Part 36, Set Off And Litigants In Person

A & V issued proceedings in the High Court seeking unpaid sums for measured works, variations, and losses incurred as a result of J&BH’s alleged breaches of the subcontract, including claims for adjudicators’ fees and enforcement costs. On the other hand, J&BH counterclaimed, seeking to set off its own contra charges for defective works and questioned the timing and validity of payment applications submitted by A & V.

Throughout this litigation, numerous adjudications and court judgments had already been handed down, including a pivotal adjudication where A & V initially won an award of £138,010.86, which J&BH refused to pay. A key aspect of the procedural history involved J&BH’s obstructive conduct in both adjudications and court proceedings, including its Part 8 proceedings seeking to invalidate A & V’s Application 14. This conduct, in part, led the Court of Appeal to find in favour of A & V on certain procedural matters.

The primary focus of the present judgment, delivered by Mr Roger ter Haar KC, was the allocation of legal costs between the parties. Given multiple settlement offers made by both parties, including Part 36 offers from J&BH, the judgment needed to determine who would bear the costs for various stages of the proceedings. Central to the court’s decision was the interplay between the principles under CPR Part 36 and CPR Part 44, as well as consideration of each party’s conduct throughout the litigation and adjudications.

Furthermore, the court had to address issues such as whether costs should be assessed on the standard or indemnity basis, how expert fees (in particular, those of Mr Judd and Mr Geale) were to be treated, and the application of statutory interest. The defendant argued that, because it had made a reasonable Part 36 offer, which A & V failed to beat, it should recover costs from the claimant for a portion of the proceedings. Meanwhile, A & V claimed that its offers had been within a reasonable range, and as the successful party in the substantive dispute, it sought an award covering its costs throughout the litigation.

 Chronology of Relevant Events

• 15 February 2023**: First prior TCC judgment involving the parties delivered ([2023] EWHC 301 (TCC)).
• 16 June 2023**: Second TCC judgment delivered ([2023] EWHC 1483 (TCC)).
• 6 October 2023**: Third TCC judgment delivered ([2023] EWHC 2475 (TCC)).
• 17 October 2023**: Fourth TCC judgment delivered ([2023] EWHC 2576 (TCC)).
• 18 June 2024**: Merits judgment delivered in the fifth set of proceedings ([2024] EWHC 1510 (TCC)).
• 3 October 2024**: Seventh judgment dealing with adjudicator fees and partial costs issues ([2024] EWHC 2516 (TCC)).
• 9 November 2023**: J&BH makes a formal Part 36 offer of £100,000.
• 10 November 2023**: A & V rejects the Part 36 offer and makes a counter offer of £600,000.
• 8 February 2024**: J&BH makes a second Part 36 compliant offer of £160,000.
• 18 June 2024**: Final substantive judgment delivered; costs remained to be resolved.
• 15 November 2024**: Judgment on costs handed down.

Issues to be Decided

The key costs-related issues addressed in this judgment were:

1. Should A & V, as the successful party in the substantive litigation, recover its full costs?
2. Should J&BH be awarded costs for any part of the proceedings, particularly from 1 March 2024, due to its unaccepted Part 36 offer?
3. Should there be a reduction in A & V’s costs recovery due to its failure on certain claims, such as the £645,100.45 breach of contract claim?
4. How should the costs of the expert reports (Mr Judd and Mr Geale) be allocated?
5. Should interest on costs be awarded, and if so, at what rate?

Parties’ Positions and Arguments

Claimant’s Position (A & V Building Solution Limited)

A & V argued that it should be awarded its full costs on the standard basis, if not the indemnity basis, as it had succeeded on the substantive issues. A & V contended that:

• J&BH’s obstructive behaviour, including its unfounded jurisdictional challenges and failure to honour the adjudicator’s decision, justified costs wholly in A & V’s favour.
• A & V had made reasonable settlement offers, even if slightly overestimated, and had prevailed on the major issues.
• Instead of accepting its offers, J&BH made inadequate and unrealistic counteroffers, further prolonging the litigation unnecessarily.
• The expert fees, especially those of Mr Judd, should be treated as recoverable disbursements essential to A & V’s case preparation.
• Interest on costs should be awarded at a commercial rate to reflect the delays caused by J&BH’s refusal to settle.

