The free guide to costs, funding and the Jackson reforms
26 July 2012 Offers, interest and indemnity costs – it pays to do your homeworkThomas Blackburn, national advocacy manager at Just Costs Solicitors, considers the lessons on part 36 and indemnity costs from a recent Court of Appeal ruling F & C Alternative Investments v Barthelemy & Anor [2012] EWCA Civ 843 is a further reminder of the need to ensure that any intended part 36 offer complies with the formal requirements in every way It also raises some interesting points regarding indemnity costs The background The underlying dispute was between members of an LLP about whether ‘put options’ had been validly exercised The claimants sought a declaration that the options had not been validly exercised and that they had no liability to pay the sums sought The defendants made an offer to settle the proceedings by selling their interests in the LLP to the claimants for approximately £6m in total The offer was expressly stated to be made outside of part 36 But it did state that the defendants would rely on the offer in accordance with CPR 44 3 and would invite the court to “apply the same consequences as regards costs and interest as would apply had it been possible to make the offer under part 36” The defendants went on to obtain a more favourable result than the settlement offer they had put forward, being awarded close to £4m each The costs In awarding costs, the judge held that the defendants were entitled to indemnity costs and interest (significantly above base rate) from the date for acceptance stated in the offer This was on the basis that the defendants had “good and legitimate reason” not to make the offer formally under part 36, and therefore in exercising his discretion on costs it was appropriate “by analogy” to apply the costs consequences provided under CPR 36 14 The claimants appealed against two aspects of Mr Justice Sales’ judgment: firstly, that the claimant pay the defendant’s costs on the indemnity basis after 16 January 2010; and secondly, that the claimant pay 3%, then 10%, then 40% then 22% inte rest per annum on those costs (different rates applying to different periods) The appeal The Court of Appeal overturned the decision, finding no justification for drawing an analogy with part 36 and so no reason to award indemnity costs or enhanced interest The court accepted that, in some circumstances, a refusal to accept a reasonable settlement offer might justify an award of indemnity costs This was not the basis for the judge’s award in this case though, and in any event, the existing authorities make it very clear that any refusal must be unreasonable This decision confirms that the courts will take a strict approach to the application of part 36 and, where an offer falls outside part 36, will not simply apply the part 36 costs consequences “by analogy” Indemnity costs In addition, it is interesting to note the fuss that parties make over indemnity costs Costs are usually assessed on the standard basis, where any doubt the costs master (or assessing judge) has will go in favour of the paying party Under the indemnity basis, this doubt goes in favour of the receiving party Parties often seem to take the view that an indemnity costs order is close to a blank cheque, when it certainly is not Master Gordon-Saker, who sits in the Senior Court’s Costs Office (and is tipped by many to become the Senior Costs Judge once the excellent Master Hurst retires shortly), is known for many first-rate judgments on difficult issues He is also known to state that “costs masters very rarely have doubts” And there we have it Only when there is doubt does the standard/indemnity basis come into play However, those seven costs masters, who make up the SCCO, very rarely express doubt when assessing parties’ costs A lot of money is wasted chasing expensive indemnity basis costs orders, and yet it usually makes very little difference, if any One has to wonder if it’s worth it Finally, it is worth noting that neither party attempted to rely on the decision in AF v BG [2009] EWCA Civ 757 In that case the Court of Appeal confirmed that a defendant can be treated as a claimant in respect of its counterclaim so that it can make a “claimant’s part 36 offer” and thereby take advantage of the more favourable costs consequences applicable to such offers, including an entitlement to costs if the offer is accepted – something every litigator should note 
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Indemnity costs are always worth getting because the issue of proportionality cannot be raised by the paying party. I agree that doubt is rarely a problem but proportionality invariably is an issue in standard basis assessments. But it does not apply where indemnity costs have been awarded