Part 36 penalties “severable”, says judge as she refuses 10% uplift

McCloud: 10% bonus would be clearly disproportionate sum

The consequences of beating a part 36 offer are “severable” and each should be assessed against the test of whether it would be unjust to award them, a judge has ruled.

In a case where the 10% penalty under rule 36.17(4)(d) was far greater than the margin by which the offer was beaten, Master McCloud decided that it would be “clearly disproportionate” to award the uplift.

This was especially as the bill had been significantly reduced on assessment.

In JLE v Warrington & Halton Hospitals NHS Foundation Trust [2018] EWHC B18 (Costs), the claimant sought £615,751 in costs after winning the substantive action.

She made a part 36 offer to accept costs, inclusive of interest, of £425,000. The offer expired, and at detailed assessment Master McCloud ordered the defendant to pay £421,089 plus interest of £10,723.

In relation to the rule 36.17(4) penalties, the defendant argued that it would be unjust to award the 10% uplift given the small amount by which the claimant beat her offer – nearly £7,000 – compared to the £43,000 windfall it would provide.

The claimant contended that the court did not have the power to order some, but not all, of the penalties contained in rule 36.17(4). She also pointed out that the part 36 penalties were not meant to be compensatory but to incentivise settlement.

Master McCloud found that, while there was no ruling directly on the point, the authorities indicated that the penalties were severable and each should be judged against whether it would be unjust to impose.

In most cases, the extent to which an offer has been beaten was not “a very material factor”, she said, but given she was applying the injustice test to each element, “the proportionality of the cost penalty must be applied separately for each of the sub-rules in 3.17(4)”.

The judge said: “It is only where the cost penalty created by the 10% rule would be clearly disproportionate that one would incline to exercise the discretion to waive it.

“But, that said, if the court was unduly unwilling to exercise its discretion on facts such as these – for example requiring something akin to ‘exceptional circumstances’ – then a party in the position of the defendant might be discouraged from taking the risk of legitimately going as far as assessment at all, despite having various meritorious objections to the bill as drawn and which have (in this case) been shown in many instances to be correct.”

With the offer made late in the day, meaning the parties had sufficient information to judge it, Master McCloud highlighted the three “most significant” factors in the case:

  • The very small margin by which the offer was beaten relative to the much greater size of the bill;
  • “The fact that where a bill is reduced (and seems to have been expected to be reduced) significantly, it will on the whole generally be very difficult for a party to know precisely or even approximately to within a few percent, where to pitch an offer such that even a competent costs lawyer would operate close to chance level as to whether an offer is likely to be ‘over’ or ‘under’ at the end of the hearing”; and
  • The large size of the 10% award relative to the margin by which the offer was beaten.

She concluded that the “bonus” of 10% here “would be a clearly disproportionate sum and it would be unjust to award it. That is also the case when one looks at the overall effect in the round of what would be the cumulative penalties in sub-rules (a)-(c) added to (d)”.

    Readers Comments

  • Richard says:

    Not a good decision in my view based on the limited facts reported (not including any P36 offer made by the paying party and how many of their points of dispute were accepted).

    The CPR already gives clarity (below) and sets the prescribed percentage uplift that shall be applies – 10% on awards up to £500k; 5% on any additional award thereafter up to a maximum of £75k. Both parties knew the risks of litigation and should have gone in with their eyes open.

    CPR 36.17 Costs consequences following judgment –

    (1) Subject to rule 36.21, this rule applies where upon judgment being entered—

    (a) a claimant fails to obtain a judgment more advantageous than a defendant’s Part 36 offer; or

    (b) judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant’s Part 36 offer.

    (2) For the purposes of paragraph (1), in relation to any money claim or money element of a claim, “more advantageous” means better in money terms BY ANY AMOUNT, HOWEVER SMALL (emphasis added), and “at least as advantageous” shall be construed accordingly.

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