The Civil Procedure Rules (CPR) state that where a claimant matches or beats their own Part 36 offer at trial they are automatically entitled to indemnity costs from the date of expiry of the offer. However, the defendant does not enjoy the same benefit and any costs recoverable are payable on the standard basis.
This imbalance in the respective benefits of Part 36 is often a source of great irritation to defendants and this was demonstrated in the recent Court of Appeal decision in Lejonvarn v Burgess [2020] EWCA Civ 114.
This was a professional negligence case brought against an architect by her friend and former neighbour in relation to free advice given concerning landscaping works at her home.
The claims were dismissed by the High Court following a five day trial and the defendant, Ms Lejonvarn was initially awarded costs on the standard basis.
She appealed the order for costs seeking an award on the indemnity basis on the grounds that the claims had been “out of the norm.” In the background was the existence of a very early Part 36 offer to settle made by Ms Lejonvarn which was not accepted.
On appeal, LJ Coulson was unwilling to accept the defendant’s earlier submissions that the absence of an automatic entitlement to indemnity costs was “scandalous” and “an oversight” on the part of the Rules Committee. However, he described the claims as “at the very least, speculative/weak ” and, noting that the claimant appeared to have been motivated in the pursuit of her claim by a desire to punish Ms Lejonvarn, awarded the defendant indemnity costs.
He then went on to address the relevance of the defendant’s Part 36 offer. He said that the CPR was clear that there is no automatic entitlement to indemnity costs on the part of the defendant in the same way that the claimant would have if they beat their own offer.
He also rejected the defendant’s argument that following the changes to CPR, in particular the renewed emphasis on proportionality, there was now a presumption in favour of a defendant who beats his or her own Part 36 offer that they should be entitled to indemnity costs.
He did, however, accept that the presence of the offer was plainly a matter of importance in the exercise of the courts’ discretion under CPR 44 and that the claimant’s failures to accept and then beat the defendant’s offer was a separate and stand-alone element of their conduct which was out of the norm, separately justifying an award of indemnity costs.
A final consideration, over which there has been some speculation and debate, was the relevance, if any of a costs budget where an award of indemnity costs has been made. In this case, the defendant’s costs amounting to £724k were described by LJ Coulson as “eye watering.” Their approved budget was £415k. The claimant had argued that an award of indemnity costs would provide the defendant with a way round her own approved costs budget. LJ Coulson, applying Denton, rejected this submission and made it clear that, when assessing costs on the indemnity basis, the court would not be constrained by the budget.
This is an important decision since it confirms that whilst, on the one hand, there may be no entitlement to indemnity costs on the part of a defendant under Part 36, the factors in CPR 44 hold significant importance.
Furthermore, and perhaps more importantly, since compensators often rely upon approved budgets when setting financial reserves in relation to a particular claim, the fact that an award of costs on the indemnity basis renders the budget irrelevant may well mean that, where there is a risk of a claimant being awarded costs on the indemnity basis, the costs reserve is wholly insufficient. In such circumstances, compensators would be well advised to carry out an urgent review of outstanding reserves in that particular claim.
Author – Yvonne Booth - Associate
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