SET OFF AND QOCS IN THE SUPREME COURT: DEFENDANT CANNOT SET OFF COSTS ORDERS AGAINST LIABILITY TO CLAIMANT
In the judgment today in Ho -v- Adelkun  UKSC 43 the Supreme Court considered the issue of set off and QOCS. The Court overturned the decision of the Court of Appeal and held that costs orders in favour of a defendant cannot be set off against costs liabilities to a claimant. There is a summary of the judgment available here.
The judgment is available on BAILLI here.
“No one has claimed that the QOCS scheme is perfect. It is, however, the best solution so far that the opposing sides in the ongoing debate between claimant solicitors and defendant insurers have been able to devise”
Effect of qualified one-way costs shifting
(1) Subject to rules 44.15 and 44.16, orders for costs made against a claimant may be enforced without the permission of the court but only to the extent that the aggregate amount in money terms of such orders does not exceed the aggregate amount in money terms of any orders for damages and interest made in favour of the claimant.
(2) Orders for costs made against a claimant may only be enforced after the proceedings have been concluded and the costs have been assessed or agreed.
(3) An order for costs which is enforced only to the extent permitted by paragraph (1) shall not be treated as an unsatisfied or outstanding judgment for the purposes of any court record.
The issue related to whether a defendant was entitled to set off against costs liability costs that a claimant was liable to pay to the defendant. The Court of Appeal found that there could be a set off. This decision has been overturned by the Supreme Court.
37. We would not accept Mr Mallalieu’s submission that QOCS is a complete
costs code, or that it wholly excludes set-off of costs against costs under rule 44.12.
But we would accept that QOCS is intended to be a complete code about what a
defendant in a PI case can do with costs orders obtained against the claimant, ie
about the use which the defendant can make of them. The defendant can recover the
costs ordered, by any means available, including set-off against an opposing costs
order, but only up to the monetary amount of the claimant’s orders for damages and
interest. This is what the Explanatory Memorandum states in terms.
38. We consider that rule 44.14(1) works in the following way. First, it requires
two comparators to be constructed. First, the aggregate amount in money terms of
all costs orders in favour of the defendant. Secondly, the aggregate amount in money
terms of all orders for damages and interest in favour of the claimant. We will call
them A and B. If A is less than or equal to B, the defendant can enforce his costs
orders without limit. If A is more than B, then the defendant can only enforce his
costs orders up to the monetary limit of B. The effect of this cap, as we have called
it, is to require the defendant to keep a running account in money terms of all costs
recoveries which it makes against the claimant, and to cease enforcement when limit
B is reached.
39. The question remains: does the defendant have to bring into account the
benefit in money terms of the set-off of a costs order in his favour; in other words
does the limit B only apply to the net amount of costs owed by the claimant, having
set off any costs the defendant is ordered to pay to the claimant? Plainly the
defendant must bring into account the monetary benefit of setting off costs against
the claimant’s damages, despite the fact that this may not generate actual cash but
only save the defendant from having to put his hand in his pocket to pay the damages
and interest to that extent. That is what “money terms” means. For example, assume
that the claimant is ordered an award of £20,000 in damages and interest, but that
the defendant has costs orders for an aggregate amount of £30,000. If the defendant
has not yet paid the damages, it can set off its damages liability against the claimant’s
costs liability, but only up to £20,000. It must bring that £20,000 into account under
rule 44.14(1) and cannot enforce the balance of its costs entitlement of £10,000, by
any means of enforcement. If the defendant has already paid the damages before its
costs are assessed, then it can enforce its costs orders by any other available means
(set-off being in practice unavailable), but only up to £20,000. It cannot therefore be
said that use of a set-off is not a means of enforcement, where costs are set off against
40. If set-off of costs against damages is therefore a form of enforcement in this
context, so as to make sense of rule 44.14, then why should set-off of costs against
costs not equally be a means of enforcement? Both achieve a recovery measurable
in money terms for the defendant on account of its costs entitlement, and by the
same self-help means of appropriating an asset of the claimant (his damages
entitlement) to the part satisfaction of the defendant’s entitlement against the
claimant for costs. Strictly it might be said that set-off of costs against damages
pursuant to rule 44.14 requires less assistance from the court than set-off of costs
against costs, because the latter requires the court’s direction under rule 44.12. But
that just makes it more like a form of enforcement.
41. Real assistance on the contextual meaning of enforcement is gained by
reflecting on the language and structure of rule 44.14(1). The requirement is to
calculate A by reference to the aggregate amount in money terms of all the
defendant’s costs orders made against the claimant, not the net amount arrived at by
netting off opposing costs orders and striking a net balance. Costs orders in favour
of the claimant are not even mentioned in the formula, and the aggregate expressly
referred to is a gross not a net amount.
42. Some slight further assistance may be available from rule 44.14(3), which
prohibits the “unenforced” part of a costs order from being registered as an
unsatisfied or outstanding judgment. That would act to the detriment of the
claimant’s credit rating, such that the threat of it would otherwise be an incentive
towards payment, and therefore a prohibited form of enforcement. This suggests a
wide contextual meaning of enforcement. The concept of the judgment for costs
being partly unsatisfied because of the impact of the cap in sub-rule (1) would be
very odd if set-off were not a kind of enforcement for this purpose.
43. Returning to the respondent’s submissions, we do not consider that the well established jurisdiction to direct set-off of costs against costs under rule 44.12 is displaced by the QOCS scheme, provided that there is an order for damages or
interest and that the headroom provided by that order has not been exhausted by
other means of enforcement. But for the reasons already given we do not accept the
submission that it is only the net costs entitlement that has to be brought into account
under rule 44.12(1).
44. We recognise that this conclusion may lead to results that at first blush look
counterintuitive and unfair. Why should a defendant which has a substantial costs
order in his favour have to pay out costs to a claimant under an order made against
him when the two costs orders would net off against each other, leaving both sides
to meet their own solicitor’s costs themselves? Whether or not the intervener in this
appeal is right that such a result accords with the policy underlying QOCS, we hold
that it is the result that follows from the true construction of the wording used in Part
44. Any apparent unfairness in an individual case such as this dispute between Ms
Ho and Ms Adelekun is part and parcel of the overall QOCS scheme devised to
protect claimants against liability for costs and to lift from defendants’ insurers the
burden of paying success fees and ATE premiums in the many cases in which a
claimant succeeds in her claim without incurring any cost liability towards the
45. We also recognise that this construction of rule 44.14 may lead to results that
appear anomalous. We have already referred to the fact that a judge in making an
order for costs might be invited to adjust the amount or percentage ordered to reflect
the relative success of the parties though, as Mr Mallalieu pointed out, a judge might
also take into account when so invited, that this would water down the protection
that would be afforded to the claimant if the judge made cross costs orders instead.
Mr Bacon also argued that in the PI cases where legal aid is still available,
particularly certain birth defect claims, it would appear that costs against costs setoff would still be available following Lockley and Burkett. No one has claimed that
the QOCS scheme is perfect. It is, however, the best solution so far that the opposing
sides in the ongoing debate between claimant solicitors and defendant insurers have
been able to devise. It works to achieve the aims for which it was introduced in the
great majority of straightforward cases in which one side or the other is entirely
46. Finally there is in our view nothing in the point that set-off is not mentioned
in the list of the court’s enforcement powers in Part 70. If set-off of costs against
damages must be a form of enforcement in order to make rule 44.14 work, then the
QOCS context requires set-off to be treated as a form of enforcement even if not
mentioned as such elsewhere in the CPR.
47. So for all those reasons we consider that the Court of Appeal was right in the
present case to doubt whether Howe was correctly decided. We would allow the