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Part 36 offer taken into account on costs even though beaten at trial

16 February 2015

In Sugar Hut Group Ltd & ors v AJ Insurance [2014] EWHC 3775 (Comm) Eder J applied the court's general discretion to decide on the appropriate costs payable to a successful claimant. CPR Part 44 was applied to take into account the circumstances of a Part 36 offer, albeit the offer had been narrowly beaten at trial.

It had been "unreasonable" for the claimants to reject the Part 36 offer and pursue a trial for quantum. This case is specifically not a validation of a "near-miss" Part 36 offer, but demonstrates the application of discretion to apportionment of costs.

On 13 September 2009 there was a fire at a well-known nightclub, the "Sugar Hut" in Brentwood, Essex. The club was effectively unusable for almost a year, until it eventually reopened on 25 August 2010. A dispute arose between the owners (claimants) and the insurers (defendant).

The parties agreed liability by a consent order agreed immediately prior to the liability trial. The terms of the consent order provided that the defendant would pay an agreed 65% of the claimants' losses. This judgment was therefore concerned with quantifying that amount, interest, and liability for costs.

Eder J upheld the claimant's claim for business interruption losses and interest, totalling the claimants' entitlement to damages and interest to the sum of GBP 1,090,021.02 from the defendant. The principal amount due was GBP 568,670 gross for business interruption. The defendant's previous payments on account of GBP 383,000 and GBP 430,000 left an outstanding balance due from the defendant of GBP 277,021.02. This narrowly beat a Part 36 offer by the defendants in May 2014 to pay GBP 250,000 on top of the previously paid sums on account (Part 36 Offer).

Costs where claimant is/was partially successful

Under CPR 44.2 the court has a general discretion as to costs, including whether costs are payable by one party to another, the amount of such costs, and when they are to
be paid. The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party (CPR 44.2(2)(a)). The claimants were clearly the successful party overall, however, certain discrete claimed losses were unsuccessful and quantified at nil.

There is no rule that requires an automatic reduction of a successful party's costs if he loses on one or more issues. The claimants pleaded that "to allow any reduction would be to chop too finely and to fail to give proper real weight to the fact that the claimants were the successful parties".

However, these were discrete and important matters on which the claimants failed completely, and an order was made for a discretionary 30% reduction in costs to which the claimants would otherwise be entitled. Eder J readily accepted that this percentage was broad brush, but arrived at by accounting for the nature and volume of the factual evidence required for such matters, and the costs that would have simultaneously been borne by the defendant for these matters.

Effect of beaten Part 36 offer

The Part 36 Offer had included a breakdown, which stated a GBP 600,000 gross figure for losses.

The Part 36 Offer was a "near-miss", just shy of the claimants' interest inclusive recovery of GBP 277,021.02, despite the Part 36 Offer's quantification for total losses exceeding the judgment's GBP 568,670 gross for business interruption. A "near-miss" cannot trigger the Part 36 regime.

However, the defendant argued that the Part 36 Offer was relevant with regard to the exercise of the court's discretion as to costs within CPR 44. Under CPR 44.2(4)(a) in deciding what order to make about costs, the court will have regard to all the circumstances including the conduct of all the parties. The gross figure in the Part 36 Offer was in excess of the losses awarded to the claimants in the final quantum judgment, and the defendants submitted that if the claimants had accepted this offer, they would have obviated the need for a three-day hearing and associated expenditure.

It was apparent that the claimant's choice to pursue particular allegations was because of their insistence that the figure for losses was higher than the GBP 600,000 offered by the defendant in the Part 36 Offer. This was set out in follow-on correspondence between the parties. The judge held that it was not reasonable for the claimants to pursue their claim, as they did, for GBP 862,024 (figure disclosed in the correspondence).

The judge specifically stated that this decision was not based on any "near-miss" Part 36 analysis, firmly rejected as an unhelpful concept by Ramsey J in Hammersmatch Properties (Welwyn) Ltd v Saint-Gobain Ceramics and Plastics Ltd and anr [2013]. Eder J distinguished that judgment, noting that in this case he had the benefit of "full information" surrounding negotiations, all relevant correspondence having been disclosed to the court, where the claimants insisted on a much higher figure than that offered by the defendant. Eder J's judgment was therefore informed rather than speculative, and reliant on the parties' failure to negotiate as opposed to any "near‑miss" analysis.

Was insistence on the higher amount unreasonable? CPR 44.2(5)(d) expressly provides that the conduct of the parties which the court will have regard to under CPR 44.2(4)(a) includes whether "a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim". The judge described this case as a "paradigm example" of such exaggeration.

Furthermore, the claimants "dragged their heels" on disclosure and eventually the defendant was obliged to make a disclosure application to secure quantum documents which even then were only provided on a piecemeal basis. The defendant incurred additional costs in taking appropriate precautions to protect its position.

Despite the claimants being the successful parties overall, they were denied their costs for the assessment of quantum from 14 June 2014 (21 days following the Part 36 Offer) and the defendant was awarded costs on a standard basis from that date. However, the claimants did not lose their recoupment of costs for the quantification of interest: the claimants beat this aspect of the Part 36 Offer and were therefore awarded costs, to be assessed.

COMMENT

We are all acutely aware of the pitfalls that can be encountered when making the important tactical step of a Part 36 offer to settle. This case highlights additional points to consider, such as the way in which the offer is drafted and whether it is important to break down your offer into its component parts. If you have severable claims or aspects of a claim, particularising your offer fully may assist if you are beaten at trial on some aspects but not others. If you do particularise your offer, be prepared to have to justify your calculations. An evidently well thought through offer may be more persuasive to the other party. If you have an offer of discrete parts with calculations which you are prepared to stand by, place your markers so that a judge can use such figures for guidance.

Breaking down your offer is by no means always advisable: some Part 36 offers are more appropriately phrased as a global settlement, pitched predominantly to persuade the other party not to continue with litigation.

However, rather than blurring the lines of when a Part 36 offer is and is not beaten at trial, this case actually rested more on the claimants' pursuit of and conduct in the litigation: they had exaggerated their claim and drawn out the litigation through their conduct, incurring unnecessary costs on both counts. The case gives a helpful insight into the factors applied by the courts in relation to CPR 44.2 and the importance of behaving in accordance with the furtherance of the overriding objective.