Part 36 and indemnity costs: Court of Appeal slams the door on attempts to avoid fixed costs regime

24 Jul 2018

Judgment has been handed down in the  appeals of Hislop v Perde and Kaur v Committee of Ramgarhia Board [2018] EWCA Civ 1726. The Court of Appeal has considered the costs consequences of accepting Part 36 offers in fixed costs cases subject to Part 45 which do not proceed to trial. It has been confirmed that indemnity costs do not apply and the only costs applicable are fixed costs, regardless of whether the defendant accepts a claimant’s Part 36 offer late or the claimant accepts a defendant’s Part 36 offer which is more than a claimant’s Part 36 offer made previously.

This issue has caused significant delays on fixed costs cases with Part 36 offers accepted out of time. Both the Association of Personal Injury Lawyers and the Forum of Insurance Lawyers submitted detailed written submissions. This is a significant win for paying parties and was precisely the argument pursued by BLM when successfully persuading a Regional Costs Judge to declare that his earlier widely publicised decision on the point was wrong. [For a link to the Whalley decision click this link.]

The facts

Both cases started out in the personal injury ‘portal’ (pre-action protocol for low value personal injury claims) and exited after proceedings were issued. In Hislop, the defendant accepted the claimant’s Part 36 of £1,500 a week before trial, made some nineteen months previously. Kaur accepted the defendant’s Part 36 offer in time of £3,000, but the claimant had previously made a Part 36 offer for £2,000. The defendant in Kaur was concerned with the potential costs consequences of accepting the claimant’s lower Part 36 offer made some five months previously and therefore preferred to make a higher offer in a bid to avoid having to pay indemnity costs or in any way allow the claimant to avoid the application of fixed costs.

Does Part 36 trump fixed costs?

The principal issue for the court was the interaction between the relevant parts of the CPR, namely Part 36 and Part 45. It was common ground that there was not an express provision as to what happens where a defendant accepted a claimant’s Part 36 offer out of time in a case subject to fixed costs.

The claimants relied heavily on the Broadhurst v Tan [2016] EWCA Civ 94 decision which considered the interaction between Parts 36 and 45 when a claimant beats a Part 36 offer on a case that proceeded to trial, concluding that the express provisions in Part 36 dealing with that occurrence overrode the fixed costs provisions in Part 45. The lack of similar consequence for a case settling without trial is an unjust lacuna.

By contrast, the defendants relied on the ‘Solomon principle’ (Solomon v Cromwell Group PLC [2012] 1 WLR 1048) that where there is any conflict between general and specific provisions, the general must yield to the specific. As there was not an express exception to fixed costs where a defendant accepted a Part 36 offer out of time, fixed costs must apply.

Indemnity costs and late acceptance

The claimants submitted that the court should reinforce the Jackson reforms by upholding a ‘carrot and stick’ approach to Part 36. By awarding indemnity costs, a claimant should be allowed to avoid fixed costs when a defendant accepts a Part 36 offer late.

The defendants argued that the law on both indemnity costs and late acceptance was settled and the application of fixed costs and the Jackson reforms should not alter the approach. Namely, an award of indemnity costs should be reserved to those cases with both unreasonable conduct and unusual circumstances and there was no automatic right to indemnity costs just because an offer was accepted late.

The judgment

It was concluded that different rules apply where a case proceeds to trial in contrast to a case that settles before trial. There is a clear exception to the applicability of fixed costs where a case proceeds to trial and the claimant beats its own Part 36 but no such exception if a defendant accepts a Part 36 offer concluding a case before trial. As there is no exception then the only costs which the claimant is entitled to if a defendant accepts its Part 36 offer out of time are the fixed costs, subject to a claim for exceptional circumstances within a costs assessment. There is no lacuna and such an analysis leads to a sensible and coherent result. Four key points in justification were made as to why the decision was appropriate:

  1. Exceptions to fixed costs should be limited
  2. Certainty for all parties dealing with cases subject to fixed costs
  3. Parity between defendant and claimant as a late accepting claimant does not get penalised with indemnity costs so neither should a defendant
  4. Within a costs assessment, exceptional circumstances in accordance with r.45.29J provides for the possibility of escaping the fixed costs regime if ‘exceptional circumstances’ are proven.

The judgment also upheld the defendants’ submissions on indemnity costs and late acceptance. So the conduct of a paying party must firstly be unreasonable ‘to a high degree’ and the case must be ‘out of the norm’. The established principle that there is no presumption for indemnity costs just because there is late acceptance of a Part 36 offer was confirmed.

The outcomes in both Hislop and Kaur were therefore resolved in the defendants’ favour. Although both claimants’ had a theoretical escape out of fixed costs through exceptional circumstances under r.45.29J, in neither case was such an escape made out. On the facts, neither case justified an escape as neither case was exceptional.

What this means for you

This is a welcome boost for the fixed costs regime and certainty. It is apparent that the door is now closed on any argument that late acceptance automatically entitles a claimant to escape fixed costs. There will be a number of cases that will have been stayed which can now be resolved. Of significant assistance to paying parties, it has been made clear that the theoretical escape route by arguing exceptional circumstances within a costs assessment should be a high threshold to overcome. However, it was expressly made clear that the claimant does not need to prove a direct causative link between the exceptional circumstances and the increased level of costs, ‘What matters are the particular facts of each case’. In Hislop, a nineteen month delay with no explanation was insufficient to trigger exceptional circumstances as there was a finding that there was nothing out of the norm in the case. If there was nothing out of the norm that it can’t be exceptional. Paying parties should therefore be watchful of attempts to divert claims through an exceptional circumstances route and prepared to maintain a robust stance. It has been made clear that such claims must be truly ‘out of the norm’ rather than simply yet another attempt to avoid fixed costs.

Authored by Adam Burrell and Marie Ingoe (BLM costs)

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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

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