An analysis by Jeremy Morgan QC of the recent Part 36 case - Blackpool Borough Council v Volkerfitzpatrick and others  EWHC 2128 (TCC)
Blackpool Borough Council v Volkerfitzpatrick and others  EWHC 2128 (TCC)
There are two good reasons to read this judgment. The first is because it decides an issue of law, namely the test to be applied when deciding the consequences of a party’s failure to accept a Part 36 offer which is later withdrawn. The second is that it is a good example of organised, rational and objective decision-making at the end of a complex trial. You would not get brownie points by showing it to the judge in a later case and tell them that this is how it should be done, but it does provide a useful model for advocates on how to structure their own costs submissions at the end of a case where everyone claims to have won and there are any number of countervailing considerations relevant to costs.
The facts are quite complex but the relevant ones can be stated briefly. The claim arose out of the construction by the defendant for the claimant of a tram depot. The claimant alleged that significant parts of the depot did not meet their design life of 50 years and that they were not suitable for the coastal site on which the depot is situated. A Scott Schedule listed defects under seven main headings and the claim was for over £6m. There were additional claims against 3rd, 4th and 5th party sub-contractors. At trial the claimant was awarded £1.1m, having failed altogether on the biggest item of the claim and recovered about 10% of the next two biggest items together with sums close to those claimed on the remaining, much smaller, items.
On August 15th 2019 the defendant made a Part 36 offer of £750k from which certain named items were expressly excluded. At the same time the defendant referred to an open offer previously made of £137k for all but one of the excluded items (the “tram doors claim”), but without making it clear whether that earlier offer remained on the table in respect of those items.
On November 21st 2019, for perfectly sound tactical reasons, the defendant withdrew its Part 36 offer. Various other offers were made but do not need to be considered for present purposes. The defendant did better at trial than its Part 36 offer in respect of those items included in the offer.
The question of law
There is a long line of authority on the approach of the court to offers to settle which are subsequently withdrawn. The cases go back to the RSC and some of them hinge on changes in the wording of the rules from time to time. The most recent statement by the Court of Appeal is by Jackson LJ in Thakkar v Patel  EWCA Civ 117, 23: "The effect of [two earlier authorities] is that where a purported Part 36 offer under the pre-April 2015 CPR is withdrawn, the crucial question is whether the offeree acted reasonably or unreasonably in failing to accept the offer while it was on the table. In both of those cases, the claimants acted unreasonably. Accordingly, the court made costs orders favourable to the defendants".
That statement leaves open the question, which is decided in the Blackpool case, of how to judge whether the offeree acted reasonably or unreasonably in failing to accept the offer. Does one simply look at whether, objectively, the offeror beat its offer or is reasonableness considered by reference to the offeree’s reasonable perception of its own interests?
The Judge held that, “(a) the court must put itself into the position of the claimant at the time and not simply decide the case by reference to hindsight; but (b) the focus must be on the reasonableness of the refusal by reference to the facts and matters relevant to the merits of the claim as they ought reasonably to have appeared to the claimant at that time, not by reference to wider commercial factors.”
On the facts of this case the Judge held that the claimant had acted unreasonably in not accepting the offer. At the time of the offer it was in a position to undertake its own assessment and valuation of the case, and there was nothing which the defendant had which the claimant had not. The later withdrawal of the offer was irrelevant since there was no basis for thinking it would have been accepted if it not been withdrawn.
So the result would have been the same whichever interpretation the Judge had put on Jackson LJ’s dictum in Thakkar. The real test of the Judge’s ruling will come in a case where, for example, crucial documents or other evidence in the possession of the offeror have not been disclosed to the offeree at the time of the offer or at any time while it is still open for acceptance.
A model decision on costs
A brief schematic analysis is necessary to illustrate my view that the judgment is a model for structuring submissions on costs.
Question 1 – who is the winner? Each side claimed to have won, the claimant because it had come away with a substantial award and the defendant because the claimant had failed on the major issues and recovered only 16% of its claim. The Judge had no doubt that the claimant was the successful party. This was not a case like the personal injury cases where the claimant succeeds on liability and gets damages for a trivial injury but fails to establish the seriously exaggerated injury which the case was all about. The starting point was that the claimant was entitled to its costs.
Question 2 – so the real question was whether to exercise the power under r.44.2(2)(b) to make some other order and if so what.
Question 3 – the effect of the only partial success. The claimant had failed on the major issue of contractual construction and had wholly failed on the largest item of claim which had taken up the greatest amount of trial time and expert evidence: in money terms it had largely failed on the two next biggest items. But the claimant had still recovered over £1m and had success on six of the seven heads of claim. In those circumstances the Judge held that if he departed substantially from the starting point he would be going too far.
Question 4 – was the claimant’s conduct such that it should either be deprived of costs on the grounds of conduct or if ordered to pay costs, should any such award be on the indemnity basis as claimed by the fifth party? The fifth party, it should be explained at this point, had only been brought in as a result of the claim on which the claimant wholly failed. The Judge rejected the submission that that particular claim was “weak, thin and to some degree speculative” (a ground for indemnity costs since Three Rivers  EWHC 816 (Comm)). He held that he could not so find in the absence of evidence that the claimant was ignoring the views of its experts or knew or ought to have known that they were wrong or needed further investigation. It had taken a trial to establish that the submissions of the defendant and fifth party were correct.
Question 5 – Part 36 offer. As we have seen, the Judge took the view that the decision not to accept the defendant’s Part 36 offer while it was still on the table was unreasonable. On that basis he held that the defendant should get its costs of the issues covered by the offer from 21 days after the offer. However, when coming on to consider the further question whether the decision was so unreasonable as to justify an award of indemnity costs, he held that it was not unreasonable in such a high degree as to justify such an award. Although it was now clear that the claim was neither as strong nor as valuable as had been assumed, it was still a viable case which, if successful, would have resulted in a substantial award of damages.
Question 6 – what order should be made? The claimant should get 80% of its costs down to 21 days after the offer, the reduction reflecting the extent of the issues on which the claimant had failed. The defendant should get 80% of its costs thereafter. The reduction here was because there was one substantial issue (the tram doors) on which no offer had ever been made and on which the claimant succeeded at trial. The Judge reduced the award to the defendant by deducting the defendant’s costs of that issue and setting-off a further sum for the claimant’s costs of the same issue. His approach to calculating these costs was interesting. He estimated that about 20% of the costs had been incurred on this issue and, as each side had similar levels of budgeted costs, if a straight line approach had been adopted he would have reduced the defendant’s award by 40% (20% for its own costs and 20% as a set-off for the claimant’s). However rather than looking at the budgets for the actual case he considered the sum that he would have approved by way of budget had the tram doors been the only claim and made a deduction of 20% (10% + 10%).