Rescuing Costs via Part 36
Christopher McClure considers the various ways in which Part 36 may be used to circumvent the CPR r. 3.14 sanction.
CPR r. 3.14 provides that:
Unless the court otherwise orders, any party which fails to file a budget despite being required to do so will be treated as having filed a budget comprising only the applicable court fees.
Unless otherwise ordered by the court, all parties save for litigants in person must file costs budgets in accordance with the requirements of Part 3 of the CPR; r. 3.13 outlines the timescales incumbent upon those required to comply in the following terms:
(1) Unless the court otherwise orders, all parties except litigants in person must file and exchange budgets—
(a) where the stated value of the claim on the claim form is less than £50,000, with their directions questionnaires; or
(b) in any other case, not later than 21 days before the first case management conference.
The claimants in Bhatti v Asghar  EWHC B5 found themselves the subject of a CPR r. 3.14 sanction; the application for relief did not succeed. But as noted by Master Rowley the sanction did not affect:
- the costs incurred to the date of the r. 3.14 sanction; and
- nor would it affect any costs incurred under a subsequently amended budget
As it happened, the claimants had made various Part 36 offers which had expired some time before trial. Releasing that things were not going to plan during the trial, the defendants accepted the Part 36 offers, the upshot of which was that the claimants were entitled to (subject to assessment):
- 100% of the costs incurred up to the date of the sanction;
- Court fees only from the date of sanction until the expiry of the Part 36 offers; and
- 50% of their post-expiry costs in accordance with CPR r. 36.23
CPR r. 36.23 provides that –
(1) This rule applies in any case where the offeror is treated as having filed a costs budget limited to applicable court fees, or is otherwise limited in their recovery of costs to such fees.
(Rule 3.14 provides that a litigant may be treated as having filed a budget limited to court fees for failure to file a budget.)
(2) “Costs” in rules 36.13(5)(b), 36.17(3)(a) and 36.17(4)(b) shall mean—
(a) in respect of those costs subject to any such limitation, 50% of the costs assessed without reference to the limitation; together with
(b) any other recoverable costs.
At the conclusion of the trial the claimants sought their costs on the indemnity basis on the premise that allegations of fraud had been made against the defendants together with the defendants’ poor conduct in continuing to defend the case until trial.
Although May J ultimately rejected the claimant’s submissions, it is nevertheless interesting to note that the effect of an award for indemnity based costs would have been to render the CPR r. 3.14 sanction nugatory for the simple reason that budgeting is effectively disapplied where costs are not assessed on the standard basis: r. 3.18 refers.
In a concerted effort to avoid paying costs under CPR r. 36.23 (otherwise unrecoverable by virtue of the r. 3.14 sanction) the defendant marshalled a technical argument founded upon simple application of the indemnity principle. Essentially, that in view of the r. 3.14 sanction the claimants (retained on conventional terms of business rather than a CFA) ‘in all probability’ reached an agreement with their instructing solicitor that they would not pay any costs after 6 October 2015 (i.e. the date of the imposition of the sanction). This was effectively a quasi-CFA arrangement – “win, no fee (from 6 October 2015 onwards)” – to ‘reflect the fact that budgeted costs, save for court fees, would not be recoverable from the defendants if the claimants were successful.’
That being so, as the claimants were not liable to their solicitor for costs incurred after 6 October 2015 it followed that they were unable to recover any costs from the defendants from that date onwards.
The court dismissed this argument for a number of reasons, foremost amongst which was the fact that the potential for an indemnity based costs award did not mean that the claimants would, as of right, be unable to recover costs against the defendants for 6 October 2015 onwards.
The defendants’ point was based on the misconception that the claimants’ solicitors had a ‘cast iron’ case of professional negligence against them which, so the defendant submitted, meant that the quantum of that potential claim was the extent of the costs incurred by the solicitors from 6 October 2015 onwards. And if the claimants’ solicitors were to seek those costs against the claimants themselves then the claimants were entitled to set off those costs, in their entirety, by way of counterclaim.
That being so, it was reasonable to assume that the claimants and their solicitor had agreed to enter into a quasi-CFA whereby no fees were payable from the date of the sanction onwards.
