In this blog Jeremy McKeown considers the Court of Appeal decision of University Hospitals of Derby & Burton NHS Foundation Trust v Harrison [2022] EWCA Civ 1660.

IMPORTANT PRACTICE POINT: This decision (as with all other similar authorities) is currently good law but its shelf-life has been severely limited by the recent published changes in the QOCS rules to take effect from April 2023 (see our recent blog post: Costs Earthquake – QOCS rules to change radically in April).

In this important decision on the impact of QOCS on a defendant’s ability to recover its costs, the Court of Appeal clarified Cartwright v Venduct Engineering Ltd [2018] EWCA Civ 1654 and confirmed that damages recorded or referred to in a necessary court order, for example where the court’s permission is required to accept a Part 36 offer after the relevant period, is not an “order for damages and interest” within the meaning of CPR 44.14.

If the resulting court order had been considered a qualifying order within CPR 44.14, the defendant could have set-off their costs against the agreed damages. Those costs were considerable since the claimant accepted a Part 36 offer some two years after the end of the relevant period.

The case builds on well-established authority that defendants cannot set-off their costs after the relevant period against damages resulting from acceptance of a Part 36. The rationale for this rule is that acceptance of an offer does not fall within the strict wording of the CPR which allows set-off against damages in QOCS claims only where there is an “order for damages and interest” (CPR 44.14). Where a case settles, there is rarely a court order for damages and therefore no ability to set-off.

However, in Harrison, owing to late acceptance of the offer (CRU had accrued since the offer was made) the court’s permission was required. In granting permission, the court issued an order which the defendants said satisfied CPR 44.14 and allowed them to set-off their costs against the agreement damages.

Decision

On appeal, Coulson LJ made the following key findings:

• In (1) granting permission for the offer to be accepted and (2) directing the amount of the deduction payable to CRU, the court “was not carrying out any evaluation or assessment of what was due or to be paid. [The Judge at first instance] was not, therefore, making an order for damages in favour of the claimant” [para. 28].

• Instead, the Judge was simply “directing the amount of deduction” that was to be made to the settlement figure in accordance with the CPR provisions.

• This was reinforced by the method of enforcement open to the claimant if the defendants did not pay. The party would have to enforce in accordance with the procedure set out in CPR 36.14(7) rather than by claiming the other party had breached a court order. The defendant’s obligation to pay therefore arose from the effect of the CPR and not from the order [paras. 29-30].

• If it were to be otherwise, “form would be elevated over substance”. It would create a two-tier system where certain (regular) settlements within Part 36 would continue to afford QOCS protection to a claimant whereas other settlements which happened to require the court to issue a certain type of order containing a reference to the damages in the body of the order, as here, would lose QOCS protection. If that were so, all that would matter would be the form of court order required [paras. 36-37].

• In fact, the concern was said not to be merely hypothetical. There are certain types of claim where Part 36 requires the court to make an order to reflect the settlement between the parties. Those include: cases where the claimant lacks mental capacity, where the claimant is a child, where the claimant is disabled and qualifies for provisional damages or periodic payments, or where a dependant claimant of the deceased is entitled to an apportionment of dependency damages. If the appellant’s argument were to succeed, it would mean that an ‘ordinary’ claimant would keep QOCS protection whereas any of the above would lose it. The court concluded that was not what the CPR intended [paras. 40-41].

In obiter comments, the court also indicated that the following circumstances were also unlikely to entitle a defendant to set-off under CPR 44.14:

• Approval hearings (CPR 36.14(2));
• Orders for Periodical Payments (CPR 36.18(7));
• Disputes over CRU (CPR 36.22(9)(b));
• Judgment where, following acceptance of a CPR, Part 36 offer, payment is not made within 14 days (CPR 36.14(7)).

Comment

The decision follows closely on the heels of Chappell v Mrozek [2022] EWHC 3147 (QB) which also denied the defendant the ability to set-off its costs (see our previous blog post: QOCS trumps Part 36 – Another Claimant “victory” (for now)?).

The decision offers further proof of the claimant-friendly framing of the QOCS rules following settlement. It is a reminder to defendants that disposal by way of settlement, whether under Part 36 or otherwise, will almost never attract the right to set-off against damages.

Harrison appears to stand in contrast to the recent case of MRA v Education Fellowship Ltd [2022] EWHC 1069 (QB) where the High Court held that an order following approval of a settlement sum did constitute an order of the court allowing the defendants to set-off. That decision must be questioned in light of the Court of Appeal’s recent findings.

