Unintended consequences of the Jackson Reforms (Part 3)

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 third installment of our series we ask George McDonald, barrister at 4 New Square, to provide his views and predictions for the future.

How have the Jackson Reforms changed the way Part 36 offers by a defendant are made in practice?

The main change to Part 36 is the increased incentivisation for claimants to make Part 36 offers. Defendant’s offers haven’t much changed—the way I see Part 36 offers impacting on defendants are on settlement strategy. There are quite a few factors that impact on settlement. I couldn’t say for sure what the overall outcome will be, but defendants have a different decision to make.

One changed factor is that previously with, say, insurers or other defendant clients they were quite often tempted to make very early Part 36 offers. Otherwise the costs ratchet up, and there will be staged premium which means the later you get on, the more you incur. Now that premiums and success fees aren’t recoverable, there’s less incentive for defendants to settle and settle early because there’s less costs risk. The counter argument is that if you're a defendant, and you have a claim against you for £100,000 and you think costs will be in the same region, insurers won't really differentiate between costs and damages, but, if there were lower costs, they might be tempted to be more generous with offers in respect of damages. Overall I do imagine that settlement is probably becoming easier because recoverable costs by claimants are becoming lower. Often the stumbling block I found was that on the damages parties could agree, the costs were often disproportionate to the sums being claimed.

I also think it’s worth bearing in mind that a significant proportion of litigation in the UK is small value personal injury claims, and those are the ones that a lot of the reforms are directed at because the costs in those cases are very disproportionate to the recoverable sums, so the biggest impact is on those types of case.

If an offer is accepted by the claimant within the relevant period, the claimant is entitled to their costs. Is there anything in Pt 36 to deal with the impact on this provision of a court order implementing the sanction in CPR 3.14 that a party who has failed to put in a costs budget is not entitled to their costs other than court fees?

The immediate answer is it doesn’t matter, because when you make a Part 36 offer as a defendant, the claimant accepts and there is a deemed order for the claimants’ costs which are assessed. It is only at the assessment stage that, whether or not they put the budget in makes a difference. Part 36 doesn’t need to deal with it because it only deals with liability.

The reason this could be interesting (although this is untested by case law) relates to Mitchell v News Group Newspapers Limited. The problem with not filing a budget is that you are deemed to have filed one for applicable court fees only. If a costs management order is made then the sanction in CPR 3.18 applies—you can’t depart from an approved budget unless there is good reason to do so. Then the faulting party will come into problems, which was Mitchell’s case. There is a suggestion that the sanction of CPR 3.18 only bites when a costs management order has been made. If that hasn’t happened because the court hasn’t had a case management conference (CMC) yet, or was unhappy with the budget and didn’t make the costs management order (CMO), then the argument is that the sanction in CPR 3.18 doesn’t bite. However there is a different provision, Practice Direction 44 para 3.1, which says that effectively where it has not made a CMO, the court will have regard to the budgets filed. But there is a big difference between having regard to the budgets filed and being limited to the amount outlined in your budget unless there’s a good reason to depart. It doesn’t really apply to what offer to make, but it does influence when you make a Part 36 offer. A defendant might want to wait until after a CMO has been made to make an offer.

Another interesting question is whether the sanction imposed in CPR 3.18 applies when there has been an order for indemnity costs. In Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd [2013] EWHC 1643 (TCC), [2013] 4 All ER 765, one of the parties’ argued that CPR 3.18—that you can’t depart from the costs budget without good reason—didn’t apply when there was an order for indemnity costs. Judge Coulson disagreed, but said that, if costs were made on the indemnity basis, then that might give a good reason to depart from the budget. Another judge in Slick Seating Systems v Adams [2013] EWHC 1642 (QB), [2013] 4 Costs LR 576 said that, if there is an order for indemnity costs, then CPR 3.18 doesn’t apply. They disagree but both decisions were obiter.

My view is that CPR 3.18 should only apply to costs on the standard basis—but, either way, whether standard or indemnity costs are ordered is quite an important question. One of the important consequences of beating a Part 36 offer is that it might get costs on the indemnity basis. If they’ve messed around with their budgets, claimants might be incentivised to make a lower offer than they otherwise would in order to obtain indemnity costs if ultimately successful.

Have you come across any other unintended consequences of the Jackson provisions?

The main consequence is the issue with relief from sanction and CPR 3.8. Lord Justice Jackson meant to have a culture of very low tolerance. What has been unintended is that CPR 3.8 basically says that parties can’t agree to extend time for doing a certain act if the CPR imposes a sanction for default. The best example is witness statements. If there is a court order saying witness statements must be exchanged by 30 May, previously, parties, if they couldn’t meet that order, would just agree among themselves for another two weeks. The problem with that is that in actual fact, they weren’t allowed to agree an extension. There is a sanction that if witness statements weren’t filed on time then such evidence could not be relied upon. While previously it would not matter due to the relaxed approach to relief from sanctions, with the stricter approach these issues come to the fore. What has actually happened now is that I believe the CPR committee is releasing standard guidance which comes into force in June 2014 allowing people to agree a 28-day extension.

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

Lawyers really have to get on top of the CPR. Diarise actions very carefully, and make sure all their team are aware of their obligations under the CPR. Because of this very low tolerance culture, many more claims will be made for litigation mishaps.

What are your predictions for the future? Do you see more reform heading our way?

The CPR committee are currently undergoing a review of the Jackson reforms one year on, and they are accepting submissions by various different bodies such as the Law Society, about how the reforms are bedding in. It will be interesting to hear what they do say. Jackson himself recognised that they would need to review it after a year or so, and check that there aren’t unintended consequences. They are ironing out these things. Going forward, and leaving aside tinkering with existing reforms, I’m of the view that the main change in the next five to ten years will be that more and more cases and stages of cases will be done on standardised cost recovery bases (ie fixed fees). What I think will actually happen is that, say for claims up to £50,000, there will be standardised costs for disclosure, each witness statement etc, or there may be graded standards depending on the number of documents. That will seriously control costs and also avoid the court having to make a number of decisions in respect of costs, and will promote certainty. You have already seen over the last few years incremental increases in the fixed costs regime. This again won’t really be applicable to high value cases. They have had to do that already for smaller cases. There is a trend among the powers that be to go for these relatively simplistic processes.

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

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