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Fixed Costs v Indemnity Costs

Last week, the Court of Appeal, in the conjoined appeals of Broadhurst & Taylor v Tan & Smith [2016] EWCA Civ 94, settled the argument over which type of costs were applicable in the situation where,...

...in a CPR 45, Part IIIA case (fixed costs cases where the claim started in the RTA or EL/PL protocol, but no longer continued in it), a claimant equals or betters his/her own Part 36 offer following judgment.

The confusion had lain in the interpretation of (what was then) CPR 36.14(3)(b) (and is now CPR 36.17(4)(b)). The section set out what a claimant that had equalled or bettered his/her own offer was entitled to following judgment, including, (b) ‘costs on the indemnity basis from the date on which the relevant period expired.’

Until now, it had generally been argued, and accepted, that the claimant would only be entitled to his/her usual fixed costs in accordance with CPR 45.29 and that “costs on the indemnity basis” simply meant that, where there was a doubt as to an item of costs that fell within the period where indemnity costs were applied, this would be resolved in the claimant’s favour. I had always had a conceptual difficulty with this interpretation because fixed costs left no scope for doubt, nor indeed assessment.

The Court of Appeal decided that this argument was wrong. The [new] rule 36.14A expressly states that 36.14 (now 36.17) will apply to section IIIA cases as a whole. 36.14A makes no modification to [what is now] 36.17(4)(b). ‘Where there is an intention for only fixed costs to be recoverable under Part 36, Part 36 has been modified to make this clear. In short, the specific provisions of rule 36.14A prevail over the general terms of rule 45.29B.’

What does this mean inpractice? In the situation where a claimant, in a Part 45 section IIIA case, makes a successful Part 36 offer, s/he will be entitled to the fixed costs as set out in Table 6B in CPR 45.29C in the normal way. These costs will go up to the point in time when the Part 36 offer became effective. In other words, the claimant will be entitled to the fixed costs up until the appropriate “staging point” (e.g. after issue but prior to allocation, or, after allocation but prior to the date of listing etc). From that point onwards, s/he will then be awarded costs to be assessed on the indemnity basis in addition to those fixed costs. No apportionment is necessary – the costs to be assessed will be such costs as the claimant’s representatives have, in fact, incurred from the relevant point in time.

As the Master of the Rolls, Lord Dyson, himself accepted, this will lead to a generous outcome for the claimant. He accepted the rationale that this was consistent with (what is now) 36.17(4) as a
whole and its policy of providing claimants with generous incentives to make offers, and defendants with countervailing incentives to accept them.

For claimants that are mid-litigation, and have already made a respectable Part 36 offer to settle (one that has a realistic possibility of being equalled or bettered at trial), this decision can be used to
exert additional pressure upon a defendant to settle the claim.

For defendants that are mid-litigation, this decision will not be welcome news. For one, there is now an even greater incentive for a claimant to refuse a low offer. Further, this decision, in the prescribed circumstances, and especially where a claimant’s offer was made a considerable period before judgment, will effectively bring back the old system of non-fixed costs with the added burden that the assessment will take place on the indemnity basis. The decision did not specifically address the situation where the successful offer was made pre-issue, but I anticipate that this could (should) mean that the claimant would be entitled to all (or virtually all) of his/her costs on a non-fixed, indemnity basis.

This decision will be even more difficult for insurers whose entire system is modelled around the premise that it will only ever make low offers. Until now this system has been extremely effective in
that either (a) a claimant will accept a low offer, thereby reducing the insurer’s exposure to damages, or (b) even if a claimant proceeds to trial, and is successful, the costs are very limited - and
this happens far less than scenario “(a)”, as claimants generally prefer a lesser settlement if it means that they receive it much sooner. This is not to say that these types of insurer will necessarily have to alter their model significantly, the premise is a generally sound one. However, it may need to reassess, and give their solicitors the flexibility to do so, in the particular cases where there is a
potential for significant costs exposure.

If I can assist with any aspect of how this decision may affect a claim that you are involved in, please do not hesitate to contact me in chambers.

Bernard Pressman / 29th Feb 2016


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