The Court of Appeal also addressed the ongoing consultation on changes to the QOCS rules triggered by the Supreme Court’s decision in Ho v Adelekun [2021] UKSC 43. Ironically, the fact that there is said to be a need for changes to CPR 44.14, and that there were known proposed changes in the works, supported the court’s thinking that the appellant’s interpretation of the rule as it currently stands must be wrong.

The decision also helpfully cites the current proposed changes under consideration by the CPR rules committee: At the meeting of the CPRC on 7 October 2022, a fuller amendment was agreed (emphasis added):

“(1) Subject to rules 44.15 and 44.16, orders for costs made against a claimant may be enforced without the permission of the court but only to the extent that the aggregate amount in money terms of such orders does not exceed the aggregate amount in money terms of any orders for or agreements to pay damages, costs and interest made in favour of the claimant.”

For defendants, this presents a welcome change. As many commentators have noted, the rule as currently written clearly runs contrary to the intention and policy aims when QOCS was being debated:

“As to the second scenario (claimant fails to beat defendant’s offer), the defendant will have adequate protection: the court will be likely to make a costs order against the claimant in respect of the post-offer period in circumstances where (a) the claimant was acting unreasonably in rejecting a proper offer and (b) the costs in respect of the pre-offer period plus the damages recovered by the claimant provide sufficient funds out of which the claimant can reasonably be expected to pay at least some costs” Chapter 19, (4.10) of Jackson’s Review of Civil Litigation Costs: Final Report dated December 2009

Practice points

• Defendants should go back and reconsider any Part 36 offers in live cases. If there was reliance on the defendants being able to set-off costs based on a reading of CPR 44.14 which the court in Harrison has now contradicted, you may wish to consider a revision of those offers.

• The case is a useful reminder of the importance of the one strategic advantage held by defendants, namely the ability to severely limit the Claimant’s costs where the defendant makes an early Part 36 offer. In Harrison, the one consequence for the claimant in accepting an offer almost two years after the end of the relevant period was that they were denied all costs after that date.

In this blog Henry King considers the decision of Judge Stevens in Chappell v Mrozek [2022] EWHC 3147 (KB).

Key Takeaways

The key takeaway from Chappell is that in a battle between the two self-contained regimes that are CPR Part 36 and QOCS: it is QOCS which comes out on top. If a Claimant accepts a Part 36 offer after the expiry of the relevant period, the Defendant will not be able to enforce its costs from the expiry of the relevant period against the sum offered under CPR Part 36. However, the editors of this blog note that this could soon be subject to change in light of the comments of LJ Coulson in University Hospitals of Derby & Burton NHS Foundation Trust v Harrison [2022] EWCA Civ 1660 at [51-52] and the proposed changes to CPR 44.14 discussed by the CPRC, see below.

Factual Background

The Claimant was severely injured on 16 December 2016 whilst riding his motorbike. Liability was formally admitted some 6 months after receipt of the letter of claim. Proceedings were served nearly 3 years later, accompanied by a Schedule of Loss totaling £8,432,461.26. On 19 May 2020 the Defendant served a Part 36 offer to settle the claim for the sum of £250,000, that offer was accepted nearly 2 years later on 16 February 2022: well beyond the expiry of the relevant period.

The (Cross)Applications

The Defendant refused to pay the settlement sum of £250,000, thereby attempting to force the Claimant to make an application for judgment pursuant to CPR 36.14(7) which provides that “If such sum is not paid within 14 days of acceptance of the offer, or such other period as has been agreed, the claimant may enter judgment for the unpaid sum.” However, what the Claimant did was make an application pursuant to CPR 34.14(8) which provides, where “a party alleges that the other party has not honoured the terms of the [Part 36] offer, that party may apply to enforce the terms of the offer without the need for a new claim.”

The Defendant cross-applied to enforce its costs against the £250,000 offered; it should be noted that the Defendant did not seek to offset its costs against the Claimant’s costs. The Defendant submitted that this should be done by either (i) treating the Part 36 offer as an order for damages; or (ii) asking that the Court enter judgment for the unpaid sum pursuant to CPR 36.14(7).

