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Managing The Costs Risks Of Litigation

Managing The Costs Risks Of Litigation

The risks

As hard times bite litigation is likely to be on the increase, but there is at the same time a pull in the opposite direction as the courts increasingly look to the parties to try to settle their disputes, under threat of costs sanctions if they do not make reasonable efforts to do so.

This was vividly illustrated at the end of the long-running action[1] arising out of the construction of the new Wembley stadium in which Multiplex obtained a judgment against Cleveland Bridge in a sum in excess of £6million and were awarded only 20% of the costs of the action. The judge criticised both sides for 'brushing aside repeated judicial observations on the wisdom of settling the litigation'.

The principles the court applies in considering what costs order to make are that;

  • In commercial litigation where each party has claims, the party which ends up receiving payment should usually be characterised as the overall winner
  • The starting point is the general rule that the successful party is entitled to an order for costs
  • The court must then consider what departures are required from the starting point having regard to all the circumstances of the case including;

    a) Conduct

      1. before and during the proceedings, in particular the extent of compliance with any relevant pre-action protocol
      2. whether it was reasonable to raise pursue or contest a particular allegation or issue and
      3. the manner of pursuing or defending the case or any allegation or issue
      4. whether a claimant who has succeeded in his claim in whole or part exaggerated it

    b) Whether a party has succeeded on part of his case, even if he has not been wholly successful and

    c) Any payment into court or admissible offer to settle made by a party which is drawn to the court's attention, and which is not an offer to which costs consequences under Part 36 apply.

  • The court must then consider what type of costs order to make

Part 36 and admissible negotiations

The judge in Multiplex stated that the court will have regard not only to any Part 36 offers made but also to each party's approach to admissible negotiations and general conduct of the litigation and that if one party makes a Part 36 or admissible offer 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.
This applies the reasoning of the Court of Appeal in Carver v BAA Plc[2] earlier this year in relation to Part 36 offers to any admissible offer to settle, that is to say any open offer, or more usually, any offer 'without prejudice save as to costs'.

  • Before Carver a claimant recovering only slightly more than a Part 36 offer would generally recover their costs as the overall winner. Although there could be a different order this was reported in cases which had involved significant exaggeration by the claimant.
  • After Carver any claimant awarded more but not much more than a defendant's Part 36 offer might be found not to have obtained a judgment 'more advantageous' than the offer and be subject to the Part 36 costs consequences of having to pay the defendant his costs and interest thereon from the date of expiry of the relevant period stated in his Part 36 offer.

Which costs order?

The judge confirmed that in many cases the court should reflect the relative success of the parties on different issues by making an order for a proportion of the costs.

Such an order, or an order for costs from or until a certain date, must be made where practicable instead of an order for the costs of particular issues which causes practical difficulties in preparing the bill of costs and on assessment of the amount of costs to be paid in respect of individual issues.

The court should consider what costs are referable to each issue and what costs are common to several issues. It will often be reasonable for the overall winner to recover both the costs specific to the issues he has won and the common costs.

The outcome

Applying these principles to the case, Multiplex were the winners of the action but the court departed a long way from the starting point that they should therefore get their costs.

Important factors taken into account were that in relation to one part of their claim, despite winning issues along the way they recovered no more than nominal damages and in relation to another they had 'unreasonably rejected' a settlement offer which far exceeded the amount recovered.

Both parties were criticised for 'throwing away golden opportunities' to achieve a favourable settlement and also taking into account the defendants' share of the blame, Multiplex were awarded 20% of the costs of the action.

Practice Points

  • The Multiplex case emphasises the sea-change which started with Carver in the interpretation of the new Part 36 introduced in April 2007 and may extend the risk of costs sanctions to the rejection of any admissible offer 'nearly but not quite sufficient'. It will be important for claimants considering any Part 36 or other settlement offer to bear in mind that there will be the risk of an adverse costs order if it is not 'beaten' by a sufficiently wide margin, and gauging what is a sufficient margin is going to be an uncertain matter pending further clarification by the courts. Of relevance to the question whether a judgment is 'more advantageous' than an offer, will be the further costs incurred in pursuing the matter to trial.
  • It is important to assess the merits of each issue and each claim as an overall win will not guarantee recovery of costs overall, if costs are expended in pursuing weak points that are ultimately lost.
  • The risks of litigation, including the costs of litigation, have to be weighed against the possibility of settlement. A favourable settlement is generally the ideal outcome for any dispute, and in a suitable case this can often be achieved by alternative dispute resolution procedures in their widest sense, whether by discussion and negotiation, mediation, or early neutral evaluation by an independent third party. That proper consideration has been given to the possibility of settlement and appropriate attempts made to resolve issues must be made apparent to the court when the question of costs comes to be decided and should be adequately reflected in correspondence between the parties 'without prejudice save as to costs'.

[1] Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd & anr [2008] EWHC 2220 (TCC) and [2008] EWHC 2280 (TCC)

[2] Carver v BAA Plc [2008] EWCA Civ 412