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There has been another interesting judgment on the costs consequences following the making of Part 36 offers.

In Sugar Hut Group Ltd & Others v A J Insurance Service (a partnership) [2016] EWCA Civ 46, Tomlinson LJ heard an Appeal against a costs order which, on the face of it, treated an unsuccessful Part 36 offer made by a Defendant as if it had been successful. The Appeal Court found that the Trial Judge came to a decision “which was outside the bounds of reasonable decision-making, which was moreover in large part based upon an error of principle”.

In brief, the owners of a nightclub suffered property loss and consequential business interruption losses as a consequence of a fire at the club. They sued the insurers for recompense after those insurers avoided the policy. When that claim failed, they pursued the insurance brokers and were successful to the extent that the brokers were to pay 65% of the Claimants recoverable losses.

There were several heads of claim, some of which were compromised prior to the trial, leaving business interruption losses and interest as outstanding. The Defendant had made interim payments on account of damages of £813,000. In a part 36 offer of 23 May 2014, the Defendant offered a further £250,000. In the letter making the offer, it was explained that part of the basis of the offer was a calculation of £600,000 for business interruption losses. At trial, the business interruption losses were assessed at £568,670 (i.e. lower than the £600,000 referred to by the Defendant). However, due to the Claimants being more successful on other heads of claim than the Defendant had offered, the Claimant’s ended up with judgement for about £270,000 over the previous interim payments and therefore bettered the offer.

Having noted that the Claimants had been unsuccessful on various strands of their claims, the Trial Judge awarded the Claimant’s 70% of their costs up to 13 June 2014 (the date of expiry of the relevant period of the Defendant’s part 36 offer) but in relation to the costs thereafter, awarded the Claimant’s only the costs relating to the question of interest payable (which had been the main other head of claim other than the business interruption losses claim) and awarded the Defendant their costs from 14 June 2014 on everything except the question of interest.

The Defendant’s case was that if the Claimants had accepted £600,000 for the business interruption losses claim, then the need for a three-day hearing would have been obviated, with the dispute over interest probably taking no more than half a day or less. It was argued that the Claimants had unreasonably insisted on pursuing their unrealistic figures for the business interruption losses.

However, the Appeal Court preferred the Claimant’s argument that the Part 36 offer had been for a global sum and that there was no freestanding offer in relation to the constituent parts leading up to that global sum. Therefore, there had been no explicit offer of £600,000 for the business interruption losses which the Claimants could have accepted. That element could only be accepted if the offers in relation to the other heads of claim were also accepted. It found that the Trial Judge had converted what wasn’t an offer into an offer and treated the Part 36 offer as distinct offers when it clearly was not. The Trial Judge had been wrong in principle to treat the offer in that way.

The general rule in CPR 44.2 is that the loser pays and even the Trial Judge had taken account of the comments in Travellers Casualty v Sun Life that in almost every case even a winner is likely to fail on some issues. Whilst it was correct that all the circumstances have to be considered, real weight has to be given to the overall success of the winning party. It was perfectly appropriate for the Trial Judge to find that there should be a reduction of 30% in the costs payable to the Claimant’s in order to reflect their failure on various heads of claim. However, the Trial Judge use the same reasoning as used there to award the Defendant the majority of the costs after expiry of the relevant period of the Part 36 offer. The Claimants had therefore suffered a double penalty.

The Appeal Court went on to say that it was wrong for the Trial Judge to find that the Claimants had been unreasonable to pursue a claim simply because they valued the claim higher than the opponent. Of itself, that could not be misconduct or even unreasonable conduct and in the absence of any finding of exaggeration (and the main body of the judgment did not find any evidence of exaggeration) it was only if the claim “exceeded the bounds of permissible optimism” that there should be adverse costs consequences in those circumstances.

The Trial Judge had found, as conceded by the Defendants, that the Part 36 offer has been beaten and he should not have treated that offer as being various offers for the different heads of claim when that is not what the offer said. The Trial Judge’s order was therefore amended simply to show that the Defendant should pay 70% of the Claimant’s costs of the assessment of damages, with no restriction as to the date of the expiry of the relevant period of the Part 36 offer.

This case is not so much about the interpretation of Part 36 as it is about the proper construction of an offer and thereafter how that proper construction plays out in the context of a Part 36 offer. As the rule changes made clear, even if a Claimant beats a Defendant’s Part 36 offer by as little as £1 then the Defendant should not be treated as successful because it was a “near miss”. Similarly, if a Defendant makes a single offer to compromise various heads of claim then it is that single offer which must be considered and not background explanations as to the value put upon constituent elements. Here, the Defendant could, if they had so chosen, have made distinct Part 36 offers in relation to the separate heads of claim and if they had done so they may well have been more successful. However, because they did not do so they could not have the offer treated as something that it plainly was not.

That must surely be common sense.

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