Unintended consequences of the Jackson Reforms (Part 2)

As the costs regime ushered in by the Jackson reforms enters its second year, tensions between existing and new provisions have begun to show. In the second part of our series we ask Malcolm Henké, senior partner at Greenwoods Solicitors, for his views and predictions for the future. (See part one here)

What impact did the Jackson reforms have on Part 36 offers by a defendant?

The most significant amendment was to Part 36.14(3) which introduced a new penalty which applies only to defendants. Where a defendant failed to better a claimant’s Part 36 offer at trial there were already penalties in interest and costs but the impact of those was dependent on when the claimant’s offer was made. The amendment added a penalty of an additional amount, which shall not exceed £75,000, calculated by applying the prescribed percentage set out below to an amount which is:

(i) where the claim is or includes a money claim, the sum awarded to the claimant by the court, or

(ii) where the claim is only a non-monetary claim, the sum awarded to the claimant by the court in respect of cost–

Amount awarded by the court Prescribed percentage
up to £500,000 10% of the amount awarded
above £500,000 up to £1,000,000 10% of the first £500,000 and 5% of any
amount above that figure

This penalty applies however recently the offer is made. So a colleague who had never previously been served with a Part 36 offer by any claimant received one on 2 April 2013 for a trial starting 22 days later. The claim was worth well in excess of £1m and the claimant could see the advantage of putting our client at risk of incurring an additional penalty of the full £75,000. The claim settled.

This may herald the start of a new trend although at present with the continued success of informal mediation (joint settlement meetings) many claimants prefer to keep their powder dry until discussions take place.

As far as defendant offers are concerned, the real impact of the changes will only be felt when cases funded by old fashioned conditional fee agreements (CFAs) have run through and qualified one-way costs shifting (QOCS) has come into play. Until then, insurers will still be under the threat of going to trial and incurring a 100% uplift on the claimant’s costs, something that influences their thinking on Part 36 offers and negotiations generally.

With QOCS cases, the imperative will be to make early and effective Part 36 offers. This means persuading clients to make potentially generous offers, at the earliest possible opportunity to put the claimant at risk and to overturn QOCS. In the most extreme case, an effective Part 36 offer from the defendant could wipe out the claimant’s damages, leading to an interesting conversation between the claimant and their lawyer. In all cases, however, the new dynamic is that the claimant once again has an interest in the costs of the case, particularly if he has a new style CFA.

How are Part 36 offers to be applied to claimants who have failed to submit a costs budget?

We have not as yet seen it in practice but it seems clear that if the claimant has no costs budget, he cannot cure the position by equalling or bettering a defendant’s offer. For the same reason we advocate defendants taking costs budgeting seriously on the basis that if they do make a successful Part 36 offer, they will not gain the benefits if they do not have a costs budget in place.

In practical terms any solicitor acting without an agreed or approved costs budget is between a rock and a hard place. He can still conduct the litigation for his client but will not be paid for it, even if successful. Will his heart be in it? The alternative is for the claimant to instruct another solicitor but he will be in no better position.

Have the Jackson reforms thrown up other contradictions or clashes with existing provisions?

One area of concern at present is exactly how Part 36 operates in cases exiting the so called ‘portals’ for road traffic and employers’ and public liability claims. The costs are now governed by the new fixed tariff scheme and the impact of Part 36 is provided for under CPR 45IIIA. The majority view is that as this is a fixed costs scheme, the claimant can never recover more than the relevant fixed costs, plus the penalties provided for under Part 36.14. However, some commentators believe that where the defendant fails to beat a claimant’s Part 36 offer at a fast track trial, the costs should be assessed and on the indemnity basis.

One concern of the claimant lobby is that a defendant can accept a Part 36 offer after the relevant period has expired but without any penalty other than paying the claimant’s costs on the fixed fee tariff or a standard basis—there are no additional penalties. A claimant in the same position is penalised to the extent that he must pay the defendant’s costs from the end of the relevant period, even where QOCS applies. Given the pressure on the parties, but particularly defendants, to make and accept offers, it is conceivable that some form of penalty could be introduced here.

Do you have any tips for lawyers when advising their clients?

The amendments to Part 36 mean that whoever is the recipient of the offer, they must have a conversation with the client. The claimant should be fully appraised of the potential impact of a defendant’s offer on QOCS. Particularly if the claimant rejects advice to accept the offer, a carefully worded letter of advice will be needed to ensure that if the offer is not equalled there can be no comeback when the claimant receives a cheque for damages, reduced by the defendant’s costs from the end of the relevant period.

The defendant needs to be reminded of all of the costs penalties under Part 36.14, not least the immediate addition, in most cases, of an additional 10% of the monetary damages.

Part 36 has been introduced to costs resolution in place of the previous Part 47.19. The provision does not sit easily with the requirement for points of dispute to be served within 21 days of service of the bill. Because the relevant period in Part 36 is 21 days this means effectively that a paying party cannot protect itself from the immediate costs of the points of dispute or the claimant’s replies.

What are your predictions for the future?

In terms of future trends and additional reform it seems likely that the conflict between the fixed tariff scheme provisions and Part 36 will need to be resolved either by amendments to Part 36 or clarification by the courts.

In terms of the balance of the reforms, even though 12 months have passed since implementation the true picture is yet to emerge. The majority of cases coming to a close to date retain pre reform CFA and after the event (ATE) arrangements. It may be another 12 months before the impact of QOCS, budgeting and fixed fees is apparent and for that reason it seems unlikely that aside from Part 36 clarification further reform in the short term will take place.

Interviewed by Dave Thorley. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on Lexis®PSL Dispute ResolutionClick here for a free one week trial of Lexis®PSL. 

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