Court of Appeal reinforces certainty of Part 36 offers; there is no 'near-miss' rule

In this case, the claim related to a fire at a well-known nightclub in Essex owned by the claimants and the defendants were the claimants' insurance brokers. Various interim payments were made by the defendants. On 23 May 2014 the defendants made a Part 36 offer of £250,000 inclusive of interest which was rejected by the claimants. The parties did compromise regarding liability and various costs but there were some differences over which they were unable to agree including the level of Business Interruption losses. The trial took place in October 2014 regarding these issues and overall the claimants were successful. The Judge ordered £277,021 to be payable by the defendants to the claimants.

The Judge heard submissions on costs at a separate hearing after which he ordered that the claimants' costs be reduced by 30% to reflect the issues they had lost on at trial. However, he then ordered that the claimants should pay the defendants' costs incurred from 30 June 2014 onwards, save in respect of one issue. The judge acknowledged that the claimants had 'beaten' the Part 36 offer of 23 May 2014, and that a 'near-miss' cannot activate a Part 36 penalty. His reasoning for reversing the general rule under CPR 44.2, that the unsuccessful party pay the costs of the successful party, appeared to be that it was unreasonable for the claimants to pursue a claim in excess of the Part 36 amount offered and therefore they should be deprived of their costs following the last date of acceptance of the Part 36 offer. The claimants appealed submitting that Part 36 was not triggered as the offer had been beaten and that they had effectively been penalised twice for losing on the same issue; the level of Business Interruption losses. The Court of Appeal agreed.

The Court of Appeal only dealt with the payment of the defendants' costs by the claimant incurred from 30 June 2014 onwards and not the reduction of 30% in respect of the claimants total costs. Tomlinson LJ considered the Part 36 offer of 23 May 2014. He noted that the offer was not just in respect of the Business Interruption losses but related to all the aspects of the claim which were still outstanding. Therefore, the offer could not be accepted solely in respect of those losses. Yet, the Judge had characterised as misconduct the continuation of the claim by the claimant in respect of those losses. CPR 44.2(5)(d) specifically refers to a claimant who in whole or part has "exaggerated its claim". Tomlinson LJ noted that nowhere in the main judgment did the Judge refer to any aspect of the claim being exaggerated and although aspects of the Business Interruption claim failed, it did not follow that those parts were exaggerated. Instead, the claimants were simply mistaken as to the strength of their case. The reduction of 30% of the claimants overall costs recovery related to those aspects of the claim which had failed, the Business Interruption losses, and therefore the claimants were correct in asserting that they had been penalised twice for the same conduct.

The Court of Appeal granted the appeal holding that the "claimants' recovery exceeded the Part 36 offer by a comfortable margin and in any event there is no longer a near-miss rule". The Court of Appeal held that the way the Judge had considered costs at first instance was "outside the bounds of reasonable decision –making", and therefore Tomlinson LJ had to exercise the court's discretion on costs following the setting aside of the original judgment. Whilst the judgment simply affirms the principles which apply to costs decisions where CPR 44.2 and Part 36 are involved, it is still helpful to have appellate court authority regarding the death of the near-miss rule which aids certainty for all those making and receiving Part 36 offers.

If you would like to know more about the changes made to Part 36 in April 2015 please click here to read our Dispute Resolution Essentials Briefing on the topic.