Fixed costs give part 36 a boost

On 23 February 2015, the Court of Appeal handed down a judgment that, a couple of months earlier, would have seemed fairly routine. Its decision in Broadhurst v Tan [2016] EWCA Civ 94 clarified the interaction of Civil Procedure Rules (CPR) part 36 (governing formal offers to settle) and the regime of fixed costs that currently applies in many lower value personal injury cases (CPR part 45).

Specifically, the court ruled that when a party makes a successful 'claimant's offer' under part 36, it should generally receive its post-offer costs on the indemnity basis, together with its other standard rewards, regardless of whether the fixed costs regime is engaged (CPR 36.17(4)).

So far, so good: the court applied straightforward principles of interpretation and took into account the relevant explanatory memorandum. But, coming as it does only weeks after Lord Justice Jackson’s Insolvency Practitioners Association annual lecture on 28 January, in which he advocated a vast expansion of the scope of fixed costs to cover civil claims up to a value of £250,000, the Court of Appeal’s judgment has huge implications for mainstream litigation.

It means, in effect, that part 36, without having changed substantially since it was revised root and branch in 2007, may soon acquire even greater potency, giving claimants' part 36 offers in particular an unprecedented power to induce a defendant to settle.

This is because the difference between a claimant receiving fixed recoverable costs on the modest scale envisaged by Jackson LJ in his lecture and receiving costs assessed on the indemnity basis under CPR 36.17(4) is likely to be much greater than the 20 per cent or so difference that currently exists between standard and indemnity basis costs.

Jackson LJ's reforms, insofar as they have been implemented, already give claimants' offers a force they did not have before April 2013. Indemnity costs are immune, of course, to the controversial new proportionality test (CPR 44.3), and they should also be immune to costs management orders, which in principle bite only on standard basis costs (CPR 3.18).

So, enhancing part 36's powers without actually changing its rules is something of a trend. It is certainly more significant in medium to large-scale litigation than the (maximum) £75,000 'additional amount' that was added to claimants' rewards in April 2013 for the express purpose of giving their offers as much force as defendants' ones.

Of course, Jackson LJ's recent proposal may not become law. Like Deng Xiaoping, he likes to 'cross the river by feeling the stones', trying reforms out on a small scale before imposing them much more widely. Jackson LJ sees the use of fixed costs in personal injury cases and other contexts as a success story, but the introduction of fixed costs into whole swathes of multi-track litigation may be a step too far, and in the face of widespread hostility, the rule makers may have to turn back - or at least not progress any further.

However, the direction of travel is clear enough: in his speech Jackson LJ spoke openly of introducing a universal costs regime. This, he conceded, would be ‘too great a change for the profession to accept, certainly in the short term’ – an important consideration given that ‘the justice system only functions because of the high level of support which the profession provides’ – and was anyway a matter of policy, which it was not for him to decide. However, if this ultimate goal is attained, the implications for civil litigation are immense. Costs management will effectively disappear, just as many practitioners are getting used to it, and costs assessment will be limited to indemnity costs and very little else. Meanwhile, part 36 will still be with us, more potent than ever.

This may be no bad thing. As a more developed version of the old system of payment into court, part 36 is considered one of the most successful parts of the CPR – a system of sticks and carrots that is highly effective at herding parties towards settlement. 

But the Court of Appeal’s decision raises two awkward questions. First, have claimants’ and defendants’ offers got out of kilter again, so that offers made by one party have much more power than those made by the other? If so, some means will have to be found to level the playing field.  

Second, has part 36 become too effective generally? It is an odd question to ask, but part 36 is meant to be about prodding and enticing an opponent to settle, not bludgeoning it into submission, and yet a time may come fairly soon when it will be very difficult for a defendant to turn down a half-decent offer made early in proceedings. 

Careful thought may need ?to be given to whether part ?36 should be adjusted so ?that it continues to operate appropriately in the broader procedural context.

Elaine Penrose is a partner and Giles Hutt a professional support lawyer at Hogan Lovells in London @HoganLovells www.hoganlovells.com