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RISKS - COSTS ORDERS, ADR AND OFFERS OF SETTLEMENT

Introduction

When considering whether to enter into formal court proceedings it is very important that you understand the risks that you may not recover all of your legal costs even if successful and that you are likely to have to pay the majority of your opponent's legal costs as well as your own legal costs if you are not successful. The court may also impose other sanctions relating to costs if it considers that you have not been reasonable in trying to seek to reach a resolution without the need for court proceedings or have been unreasonable in rejecting offers of settlement put forward by your opponent. This note provides guidance on these risks.

 

Costs orders

As a general rule, where court proceedings are issued on commercial claims above £10k, the court will usually make an order that the "loser" pay the "winner's" costs of the proceedings (including solicitors' fees, barristers' fees and experts' fees). However, there are some very important exceptions to this general rule and other important points to note.

The first important point to note is that whether or not to make a costs order is entirely within the discretion of the court. There is therefore never any guarantee that you will recover your costs even if successful.

It is also important to note that costs orders only reimburse you for your costs. Regardless of any costs order made by the court, you will remain liable to pay our costs for acting and advising on your behalf.

The court will only make orders for costs that it deems proportionate to the issues involved and the value of the claim. It will scrutinise costs estimates and will not allow recovery of costs that it considers to be unreasonably high.

The court will also take into account the conduct of the parties prior to and during the proceedings when deciding on what costs order to make including:

  • compliance with any pre action protocols (these set out the conduct the court expects for particular types of claims);
  • the willingness to exchange relevant information in order to narrow the issues;
  • whether a party has exaggerated its claim; and
  • attempts made to reach settlement.

 

Where there are a number of issues to be decided in a claim, the court may make a different costs order for each issue. It will take into account the extent of court time and costs involved in dealing with each issue.

There may also be hearings in the run up to trial to decide on certain procedural issues. For example, a parties may disagree on the evidence that must be disclosed or information that must be provided. The courts usually make separate costs orders relating to such hearings.

Given the above, it is important to appreciate that the benefit of a costs order may not cover all of the legal costs that you will incur. As a general rule of the thumb, the successful party at trial can expect to obtain a costs order in its favour that will cover roughly 70% to 80% of the costs that it actually incurs. Therefore, as a party will remain liable for its own costs, and given that even if successful, the costs order made in its favour will not cover the full extent of these costs, the shortfall will eat into and may even extinguish any damages awarded in its favour depending on the amount of damages it is able to recover.

The amount of costs recovered will also be affected by the size of the claim. The court has three tracks to which it assigns cases depending mainly on the value of the claim, namely:

  • the small claims track – usually deals with claims below £10k;
  • the fast track – usually deals with claims between £10k and £25k; and
  • the multi track – usually deals with claims above £25k.

 

There are special costs rules that apply to the different tracks as follows:

  • the small claims track – the court usually does not make any costs order in the winner's favour;
  • the fast track – the court usually limits the amount recoverable for fees for attending at the trial. This changes according to the value of the claim. The highest amount recoverable at the time of writing (January 2016) is £1,995. You may wish to use a barrister that is more expensive than this and you may need our attendance which will be charged for at agreed rates. If so, you will not be able to recover all of these costs even if successful.

If you are the claimant, you should also be aware that once you issue proceedings, if you change your mind and want to discontinue your claim, it is usual for an order to be made that you pay the defendant's costs up to that point.

Finally, you should also consider whether you will be able to obtain payment in respect of any costs order. This may be problematic if your opponent becomes insolvent or is difficult to trace.

 

ADR

This is short for alternative dispute resolution. The courts have made it clear that litigation should be used as a last resort and the parties should seek to use alternative means to reach a resolution to their dispute.

There are many different types of ADR. You can use a neutral expert or lawyer to make a binding decision or give their view on the case to help you decide at what level to settle at. However, by far the most common form of ADR is mediation. The usual procedure for mediation is that the parties agree on the appointment of a neutral mediator. They then hold a mediation where, following a joint session where each party makes any representations it wishes to make, the parties sit in separate rooms and the mediator goes from room to room, discussing each parties' position with them on a confidential basis, facilitating the exchange of offers with the aim of the parties voluntarily reaching an agreed settlement.

There is normally no obligation on a party to agree to ADR, however, the courts will not make a costs order if it takes the view that a party has unreasonably refused an offer of ADR made by its opponent and will require a witness statement to be filed to set out the reasons for refusal.

 

Offers of settlement

The usual costs rules referred to above may not apply where the claimant or defendant makes on offer of settlement that complies with Part 36 of the Civil Procedure Rules (the court rules). This is known as a Part 36 Offer.

A Part 36 offer has financial consequences for the recipient of the offer if it rejects the offer and does not get a better result at trial.

The basics

The basics of a Part 36 Offer are as follows:

  • it can be made or accepted before or after legal proceedings have been started but must be in writing and comply with certain formalities;
  • it states a figure either offered by the claimant to the defendant or by the defendant to the claimant (inclusive of interest) which, if accepted will bring the claim to an end;
  • specifies a period of not less than 21 days (called the “relevant period”) in which, if the offer is accepted, the defendant will pay the claimant's costs of bringing the claim (to be agreed or assessed by the court if agreement can't be reached);
  • if the offer is accepted, the defendant must pay the sum offered within 14 days.

 

Late acceptance

If the claimant accepts a defendant's offer outside of the relevant period, the court usually orders the defendant to pay the claimant's costs up to the end of the relevant period and the claimant to pay the defendant's costs from the end of the relevant period up to the date of acceptance.

If the defendant accepts the claimant's offer outside of the relevant period, the court usually orders the defendant to pay the claimant's costs of the proceedings up to the date of acceptance.

Failure to beat a Part 36 Offer

If a claimant wins at trial but fails to obtain a judgment that is more advantageous than the defendant's Part 36 offer, the court will usually make the following order:

  • the defendant pay the claimant's costs up to the end of the relevant period;
  • the claimant pay the defendant's costs from the end of the relevant period; and
  • the claimant pay interest on the defendant's costs from the end of the relevant period (the rate agreed for this is usually 1% above the base rate of the Bank of England).

 

If the claimant wins at trial but the judgement is the same or more advantageous than the claimant's Part 36 offer, the court will usually make the following order:

  • the defendant pay enhanced interest on the amount of money awarded in the judgement at up to 10% above the base rate of the Bank of England from the end of the relevant period;
  • the defendant pay the claimant's costs on the standard basis (assessed in the normal way) up to the end of the relevant period;
  • the defendant pay the claimant's costs on an indemnity basis (a more generous basis of assessment with less irrecoverable costs where the benefit of doubt on what is reasonable is given to the claimant) and interest on these costs at a rate of up to 10% above the base rate of the Bank of England from the end of the relevant period up to the date of judgment;
  • the defendant pay an additional amount of 10% on the first £500k of money awarded in the judgment and 5% of any amount of money awarded in the judgment above £500k up to a maximum sum of £75k.

 

It can be seen from the above that:

  • a Part 36 offer made by a defendant can be a useful tool for pressurising a claimant to accept a reasonable offer as even if the claimant wins, it may have to pay significant costs to the defendant which will eat into and may even extinguish any damages recovered; and
  • a Part 36 offer made by a claimant, if pitched at a reasonable level, will put the defendant under considerable pressure to accept given the heavy penalties it will suffer if it does not beat the offer.

 

Given this, it is sensible to make an offer as soon as there is sufficient information to judge the likely award to be made at trial and prior to issuing proceedings if possible.

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