The Relevant CPR Provisions

CPR 44.14 provides for the enforcement of costs orders against claimants by way of set-off against “any orders for damages and interest made in favour of the claimant”. The question was whether such a set-off can apply against a “sum of money” tendered by way of a Part 36 offer. The Claimant submitted that it did not given that a Part 36 offer reflects the commercial value a party has placed on resolving a dispute which is markedly different to a judicially determined award of damages supplemented by a judicial calculation of interest. The Defendant submitted that it did.

A written notice of acceptance under CPR Part 36.11, results in a stay of proceedings and automatic obligations on the offeror to pay the settlement sum in a specified timeframe. If there is a breach of those obligations, the claimant contended that whilst the offeree can apply to enter judgment for the unpaid sum under CPR 36.14 (7), the resultant court order is not an “order for damages and interest”, but is a completely different species of order, with a DNA more analagous to that of a Tomlin order.

It was agreed by the parties that the Claimant had his costs up to the expiry of the relevant period and the Defendant had its costs from expiry to acceptance. However, despite both parties being represented by “very experienced” costs counsel it was noted at [11] that:

“Both parties asked me to imply markedly different meanings to words in the civil procedure rules in order to arrive at the respective interpretations which they say reflect the original policy intentions. The battleground in this case, has a focus on the words “settlement sum” or “damages and interest” as the target funding pot for the defendant’s additional costs outlay, beyond the relevant 21 day period for acceptance of their offer. There is a separate issue about which statements in the various judgments to which I was referred establish precedent or are otherwise binding upon me.”

The Decision

Having considered the authorities, including the policy background to QOCS following Sir Rupert Jackson’s Review of Civil Litigation Costs 2009 and the Government’s Response in March 2011, the Judge held that the Defendant’s course of action (deliberately refusing to pay the settlement sum offer under CPR 36) could not result in enforcement against the Claimant’s damages.

LJ Coulson’s judgment in Cartwright was considered in detail and it was noted at [35]:

The court rejected submissions that the addition of wording, (whether implied or express) in CPR 44.14(1)to include, “a sum payable by way of damages which is compellable by court order”, would fulfil the original purpose of the rule and indeed encompass Tomlin orders as well. A conclusion was reached at paragraph 46 “At the very least,…the rule would have to refer, not only to an order, but to an agreed settlement”. Once again, the line of reasoning, even though it did not reference Part 36, would naturally encompass it.

The Supreme Court’s judgment in Adelekun was also carefully considered and it was noted at [42]:

The clear message that I take from Adelekun is that the court was not prepared to imply or infer words into Part 44 to expand the scope for enforcement, where the brief wording of the rule might otherwise seem to produce an unfair result on occasion… the Supreme Court did not consider it appropriate to add words to the QOCS scheme which is currently set out “with commendable brevity” (as noted at paragraph 19), to expand its scope, preferring that words should be given their straightforward meaning and any amplification or further finesses should only be introduced by the CPRC.

The Defendant’s attempts to distinguish Adelekun v Ho [2021] UKSC 43 on the basis that it was a set off of costs against costs whereas this was set off against damages were rejected, see the judgment at [30].

However, MRA v The Education Fellowship [2022] EWHC 1069 (QB) [43; 50] was distinguished. It was noted that the real issue in that case was whether it would be unjust to order the Claimant to pay the Defendant’s costs after the expiry of the relevant period, which was not the issue to be adjudicated upon in this case.

Reference was made (although we are surprised it was only in passing at paragraph 54) to the commentary in The White Book at 36.14.2 which explicitly states: “a claimant is entitled to be paid the offered sum within 14 days, he is entitled to such payment without set off against an unquantified costs liability (Cave v Bulley Davey [2013] EWHC 4246 (QB) (HH Judge Seymour QC)).”

Accordingly, Judge Stevens acceded to the Claimant’s application that the Defendant pay the Claimant the “settlement sum” of £250,000 and that the costs order against the claimant made in respect of late acceptance is not to be set-off against any part of the ordered sums (£250,000) in the claimant’s favour. The defendant’s cross-application was dismissed to enter judgment pursuant to CPR 36.14(7) or to treat a Part 36 settlement as an order for damages.

Comment

Given the sums at stake, the case having been pleaded at over £8m and yet settling for just over 3% of this figure at £250,000, this may not be the last we hear on this matter. We also note that proposed changes to CPR 44.14(1) have already been discussed by the CPRC on 7 October 2022 at [34-40] (proposing the explicit addition of the word “costs” such that a Defendant could enforce a costs order in its favour up to the “aggregate amount in money terms of any orders for damages, costs and interest made in favour of the claimant”.