Judge provides useful insight into admissible, non-Part 36 offers in its recent costs decision in Zagora Management Limited v Zurich Insurance Plc and Others  EWHC 257 (TCC), the High Court has provided useful insight into the weight given to admissible, non-Part 36 offers to settle when calculating costs. In particular, the judgment highlights conduct that should be avoided by all parties, whether they are giving or receiving offers. The decision also provides much-needed guidance on the relevance of "near miss" offers in this context.
Details of the underlying case can be found here, but for the purposes of this costs decision that main judgment can be summarised briefly:
- All of the Claimants ("the ZBC Claimants") who sued the Second Defendant ("ZBC") lost their claims against it, although the ZBC Claimants succeeded in establishing that ZBC had been guilty of deceit.
- Similarly, the first Claimant freeholder ("Zagora") lost its claims against the First Defendant and Third Defendant (collectively "ZIP").
- The remaining individual leaseholder Claimants ("the Leaseholder Claimants") succeeded in securing a substantial judgment amounting to over £3.6m plus interest of just under £700k (totalling over £4.3m).
The costs in relation to (1) above are considered first, then (2) and (3) are considered together.
ZBC Claimants v ZBC
In attempting to calculate costs for this part of the dispute, Davies HHJ noted a handful of opposing factors. On the one hand, the ZBC Claimants had proved in the main judgment that ZBC was guilty of deceit. They therefore argued that, while they had lost overall, this deceit should justify a departure from the normal rule that costs follow the event. On the other hand, not only had ZBC been successful but it had also made an admissible offer to settle the claim, inclusive of costs, for £250,000. ZBC argued that the ZBC Claimants' insistence on continuing with their ultimately unsuccessful case was unreasonable in the face of this offer.
Ordinarily, when calculating costs the Court will take into account an offer to settle where the offeree has not bettered that offer in the final judgment. However, the unsuccessful ZBC Claimants argued that this should not be the case here, for two reasons. First, the offer constituted only a "trifling amount"; and second, it did not contain any admission or apology for ZBC's deceit.
Despite these contrasting arguments, Davies HHJ came to a number of clear conclusions. He was confident that the offer, while it would not have provided a "substantial" net recovery for the ZBC Claimants, would nevertheless have provided them with "at least a significant proportion of the costs incurred as against ZBC up to that point". He considered that it was "a generous dose of sugar, in the form of a significant contribution towards costs, to sweeten the pill of being compelled to abandon the claim".
He also disagreed with the ZBC Claimants' submission regarding the absence of an admission or apology. They had submitted that there was a public interest in knowing about the fraudulent issuing of public documents (in this case, Building Regulations final certificates). They therefore argued that the offer was inadequate in a manner broader than the purely financial. Davies HHJ found that where an offer does not contain an admission, a party cannot justify its refusal of that offer on the grounds that "it was entitled to proceed to trial to obtain a public exposure of the fraud". Davies HHJ also noted that the ZBC Claimants had originally pleaded their case in negligence (with an amendment made later to add the fraud claim), and that the ZBC Claimants had never sought an admission or apology from ZBC during the proceedings. As a result, there was no public interest and the ZBC Claimants were not entitled to now rely on the lack of an admission as the basis for rejecting the offer.
In light of these findings – and his rejection of both points raised by the ZBC Claimants – Davies HHJ ruled that the ZBC Claimants must pay all of ZBC's costs from the date on which the offer expired.
Zagora and Leaseholder Claimants v ZIP
In this second part of the dispute, which the Leaseholder Claimants ultimately won, ZIP had made an offer to settle. This offer, which the Claimants rejected, was that ZIP would pay £3.8 million plus their legal costs as incurred against ZIP.
Zagora and the Leaseholder Claimants made a number of criticisms of the offer, revolving around the conditions ZBC had attached to it, with which importantly, Davies HHJ agreed:
- First, ZIP had requested that that the Claimants indemnify them against any future claim by the two remaining leaseholders who had not joined in the litigation (and to provide acceptable security for that indemnity);
- Second, ZBC required that the bank should release any claims it might have had, as the mortgagee of the residential flats in question, against ZIP;
- Third, ZIP required that the Claimants should not bring any future proceedings against ZIP in relation to the subject matter of the claims; and
- Finally (and, in Davies HHJ's view, most importantly) the offer stipulated that the Claimants would only be entitled to be paid their costs "if any of the Claimants can demonstrate to ZIP's reasonable satisfaction that they are liable to pay costs".
