never overwhelm the issue at the centre of litigation‘ (see MR v Metropolitan Police Commissioner [2019] Costs LR 1441 at [16]-[18]) – in this case, the issue of fault.
I am satisfied, for the reasons he gave, that the Judge’s decision that the Part 36 offer was genuine is consistent with the authorities and one he was entitled to take on the facts as he found them. The Appellants clearly found the offer unattractive. It required them to concede the very point on liability which they refused to concede and it required them to pay a hefty costs bill. So the questions they had to go on to ask themselves were exactly how much they were prepared to stake on the liability issue (how important it was to them), how likely they were to win or lose, how much more in the way of costs they were risking if unsuccessful, and whether to make a counter-offer. Those are the components of the usual sorts of calculations parties have to make about whether to settle or not. Part 36 offers demand hard choices about the least worse alternative. The Part 36 code is specifically designed to make parties face up to these sorts of difficult decisions.
The next question was whether the judgment the Respondents had obtained was ‘at least as advantageous’ to them as their offer. The Judge concluded it was: they had obtained judgment on liability and a nominal award of damages slightly higher than the sum they had asked for. He was entitled to that conclusion.
The last question the Judge had to address was whether, in all the circumstances, it would be ‘unjust’ for the CPR 36.17 consequences to ensue. He correctly observed that the authorities had indicated this was a ‘high hurdle’, in order to preserve the risk structure of CPR 36 and the powerful motivation to avoid litigation which it is its policy to provide. CPR 36.17 directs a Judge’s attention, in considering the test of ‘unjust’, to all the circumstances including the terms of the offer; the stage in the proceedings (in particular how long before the trial started) the offer was made; the information available to the parties at the time; the conduct of the parties with regard to the giving of or refusal of information for the purposes of enabling the offer to be made or evaluated; as well as whether the offer was a genuine attempt to settle the proceedings.
The Judge accepted the Respondents’ submissions that it would not be unjust for CPR 36 to take its normal course. He found the claim had substance and was not abusive; the Respondents had a good case on liability; they had an arguable case on damages (although defectively presented); and the objections made to the Respondents’ conduct – in a hard-fought case where both parties were so heavily invested in winning on fault that the Respondents were prepared to settle without satisfaction of their money claim and the Appellants were ‘unbendable’ to the point of proceeding to litigation at Part 36 risk – did not, in all the circumstances, amount to ‘injustice’ sufficient to set aside the Part 36 consequences.
It has to be acknowledged (and the Judge did so expressly) that the consequences of Part 36 in cases such as this are punishing, but it is a separate question whether they are unjust. The justice of Part 36 is that decisions about litigation should be economically utilitarian: it actively discourages litigation on ‘points of principle’ by making litigation not fought on a commercial basis a high stakes activity. Whether the Appellants over-estimated their prospects of success, or whether, as the Judge thought, they valued the chance of inflicting litigation defeat on the Respondents so highly they were prepared to take that chance whatever the cost, their choice to litigate was one which Part 36 is designed to discourage. However intuitively unappealing the offer, the Judge found it reasonable to expect the Appellants to consider it very seriously indeed. On that basis, the Part 36 result was not an unjust windfall for the Respondents, but the product of the Appellants’ preference for a win/lose outcome and the hope of victory, over a settlement which the Judge found not to be a ‘request for total capitulation’ in objective reality. He found the reason it was refused was not its inherent and objective lack of merit but the Appellants’ ‘intransigence’ on the issue of fault. The justice of the outcome therefore has to be seen next to what would have been the injustice to the Respondents of forcing them to litigate for a result they would have settled for, but avoiding the adverse consequences of doing so which the Rules provide.
The authorities are clear that the test of an injustice is a high hurdle. No court will easily set aside the Part 36 consequences of litigating, when a judgment confirms an outcome a claimant could have achieved by other means if a defendant had engaged on commercial terms. The Judge directed himself correctly to the test and applied it to the facts of the case as he found them. No error of principle appears in this.
Conclusions
I am in no doubt that the Appellants disagree with the costs judgment in this case in the strongest terms. The intensity of their disagreement is a measure of their acute disappointment, the personal context the Judge found to be driving this litigation, and the bill they have to pay. It is not, however, a measure of the injustice or impropriety of the Judge’s decision-making. I have examined that decision-making with the critical respect which is required of an appellate court. I do not find a proper basis for interfering with it. The decisions he made he was entitled to make. The test is not whether, like the Appellants, I also disagree with the Judge; nor whether all of his decisions were ‘right’ in the sense that they were the only ones he could have taken; nor whether any of them was ‘wrong’ in the sense that he could have taken different or better ones. The test is whether in any respect he took a decision which it was not properly open to him to take at all, because he got the law wrong, went wrong in principle or reached a wholly unsustainable conclusion. I am not satisfied, for the reasons I have given, that that test is passed.
Litigation consumes public resource. It is both discouraged and constrained by rules of court, on the basis that it should be a last resort, avoided where possible. That is particularly relevant to contract disputes within families: litigation is costly, adversarial and delivers binary outcomes on limited issues, so is likely to solidify rather than dissolve the grievance and controversy of long-standing personal quarrels. The rules of litigation justice, and the discretions judges can and must exercise in the interests of fairness to both sides, and in the public interest, will in those circumstances produce results that a disappointed party may find very hard to come to terms with.
Decision