Another legal costs negotiating trap

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Negotiating settlement of legal costs can be difficult at the best of times. However, the last thing one wants at the end of a difficult negotiation is to discover that there has been no settlement at all or, at least, not on the terms that you thought.

In the case of Amer v London Borough of Barnet [2009] EWHC 90146 (Costs) the Claimant served a bill of costs totalling £15,816.45. After points of dispute were served by the Defendant, the Claimant wrote to the Defendant with the following offer: “I would be prepared to agree a reduction in the amount of the bill from £15,816.45 to £14,800″.

The Defendant replied: “In the interests of resolving this matter my client has agreed your proposals. I have requested cheque and will forward asap”.

The Claimant then requested payment of interest in addition to the £14,800, which the Defendant opposed on the basis that the sum proposed by the Claimant’s solicitors and accepted by the Defendant should be regarded as a sum inclusive of any interest.

When the dispute reached court, the costs judge concluded that the key words in the original offer were: “I would be prepared to agree a reduction in the amount of the bill from…”. He held: “I do not accept that the failure to mention in that email either interest or the costs of assessment should be treated as an implied inclusion of those sums in the £14,800 proposed. … Interest on costs and the costs of assessing costs are incidental extras to the amount of the costs claimed in the bill. The email expressly refers to a reduction in the amount of the bill only and I do not accept that it should be treated as impliedly referring to the incidental extras I have described”. He therefore allowed interest in addition to the amount agreed.

In a previous posting I warned of the Part 47.19 trap. This is another lesson in the need to be very careful in the wording of any negotiations on costs. As a general rule, always make clear that any offer is to be treated as fully inclusive of interest and the costs of detailed assessment.

Offers to settle costs

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One of the more unfortunate costs provisions in the CPR is the general presumption that the receiving party is entitled to the costs of the detailed assessment proceedings. This encourages some receiving parties to submit inflated and unrealistic bills and, unless the paying party makes an offer that they consider puts them at real risk, pursue the matter to an assessment hearing without making any attempt at settlement or making any offers of their own.

It is worth mentioning at this point that an offer to settle a costs claim made under Part 47.19 does not carry any automatic consequence, unlike a Part 36 offer. The courts certainly do place enormous weight on Part 47.19 offers but it would be a mistake for either party to think that beating such an offer is determinative.

However, the approach of failing to actively engage in negotiations carries its its own dangers. CPR 47.18 lists the various factors that the court "must" have regard to when deciding whether to make an order other than that the receiving party recovers their costs. This includes the conduct of the parties and the amount by which the bill is reduced.

Referring to the case of Butcher v Wolfe [1999] 1 F.L.R. 334, the Court of Appeal in Codent Ltd v Dyson Ltd EWCA Civ 1835 stated:

"The second point to be derived from the case of Butcher is that there is an obligation to negotiate, placed upon the parties, which, as that case held, was not limited purely to family proceedings. A party who has refused a Calderbank offer point-blank and failed to negotiate might be penalised in costs if such refusal was unreasonable."

This approach has been reemphasised by Jackson J (now Jackson LJ) in Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2008] EWHC 2280 (TCC) where he held that if one party makes an offer to settle a claim which is nearly but not quite sufficient and the other party rejects that offer outright without any attempt to negotiate, then it might be appropriate to penalise the second party in costs.

In my experience, judges are willing to apply this reasoning to detailed assessment costs. Further, even where (rarely) I have not succeeded on my own Part 47.19 offer, I have often been able to persuade a judge to make a costs order in the paying party’s favour or no order for costs where the bill has been significantly reduced.

As readers are no doubt aware, Jackson LJ has now been given the task of undertaking a fundamental review of litigation funding. I am sure he is a regular reader of this blog and he may wish to consider the following modest proposal. Receiving parties have an enormous advantage in detailed assessment proceedings because they have access to something the paying party does not: their own file of papers. A receiving party is in a far better position than the paying party to actually calculate what their bill is really worth. Paying parties must always engage in a certain amount of guess work, however "educated" that guess is.

Why not introduce a rule that the receiving party must make an offer to settle in relation to their own bill of costs and they will not be able to recover their assessment costs if they fail to beat that offer? Something similar was proposed, but dropped, in respect of quantum hearings for the new claims process. This offer should be made at the same time as serving the bill and any further offers would provide no further protection. This would force receiving parties to sensibly value their costs from the outset and would almost certainly dramatically reduce the number of detailed assessment hearing.

I would be interested to hear readers’ views.

Click image to enlarge:

qc april 16 96

Part 47.19 Trap

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CPR 47.19 allows a party to make an offer to settle the costs of proceedings. The corresponding Costs Practice Direction states that, unless the offer states otherwise, the offer will be treated as being inclusive of the cost of preparation of the bill, interest and VAT. It might therefore be assumed that if a Part 47.19 offer is made and accepted that will conclude matters. Unfortunately not.

The Court of Appeal’s decision in Crosbie v Munroe [2003] EWCA Civ 350 makes it clear that a Part 47.19 offer does not include the costs of the detailed assessment proceedings (ie the work relating to negotiations and assessment of the costs of the substantive claim). Therefore, acceptance of a Part 47.19 offer, even if the offer is expressed to be “fully inclusive”, would not conclude matters. It leaves open the possibility of the other side returning to seek further payment in respect of the assessment costs. This is a trap for the unwary.

The situation is further complicated by the fact that there is no automatic entitlement on the part of the receiving party to their assessment costs even upon acceptance of a Part 47.19 offer. There is a general presumption, but no more, that the receiving party is entitled to the costs of assessment (CPR 47.18(1)). When deciding which party to award these costs to, the Court must consider the factors listed in CPR 47.18(2) including CPR 47.18(2)(b) which is the amount by which the bill has been reduced. The danger, of course, is that despite reaching agreement on the substantive costs, one then has to proceed to assessment in relation to who should be entitled to the assessment costs.

The way to deal with this problem is to make clear in any offer that it is inclusive of the costs of the detailed assessment proceedings. Although this may technically mean the offer is no longer a Part 47.19 offer, the basis of the offer is clear and we have never experienced any problems at court with this approach.