February 5, 2019

Costs: Discretion is the better part of Part 36 penalties

A recent decision held that Court may apply the 'injustice' test separately for each part of CPR 36.17(4).

Background

The Claimant presented a Bill of Costs in the sum of £615,751.51.

On 21 June 2018, the Claimant made a Part 36 offer in the sum of £425,000 inclusive of interest. The offer expired on 13 July 2018, and detailed assessment started on 16 July 2018. At assessment, Master McCloud assessed the Claimant's bill of costs at £421,089.16 plus interest of £10,723.89 (a total of £431,813.05).

During the assessment, the Claimant asked for the penalties set out in CPR 36.17(4) (a), (b) and (c) to apply, but not for the additional 10% as prescribed in subsection (d).

A draft order was agreed between the parties, providing for the consequences of paragraphs (a), (b) and (c) but not (d). Following the lodging of the order but before it was sealed, the Claimant invited Master McCloud to order the additional 10%.

The Defendant argued that it would be 'unjust' for the consequences of paragraph (d) to apply as the Claimant had only beaten its offer by a small margin of £7,000. Allowing the 10% on the bill provided would provide the Claimant an additional sum in excess of £40,000.

The Defendant submitted that the Court, when applying Rule 36.17(4), should deal with the question of whether it is 'unjust' to make an order under the Rule separately for each of the consequences set out in paragraphs (a)-(d). In other words; the Court has the power to award all, some, or none of the penalties. The Claimant disagreed that the Court should be entitled to disapply one of the penalties.

Outcome

Master McCloud adopted the Defendant's view, although with some doubt.

She found the argument presented by the Claimant based on the policy of rule 36.17, namely "to promote settlement and avoid unnecessary expenditure of costs and time”, persuasive and stated that "the wording of rule 36.17 (4) to my mind is itself indicative of the test of 'injustice' being intended to be applied globally to sub-rules (a)-(d)".  

Nevertheless, Master McCloud found, referring to Thinc Group Limited v Kingdom and Ayton v Jennison, that even if not strictly bound by precedent, the preferred judicial construction was that "it is open to the court to apply 36.17(4)(d), or not, or to the extent considered just, in any given case independently of parts (a)-(c) (…)".

She proceeded to disapply paragraph (d) and not award the additional 10%.

What can we learn?

  • The decision provides guidance on this specific point of the CPR, which is always welcomed. However, parties should be careful with placing too much reliance on it in future, or an expectation that the penalties may be disapplied as a matter of course.
  • The decision of Master McCloud was heavily influenced by the specifics of this particular costs negotiation. The Claimant had beaten their offer by a relatively small margin in context, having already been significantly reduced the costs sought from the bill presented.She stated that "the 'bonus' of 10% in his case would be a clearly disproportionate sum and it would be unjust to award it."
  • It could well be said that this decision represents a further watering down of Part 36. It remains a matter of some debate amongst practitioners as to whether the circumstances of a relatively modest success by a claimant on their Part 36 offer meant it was truly unjust to award the additional 10%.
  • Indeed, Master McCloud reached the conclusion of severing the whole test "with some reluctance, since given an entirely clear field devoid of examples from case law I might reach a different conclusion ". She clearly stated that the penalties are not intended to be compensatory, but as an incentive to settle.

The full transcript of the judgment can be found here.