A costly offer to settle

Following the surprise costs decision in Verrechia, Fraser Whitehead advises solicitors to reassess the risks when claimants make a part 36 offer

The decision of the Court of Appeal in Verrechia v Commissioner of the Police of the Metropolis raises important practical issues for solicitors involved in litigation.

How does a solicitor advise his client as to the extent of the risk of not recovering his own costs even when the case is successful, and what amendment is necessary when making a conditional fee agreement with a lay client in the light of this? Is the risk of not obtaining an order for costs increased when a claimant makes an unsuccessful part 36 offer, even if the claimant substantially beats a payment in by the defendant and should this be reflected in the success fee? In particular, what is the proper definition of a win?

To add to the dismay, coverage of this decision in the legal press gave prominence to comments made by the Master of the Rolls about the imperative to stem the 'cottage industry' in costs litigation.

The claimant appealed following the decision of the trial judge to make no order for costs.

No reasons were given for that order and the case was listed for hearing with two other cases also concerned with the adequacy of reasons.

The Court of Appeal dismissed the appeal while giving guidance on the standards of reasoning required.

The claimant had claimed damages in relation to 65 items removed by the police.

The defendant made a payment into court of 5,500 and the claimant made a part 36 offer of 98,600.

The claimant proceeded to trial in relation to 40 of the items and obtained judgment for 53,225.

The trial judge made no order for costs on the basis that this outcome constituted a draw.

The Court of Appeal reviewed the orders which might properly be made within the discretion given in the Civil Procedure Rules (CPR), rule 44.3.

The court has a wide discretion over costs and solicitors are growing used to partial costs orders to reflect partial victory and a selective approach to litigation in the knowledge that if the issue is lost, the costs are lost also.

However, the provisions of part 36 of the CPR have been interpreted as meaning that if a claimant beats a defendant's offer then this is a victory and a favourable order for costs is anticipated.

Claimant solicitors have not previously anticipated adverse costs consequences where they fail to reach their own offer; rather, claimant offers have been perceived as defining the parameters for negotiation.

This decision appears to have altered the position and raises the stakes for a claimant considering making an offer.

The danger of making an over-ambitious part 36 offer is clear.

Will this decision make claimants less ready to make settlement offers?

Research by the Law Society and Civil Justice Council found unequivocal support for part 36 and the use of claimant offers.

These were seen as instrumental in promoting the settlement culture, perceived as a positive feature of litigation in the post-Woolf era.

Solicitors will have to reassess risk against this background, in advice to clients and also in relation to the viability of their practices where they are offering large scale litigation on conditional fee arrangements.

Unless there is consistency in interpreting the CPR and some predictability in the costs outcomes of cases, solicitors will be unable to assess risk with any certainty.

The result in this case would seem unfair to many practitioners but what has been reaffirmed is the need to tailor part 36 offers to the reality of the evidence and not to pursue more speculative aspects of the claim.

Previously practitioners might have only expected a partial disallowance of costs.

Fraser Whitehead is chairman of the Law Society's civil litigation committee and a partner at Russell Jones & Walker