Defendant’s Position (J & B Hopkins Limited)

J&BH argued that, despite A & V’s success in the substantive judgment, it should be awarded its costs from 1 March 2024, as A & V had failed to better its Part 36 offer. J&BH submitted:

• Its Part 36 offer of £160,000, made on 8 February 2024, was reasonable, and A & V’s failure to beat this offer necessitated a costs order in J&BH’s favour from that date forward.
• A & V had asserted several unmeritorious claims, especially the £645,100.45 breach claim, and J&BH should not be penalised with full liability for costs when it succeeded on such key points.
• The expert fees claimed by A & V, particularly for Mr Judd, were inappropriate and not recoverable as they did not solely relate to this litigation but also involved the earlier adjudications.
• Any award of interest on costs should be modest, given that J&BH had made reasonable attempts to settle the matter from an early stage.

Decision

The judge held that A&V was the successful party for this period and was entitled to its costs. Despite J&BH’s partial success concerning the dismissal of A&V’s large damages claim, the judge found that the central factual and legal issue—J&BH’s repudiatory breach—was decided in favour of A&V. Therefore, a full costs order in favour of A&V was appropriate for this period.

“By contrast, A & V made offers which, although rather too high, were not far short of the amount which I found due to them…The appropriate conclusion in respect of this period is that A & V was the successful party and that, in consequence, a costs order in its favour is appropriate.”

The judge also considered J&BH’s actions during this period which he determined had contributed significantly to the escalation of costs due to its inappropriate objections to the Blizzard adjudication and the pursuit of ill-founded Part 8 proceedings. These tactics, according to the judge, delayed resolution and led to further avoidable costs for A&V.

“J&BH’s inappropriate deployment of jurisdictional objections to the Blizzard adjudication, its inappropriate commencement of Part 8 proceedings, its persuasion of Eyre J to reach an erroneous conclusion which had to be put right by the Court of Appeal, and its presentation to Mr Smith in that adjudication of what I have held to be a case ill-founded in fact and law…All of these combined to increase the costs of the action.”

While A&V was successful overall, the judge allowed J&BH a credit against the full costs award, based on identifiable costs attributed to A&V’s failed large damages claim.

“In my judgment the fair result in this period is that A & V as the successful party should have an order for costs in its favour during this period, but there should be a deduction or allowance in J&BH’s favour in respect of the costs clearly identifiable as relating to A & V’s damages claim – i.e. a total of £8,536.”

The judge concluded that A&V, although successful in the outcome, failed to beat J&BH’s 8 February 2024 Part 36 offer of £160,000. The judgment sum was calculated to be less advantageous than the offer, when accounting for interest and CIS tax deductions.

“On the basis of this calculation, in my judgment A & V failed to beat this offer…A & V will pay J&BH’s reasonable costs from 1 March 2024 to the date of Judgment No. 5.”

He rejected J&BH’s submission that Construction Industry Scheme (CIS) deductions should apply when evaluating Part 36 offers. J&BH argued that the judgment amount should be reduced by 20% to account for its CIS obligations. The judge rejected this, stating that the CIS deductions were payments for A&V’s tax obligations to HMRC and did not affect the amount owed to A&V.

“It seems to me that a claimant would not be acting unreasonably if it erred on the side of caution in determining the amount claimed by way of Court issue fee. Accordingly, when considering the effect of the 9 November 2023 offer, I hold that it was an inadequate offer. Alternatively, it would be unjust to take the CIS deduction into account…”

For the period after 1 March 2024, the judge applied the usual consequence under Part 36, ruling that A&V must bear J&BH’s legal costs because A&V had failed to beat the Part 36 offer.

“I have no hesitation in holding that it was unreasonable for A & V to continue its pursuit of a higher recovery in the face of a reasonable offer… applying the guidance given, A & V will pay J&BH’s reasonable costs from 1 March 2024 to the date of Judgment No. 5.”

He held that it would be appropriate to offset the judgment sums in favour of A&V with the costs owed to J&BH, to avoid multiple unnecessary payments between the parties.

“I accept those submissions…It would be manifestly unjust and inequitable for the Claimant to receive payment of the main judgment sum without giving credit against that payment for the liability in costs it has incurred in pursuing the claim to recover the main judgment sum.”

Although A&V was entitled to pursue the application for a Third Party Debt Order, the judge ruled there should be no costs awarded in relation to this, as A&V’s application had been premature.

“Had the issue only been as to whether an Order should be granted before issues as to Costs had been considered, then the matter could have been resolved by… asking either the Master or myself to decide that on paper… the appropriate order is that there should be no order as to costs.”