Davies HHJ decided that the Claimants were wholly entitled to reject these conditions as unreasonable. While it may have been commercially sensible for ZBC to seek them, the Claimants were not obliged to accept them (especially since there was no reason for the Claimants to shoulder risks which should otherwise rest with ZBC). It was therefore unreasonable for ZBC to continue to insist on their inclusion in the offer.
Davies HHJ stated that "The only sensible conclusion to draw is either that ZIP was simply not prepared to conclude an agreement without these stipulations or it considered that it could stand on this offer and justify it as reasonable without the need for a fall-back position." He therefore concluded that the Claimants were not unreasonable in refusing to accept the offer.
"Near miss" offers
Finally, Davies HHJ turned to the issue of "near miss" offers. That is, the situation where an offer is bettered at trial but where that offer was "still sufficiently close to the eventual outcome at trial that the claimant ought to be penalised for rejecting it outright without any attempt to negotiate".
The relevant offer in this case was ZIP's offer of £3.8 million plus legal costs. Although Zagora had lost, the remaining Claimants had been successful against ZIP and had obtained a judgment greater than the offer. An important factor here is that ZIP successfully argued that the Leaseholder Claimants' claim should be limited by a maximum liability ("ML") cap. Were it not for this ML cap, ZIP liability would have been in excess of £9.7M plus VAT, as opposed to the eventual total of £4.3 million.
First, Davies HHJ relied on the Court of Appeal's decision in Coward v Phaestos  EWCA Civ 1256 and made it clear that the near miss principle does apply to admissible, non-Part 36 offers.
Next, he criticised the Claimants for not having adequately considered the offer, noting that they ought to have appreciated that their claims may have been limited by the ML cap (as indeed they ultimately were). He even suggested that they should have set out that position in open correspondence. On the other hand, however, was the fact that the Claimants had also pleaded a claim for interest. ZIP should therefore have appreciated that interest could be added to any capped judgment, thereby increasing that judgment far beyond ZIP's offer. As a result, Davies HHJ was not content that the offer constituted a "near miss". He also highlighted the numerous unreasonable terms requested by ZIP, as described further above.
Davies HHJ went on to make the following useful comments, of which all offerors should take note:
- Once ZIP's offer had been ignored by the Claimants, ZIP ought to have considered whether to make a more straightforward offer without any unreasonable conditions;
- There was no good reason why, in this case, ZIP should not have made a Part 36 offer in the sum of £3.6 million; and
- It is critical that any offer intended to give costs protection can be defended, at the costs stage, as one which ought reasonably to have been accepted at the time it was made.
By insisting on its offer with unreasonable conditions and subsequently attempting to rely on that offer as constituting reasonable conduct, ZIP was "seeking to ride two horses". It ultimately suffered the consequences.
When calculating the resulting impact on costs, the starting point was that the Leaseholder Claimants had been successful so should receive their costs. However, Davies HHJ stated that there ought to be a percentage reduction to reflect the significant impact of the ML cap; the fact that Zagora had lost its claim; and the Leaseholder Claimants' lack of realism when considering ZIP's offer. However, this reduction was "relatively modest", because the Leaseholder Claimants had obtained a judgment in excess of the offer; ZIP was responsible for the unreasonableness of its offer; and because the costs involved in the Leaseholder Claimants' defence of the ML cap issue were relatively small.
As a result, Davies HHJ ordered that the costs recovered by the Claimants be reduced by 12.5%. On top of the 7.5% reduction made in light of Zagora's failed claim (not discussed here), the Claimants' lost out on 20% of their costs.
There are a number of key takeaways from this decision, which should act as words of warning for those making or receiving admissible, non-Part 36 settlement offers. It is clear that the Courts will not look kindly upon offerees who simply ignore offers, or who attempt to justify any refusal solely on the basis that an offer did not contain an admission of guilt. Instead, such a party should engage and take note where the offering party's position does have some merits. This can be done either by open or (more realistically) by "without prejudice save as to costs" correspondence. Failure to contact or acknowledge the other party may lead to adverse consequences in a near miss situation.
By contrast, it goes without saying that no offeror should insist on onerous, unreasonable conditions. Where it is clear that the conditions on an offer will not be accepted, the Courts expect a simpler offer to be made instead – perhaps on a Part 36 basis.
Ultimately, this decision shows that neither party should attempt to take undue advantage of the settlement offer process. Anyone who attempts to ride two horses does so at their peril.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.