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Weighing up the cost of gambling on an out-of-court settlement

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The second anniversary of Lord Woolf 's overhaul of the Civil Procedure Rules (CPR) fast approaches. It is well known that the majority of actions settle before reaching trial. As one of Lord Woolf 's aims was to promote settlement, it seems timely to review his changes to the outof-court offer regime. The lever behind offers is costs incurred by both parties, which can be considerable. The offering party tries to protect itself from costs by guessing the final damages award and pay up before trial.

Pre-Woolf, the system was relatively straightforward. Consider customer Clare, our claimant, who employs defendant decorator Dan. While Dan was decorating Clare's house, paint was spilt on Clare's carpet. Clare sued Dan for £1,000 (the value of the damaged carpet) plus an unspecified amount for inconvenience. (Actually, a claim for this amount of money would be too small to allow recoverable costs, but let's keep the numbers simple. ) Dan thought Clare's carpet could be cleaned for £500, and her inconvenience was negligible. He made no offer. The court, agreeing with Dan, awarded Clare £500. But because Clare's claim was successful, Dan had to pay the £500 damages, plus Clare's costs and his own.

However, Dan could have made an offer to Clare of £550, which the judge would have known nothing about. After the judge awarded Clare £500, Dan could produce his rejected offer like a rabbit from a hat. Although he would still have to pay Clare £500, he would not have to pay Clare's or his own costs from the date the offer ought to have been accepted. Clare would have to pay those costs, the logic being that had Clare accepted the offer, which was plainly a reasonable one, all those costs would have been saved. But if Dan's offer had been £450, Clare would have beaten it, again leaving him to pay all the costs.

Post-Woolf, things are complicated by the intricacies of CPR Part 36. Dan's offer - and the cost consequences of it - remains similar. But now Clare can make an offer to Dan. Clare still sues Dan for £1,000 but offers to accept less, say £550. She is impatient, and the new carpet she wants only costs £550 anyway. Dan makes no offer, but has to think carefully about Clare's. He still thinks the carpet can be cleaned for £500. Even if the judge agrees with him and awards Clare £500, but adds £75 for inconvenience, Clare will recover more than her offer. If this happens, when the judge finds out that Dan should have accepted Clare's offer, he can order that Dan pays not only the £575 damages but also interest on the damages at a rate of up to 10 per cent over base rate, plus Clare's costs on a more onerous assessment basis than normal, plus interest on those costs at a rate of up to 10 per cent over base.

Various other things are also provided for by the new offer regime. Parties can make offers before proceedings start, later translating them into a formal offer under the rules. Where there is more than one element to a claim, offers can be accepted in respect of each part, for example one amount for the carpet and one for inconvenience.

Where there are several defendants, there is provision for accepting offers from only some of them.

Judges have always exercised discretion in awarding costs, but the CPR have encouraged greater flexibility. One area has been the power to award interest of up to 10 per cent over base, unless the court considers it unjust, where a claimant has been more successful than her offer. In Little v George Little Sebire & Co (September 1999) the High Court took the view that 10 per cent above base, awarded from the earliest possible date, should be the starting point, then evaluating whether the result is unjust. More recently, Lord Woolf, sitting in the Court of Appeal in Petrotrade v Texaco (May 2000), said that for a sum of damages 'neither particularly large nor particularly modest' (US$140,000, about £97,000), interest of 4 per cent above base might be appropriate.

So, if you are ever involved in litigation in which offers are being made and considered, don't be surprised by the time taken worrying about them.

The risks being balanced up are not straightforward, and neither is it clear cut how the court will assess the consequences.

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