But that argument overlooked the reality of the situation which was that, in certain circumstances, whilst the claimants were unable to recover (anticipated) costs from the defendant in principle under CPR r. 3.14, this did not necessarily mean that the claimants were exonerated from liability to their solicitors under the retainer for those costs to the same extent. As Master Rowley put it:
‘In this case there was a further budget and some Part 36 offers which might have been accepted, but were not, which would appear to provide fertile ground for causation issues.’
Those points, in addition to others, were sufficient to show on balance that the claimants and their solicitor had not entered into the type of quasi-CFA suggested on behalf of the defendants.
That being so, the claimants were entitled to their incurred costs at 100% (subject to assessment) to the date of the r. 3.14 sanction and 50% of the anticipated costs to the date of the subsequent budget (again, subject to assessment) from the date of expiry of the Part 36 offers onwards.
Whilst prevention is always preferable to cure, the fact that a party is subject to a CPR r. 3.14 sanction does not necessarily spell absolute disaster.
The first and most obvious way forward is to make an application for relief from sanctions pursuant to CPR r. 3.9. The Denton test has softened somewhat the harshness of the approach originally adopted by the Court of Appeal in Mitchell; the sanction of court fees only for would-be anticipated costs is draconian indeed and one would therefore only expect to be refused relief in the most extreme circumstances of non-compliance.
Secondly, total absolution is found in the form of an award for indemnity costs. Whilst late acceptance of a Part 36 Offer does not create a presumption of an award for costs on the indemnity basis (Fitzpatrick v Tyco  BLR 144) it is the case that late acceptance can, in the context of additional poor conduct, be sufficient to justify an award for costs on the indemnity basis. Of course, poor conduct independent of Part 36 issues can also be a reason to grant costs on the indemnity basis: CPR r. 44.2.
Part 36 is most likely to remedy, in part, the effect of r. 3.14 when pitched in such a way to invoke r. 36.23: essentially, late acceptance or bettering (or equalling) ones own offer at trial.* That being so, parties who are made the subject of a r. 3.14 sanction would be wise to make a Part 36 Offer which is pitched at a level, and in such a way, so as to dissuade the other side from acceptance but still leave open the decent possibility of beating the same at trial (or being subject to late acceptance). This is most likely to be achieved if the offer is made soon after the sanction has bitten and will require no small degree of tactical nous in terms of forecasting how the value of the case may fluctuate as it progresses towards trial.
Failing that, there is the option to file an amended budget and thus minimise the effect of the sanction on the defaulting budget. However, scope to do so is limited to the circumstances provided for in CPR 3 PD 7.6, i.e. where significant developments in the litigation warrant such revisions.
* The writer questions the purpose of the reference to CPR r. 36.17(4)(b) in r. 36.23, i.e. that a claimant who equals or beats his Part 36 offer at trial is limited to 50% of his post-expiry costs on the indemnity basis. As has been mentioned (and enunciated in the judgment of Master Rowley), an award for indemnity costs disapplies budgeting completely: CPR r. 3.18 makes it clear that parties are held to their budgets (including ones limited to court fees only in respect of anticipated costs) only where costs are to be assessed on the standard basis.
The Court of Appeal in Mitchell made it clear that CPR r. 3.14 is directed at the mischief of failing to file a budget in accordance with r. 3.13. Thus the sanction bites whether a party fails to file a budget on time or at all. Said Dyson LJ –
The second question is whether the Master was wrong to construe CPR 3.14 as referring to a failure to file a budget within the time prescribed by CPR 3.13 (in the present case, seven days). Mr Browne says that it is significant that the words “within the time prescribed by CPR 3.13” are absent from CPR 3.14 and that CPR 3.14 is directed to the case of a party who does not file a budget at all. In our judgment, this is not a sensible interpretation and it cannot have been intended. If it were right, it would mean that CPR 3.14 would not apply to a party who filed a budget just before the hearing of the first case management conference, but would apply to a party who had filed the budget immediately after the conclusion of the hearing. The mischief at which CPR 3.13 and 3.14 are directed is the last-minute filing of cost budgets.
LLB (Hons), PG Dip (BVC)
Friday 20th September 2019