Court Cannot Divide An Offer To Settle

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In Sugar Hut Group Ltd & ors v A J Insurance Service [2016] EWCA Civ 46, 3 February 2016, the Court of Appeal over-ruled the High Court’s judgment about how costs should be awarded where a claimant succeeds on only part of its case. There was no facility for dividing a defendant’s Part 36 offer (eg in which separate amounts had been offered for different aspects of a claim) and penalising the claimant in costs for rejecting “parts” of it. The ruling also covers what constitutes unreasonableness in pursuing a claim. 

Normally in litigation, the loser pays the winner’s costs. These are awarded on the “standard basis”, such that the party claiming them must show that they were reasonably incurred. However, this can change if a claimant succeeds only in part, or has behaved unreasonably. Part 36 of the Civil Procedure Rules (CPR) also contains a special regime for awarding costs which is intended to encourage settlement.

If a claimant makes a Part 36 offer which is rejected, and then recovers more at trial than it had offered to accept in settlement, the loser must pay the claimant’s costs on an indemnity basis from 21 days after the offer was made. If a defendant makes a Part 36 offer, and succeeds at trial, or is ordered to pay less than it had offered in settlement, the claimant must pay the defendant’s costs on an indemnity basis. The “indemnity basis” assumes that the costs were reasonable, (and therefore allowable) unless proved otherwise.

The Court of Appeal held that Eder J had applied Part 36 incorrectly and had wrongly treated the claimants’ refusal to accept an offer as unreasonable.

Background

Sugar Hut owned a nightclub which was seriously damaged by fire. Sugar Hut claimed against its insurers for losses caused by the fire, but its claim failed. It then sued its brokers, A J Insurance Service, for negligence in placing the policy. Parts of the claim were settled, and A J Insurance paid GBP 813,000 on account before trial.

However, it disagreed about some of Sugar Hut’s claim, especially for “Business Interruption”. At trial, Eder J held that “the overall gross level of recovery” should be GBP 1,676,955.30, of which 65% was allowable. Given the interim amount already paid, this left GBP 277,021 payable by A J Insurance.

Before trial, both sides made Part 36 offers but “none had been “effective” in that each of the claimants’ offers had been for sums higher than in the event recovered, and each of the defendant’s offers had been for sums lower than in the event allowed.”  A J Insurance made its last Part 36 offer on 23 May 2014. It offered to settle the claim for a further GBP 250,000 in addition to the payments made on account. The letter explained that the basis for the calculation of the defendant’s offer was a figure of GBP 600,000 for Business Interruption losses. It also explained that interest was calculated at 2.5% over shorter periods than those claimed by Sugar Hut. The offer was rejected.

Eder J ordered that Sugar Hut should recover its costs up to 13 June 2014 (ie 21 days after A J Insurance’s last Part 36 offer), subject to a 30% reduction reflecting issues on which it had failed at trial. For the period thereafter, it was to pay A J Insurance’s costs, save for costs relating to a claim for interest. This was because Sugar Hut had acted unreasonably in rejecting A J Insurance’s final Part 36 offer, in particular, as regards the Business Interruption claim.

Eder J found that “The present case is… a paradigm example of one where the overall claim and certain individual components were indeed very much exaggerated.” He also found that Sugar Hut’s compliance with its disclosure obligations had been “piecemeal”, slow and patchy.

Court of Appeal’s ruling

Sugar Hut appealed saying that the judge had treated A J Insurance’s Part 36 offer as if it had been effective. It also said that it had suffered a double penalty. First, its recoverable costs up to 13 June 2014 had been reduced to reflect points on which it had failed at trial, and second, it had been ordered to pay A J Insurance’s costs thereafter until trial.

In his judgment, Lord Justice Tomlinson highlighted key elements of the costs regime. In particular, the court must give “real weight” to the overall success of the winning party, bearing in mind that “It is a fortunate litigant who wins on every point” (per Christopher Clarke J in Travellers’ Casualty v Sun Life [2006] EWHC 2886 (Comm)). Sugar Hut had failed to recover anything for three elements of its claim, prompting Eder J’s disallowance of 30% of its claim for costs.

When awarding costs, the CPR require the courts to consider “the conduct of all the parties” and “whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim”.

Tomlinson LJ found that:

  • Eder J had treated Sugar Hut’s pursuit of its Business Interruption claim as unreasonable from the point at which it had rejected A J Insurance’s last Part 36 offer. This converted “what was not an offer to compromise the claim… at GBP 600,000 into just such an offer”. 
  • Eder J had treated the letter of 23 May as containing distinct offers in relation to (i) Business Interruption losses and (ii) interest, and treated Sugar Hut on the footing that they could and should have accepted the first, notwithstanding his acknowledgement that the first could not in fact be accepted without also accepting the second. 
  • A J Insurance had made no offer to that effect capable of acceptance by the Sugar Hut. 
  • There was no facility for dividing Part 36 offers and applying the cost consequences of rejecting parts of it.
  • He also held that “it cannot be misconduct… simply to pursue a claim in an amount greater than that at which it is valued by the opponent party. Something more is required to render pursuit of the claim unreasonable.” If Sugar Hut’s behaviour could be criticised, this had been reflected in the disallowance of 30% of its costs before 13 June 2014.

The Court of Appeal amended Eder J’s order to award Sugar Hut 70% of its costs, on the standard basis.

COMMENT

While this case turns on its own facts, it does highlight the importance of considering costs, and costs awards, throughout preparation for and during the conduct of cases which are likely to end up in a hearing. In this case, a relatively small claim had led to a three-day hearing about costs in the High Court, followed by an appeal to the Court of Appeal.

There are a number of points which parties should bear in mind. The most obvious is the “loser pays” principle. The costs of bringing a bad claim, or defending a strong one can, therefore, include not just any award of damages, but also a considerable bill for the loser’s own legal costs, and its opponent’s.

The next is that even a clear winner is likely to end up having to bear perhaps 30-35% of its own legal costs itself, since the courts rarely award costs in full against a losing party. Given that few complex claims succeed in their entirety, this proportion may rise if a claimant is only partly successful, though, as the Court of Appeal noted, a claimant who is generally successful can expect a fairly liberal approach in its costs award.

A further point is the importance of the Part 36 regime. This provides a powerful tactical weapon. If an offer is made, the other party faces the choice of accepting it, or of running the risk that it will have costs awarded against it on the indemnity basis. An offer which is made at an early stage in the proceedings, when considerable costs have yet to be incurred, can be a real incentive to settle and, if a party has a weak case, rejecting an offer can be disastrous. At the same time, the courts expect Part 36 offers to comply strictly with the rules governing their form and content. A Part 36 offer which is not capable of immediate acceptance in full is not good enough, nor is an offer which comes close to, but just short of, the amount awarded at trial.

Finally, the case highlights the fact that a claimant is allowed to take a generous view of the value of its claim. In terms of misconduct or unreasonable behaviour “the question is whether the claim exceeded the bounds of permissible optimism”. Provided a claimant stays on the right side of this boundary, it will not be penalised in any costs award.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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