The Courts are taking an increasingly dim view of parties who fail to entertain trying Alternative Dispute Resolution (ADR) during proceedings in an effort to avoid the matter progressing to trial. The Court is increasingly looking to awards of indemnity costs as both a carrot to the receiving party and a stick to the paying party as a form of encouragement for both parties to attempt to find common ground and potentially avoid the additional costs and save the Court’s precious time of matters proceeding to Court.
This matter proceeded to trial where the Claimant was awarded damages which were in excess of the Claimant’s Part 36 offer made in December 2019. The Court was then posed with three consequential issues to be decided. One of which was whether the order for costs should be on the standard or indemnity basis.
Part 36 consequences follow
The Defendant’s first line of resistance against the award of indemnity costs was that it was unjust for the main consequences of beating a Part 36 offer at trial, namely enhanced interest and an additional amount under CPR 36.17(4)(d), to be applied and for costs to be awarded on the indemnity basis. The Defendant’s argument was that the Claimant’s Cost Budget was set on the value of the claim being between £50,000 to £100,000. However, the Claimant’s abandoned a head of loss and their Part 36 offer was only for £10,000. The Defendant argued that in the circumstances the making of the indemnity order would remove the Court’s requirement to assess the costs in respect of proportionality.
The Court found that this argument did not hold any weight and that the making of an order for costs on the indemnity basis, and thus removing the test or proportionality, was part of the incentive for parties to make good and early Part 36 offers. The Court therefore ordered costs on the indemnity basis from the expiry of the relevant period.
Failure to engage in ADR
The Claimant sought costs on the indemnity basis for an extended period based on the Defendant’s refusal to enter into settlement negotiations and refused ADR. The Claimant made a Part 36 offer in March 2018 to which the Defendant did not respond.
The Directions were set by Master McCloud in October 2018 and they included a provision requiring that the parties ‘must consider’ ADR as a means of settling the claim. The Order directed any party not engaging to provide a witness statement setting out their reasons why they were not engaging.
The Claimant proceeded to make two further Part 36 offers in February 2019 and October 2019 to which the Defendant again rejected the offers and made no counter offer. In November 2019 the Defendant was invited to set out its reasoning why it was not entering into settlement negotiations. The Defendant provided a witness statement that stated that it ‘believes that it has a strong defence to the claim’.
The Court found that such reasoning was inadequate. Clearly, the defence was not strong given the outcome of the trial. The Court provided warning words to any Defendant intending to refuse to enter ADR: “No defence, however strong, by itself justifies a failure to engage in any kind of alternative dispute resolution”. The Court further commented that the Defendant’s conduct, even if the defence had been strong, had fallen below an acceptable level of engagement in settlement negotiations or ADR.
The Court made an order for indemnity costs to run from the beginning of December 2018, one month after the Directions Order was made compelling the parties to explore settlement negotiations and ADR.
The comments of Griffiths J in this claim clearly show that the Courts are no longer willing to allow Defendants to simply refuse to enter into ADR just on the basis that they believe that they have a strong or complete defence. Furthermore, the Courts have shown that they are willing to use their discretion to order costs on the indemnity basis to punish any form of conduct that fails to engage in attempting to settle a claim early through negotiation or ADR.
I feel it fitting to end on the words of Griffiths J and his supportive comments on the many benefits of effective ADR:
‘Experience has shown that disputes may often be resolved in a way satisfactory to all parties, including parties who find themselves able to resolve claims against them which they consider not to be well founded. Settlement allows solutions which are potentially limitless in their ingenuity and flexibility, and they do not necessarily require any admission of liability, or even a payment of money. Even if they do involve payment of money, the amount may compare favourably (if the settlement is timely) with the irrecoverable costs, in money terms alone, of an action that has been successfully fought. The costs of an action will not always be limited to financial costs, however. A trial is likely to require a significant expenditure of time, including management time, and may take a heavy toll on witnesses even for successful parties which a settlement could spare them. As to admission of liability, a settlement can include admissions or statements which fall short of accepting legal liability, which may still be of value to the party bringing a claim.’
The full judgment of this case can be found here.
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