woman at desk pinching bridge of nose in stress over disputes

To encourage the resolution of disputes, there are rules about the costs of litigation.

The English legal system has, over time, developed rules about the costs of litigation that are designed to encourage parties to settle their disputes, and to discourage every matter from going all the way to trial. A key part of these costs rules is the rule that in general, the losing party will pay the legal costs of the winning party.

To further encourage early settlement, Part 36 of the Civil Rules provides significant benefits in terms of costs and damages to a party that beats its offer at trial.

What are the consequences of rejecting offers?

The cost consequences of Part 36 offers are relatively complex, but in short, if a Claimant makes a Part 36 offer, and, at trial the Defendant is ordered to pay more than that offer the Claimant will be awarded:

  1. Its legal costs on the indemnity basis (this could result in a recovery of approx. 90% as opposed to the usual recovery of approx. 70%);
  2. Interest on those costs of up to 10% above base rate;
  3. Up to 10% interest on the damages awarded; and
  4. An additional lump sum of damages up to £75,000.

Clearly, the penalty for a Defendant facing these sanctions where they do not accept a Part 36 offer which the Claimant then beats at trial is significant, and so the pressure to settle a well-pitched Part 36 offer is high.

A recent case study

In the recent case of Shah & Anor v Shah & Anor [2021] EWHC 1668 (QB) the Court’s commitment to this rule was put to the test, as, at trial the Claimants were awarded £10 in nominal damages, in circumstances where they had made a Part 36 offer to accept just £1 to the Defendants.

This offer had been rejected by the Defendants. By the strict wording of the Part 36 rules, the Court should order that the Defendants pay the Claimants their legal costs on the indemnity basis from the date of the rejected offer to conclusion of the trial; a sum which in this case was some £75,000. The County Court judge followed the strict wording of the rules, and awarded the Claimants £10 in damages and £75,000 in costs.

The Defendants appealed, in part on the basis that it was unjust to make such a large costs award in circumstances where the damages award was so low.

They also questioned whether the £1 settlement offer was a genuine attempt to settle. The Court has some limited discretion to deviate from the Part 36 rules where it would be unjust to apply them, and so the Defendants argued that as the Claimants’ Part 36 offer was an attempt to ‘play’ the costs system, it would be unjust to apply the Part 36 rules in this case.

The results

On appeal, the High Court judge dismissed the Defendants’ arguments, commenting that the purpose of Part 36 is to force the parties to make difficult decisions and settle disputes. It is for each party to consider the potential consequences of rejecting an offer, however low that offer might be, and however high the potential costs consequences.

Even the judge herself acknowledged how ‘brutal’ the application of the rules in this case was, but her decision to apply them nevertheless is an indication of just how much weight the Courts put on resolving disputes without the need for litigation.

This decision is a reminder to clients in disputes to seriously consider every offer of settlement made by the other party, however low, given the costs of litigating matters, and the risks of being ordered to pay the other party’s costs. The proportionality of continuing to pursue a claim should always be at the front of the mind.

This decision also serves as a reminder of the strength of negotiating position that can be won by a well-timed, well-positioned settlement offer.

For dispute resolution advice, contact our expert team today.